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Sunday, 18 November 2012

UAE: Fitch Affirms Abu Dhabi Islamic Bank's ratings

A change in Fitch's view of the willingness or ability of the UAE authorities to support ADIB would be negative for its IDRs and its Support Rating Floor.

However, Fitch notes recent supportive actions for the domestic banking sector including pre-emptive capital injections.

In addition, Fitch believes that support would be forthcoming from the Abu Dhabi government ('AA'/Stable/'F1+'), which has injected hybrid capital into the leading Abu Dhabi banks. Members of the Abu Dhabi ruling family hold a significant amount of ADIB's shares in a private capacity. Given the high level of ADIB's IDRs there is limited upside potential.

Rating drivers and sensetivities - VR

ADIB's VR is driven by its robust pre-impairment operating profit, sound balance sheet liquidity and its growing franchise in the UAE. The VR is constrained by ADIB's weak asset quality and exposure to problem financing.

Fitch has some concerns relating to ADIB's below average Fitch Core Capital relative to peers although Fitch recognises the improved regulatory Tier 1 capital ratio.

ADIB's asset quality continues to suffer from its exposure to legacy financing. Impaired financing/ gross financing remains elevated at 7.6% at end-9M12 but has come down from 8.7% at end-2011. Reserves for impaired financing improved to 80% at end-9M12 but the unreserved proportion of impaired loans/ common equity remained at 11.8%. Overall asset quality issues present some challenges for ADIB and exposure to a seasoning financing book may continue to present challenges in 2013, albeit manageable ones in Fitch's opinion.

ADIB increased its CBUAE regulatory Tier 1 ratio to 19.4% with a USD1bn Tier 1 hybrid issue in November 2012 which Fitch views as positive. Fitch assigned 50% equity credit to the issue resulting in a Fitch Eligible Capital ratio of 16.6% compared to 13.8% prior to the issue, assuming stable risk weighted assets. ADIB's Fitch Core Capital ratio of 10.7% at end-9M12 remains below domestic and regional peers but does not include the added Dhs3,672m cushion from the new hybrid Tier 1 issue or the existing Dhs2,000m hybrid Tier 1 capital injected by the Abu Dhabi Government, both of which provide some extra comfort.

ADIB's robust pre-impairment operating profit should provide sufficient capacity to absorb continuing impairment charges as well as moderate shocks from financing concentrations. Impairment charges continued to hurt profitability in 9M12 and consumed 39% of pre-impairment operating profit. ADIB's net income and margins compare well with peers. The bank's cost/ income ratio is likely to remain at its current level as ADIB continues to invest in its retail operations. 

ADIB's liquidity is healthy and compares well with peers. ADIB's large stock of liquid assets provides the bank with sound liquidity.

ADIB is well funded by customer deposits and its financing/deposits ratio remains healthy at 89%. However the vast majority of customer deposits are short term which results in a large asset and liability maturity mismatch. ADIB increased its long-term funding in November 2010 and November 2011 through issuing two five-year sukuk totalling Dhs4.6bn which help its long-term mismatch somewhat.

A significant and sustained improvement in asset quality as well as maintaining its recently increased capital ratios could lead to an improvement in ADIB's VR although Fitch recognises the challenges in the UAEoperating environment and continuing asset quality problems. Pressure on ADIB's VR could come from a further deterioration in asset quality, profitability or a significant deterioration in capital ratios.

The rating actions are as follows:

Long-Term IDR affirmed at 'A+' with a Stable Outlook.
Short-Term IDR affirmed at 'F1'.
Viability Rating affirmed at 'bb'.
Support Rating affirmed at '1' .
Support Rating Floor affirmed at 'A+'.
ADIB Sukuk Company Ltd.
Trust certificate issuance programme affirmed at 'A+' / 'F1'.
Senior unsecured certificates affirmed at 'A+'.

(Ame Info.Com / 18 Nov 2012)

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Pakistan: Islamic banks await framework on profit distribution, pool management mechanism

KARACHI: The Islamic banking industry has been waiting for the issuance of a standardised framework on distribution of profit and pool management mechanism for the Islamic banking institutions so that the procedure of financial reporting and general disclosure could be streamlined, said sources in the banking industry.

The State Bank of Pakistan’s (SBP) authorities have reportedly said that the bank has developed a comprehensive profit distribution and pool management framework in consultation with the industry in order to improve transparency and bring standardisation in the Islamic banking institutions’ practices regarding profit distribution and pool management.

Kazi Abdul Muktadir, deputy governor of the central bank, on an occasion in September had revealed that the framework will be issued soon most probably within the same month and will be instrumental in improving public confidence in Islamic banking, in general, and profit distribution policies and functioning of the Islamic banking institutions (IBIs), in particular.

He also said that the SBP in collaboration with the industry will also develop strategic plan for the industry for the next five years, 2013-17.

The strategic plan aims at making a detailed assessment of the earlier plan (2007-12), as well as the existing environment and will set the strategic direction for the industry, he said.

However, so far, the framework has been upheld with the SBP and no development has so far been made on the working of the strategic plan, said sources.

Interestingly, the central bank in its recently issued Financial Stability Review, has not only admitted that the profit and loss computation and distribution policies of the Islamic banking institutions lack uniformity but hinted that the framework is likely to be introduced and enforced (before the year-end) during the second half of the current calendar year.

The SBP review also said that the Islamic banking institutions are contractually obliged to share profits and losses with the PLS depositors.

A representative of one of the leading full-fledged Islamic banks in Pakistan said that as the Islamic financial industry is in the developing phase, there is no formal policy by the central bank about the financial disclosure and sharing profit and losses information with the saving depositors.

“We have given our output in the form of recommendations on the issue to the authorities of the central bank and have been pushing it to issue clear instructions and framework on profit distribution method for the last few years but it has not been come out yet.” said a banker at an Islamic bank.

Sources said that all the Islamic banking institutions have uniformity in the product and they use Mudarabah for the distribution of profits. They have to be competitive with their conventional counterparts as regard the profit payment is concerned, they said.

They not only fix the profit sharing ratio in between respective IBI (Mudarib) and its depositors (Rabb-ul-Maal) but also assign appropriate sub-profit sharing ratios (weightages) to different depositors based on the amount and duration / tenure of deposits, to distribute profits, said sources.

However, to remain competitive in the market, the IBIs have to sacrifice their profit in favour of some of depositors to remove any heavy fluctuation in between the expected profit and the profit received by a depositor, based on profit sharing ratio and weightages.

Accordingly, the main problem is to how any such fluctuation is removed. Consequently, it is generally said that “IBI have different policies to distribute their profits”, said sources.

Several proposals were taken into consideration by the Shariah advisers to distribute IBIs profits in conformity with the Shariah rulings for removing heavy fluctuations in between the expected profit and the actual profit payment such as introduction of “profit equalisation reserve” and “introduction of pool management”, said sources.

“Profit and loss allocation or pool management function of an Islamic bank is a key area where Islamic bank needs to focus its resources, said Muhammad Faisal Shaikh, head of product and business development , BankIslami Limited.

“Majority of the transaction undertaken by an Islamic bank on liability side of the balance-sheet require application of pool management techniques, he said. Keeping in view the importance of this area, Islamic Banks and the SBP have worked closely in developing framework for pool management, which is expected to standardise profit and loss sharing mechanism of Islamic Financial Institutions,” he said.

“The guidelines for Shariah compliance in the Islamic banking institutions issued in 2008, say that the Islamic banks are encouraged to disclose the general disclosures with the PLS depositors. Instead of encouraging, the central bank must make it mandatory for all the Islamic banks, including Islamic banking windows being operated by the commercial banks in the country,” said a banker.

Most of the banks make financial information public but some of the banks do not follow this, said the banker.

“There is not a level-playing field within the Islamic banks with regard to follow consistent practices on profit distribution and financial accounting. Most of the banks such as Meezan Bank always comply with the Shariah compliance guidelines, providing the additional financial disclosures with the depositors,” said Ahmed Ali, head of Shariah compliance and product development at Meezan Bank.

“We are waiting for the new amendments and regulations on the financial accounting and profit distribution computations, which will make the sector more transparent and competitive,” said Ahmed.

According to the guidelines for Shariah Compliance in the Islamic Banking Institutions 2008, IBIs would follow the financial reporting standards for Islamic modes of financing issued by the Securities and Exchange Commission of Pakistan (SECP) under the Companies Ordinance, 1984.

However for modes / areas not covered by these standards, the Islamic banking institutions are encouraged to use AAOIFI accounting standards.

According to the guidelines in the annual report the Islamic banking institutions are encouraged to disclose overall basis of working of profit distributed to depositors; breakup of their financing by Islamic modes of finance; and remuneration of the Shariah adviser.

In addition, the annual report of conventional banks having Islamic banking branches would include separate balance-sheet and profit and loss statements of their Islamic banking operations.

Additional disclosure in the form of cash flow statement of Islamic banking operations is also encouraged.

About the policy for profit distribution with the PLS account depositors, the guidelines say, Islamic banking institutions would have a policy statement in place, vetted by the Shariah adviser and approved by the board of directors, regarding the policies and procedures to safeguard the interest of the profit and loss sharing-based deposit holders (PLS account depositors). The SBP in its report said that the central bank is in the process of developing a comprehensive Shariah governance framework. The framework will explicitly define the roles and responsibilities of different organs of Islamic banking institutions, including the board of directors, Shariah advisers / committees and executive management for ensuring Shariah compliance.

Presently, Shariah compliance is perceived to be the responsibility of the Shariah advisers only, whereas the board of directors and the executive management assume no such responsibility.

“This, we believe, is contrary to the corporate governance principles as unless the board of directors and the management are not fully aware of the Shariah non-compliance risk, it would be difficult for the Shariah adviser to develop an effective Shariah compliance mechanism in the Islamic banking institutions.

The Islamic banking industry currently constitutes over eight percent of the banking system with a network of 964 branches and over 500 windows across the country.

Presently, Islamic financial industry has five takaful operators and around 30 Islamic mutual funds.

(The International News / 18 Nov 2012)

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India: RBI Needs to Evaluate Principles of Islamic Monetary System

RBI has left with the only tool (of interest rate) to control liquidity for balancing inflation and growth rate, but has so far failed to allow India grow better without inflation. Whenever with intention to control inflation, RBI screws interest rate, economic growth rate has tumbled. After all exercise of balancing between inflation and growth rate, RBI Governor said that growth rate will decline and inflation will increase. His wordings on this issue are as follows:
“On the basis of the above considerations, the baseline projection of GDP growth for 2012-13 is revised downwards from 6.5 per cent to 5.8 per cent. “
“Taking the above factors into consideration, the baseline projection for headline WPI inflation for March 2013 is raised to 7.5 per cent from 7.0 per cent indicated in July. Importantly, inflation is expected to rise somewhat in the third quarter before beginning to ease in the fourth quarter.”
So, when RBI will come to conclude that monetary system followed by capitalism from the United Kingdom and spread up by the United States has no answer to the question ‘How can we achieve anti-inflationary higher growth rate’. The Monetary Economics developed after Keynes and World War II has no answer to problems arose due to deficit finance and side effects of interest accrued in the economy. The concept of preserving currency’s purchasing power is not discussed, but it is accepted by all that growth will lead inflation. Economists are not taught about growth without inflation. Now after global financial crisis and economic recession, if bailouts and quantitative easing are not giving desired results, we must look other options including discipline of Economics and monetary system. It may not be based on any renowned economist’s theory, but could be simply based on principles of religion like Islam.
RBI has been so far not in favour of Islamic Banking. RBI Governor, following statement published in the Times of India, is appointing those who expect RBI believes in finding optional means and ways to regulate and facilitate banking services.
“The central bank had also received a proposal to consider whether it was possible to permit Islamic banking in India. Current banking regulation requires interest rates. RBI charges interest on the funds it provides banks under repo and it also pays interest. Also, we do not permit risk financing while Sharia finance takes a position on this. There is the issue of dual regulation by Sharia board and RBI. We have said that should the government want this, they should have a new law" said Subbarao.”
Countering the first excuse, we know that Section 17 (1) of the Reserve Bank of India Act 1934 states that the bank shall be authorised to accept money on deposit without interest from and the collection of money for the central and state governments, local authorities, banks and other persons.
Countering the second excuse, we should know that we all are facing trouble today because of risky finances extended by interest based banking and financial system. RBI Governor seems denying the lessons we learned from the global financial crisis and recession thereafter that banking and finance without sound principles has shifted financial risks over others and at last collapsed because no one was to share the risk. The principle behind Islamic banking promotes sharing of risks instead of shifting it to others. It does not mean Islamic banking finances risk projects. In fact, Islamic finance prohibits financing activities involving high speculations and uncertain risks. But one can only discuss and analyse the model if there is any will to do so. One cannot force any monetary regulator by adopting any new model if they are not ready to do so.
In 2005 our Prime Minster Dr. Manmohan Singh (renowned Economist), visualising the significance of Islamic Banking, had asked RBI to study feasibility of Islamic Banking in India. But the Working Group headed by then Executive Director and present Deputy Governor Shri Anand Shinha (without interacting with experts of Islamic Banking and Finance, just on basis of internet resources) concluded that Islamic banking is not possible without amending laws. This denied possibility of experimenting those products and services which do not need any amendment in any Indian Act. They have cancelled licence of NBFC experimenting Islamic financial transactions and denied registration of Islamic NBFC in India.
How one can put any sort of argument behind monetary regulators if they don’t seek any comments, arguments or advice on Islamic Banking. RBI has so far replied to the applications in one line concluding either that it is not possible under present regulatory regime or is seized of the issue. RBI has observed avoiding any scope to call a workshop or seminar to study principles and practices of Islamic Banking and Finance. This could have been done by calling upon active players and experts of Islamic banking and finance for interaction.
RBI is not only monetary regulator for India but is also Government advisor on financial and economic aspects. The Government seeks RBI advice to counter inflation, currency devaluation and target economic growth rate. RBI is not only bank for the Government but is also responsible for increased public debt. Fiscal consolidation cannot be done without RBI support. If RBI manages market loans to finance public deficit, it can also raise zero interest or equity based finance which could reduce fiscal deficit.
We seek RBI study the fundamental principles of Islamic Banking and adopt suitable principles for managing monetary and banking system if we all are benefitted. We are facing consequences of global financial crisis and recession thereafter just because of avoiding sound principles. Islamic banking in India may be termed as Participatory or Commercial Banking and must not be introduced to please any minority community. It must be studied thoroughly and adopted only by a secular institution like RBI in a secular manner if deemed fit for the nation as a whole. India adopted principles of democracy for political system, likewise we can adopt the principle of risk sharing system in banking and finance as well.
RBI seems putting just excuses for Islamic Banking as it points risk factor. Has RBI learned any lesson from Sub Prime Mortgage crisis and insulating banks from corporate losses? Is the huge lending to companies like Kingfisher and the loan waiving of Rs. 72,000 crore without indulging in risk factors? What RBI as regulator was doing when compounded NPA in agriculture sector stood to Rs. 72,000 crores and ultimately the tax payers bore those losses? If RBI wants to allow safer and principle-based banking, it may appoint its own Shariah Board for ethical guidance and technical board to control transactional activities. The NPAs in interest based banks are increasing. RBI as silent observer instead of active regulator has caused recent crisis in Micro Finance sector and collapse of Micro Finance institutions causing increased NPAs for banks. RBI hardly attempts to learn lessons from mistakes.
It is better that RBI discusses and analyses the financial merits and demerits of principle and faith based participatory banking and finance (need not call it Islamic Banking). India need anti-inflationary monetary policy stand which may be by allowing option to bank on equity instead of only interest factor. The Government needs to come out of diplomatic style by referring the agenda to RBI and make suitable changes to allow RBI frame suitable regulatory framework and infrastructure to provide diversified banking services for all.
Rupee value depreciation is devastating for the economy and fiscal deficit is worrisome for all of us. Public debt doesn’t allow common man to get benefits of growth. There are persons who are prejudiced about Islamic banking that it will help funding Islamic terrorists, but the fact is that terror has no scope in Islam and there is not a single incident of terrorist funding incident in any Islamic Bank around the world so far; and the reported incidents of money laundering had been on interest-based banking not in any Islamic bank.
If we need to let India grow for all Indians (not only for corporate sector) we need a banking system supporting anti-inflationary inclusive growth model. Call it Participatory or Commercial Banking, but let RBI hold it so that there may not be any insecurity among any community. Islamic banking will not allow black money; it would help the poor grow without debt burden and ensure sharing of fruits of development by all (instead of capital providers only). So, it is requested that either Dr. Subbarao make sure that RBI is going to reduce inflation, public debt and currency devaluation with desired increase in GDP growth rate, or must call a debate to discuss optional monetary policy (wherein Interest may not be only mechanism to control money market).
It is advisable that RBI should evaluate principles of Islamic monetary system and see whether those principles can guide India have better monetary policy to safeguard our banks, financial institutions, agriculture, industries, manufacturing industries, exports, currency value and more importantly with anti-inflationary but inclusive high growth rate.
Hope RBI will genuinely review the matter seeing it as a national matter to resolve the country’s financial and economic issues instead of counting it as a religious issue related to minority community wherein scholars can have any say. RBI can hold Shariah Advisory Board as well as other technical boards to supervise and regulate Islamic Banking in India. This would resolve threats of any misappropriation and misuse of opportunities. We need to understand that in absence of any regulation the potential Islamic investment funds are being deployed into non-productive and non-desired channels. This needs to be resurrected for the sake of national economy and welfare of people of India in general. Muslims should not be left aloof to find their own means to invest and channelize their savings in undesired projects and channels.

(Radience Views Weekly / 18 Nov 2012)

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