Egypt: Government Approved Islamic Bonds (sukuk)

The Cabinet at a meeting on Wednesday 19/12/2012 under Prime Minister Hisham Qandil approved in principle a draft law on using Islamic bonds.

The new financial instrument (Islamic Sokouk) will be referred to the Legislative Authority so that the draft will pass into law. The new mechanism is a tool for financing and investment.

The logic behind introducing "sokouk" in the Islamic world is that any form of interest [riba] derived from investments is prohibited.

Islamic finance works from the premise that both the individual customer and bank should be at equal risk upon investment; any possible profits or losses should be equally divided between them.

The proposed bill regulates provisions and measures of issuing such kind of bonds (finance, rental and investment bonds) and organizes the authority to be in charge of issuing and managing these bonds, and registering them in the stock exchange. The bill suggests the establishment of a fund called Investment Risks Fund which is financed by the owners of these bonds.

A statement said the Cabinet also agreed to exempt entrepreneurs and the insured citizens from the additional sums which are not paid from subscriptions during the period from 1-2-2012 until 30-11-2012. The statement said this exemption emanates from the government keenness to ease the burden of entrepreneurs and the insured who were unable to pay their subscriptions to the National Organization for Social Insurance in the light of the recent circumstances which faced them and from the government desire to support them so that they may recover their economic and productive capacities.

As for the economic situation, the Cabinet said Egypt is currently passing through economic and political situation adding current spending rates are higher than the volume of increase in resources which have eroded as a result of the drop in investments and the impact of demonstrations and protests on the progress of work and production.

(All Africa / 20 Dec 2012)

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Oman adopts strict Islamic banking rules

Oman’s central bank took a strict approach to regulating Islamic banking in rules for the sector which it released on Wednesday, setting higher standards for the industry than many other countries.

The sultanate announced last year that it would introduce Islamic finance, becoming the last country in the six-nation Gulf Cooperation Council to do so. Business activity is expected to start early next year.

The central bank’s rules cover areas including banks’ liquidity management, the administration of boards of sharia scholars who oversee Islamic financial institutions, and the operation of conventional banks’ Islamic windows – and in many cases, the rules appear considerably stricter and more detailed than regulations in other countries.

A major provision is tight restriction of the use of tawarruq as a money market instrument for banks; this is expected to limit banks’ flexibility in managing their funds overnight, and could thus raise their costs.

“Commodity murabaha or tawarruq, by whatever name called, is not allowed for the licensees in the Sultanate as a general rule,” the document states.

In tawarruq, one party buys an asset from a vendor with payment deferred, and sells it to a third party for cash. Organized tawarruq, where transactions occur in exchange for a financial obligation, has been criticized by some Islamic scholars because of its weak link to real economic activity.

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

Omani banks had lobbied the central bank to permit tawarruq, at least temporarily while the new industry found its feet. But the rules do not appear to permit this, saying tawarruq can only be used in emergency situations on a one-off basis for a period of no more than three months.

Interbank transactions which are allowed include mudaraba, musharaka and wakala placements, all common Islamic finance structures.

The rules state that financial accounting standards from the Accounting and Auditing Organization for Islamic Financial Institutions, a Bahrain-based industry body, will be followed.

In the area of vetting and supervising Islamic products, Oman is opting for the decentralized approach that prevails in the Gulf. It will allow each bank to have its own sharia board to supervise products, rather than imposing a centralized board for the whole industry as Malaysia does.

Smaller institutions will be allowed to outsource the sharia board function subject to central bank approval.

But unlike other countries in the region, the central bank has set out strict requirements for scholars, including criteria for whether they are fit and proper, maximum tenures, and limits on the number of board seats that an individual can hold.

Each sharia board must have a minimum of three scholars; they can only be appointed for three-year terms and serve a maximum of two consecutive terms. Board chairmen should preferably serve on a rotation basis, the rules state.

Scholars must demonstrate an understanding of both legal and financial matters and have a minimum of 10 years’ experience, and banks are encouraged to develop local expertise by increasing the membership of Omanis in sharia boards.

The scholars are not allowed to serve in two competing Islamic financial institutions within the country, and they can work in a maximum of four non-competing institutions.

They are also required to attend a minimum of 75 per cent of board meetings or risk being disqualified; sharia boards must meet at least four times a year, and must disclose the number of meetings in the bank’s annual report. Sharia scholars will face performance assessments, both collectively and individually.

These provisions appear to go a long way to addressing complaints of potential conflict of interest and lax standards on sharia boards that have plagued Islamic finance in recent years.

Two full-fledged Islamic banks, Bank Nizwa and Al Izz International Bank, will be joined in Oman by conventional banks using Islamic windows to offer sharia-compliant products through their branch networks.

According to the rules, a single branch cannot operate both an Islamic window and conventional banking services, while the windows must disclose the sources and the uses of their funds.

Banks that plan to offer sharia-compliant products through Islamic windows include Bank Sohar, Bank Dhofar, Bank Muscat, Ahli Bank and National Bank of Oman (NBO).

The rules also outline stock market listing requirements, ownership limits, minimum paid-in capital amounts, and a 12-per-cent minimum capital adequacy ratio for Islamic banks.

Banks may be allowed on a case-by-case basis to issue sukuk (Islamic bonds) to raise Tier 1 capital and to issue subordinated sukuk, while the treatment of sukuk under bankruptcy and insolvency proceedings is outlined in detail. Islamic collective investment schemes will be regulated by the Capital Market Authority.

(The Globe And Mail / 20 Dec 2012)

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Saudis to launch Islamic banking in Cameroon

Cameroon will soon see the launch of banking services tailored to Muslims who make up 21 per cent of the country’s population, a senior official with Saudi-based Islamic Development Bank Group (IDB) has said.

“We mean business and we’re looking for business,” said Khaled Mohammed Al-Aboodi, Chief Executive Officer of IDB’s Islamic Corporation for the Development of the Private Sector (ICD).

Mr Al-Aboodi spoke at a conference Thursday in the capital Yaoundé, which had the objective of explaining to local businesspeople how they could benefit from the opportunities that the multilateral development financing institution offered.

On the sidelines of the event, ICD signed a partnership with a local bank, Afriland First Bank.

The agreement will see the launch of an “Islamic Window”, which will harness a customised service the bank began providing its Muslim clients 10 years ago and also introduce a range of other products and services for them.

Mr Al-Aboodi said more of such partnerships that sought to stimulate Cameroon’s fledgling private sector and create more jobs would follow.

“Once this window is set up, the advisory services we offer will end. But we will look into providing lines of financing to the banks so they can support the private sector here, which is mostly made up of small and medium size enterprises.”

The IDB has been partnering with Cameroon since 1976 and today it was funding 22 projects mainly in the transport and agricultural sectors to the tune of $260 million.

About 27 other projects, costing $350 million, had so far been completed.

(Africa Review / 21 Dec 2012)

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Politics, laws weigh on Islamic finance in India

An estimated 177 million Muslims in India, the largest Muslim minority population in the world, are unable to use Islamic banks because laws covering the sector require banking to be based on interest, which is forbidden in Islam.

This policy has persisted since 2005, when the Reserve Bank of India (RBI) set up a committee to study Islamic finance.

"The Reserve Bank's position has been that the current Banking Regulation Act does not permit Islamic banking because interest rate is an important component of banking in India," RBI governor Duvvuri Subbarao told reporters in October.

Last month, the governor added that some Islamic financial services could be delivered through vehicles other than banks - a comment which is encouraging some firms to look at developing sharia-compliant products outside the banking sector.

"It can be got around not through banking, but other vehicles," Indian media quoted Subbarao as saying.

Shariq Nisar, director of research and operations at Mumbai-based Taqwaa Advisory and Shariah Investment Solutions (TASIS), an advisory firm, said of Subbarao's statement: "This is a good thing - it is the first time the RBI is saying that Islamic banking is possible through other mechanisms.

"The message is to try out other things."

Because Islamic banks pay depositors based on the returns earned by pooled investment funds, equity- and investment-related products might to some extent mimic the operations of Islamic banks and fill the gap left by the ban on them, the products' proponents hope.

Saif Ahmed, managing partner at Bangalore-based Infinity Consultants, said: "The RBI's comments will enable a more creative approach to developing Islamic finance in the country, by getting people to critically think through ways they can introduce Islamic finance under the present regulations."

INNOVATION

The 2006 Sachar Committee report, commissioned by the state to examine the social, economic and educational conditions of India's Muslim communities, recommended steps be taken to improve Muslims' access to credit, which it called inadequate.

Muslims across all income categories in India are shunning conventional banks because of Islam's ban on interest, said Ahmed. "Access to sharia-compliant credit is the biggest issue, followed by access to sharia-compliant investment options."

The issue of investment options looks easiest to resolve. Some capital market products, regulated by the Securities and Exchange Board of India (SEBI), are already based on Islamic equity indexes, such as one launched in 2010 by TASIS and the Bombay Stock Exchange; Islamic indexes exclude firms involved in areas forbidden by the religion, such as alcohol and gambling.

In May, SEBI introduced guidelines for alternative investment funds (AIF) which allow the pooling of capital from local and foreign investors.

"We expect sharia-compliant funds to be registered under the AIF regulations," and to invest in permissible assets such as real estate, said H. Jayesh, founding partner of Mumbai-based law firm Juris Corp.

Both Infinity and the Bangalore-based Amana Group have developed savings schemes known as chit funds which they say comply with Islamic finance principles. In chit funds, subscribers pool their money; members can then obtain temporary use of the funds through a bidding process.

"Our schemes have been approved by major sharia institutions...along with prominent scholars. This can promote Islamic banking in the country more wisely," said Asifulla Khan, founder and partner at Amana.

CREDIT

But providing any form of credit in India under Islamic principles appears much more difficult, and would probably require regulatory changes.

A handful of politicians, particularly Muslim leaders such as Vice President Mohammad Hamid Ansari, has been lobbying for years to start Islamic banking in India. Politicians from the southwestern state of Kerala, where there is a large Muslim population, have raised the issue many times in parliament.

They have met strong opposition from bureaucrats in the finance ministry and banking circles. Some politicians, especially from the main opposition Bharatiya Janata Party, say they fear Islamic banking could be used by militants and might strengthen the hold of clergy over India's Muslim community.

Also, the government is struggling to shut down channels for illicit flows of funds from the country, which are used by businessmen, politicians and bureaucrats to evade taxes.

For these reasons, India seems unlikely in the foreseeable future to permit any form of Islamic banking.

Nisar at TASIS said that one possibility, which would not require amendments to the banking act, would be for the RBI to issue an order allowing non-bank financial companies (NBFCs) to operate under a participatory model. Under this model, NBFCs would not charge interest but instead pay depositors with the proceeds of investment funds.

However, RBI officials told Reuters they did not think this would be feasible. Rules for NBFCs are the same as for banks with regard to interest rates, they said.

Abdur Raqeeb, general secretary of the Indian Centre for Islamic Finance in New Delhi, said laws other than the banking act could be amended to facilitate Islamic finance. This has been done in Singapore, Japan and Britain, he said.

"Changes have been introduced through the finance act as in the UK and other jurisdictions in the tax laws, to create a level playing field," Raqeeb told Reuters via email.

Tax rules are important for Islamic finance because many popular asset-based transactions are vulnerable to double taxation under conventional accounting methods.

"It primarily will be a political decision that has to be made by the government through legislation in the parliament," similar to steps taken by Sri Lanka in 2005, Ahmed at Infinity Consultants said. This will test how serious the government is about creating an inclusive financial system, he added.

Even if top government officials decide in principle to change rules, though, progress is likely to be very slow because of a complicated consultation process, the large number of stakeholders involved, and opposition in some political parties.

Contacted by Reuters, the RBI declined to elaborate on Subbarao's comments. A person with direct knowledge of India's regulatory environment, declining to be named because of the issue's sensitivity, said the RBI had written to the government requesting clarification of its stance on Islamic finance.

COURT CASE

A court case now underway is testing the legal climate; in May, the RBI revoked the licence of Kochi-based Alternative Investments and Credits Ltd (AICL), which had operated under a participatory model since 2002.

"The RBI took a stance that compliance to the code requires declaring a fixed rate of interest rather than profit-sharing ratio," AICL chairman Mohammed Ali A. said in September.

AICL has challenged the RBI's decision, with the matter still being heard in Indian courts.

"In our opinion sharia-compliant NBFCs can operate within the existing legal framework," said Jayesh at Juris Corp.

He noted that in a separate case, the High Court in Kerala had upheld the constitutionality of the state government's investment in a company set up to carry out sharia-compliant financing activities.

(Reuters / 20 Dec 2012)

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Islamic finance works in fostering sustainable economic growth: Zeti

In response to the global financial crisis, Islamic finance is expected to contribute to the global agenda of fostering sustainable growth that is firmly anchored to the real economy, Malaysia’s central bank governor Dr. Zeti Akhtar Aziz said. 

Islamic finance calls for the banking industry to focus on its core function of providing financial services that add value to the real economy.

The Islamic tenets ensure a close link between financial transactions and the real economy, strongly discourage excessive risk undertakings and prohibit speculative elements, the governor of Bank Negara Malaysia and the IDB Prize Winner in Islamic Banking and Finance 1433H/2012 said on Wednesday.

Dr. Zeti was in Jakarta to deliver an inaugural lecture as part of the IDB Regional Lecture Series on Islamic Economic, Finance and Banking at Bank Indonesia’s headquarters. The lecture was attended by Bank Indonesia Governor Darmin Nasution, director general of the Islamic Development Bank’s Islamic Research and Training Institute Mohammad Azmi Omar, chief commissioner of the Financial Services Authority (OJK) Muliaman D. Hadad, representatives of international organizations, House of Representatives members, religious leaders, senior government officials and financial industry executives.

“These rulings also serve to insulate the Islamic financial system from excessive leverage, which in turn contributes toward promoting financial stability and its long-term sustainability,” Dr. Zeti said during her lecture, “Finance and the Real Economy: Fostering Sustainability”.

She explained that the global financial crisis provided a distinct example of how excessive leverage and exponential growth in financial activities that were detached from the growth trajectory of the real economy could become a source of instability.

In advanced economies, bank balance sheets exploded, growing to multiples of annual gross domestic product (GDP). In Iceland, for example, the three largest banks that were nationalized in early October 2008 had seen their total assets expand from 100 percent of GDP in 2004 to more than 900 percent of GDP as of the end of 2007, while in the United Kingdom, bank assets were more than 500 percent of GDP prior to the global financial crisis. 

The sheer size, complexity and leverage in the banking system increased the fragility of financial institutions and limited their ability to absorb even small losses, thereby resulting in widespread and deep economic dislocations. 

At the height of the crisis, the size of gross amounts outstanding of over-the-counter (OTC) derivatives globally was estimated at over US$614 trillion, more than 10 times global GDP. Despite its size, the OTC market was opaque and inadequately regulated, making it difficult to quantify the risk that had been assumed by the financial institutions. 

Dr. Zeti said that this recent decade had witnessed a dramatic transformation of the Islamic financial landscape, marked by sustained rapid growth and the widening of its geographical reach, resulting in more diverse Islamic financial institutions and the generation of a wide spectrum of innovative products. Islamic finance had also evolved from being domestic-centric to become increasingly internationalized. 

“Today, the total global size of the Islamic financial assets is $1.6 trillion,” she said, adding that there were currently more than 600 Islamic financial institutions operating in 75 countries. 

She acknowledged that countries hosting Islamic banks needed to adjust their legal, regulatory and supervisory frameworks to accord greater clarity to the appropriate legal and regulatory treatment in order to foster the sound and orderly growth of risk-sharing structures and activities, both in terms of the funding and the assets-side of Islamic banks.

Another important dimension in fostering the further development of risk and profit sharing instruments was the need to ensure the institutional soundness of the Islamic financial institutions and their enhanced ability to assess risks in the real sector. 

This underscored the imperative of robust risk management capabilities to manage new risks peculiar to risk and profit sharing contracts and the adoption of strong governance, transparency and disclosure practices within the Islamic financial institutions to meet the due diligence requirements for determining the viability of business and investment proposals, she said. 

“Equally important in ensuring the institutional soundness of Islamic financial institutions is the need for robust liquidity management,” Dr. Zeti said. 

Today, Islamic financial institutions operating in the different jurisdictions are still confronted with the challenge of managing their liquidity positions effectively, given the limited supply of high quality sharia-compliant liquid instruments being the reason most commonly cited. 

The lack of high quality liquidity instruments for Islamic finance not only constrained effective liquidity management, but it also affected the efficient cross-border diversification of financial flows. 

Darmin Nasution said in his welcoming remarks that Islamic finance standard setters, such as the Islamic Financial Services Board (IFSB) and the Accounting Auditing Organization for Islamic Financial Institutions (AAOIFI), consistently developed international Islamic finance standards in the areas of risk management, stress testing, accounting and auditing.

“However, the prescribed Islamic finance standards alone will not be sufficient to tackle the current economic and finance conditions that have posed a challenge for the development of Islamic finance,” he said. 

He said that to manage the stability of the financial system as a whole, countries needed to strengthen their macro and micro prudential policies.

(The Jakarta Post / 22 Dec 2012)

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Islamic finance: Idea whose time has come

Even as the Reserve Bank of India (RBI) is driving financial inclusion through a combination of conventional and non-conventional approaches, it’s time to take a fresh look at Islamic finance to expedite finance inclusion, especially within the 170 million Indian Muslim community.  

A banking professional with a three-year stint at global banks initially in the US and then at Islamic banks in Kuwait for about five years, Saif Ahmed, who is currently Managing Partner at Infinity Consultants, Bangalore, told Deccan Herald that though Islamic banking in India was ruled out by the RBI Governor D Subbarao last month, there is scope for Islamic finance in many other ways.

“Many people don’t know that Islamic finance has a lot to offer than just interest-free loan, or karz-e-hasan. It has many financial products to offer, ranging from leasing, to equity, venture capitalism and so on. These are doing well in both Islamic and non-Islamic countries and deserve attention.”  

According to him, some of the products can be introduced with appropriate tweaking, to make them compliant with the existing laws of India.

Islamic finance is broadly classified in two models, asset-based and equity-based. In asset-based finance, there are two products, murabaha and ijarah. The latter is a form of lease financing and similar to conventional lease finance, but comes with the basic ride that the purpose of the lease should be halal, or Sharia compliant. In case of murabaha, the lender buys an asset on behalf of the borrower and then sells it to be borrower for a profit, the full amount payable in installments.  

Another form of financing is besalam, similar to the concept of contract farming; its equivalent for manufacturing activity is called istisna. He said that of the two common models, equity-based ones – musharaka (a form of partnership) and mudaraba ( a kind of venture capitalism) can be explored, within the framework of market regulator Sebi.  

Saif said, “Islamic finance is so vast that it is possible in India even within the framework of existing laws. Once its acceptance grows gradually, it can be stand on its own as an alternate system of financing.

Infinity Consultants has advised companies, family businesses and entrepreneurs primarily in the Middle East and India on corporate finance and business solutions. It recently   launched India’s first Sharia compliant chit fund, Zayd Chit Funds Pvt Ltd.

“I believe Islamic finance will gain momentum in India when professionals, like bankers, lawyers, accountants, from within the community and outside start taking interest so that they can come up with innovation products that are Sharia-compliant and within the existing the Indian laws. It is this critical mass of human capital that can drive Islamic finance. Academicians do have a role but it is limited.”  He said that NRIs working in the Gulf as finance professionals and also those in India need to take the lead.

Globally, Islamic banks have been growing consistently, though return on assets and return on equity continue to be low when compared to conventional banks, according to the latest World Islamic Banking Competitiveness Report 2013, released by global advisory firm Ernst & Young.

Prepared by Ashar Nazim, Partner, Islamic Banking Excellence Center, and Grodon Bennie, Partner, Financial Services Leader, , Ernst & Young, MENA, the report said, “It is however a different story when it comes to profitability. The industry’s average ROE was 12 per cent compared to 15 per cent for conventional in 2011. Islamic banks continue to grapple with multiple challenges relating to sub-scale operation and asset quality.

(Deccan Herald / 22 Dec 2012)

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