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Wednesday, 16 January 2013

Malaysia: DanaInfra sukuk this year may exceed RM6b

Kuala Lumpur: DanaInfra Nasional Bhd is likely to sell at least RM6 billion of Islamic bonds (sukuk) this year to finance the mass rapid transit (MRT) project, with a tranche of about RM1.5 billion expected to be issued every quarter, an official says.

"It could be more than RM6 billion, but this will ultimately depend on (the project handler) MRT Corp's requirements. We think a quarterly issuance is optimal," said chief operating officer Datuk Kamal Mohd Ali, when met by reporters here yesterday.

Up to a fifth of each tranche may be allocated to retail investors if there is demand for it, he added.

DanaInfra, a unit under the Ministry of Finance set up in mid-2010 to help raise financing for the MRT project, launched its first RM1.5 billion tranche last week, setting aside RM300 million for retail investors, with the rest to be taken up by institutional investors.

The retail sukuk, the country's first, is currently being marketed to investors and is expected to be listed on Bursa Malaysia as the first exchange-traded bond and sukuk on February 8.

The profit rate of the retail sukuk will be determined at the close of the book-building exercise for the institutional offering at the end of this month.

According to Kamal, both institutional and retail investors will be offered the same profit rate. 

Last week, DanaInfra announced that the profit rate for retail sukuk would be at least 3.7 per cent a year.

The retail sukuk will be the world's first such issuance, he said.

The first phase of the MRT project, the country's largest infrastructure project, is a 51 kilometre stretch linking Sungai Buloh with Kajang in the Klang Valley and is expected to be completed by 2017.

MRT Corp's chief executive officer Datuk Azhar Abdul Hamid said last month that the final cost of the first phase would not exceed RM23 billion.

(Business Times / 16 Jan 2013)

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Islamic banking law decree in the Sultanate of Oman

Critical elements in the process of institutional change, even profound change, frequently occur without warning or preparatory fanfare. That has been true with regard to the implementation of Islamic banking in the Sultanate of Oman, as illustrated by the issuance by His Majesty Sultan Qaboos bin Said, on 22nd Muharram 1434 A.H. (6 December 2012 A.D.), of Royal Decree 69/2012, Amending Some Provisions of the Banking Law promulgated by Royal Decree 114/2000 (the “Islamic Banking Decree”). In addition, the Central Bank of Oman (the “CBO”) issued Circular IB 1 on 18 December 2012, which adopted the relevant Islamic banking regulations (the “Islamic Banking Framework”) with only minor amendments to the previously circulated draft. The long-anticipated Royal Decree consists of only three sentences. The amendments to the Banking Law (the “Islamic Banking Law”) are comprised of only 12 sentences set forth in six Articles in one new chapter of the Banking Law (Chapter Six, entitled, quite simply, “Islamic Banking”). The Islamic Banking Framework runs to 589 pages, plus some amendments in Circular IB 1. It is anticipated, however, that the changes effected by the Royal Decree will be significant as the Sultanate embarks upon the age of Islamic banking, finance and investment.
The Islamic Banking Law leaves much to the Islamic Banking Framework and future regulations, circulars and guidelines. But, laying the foundation for the development of the Islamic banking industry in Oman, the Islamic Banking Law does specifically address four critical substantive structural elements, as well as a few procedural elements of the transactional structure of Islamic banking in Oman. This article focuses on those four areas, leaving discussion of the Islamic Banking Framework to future articles.
The four substantive structural elements are: (i) the transactional base of Islamic banking in the Sultanate, and some fundamental requirements pertaining to that transactional base; (ii) the status of Islamic banking and Islamic banking transactions in terms of taxation, land law constraints and the provisions of other areas of substantive law; and (iii) two matters pertaining to Shari’ah supervisory boards, one at the level of the individual banks and one at some higher level.
The procedural matters pertain to: (a) the obligation of the Board of Governors of the CBO (the “Board of Governors”) to issue the Islamic Banking Framework; (b) the obligation of the CBO to license Islamic banks and Islamic windows at conventional banks; and (c) interpretation of the Islamic Banking Law, particularly as its provisions may conflict with other laws, rules, regulations and Royal Decrees. As is so often the case, a great deal of substantive law impact is embedded within the procedural provisions.
Transactional base of Islamic banking
The Islamic Banking Law (specifically Article (124)) is expansive in authorizing Islamic banks to make use of essentially allShari’ah-complaint contracts and structures in Islamic banking transactions. It mandates that Islamic banks perform those transactions in a manner that does not contradict the Shari’ah (leaving aside for the moment the critical analysis of how the substantive principles of Shari’ah are to be determined and interpreted). By way of example, and not by way of exclusive itemization, Article (124) affords special attention to four types of Shari’a-compliant transactions. Each authorization is gratifyingly broad, and it is likely, in each case, that applicable restrictions will be set forth in the Islamic Banking Framework and future circulars and guidelines. And it is apparent, in each case, that further clarification of the scope of each authorization is necessary. First, Islamic banks are authorized to accept deposits and manage restricted and unrestricted investment accounts, whether those accounts are operating on the basis of charges or profits or otherwise.
Second, Islamic banks are authorized to finance and invest through mudaraba, musharaka, murabaha, ijara, salam, istisna, qard hasan and other Shari’ah-compliant contracts and structures.
Third, Islamic banks are authorized to issue asset-supported or project-supported sukuk and invest in asset-supported and project-supported sukuk. There is no indication of how an Islamic bank might go about issuing an asset-based or project-based sukuk. Presumably, issuance by the bank for its own account and based upon its own assets is permitted.
It would seem that this provision also allows for a broader sukuk issuance authority in order to allow Islamic banks to fulfill the functions of building capital markets and facilitating financing of bank clients. That would likely entail issuances by bank subsidiaries where the subsidiaries are capitalized by assets provided by third-party entities (i.e., customers of the Islamic bank). The use of bank subsidiaries is prudent as a matter of bank regulatory policy and practice; among other reasons: it is undesirable to allow an Islamic bank (or any other bank) to have liability on sukuk structured on the assets or projects of third parties – those liabilities should be isolated into subsidiaries holding those assets or projects. If this bank-subsidiary issuance structure is permissible, the sukuk markets in Oman have been given a major structural boost. And, depending upon the interpretation of the Article (125) tax exemption (discussed in the next section of this article), it seems likely that tax impediments to the use of such structures also have been removed. Thus, for example, it is arguable that the 12% tax that would be levied on a special purpose vehicle (“spv”) established as a sukuk issuer is not applicable if that issuer spv is a subsidiary of an Islamic bank effecting a Shari’ah-compliant banking transaction. Obviously, clarification is needed on these matters, and some clarification may be forthcoming as the Capital Markets Authority considers sukuk regulations for Oman.
Fourth, Islamic banks are authorized to deal in real estate and movables, including by way of selling, purchasing, investing in, renting and leasing real estate and movables, and this authorization is expressly stated to be an exception to and from restrictions in the laws referenced in the Islamic Banking Decree (presumably the Land Law) and related laws and Royal Decrees. This is a monumental modification of the laws that goes to the heart of Islamic banking and the use of Shari’ah-compliant structures because essentially all Shari’ah-compliant structures make use of land and movables: the essence of Islamic banking and Islamic finance is the involvement of tangible assets. This provision is discussed in the next section of this article.
Status of Islamic banking transactions: Tax, Land Law, and others
The Islamic Banking Law seems to override a number of Oman’s existing laws, rules and regulations, including, in particular, the Land Law promulgated by Royal Decree 5/80 and tax laws pertaining to land transactions. Clause (D) of Article (124) of the Islamic Banking Law provides that Islamic banks are entitled to deal in real estate and movables, including (without limitation) by way of selling, purchasing, investing in, renting and leasing real estate and movables and that this authorization is an exception to and from restrictions in the laws referenced in the Islamic Banking Decree (presumably the Land Law) and related laws and Royal Decrees. The Article (124) authorization is supplemented by Article (125), which provides that licensed Islamic banks are exempted from charges imposed by transactions related to the ownership, leasing and renting of real estate and movables where the transactions are performed for the purpose of providing Islamic banking services.
The lists of illustrative activities in Articles (124) and (125) do not match. Article (125) does not include references to ‘selling, investing and other dealings’, while Article (124) does refer to those activities. It is unknown whether this mismatch is intentional. Logic would dictate that ‘selling, investing and other dealings’ in real estate and movables in the course of practicing Islamic banking also should be exempted from charges, particularly in light of the nature of Islamic banking transactions, including with regard to the matters discussed in the next paragraph.
The scope of the exemption from land-related charges is undefined. Certainly it must encompass transfer taxes applicable to interests in land. Hopefully, the provision will be applied in such a manner that Islamic banks will not suffer charges or impositions that would not be incurred by a conventional bank on a similar banking transaction. Some of the more problematic areas of application of the exemption provision will arise in Islamic banking transactions that give rise to accretions or profits that are not incurred in conventional banking transactions. Consider, for example, mudaraba andmusharaka arrangements involving interests in land where the transaction results in capital gain on the land interest. It will be necessary to consider, on a charge-by-charge basis, every charge of every type to determine whether it is appropriate to exempt Islamic banking transactions from each of those charges.
The second clause of Article (126) of the Islamic Banking Law provides the customary, but quite important, catch-all statement to the effect that ‘all that contradicts or contravenes the amendments set forth in the Islamic Banking Decree shall be revoked’. This provides comfort that other laws, rules and regulations that interfere with the implementation of Islamic banking in Oman will be removed. Resolution of these conflicts is left to the future. Potential conflicts are many and varied. This article mentions a few, such as taxation on land-related capital gains incurred because of the use of aShari’ah-compliant structure and, as discussed in the next section, enforcement of determinations of the supreme authority for Shari’ah oversight. But many more can be easily imagined. These include not only charges in the nature of taxes, but also liabilities and impositions that arise because of the use by an Islamic bank of Shari’ah-compliant contracts or structures. Consider, for example, environmental liability or third-party liability arising as a result of the ownership or control of a land interest by a mudaraba or musharaka used by an Islamic bank to provide transactional financing. Will the Islamic bank be exempted from liabilities such as these? Will these types of liabilities be assessed only against the assets involved in the transaction? Or will the Islamic bank itself have liability? Much remains to be determined in the future.
Shari’ah supervisory matters
The Islamic Banking Law requires each institution doing Islamic banking to establish a Shari’ah supervisory board. The form, prerogatives and functioning of these Shari’ah supervisory boards are to be governed by the Islamic Banking Framework, as are the qualifications and conditions applicable to members of the Shari’ah supervisory boards. One of the more interesting features of the Islamic Banking Law as it pertains to Shari’ah supervisory boards is the requirement that the appointment of the board members and the determination of the compensation of board members are to be established by the general meeting of the Islamic bank. No separate provision is made in respect of these matters in the case of Islamic windows of conventional banks, but, presumably, the same concept would apply. Some of these matters were addressed, in part, in one of our previous articles on Islamic finance, which is available on our blog at
Article (126) B of the Islamic Banking Law sets forth a requirement that has been described by various market participants as “unexpected”. It requires the Board of Governors to establish a supreme authority for Shari’ah oversight (the “Oman SOA”) and to specify the form, prerogatives and functioning of the Oman SOA as well as the qualifications and conditions applicable to members of the Oman SOA. The Oman SOA has not yet been established, and no guidance has been provided as to the nature of its role, function, power, authority or institutional status. Will the Oman SOA set standards for different contracts and structures (such as mudaraba, musharaka, ijara, murabaha, wakala, and the like) and require that the Shari’ah supervisory boards of the Islamic banks implement transactions in accordance with those standards? Will courts and arbitrators be required to submit Shari’ah matters to the Oman SOA? If any such submission is required, will the determinations of the Oman SOA be advisory in nature or will they constitute binding determinations? No indication has been provided with respect to any of the foregoing questions, or any other similar matter. One may surmise that the pronouncement establishing the Oman SOA will specify its role, function and power and authority, although that pronouncement will likely leave much to future determinations.
The Islamic Banking Law does not make reference to any paradigm or source that might provide guidance in respect of the role, function, power, authority, and institutional status of the Oman SOA. However, one might consider, as a possible paradigm, the central Shari’ah Advisory Council (the “Malaysia SAC”) of Bank Negara Malaysia, the Central Bank of Malaysia (“Bank Negara”). Bank Negara comprised the Malaysia SAC, under the auspices of Bank Negara, in 1997 as the highest Shari’ah authority for Islamic finance in Malaysia. The Malaysia SAC’s authority in its ‘regulatory’ function allows it to ascertain Islamic law for the purposes of Islamic banking, takaful, Islamic finance, Islamic development finance, and other business which is based on Shari’ah principles. The Malaysia SAC also has an advisory function, pursuant to which it is responsible for validating all Islamic banking and takaful products to ensure their compatibility with Shari’ah principles.
The Malaysia SAC was further institutionalized, defined and empowered pursuant to the Central Bank of Malaysia Act 2009, Act 701, Laws of Malaysia (the “CBMA”; available at, particularly in respect of its ‘regulatory’ function. Pursuant to the CBMA, Bank Negara is required to consult the Malaysia SAC on any matter relating to Islamic financial business and any matter pertaining to the performance by Bank Negara of its business or affairs or under any law in accordance with the Shari’ah (CBMA, Article 55(1)). Any financial institution may seek a ruling or the advice of the Malaysia SAC in respect of the operations of its business; no provision mandates that the SAC take such a request and render a ruling or advice (CBMA, Article 55(2)). Further, a court or arbitrator in any proceeding in any court or before any arbitrator is required to consider the published rulings of the Malaysia SAC and is required to refer any question concerning a Shari’ah matter to the Malaysia SAC for a ruling or advice (CBMA, Article 56). Articles 57 and 58 of the CBMA provide that the Malaysia SAC determinations in respect of each of the foregoing matters prevails, including over determinations of courts and arbitrators and contrary rulings of other financial institutions and in respect of rulings provided in response to requests made by financial institutions.
The definition of the nature, role, functions, power, authority, and institutional status, among other elements, of the Oman SOA is likely to be one of the most difficult challenges facing the Board of Governors in connection with the design of the Islamic banking model and practical implementation of Islamic banking in Oman. It entails delicate balancing among the CBO, the Oman SOA, the Islamic banks, and the Shari’ah supervisory boards of those Islamic banks. It further entails a careful reconsideration of the relative power, authority and institutional status, with respect to dispute resolution, among the courts and arbitrators, on the one hand, and the Oman SOA, on the other hand. The policy issues are many, and the effect on the existing legal and regulatory system is likely to be profound.
Regulations and licensing
Two Articles of the Islamic Banking Law, constituting a total of two sentences, address obligations in respect of issuance of Islamic banking regulations and the licensing of Islamic banks and Islamic windows of conventional banks. Each of these matters will be discussed in greater detail in future Client Alert articles, particularly those dealing with the Islamic Banking Framework.
Very simply, the Board of Governors is obligated to issue the Islamic banking regulations, as well as circulars and guidelines, in respect of certain enumerated matters and, in open-end format, other non-enumerated matters. As noted above, the CBO issued the Islamic Banking Framework on 18 December 2012 pursuant to Circular IB 1. The enumerated matters are licensing, governance, Shari’ah control, capital, credit, limits of investment and exposure, accountability, reports, disclosure and risk management. This sentence lays the foundation for the Islamic Banking Framework and for a dynamic, ongoing regulatory process that includes regulations, circulars and guidelines in a system that will be familiar to all parties that have banking experience.
With respect to licensing, the CBO is mandated to issue licenses to Islamic banks and Islamic windows of conventional banks. Those matters are addressed in the Islamic Banking Framework with respect to both banking and investment banking activities.
Interpretations of Islamic banking
As noted in other sections of this article, there are significant unresolved questions regarding the interpretation of different provisions of the Islamic Banking Law. These include the scope of taxation exemptions, the scope the revocation of laws, rules and regulations that contradict or contravene the Islamic Banking Law, and the status of the determinations of the Oman SOA vis-à-vis court and arbitrator determinations.
Two provisions of the Islamic Banking Law (Articles (121) and (124)) seem to indicate that whoever interprets the Islamic Banking Law must do so in a manner that does not contradict the essential substantive principles and nature of Islamic banking. A likely interpretation of that mandate is that application and interpretation of the Islamic Banking Law must be in accordance with the substance of the applicable Shari’ah principles. This interpretation gives rise to some delicate policy issues relating to the relative powers, authorities, institutional status, rights, and responsibilities of different branches and organs of government. One will have to consider the Oman SOA as an organ of government for purposes of these policy determinations. For example, the Board of Governors, in the exercise of its Article (126)(B) establishment obligation, may vest the Oman SOA with the ultimate authority to determine the substance of those Shari’ah principles, at least as a primary matter. That would seem to vest exceptional ‘judicial’ or ‘quasi-judicial’ authority in the Oman SOA, and will certainly raise the issue of the balance of power and authority as between the courts and arbitrators and the Oman SOA. In considering the policy arguments, and the inter-branch balancing, it is worth noting that Article (124) seems to indicate that Islamic banks must practice Islamic banking in accordance with the restrictions set by the Board of Governors, even where those restrictions might conflict with interpretations of the regular nature of the applicable Shari’ah principles.
The long-awaited Islamic Banking Decree giving effect to the Islamic Banking Law is now effective. It will result in profound changes in the law of Oman. Over time, it will result in profound changes in the financial markets in Oman. And, over time, it will influence the essence of the Omani culture. The Islamic Banking Law sets forth some elemental principles and the outline of the basic structure of Islamic banking. Much remains to be clarified as the Islamic Banking Law is implemented in the coming months and years. The Islamic Banking Framework, and related circulars and guidelines, will be a first step in resolving some of the many issues. But numerous other matters, some being of a fundamental policy nature, will remain and be resolved incrementally as the Islamic banking system evolves and becomes a part of the fabric of Omani existence. It is our hope that transparent and comprehensive discussions of these issues and these policy matters will accelerate and that the public will be better informed and served as a result.

(Association Of Carporate Counsel / 15 Jan 2013)

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Essence of Islamic wealth management

ISLAM enjoins wealth acquisition so long as it is done within the parameters of the Islamic law (syariah).
The wealth, which is acquired through halal sources, that is, from permissible sources and activities sanctioned by the syariah, will be blessed by Allah and hence, will benefit the owner and his family not only in fulfilling the needs of worldly affairs but will also be rewarded in the hereafter.
Conversely, wealth, which is acquired through sources and activities that contravene the parameters of syariah will earn the wrath of Allah in both this world and the hereafter.
With this in mind, a Muslim must always be vigilant in ascertaining both the sources and the activities in acquiring wealth, and equally be mindful about how the wealth is to be used or spent.
Muslims can adopt whatever ways and means in acquiring wealth that suit their needs as long as the parameters of syariah are not violated.
Equally important, acquiring wealth through ways and means that contravene the law of the state or which are against moral values or depriving public interest, are illegal and unlawful in Islam.
Indeed, these limitations or restrictions imposed by Islam in acquiring wealth are of universally accepted values.
In many respects, the parameters of syariah are in harmony with other cultures and system of laws that are practised by society.
Islam essentially accepts innovation and creativity as ways and means to acquire wealth so long as no fundamental principles prescribed bysyariah are infringed.
In this regard, the parameters of syariah are indeed dynamic in adapting and embracing the technological advancements as well as the sophistication of the economic activities in this contemporary world.
In term of the uses of wealth, for a free market society, it is entirely up to the owner to determine how to spend his wealth.
It is natural that one will first spend on essential items, specifically food, clothing and shelter. After that, one will use his wealth on other important things such as education, health, transportation, vocational tools, religious obligation, leisure and others, depending on his needs.
Ideally, a Muslim should spend his wealth not only for the maintaining and sustaining of his and his family life; but he should also spend for his community.
A Muslim who does good deeds for his community with the wealth he owns will invariably be among those who are successful and prosperous. This assurance can be found in the verse of the Holy Quran, where Allah says: “So fear Allah as much as you can; listen and obey and spend in charity for the benefit of your own soul and those saved from the covetousness of their own souls, they are the ones that achieve prosperity.” (64:16).
On the other hand, a person who is a miser and devours his wealth above all others, will live in a more confused and disordered life as the wealth he owns will become an enormous burden to him.
Inevitably, wealth in the hands of a miser will be a source to punish himself in the hereafter, as stated in the Quran: “But he who is a greedy miser and thinks himself self-sufficient, and gives the lie to the best, we will indeed make smooth for him the path to Misery; Nor will his wealth profit him when he falls headlong (into the Pit).” (Quran, 92:8-11).
The intense devotion to wealth may be an obstacle for him to perform religious obligations, such spending for zakat (alms). The parable about what had happened to Qarun when he disobeyed the command to give alms is a great lesson to us.
Qarun was a cousin and faithful follower of Prophet Moses. His early life was filled with poverty. Therefore, he asked Prophet Moses to pray to Allah, for him to fulfil his livelihood.
The request was granted and Qarun became a wealthy man. He was so rich that the keys of his possessions had to be carried by a large number of servants.
Despite his enormous wealth, Qarun refused to give alms and reneged upon the favour from Allah, and in the end was given a severe punishment, where, he and all his possessions were piled together into the ground overnight.
The integral lesson of this parable is that the rich should be grateful to Allah, which favours upon him wealth.
Allah promises that He will increase the sustenance to whoever is thankful to Him and will curse the one who is arrogant with his wealth. Indeed, wealth is a test for man to the extent that even the characteristics of a person will change because of the intense devotion towards wealth.
Therefore, in order to eliminate excessive devotion of wealth in our heart, it is imperative to use a portion of our wealth and spend it by ways of sadaqah (charity), zakat (alms), waqaf (endowment) or other forms of charity that can benefit those who are unfortunate in the community.
Allah has promised in the Quran that: “Who is he that will loan to Allah a beautiful loan, which Allah will double unto his credit and multiply many times? It is Allah that giveth (you) want or plenty, and to Him shall be your return.” (2:245).
In essence, management of wealth from an Islamic perspective is a holistic approach that deals with one’s wealth that not only fulfills his own needs but also extend it to benefit his community.
More importantly, the benefit of one’s wealth, if one acquires and uses it in accordance with syariah principles will be transcended and perpetuated for one’s life in the hereafter.
In contrast, if one neglected the syariah principles in managing his wealth, one will be severely punished by the absolute owner of the wealth, Allah.
Let us always be mindful and vigilant on what we decide to do with the wealth that Allah has bestowed upon us as His trustees.

(The Star Online / 15 Jan 2013)

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Oman: NBO — the first conventional bank to launch Islamic banking services

MUZN — Pure Islamic Banking is now open for you — MUSCAT — National Bank of Oman (NBO) has received the final license from Central Bank of Oman and is proud to announce the soft launch of MUZN Pure Islamic Banking from TODAY! Muzn is now officially open to welcome and serve customers at its first branch in Al Athaiba.

Muzn’s flagship branch located in A’Sahwa Towers — Athaiba North, is a full fledged Islamic Banking Branch. The Branch has qualified staff and robust systems in place to offer a broad spectrum of Shari’a approved Islamic Banking products and services to all its customers. The Bank will also progressively open more branches in all regions of Oman.

Customers are cordially invited to visit the Muzn Branch from Sunday to Thursday between 8am until 2pm. Muzn’s friendly staff will be at hand to welcome customers and explain all the products and services in the most simple, yet professional and transparent manner.

Muzn’s guiding principle is to create ethical value for all stakeholders through innovation, customer care and superior standards of operation. It’s Mission is to provide innovative, competitive and quality Islamic Banking products and services; ensuring they are accessible and understood by all.
Muzn strictly adheres to Shari’a principles and to the highest 
standards of professional conduct, corporate governance and ethics. All related transactions and activities will be conducted in accordance with the principles of Shari’a that allow asset-backed financing and prohibits interest-based dealings. All activities conducted by Muzn Islamic Banking will be independent and separate from the activities conducted by conventional banking at NBO.

Muzn Islamic Banking has a Shari’a Supervisory Board comprising of well experienced and knowledgeable Sharia Scholars to supervise its Islamic banking business.

The Muzn brand was first unveiled by the Bank’s Deputy Chief Executive Officer (DCEO), Mr Ahmed Al Musalmi, in July 2012, at a special function held in the presence of the Honourable Shaikh Khalfan Al Esry, Muzn Shari’a Supervisory Board Member and Sayyidah Rawan bint Ahmed Al Said, NBO Board Member.

The name Muzn is the Arabic word for rain clouds which are, in turn, associated with favourable outcomes such as growth and prosperity, fortune, blessings and longevity. In turn, Muzn aims to deliver growth for your money, hope and prosperity for customers.

‘The green colour used in the Muzn brand identity is closely connected to the meaning of the word Muzn. Rain which brings life to the land — and green is strongly associated with life and growth, indicating prosperity and well-being.

NBO’s Chief Executive Officer, Salaam Al Shaksy said: “This is 
indeed a landmark event for us. The launch of Muzn is in line with NBO’s long term strategic objectives. Muzn offers a rich bouquet of products and services which will cater to Institutional, Corporate and Retail clientele. We are proud to be the first conventional bank to commence Islamic Banking Services in Oman”.

Deputy Chief Executive Officer, Mr Ahmed Al Musalmi commented: “ We are indeed very happy to serve and meet the needs of the community by providing products and services that are in accordance with Islamic Laws. We will always remain transparent and committed and thereby become the leading provider of innovative Islamic financial services. We look forward to welcoming customers at our Muzn Branch from today”.

(Oman Daily Observer / 16 Jan 2013)

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New law may bolster Hong Kong market for Islamic finance

The Financial Services and the Treasury Bureau presented feedback last year on the consultation on proposed amendments to the Inland Revenue Ordinance and the Stamp Duty Ordinance to ease development of an Islamic bond, or sukuk, market in Hong Kong.
As part of the Hong Kong government's long-standing policy initiative to develop Islamic finance in the city, the bureau sent out a consultation paper with detailed proposals for the amendment of relevant tax-related legislation. The essence of the proposal is that a level playing field needs to be created to enable Islamic finance products to be structured in Hong Kong.
The way things stand now, if property located in Hong Kong is used as the underlying asset in a sukuk then there would be a significant additional tax burden compared with a conventional product yielding similar economic returns, such as a bond.
In brief, Islamic law prohibits various activities, including the payment and receipt of interest. This means that while loans and bonds can be issued, no interest or coupon payments can be made or received. Several different structures have been developed over the centuries, many of which have roots in the medieval commercial markets that were pervasive in the Persian Gulf during Koranic times.
One group of these structures is often referred to as a sukuk (Arabic for "notes"). The notes issued under a sukuk represent an undivided beneficial interest in an underlying asset or business of the issuer. This asset or business is structured to generate a financial return that is often set at a pre-defined rate for the period of the note. This way, a sukuk can be structured to give an economic return similar to that provided by conventional fixed-income securities.
It should be noted that the Hong Kong financial services sector has been involved in many Islamic finance transactions but those transactions involve property and businesses outside of Hong Kong.
At present, if a company compliant with Islamic sharia law in Hong Kong wanted to finance a property or business located in the city, it would need to find a more structured solution involving assets located in a tax-neutral jurisdiction.
One good example of such structure would be a commodity-based murabaha facility in which commodities are bought by the financing institution(s) in a bonded warehouse and sold to the Hong Kong-based customer for a cost-plus profit price (the profit can be fixed at the time of the sale on a Libor-plus-margin basis). The customer will then sell the commodities to a third party to generate a cash balance that it can use to fund its Hong Kong activities. While this type of structure delivers the economic returns of a loan, it is constructed in a way so as to reflect profit from permissible trading activities.
The Islamic finance industry relies heavily on this sort of financial engineering but there is a strong push within the industry towards more direct financing of assets or businesses.
Other non-Muslim countries such as Britain, Singapore and Japan have already adapted legislation to enable a more level playing field and help its financial services sector sell products in the attractive and rapidly expanding market.
As with the Hong Kong proposals, these countries have not granted any special tax incentives to develop the market. Instead, they have ensured that financial products with similar economic risks and returns are given similar tax treatment.
Although this development is welcomed by Hong Kong's financial services industry, I do not think this means we can expect to see a deluge of transactions once the law actually changes.
Sharia-compliant transactions will be a niche product offering and a Hong Kong-based sukuk in particular, will give Hong Kong issuers access to a potential market worth about US$85 billion. Total assets in the Islamic finance industry are estimated at US$1.3 trillion.
The bureau's key conclusions were that respondents welcomed the proposals and supported the religion-neutral approach in the drafting of the bill. This means that there will be no use of Arabic or sharia terminology as opposed to referring to the various types of Islamic instruments - such as sukuk - that get used in the industry. This is the same approach that was taken in Britain and is the right way to go about the changes since it ensures a fully inclusive market and removes politically sensitive issues.
Although it has taken Hong Kong a long time to get here, the Financial Services and the Treasury Bureau should be congratulated for preparing a well thought out and detailed paper. This should ensure the government does not encounter long delays in drafting the bill.
Those interested in the development of Hong Kong's Islamic finance industry will be looking forward to the bill being presented and passed this year.
Regardless of how many actual transactions come to market in the years ahead, it will place Hong Kong in the minds of Islamic financial institutions and investors in Europe and the Gulf. This will raise Hong Kong's profile in the fast-growing market.

(South China Morning Post / 16 Jan 2013)

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