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Thursday, 1 November 2012

Maldives: Capital Market Authority and Islamic Ministry unite to promote Islamic finance

The Maldives Capital Market Development Authority (CDMA) has signed a memorandum of understanding with the Ministry for Islamic Affairs to further develop an Islamic capital market in the country.

Among the most prominent details of the agreement was a joint commitment to establish the ‘Maldives Centre for Islamic Capital Market and Finance’.

“This is going to help in promoting the various services available in Islamic financial services under one organisation,” read a press release from the CDMA.

Other features of the arrangement include the scheduling of meetings between the CDMA’s Capital Market Shariah Advisory Committee and the Ministry’s Fiqh academy, a program of training events on the practice, and the ministry’s endorsement of Shariah advisors registered with the CDMA.

The CDMA is an independent body charged with regulating the capital market and the pension industry in the Maldives, with statutory powers to license brokers, asset managers, and investment advisors.

“The vision of CMDA is to develop an Islamic capital market parallel to the existing conventional capital market in Maldives,” reads the authority’s website.

The country’s first shariah-compliant bank opened just over 18 months ago, when the Maldives’ Islamic Bank (MIB) first began offering services to the public after what the company’s head described as strong demand.

MIB is part owned by the Ministry of Finance and Ministry (15 percent), with the remaining 85 percent owned by the Islamic Corporation for the Development of the Private Sector (ICD) – a Saudi based multilateral organisation designed to promote Islamic finance globally.

2011 also saw the first public offering for a Shariah compliant company on the Maldives Stock Exchange – Amana Takaful (Maldives) Plc – for which shares were oversubscribed, report the CDMA.

Amana Takaful offers Shariah compliant insurance services, including third party vehicle insurance, which became mandatory in the country earlier this month.

Director of Amana Takaful Osman Kassim explained at the time that Islamic finance was “a phenomenon worth 1.4 trillion and growing at a rate of 20 percent annually,” which functioned through the prohibition of riba, or interest.

“Taking a return without participating in the risk of the return is not allowed, be it 1 percent or 99 percent. Any additional revenue is riba,” he said. “Even if you give a loan and he gives a gift, and is not in the habit of giving a gift, that is also riba.”

Islamic finance in its current form emerged 40 years ago, Kassim explained, first in Egypt and the Arab Emirates.

“It promises to be a just system. Interest is oppression – the charging of something where nothing is due,” he said, noting that in the wake of the global financial crisis, “All major banks now have Islamic financing products, and the more adventurous have their own Sharia Councils.

Islamic finance and financial products also differ from conventional services in that they abstain from ‘Maisir’ and ‘Gharar’ – speculative transactions – considered akin to gambling under Shariah.

Minivan News was unable to gain further comment from the Ministry of Islamic Affairs at the time of press.

(Minivan News / 31 Oct 2012)

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Money market curbs to challenge Islamic banks in Oman

DUBAI, Nov 1 (Reuters) - As Oman prepares to introduce Islamic finance, a restriction on the money market instruments which banks can use may curb their ability to manage funds in the market, hurting profitability.

Authorities are expected to release Islamic banking rules by year-end, making Oman the last country in the six-nation Gulf Cooperation Council to accommodate sharia-compliant banks.

But the draft rules, seen by bankers before their publication, exclude an instrument which is widely used in some other countries: commodity murabaha or tawarruq, several banking sources in Oman told Reuters. They declined to be named because of the sensitivity of the issue.

"The central bank was careful to ensure Islamic finance is of high standards," said Mohammad Haris, head of Islamic banking at Bank Sohar.

"Certain areas, we believe, are too stringent such as liquidity management," he added without elaborating.

Omani bankers argue that in the initial stage, Oman's Islamic money market will be too shallow and undeveloped for them to access it conveniently with tools other than tawarruq.

So banks have been lobbying regulators, asking that tawarruq be made temporarily permissible until the market can develop other solutions, bankers said.

Such a provision could be similar to one given to Pakistani banks in that country's initial stage of building up Islamic banking, one Omani banker said.

Oman's central bank told Reuters the Islamic banking law was still being drafted and it would not comment on tawarruq, adding that an announcement would be made by the end of this year.


In tawarruq, one party buys an asset from a vendor with payment deferred, and sells it to a third party for cash. The arrangement allows banks to manage their overnight funds.

But organised tawarruq, where transactions occur in exchange for a financial obligation, has been criticised by some Islamic scholars because of its weak link to real economic activity; Islamic finance bans pure monetary speculation.

In April 2009 the Jeddah-based International Islamic Fiqh Academy, an international body of scholars, issued a resolution criticising organised tawarruq as a "deception", hurting its acceptability in the industry.

Tawarruq, of the organised type and other types, is widely used in most countries which practice Islamic finance. There are no reliable measures of transaction volumes, but it forms the basis for many Islamic credit card transactions in the Gulf, while Malaysia's stock exchange has a trading platform based on commodity murabaha.

At least 350 million rials ($909 million) will enter Oman's Islamic money market when the country's two new Islamic banks and the Islamic windows of conventional banks start operating, Haris estimated.

The figure could climb as high as 550 million rials as other firms enter the market, said Shaher Abbas, Oman-based director at Islamic Finance Advisory & Assurance Services (IFAAS).

If banks lack ways to manage the funds in the market, "this money will be parked until it is deployed. Banks would be forced to place funds with the central bank at zero - this will put huge pressure on asset yields," Haris said.

In the absence of tawarruq, some banks aim to use wakala (agency) agreements under which they would entrust their money to other institutions to manage. But the small number of Islamic counterparties would limit this option's appeal, bankers said.

A ban on tawarruq could pressure the government into issuing short-term sukuk, or Islamic bonds, to fill the gap and help banks manage their money. If this happens, Oman could move ahead of some other countries which have been slow to develop issuance of short-term sukuk.

But so far Omani authorities have shown no sign of starting an extensive issuance programme. The finance ministry has no need or incentive to issue large volumes of sukuk, Abbas said.

Also, foreign exposure limits mean Oman's new Islamic banking operations will have to keep most of their money onshore. A two-year exemption from or relaxation of the limits, allowing banks to invest offshore, could alleviate the liquidity management problem, Abbas said, but authorities have not indicated they will grant such an exemption.

If there is no action to make it easier for Islamic banks to manage their money during their initial years of operation, "it will be a disaster for the banks," he said.


Even if liquidity management problems are resolved, competition may be tough for the Islamic banks from the start.

In addition to the two dedicated Islamic institutions, Bank Nizwa and Al Izz Islamic Bank, five banks plan to offer sharia-compliant products through Islamic windows: Bank Sohar, Bank Dhofar, Bank Muscat, Ahli Bank and National Bank of Oman (NBO).

Fuelling competitive pressures, the overall banking market is quite concentrated: the three largest banks accounted for 62 percent of total assets and 59 percent of total deposits as of December 2011, central bank data showed.

"Incumbent banks have a competitive advantage over new Islamic lenders, as they have expertise relating to Islamic finance products, including Bank Muscat and NBO," said Mahin Dissanayake, director of financial institutions at Fitch Ratings.

Bank Muscat has offered Islamic products in Saudi Arabia, while NBO is part-owned by Qatar's Commercial Bank of Qatar , which used to operate an Islamic window, he said.

Dissanayake said Bank Sohar, which floated on the Omani stock market in 2007, had taken three years to gain substantial market share - an indication of the time which the new Islamic banks might have to spend to become major players.

IFAAS said it had conducted a market survey suggesting 70 percent of consumers in Oman anticipated opening an Islamic savings account in the next 12 months, while 77 percent expected to take out Islamic loans in the next one or two years.

These intentions may not necessarily translate into business for the new Islamic banks, however. Studies in other countries such as Qatar have shown many consumers tend to remain loyal to their existing banks, and religious permissibility is only one factor for them; quality of service and financial returns can be equally important.
(Reuters / 01 Nov 2012)
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Glossary of Islamic financial terms from various sources

Glossary of Islamic financial terms from various sources:

1) List No. 1 >
2) List No. 2 >
3) List No. 3 >
4) List No. 4 >

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