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Thursday, 7 February 2013

'Halal' Financing for Muslim Entrepreneurs Gains Currency

In mid-2009, Pakistani immigrant Junaid Akbar struck out at a host of major banks when he sought funding to buy bagel shop franchises in the Dallas-Fort Worth area. Then, in early 2010, the retired computer programmer landed just over $500,000 from an unusual source: Bank of Whittier, a tiny community bank in Los Angeles that specializes in financing for Muslims who want to comply with Islamic anti-usury laws that prohibit the paying or charging of interest.
The bank, whose staffers speak more than a dozen languages, markets itself to observant Muslim entrepreneurs trying to stay within the boundaries of Shariah, or Islamic law. Its clients include owners of gas stations, supermarkets, and restaurants. Even though avoiding loan interest wasn’t his priority, “they came and helped us out,” says Akbar, who now owns four Einstein Bros. Bagels (BAGL) outlets. “I applied so many places, but they took a chance on me.”
Islamic finance is widely available throughout the Muslim world, but is rare in the United States, says Yahia A. Rahman, who bought the bank in 1982 and five years later opened a related financing operation, Lariba American Finance House, to handle mortgages and small business ventures. Deals are structured so that the bank buys into the venture with the entrepreneur, who runs the company and buys the bank out, with payments structured so that the bank is compensated for its investment. Profits and losses are shared; the overall cost tracks with a traditional loan repayment at a standard interest rate.
“Our model is that we do not rent money,” says Rahman, who spent most of his career as an engineer in the oil and gas industry.”We do not charge interest; we look at every deal as an investment deal.”
Such a model may become more popular as the population of Muslims in the U.S. booms. Estimated at 2.6 million in 2010, a 2011 Pew Research Center reportprojects that the number of Muslims living in the U.S. will more than double by 2030, to 6.2 million. A March 2012 study of American Muslim entrepreneurs (PDF) tallied 81,000 Muslim-owned businesses in the U.S., with half located in New York, Chicago, and Houston.
Most obtain conventional funding for their small business operations, as well as for their home mortgages, says Aijaz Hussain, vice president of national sales at University Bank in Farmington Hills, Mich. His bank does “Sharia-compliant” home mortgages but not entrepreneur financing, which is much more complicated, he says. “It’s easier to do with asset-based financing” such as a home or commercial mortgage, Hussain says. “A business is a whole different challenge because you have to evaluate the risk, share in profits and losses, and you have to bet on the ability of the guy who’s going to run the business for you.”
In his conversations with Muslim Americans, Hussain says he finds about 20 percent of the most religiously devout are concerned about finding Islamic finance. “It’s like in any religion, you have 80 percent who are more liberal and don’t worry about it so much. The more conservative types want the Islamic product, but even most of them will shop around and make sure they’re not paying more for it.”
Business financing without interest requires a level of scrutiny that goes far beyond the typical bank underwriting process, which relies heavily on credit scores and borrower collateral. It is labor-intensive, but it makes for prudent operations: “Our losses are very, very minor because we work with the customers closely on their business plans, we tailor things individually, and we do detailed financial analysis on each deal,” Rahman says. “Our employees are not paid by earning a commission on the number of loans they produce, they are paid and motivated by satisfied customers.”
Some analysts feel that Islamic finance, which also prohibits investments in alcohol, casinos, and the adult entertainment industry, is a natural fit with the trend toward socially responsible and faith-based investment. That topic was on the agenda of a 2012 Harvard University Forum on Islamic Finance, where participants concluded that a shared focus on values-based investing could help extend acceptance of Islamic finance in the West. Saturna Capital Chairman Nicholas Kaiser explained on Bloomberg TV in 2011 how following Islamic finance principles has affected his Amana mutual funds’ strong performance.

International finance and entrepreneurship professor Jaemin Kim, who teaches at San Diego State University, foresees a partnership among private equity or venture capital investment and Islamic funding of entrepreneurs who are running fast-growing companies. “Equity is the primary financial claim used by the VCs, who invest in the possibility of growth potential. With all the liquidity in Arabic countries and Islamic financial institutions around the world, entrepreneurial finance could be a good venue for that,” he says.
Of course, for many Muslim entrepreneurs, the main objective is simply finding capital, whether or not it complies with religious precepts. Mohammad Kaskas has gotten traditional bank loans and also got funding from Bank of Whittier three years ago for his Fresh Choice Marketplace, an ethnic grocery store with 80 employees based in Garden Grove, Calif. “They call it a halal loan, and the other banks call it interest, but it’s the same rate—prime plus 1.5 percent.” he says. “In the end, anybody who gives me the better deal, I go with. They’re both collecting the money.”
(Bloomberg Business Week / 06 Feb 2013)

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Belgian Muslims ‘fascinated’ by Islamic finance

Key findings published this week from Belgium’s first independent market study, Islamic finance in Belgium – sizing the retail market points to a very strong interest from local Muslim consumers in Islamic finance products and services. Over 70 per cent of survey respondents interviewed for the study have indicated their likelihood to take up such services if local banks were to begin offering them.
Islamic finance in Belgium – sizing the retail market was independently commissioned by the Association for the Development of Islamic Finance (ADEFI) in conjunction with IFAAS (Islamic Finance Advisory & Assurance Services). 
The report sets out the market opportunities for financial institutions interested in developing an offering for the Belgian consumer market, and analyses Muslim consumers’ current consumption of financial products and services and their attitudes towards conventional, interest-based retail finance.  It then gauges their predisposition to change from conventional products to Islamic products, such as loans and savings accounts, their price elasticity towards these products and their likely speed of response to the launch of such products.  
Fouad TAHERE, president of ADEFI says, “Islamic finance in Belgium – sizing the retail market” is the first specialised independent report providing an insight in to the Belgian Muslim consumer’s appetite for Islamic Finance products and services.  With over 70% of respondents likely to take-up such products,Islamic finance offers vast potential for financial organisations wishing to develop their offering.”
Boubkeur AJDIR, director, IFAAS added, “Islamic finance is a developing market in Europe including France and Belgium, and with Brussels as the heart of the EU, it offers great potential to financial services companies.  The challenge for decision makers is to ensure that their early critical decisions are based on accurate market information to ensure long term success. This report will prove invaluable for many institutions keen to unlock this potential.”
Interviews were conducted per phone on a weighted sample size of over 500 individuals, reflecting a true picture of the Belgian Muslim consumer market.  The target sample was composed of adult men and women, from a variety of socio-economic categories living in Brussels, Flanders and Wallonia.
(Albawaba Business / 07 Feb 2013)

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Malaysia: New Islamic Financial Services Act to enforce management of syariah non-compliance risk

KUALA LUMPUR: The new Islamic Financial Services Act (IFSA) 2012 will statutorily enforce the management of syariah non-compliance risk and require Islamic financial institutions to ensure that their aim, operation, business, affairs and activities are syariah-compliant at all times.
“This is perhaps one of the most distinctive features of the IFSA 2012,” said International Islamic Banking Liquidity Management Corp chief executive officer Prof Datuk Dr Rifaat Ahmed Abdel Karim in a statement.
The act, which is pending Royal Assent, requires that any failure to abide by this statutory requirement has to be immediately notified to the regulator and the syariah committee of the financial institution.
Furthermore, the financial institution is required to immediately cease continuing with the business or activity, which is the cause of the non-compliance, and submit a plan for the rectification of the non-compliance to the regulator within 30 days.
“This strict provision is in line with the principal regulatory objectives of the act, which aims to promote financial stability and compliance with syariah,” he said in his lecture on The Significance of Supervision and Regulation in Islamic Finance at the International Centre for Education in Islamic Finance.
The new act, which is expected to come into force this year, seeks to consolidate the Islamic Banking Act 1983 and the Takaful Act 1984.
“When it comes into force, it will be a landmark law, perhaps the only omnibus Islamic finance legislation in the world,” he added.

(The Star Online / 06 Feb 2013)

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Location, rules may aid Dubai's Islamic finance push

Dubai's strengths as a vibrant trading economy could help its push into Islamic finance, which has been plagued by doctrinal disputes and uncertainty over regulation.
If Dubai has its way, the world's biggest Islamic bond issues will be designed under its rules and traded in its market. Muslims around the world will use Dubai's standards to prepare food, and take disputes to Dubai for Islamic arbitration.
As it recovers from a crippling property market crash in 2009-2010, the emirate has set its sights on becoming a global centre for Islamic business - activity conducted under religious principles, in areas from banking and insurance to food production, education, tourism and contract negotiation.
Better known for its freewheeling commercial culture, cosmopolitan lifestyles and glitzy shopping malls than for Islamic scholarship, the emirate may seem an unlikely entrant to the field.
In Islamic finance, the tiny city state of about 2 million people faces tough competition from more established centres such as Kuala Lumpur, Bahrain and even London.
But as it seeks to diversify its economy beyond the volatile property market, Dubai's strengths as a vibrant trading economy could help its push into Islamic finance, which has been plagued by doctrinal disputes and uncertainty over regulation.
"This initiative can put Dubai on the map versus other centres like Bahrain and Malaysia," said Greg Rung, Dubai-based partner at management consultancy Oliver Wyman.
"One thing Dubai is well-known for is connectivity to the rest of the world. I am not sure other financial centres have managed to build bridges beyond their home region."
Dubai's ruler, Sheikh Mohammed bin Rashid Al-Maktoum, announced the Islamic business drive in a statement last month. He did not give details but government departments are now working out how to translate the plan into action.
The emirate's main motive appears to be practical rather than political or ideological - it sees a way to boost foreign investment.
New issues of sukuk (Islamic bonds), which under religious principles are structured to avoid the payment of interest, jumped to about $121 billion worldwide in 2012, according to Thomson Reuters data, from around $85 billion in 2011.
More growth is expected as high oil prices leave Islamic funds in the Gulf flush with cash. Islamic banking is growing; Gulf-based Islamic banks now have about $450 billion in assets, around 30 percent of the region's total banking assets.
Political shifts are likely to boost the industry elsewhere in the Middle East; Egypt, Tunisia and Morocco among other countries now have Islamist-led governments which have said they want to promote Islamic finance. Dubai could profit by selling services and expertise to these countries.
The emirate is expected to focus initially on banking and securities issuance, though it aims to cover many areas of Islamic business.
Dubai Financial Market (DFM), which runs the emirate's securities market, took a big step last month by publishing new draft standards for how sukuk can be structured, and inviting the financial industry to comment.
DFM hopes its standards will eventually be adopted by sukuk issuers in other countries, which would encourage them to list their sukuk on the Dubai securities market and bring their legal and underwriting business to the emirate.
"In this manner, Dubai and DFM will set the tone for financial instruments' standards all over the world," said Mabid Ali Al-Jarhi, a member of the board overseeing Islamic business at DFM.
Sceptics point out that while Dubai is the Gulf's top centre for conventional finance, it is only a moderate-sized player in Islamic finance; DFM's website lists just five sukuk, all of them issued by the Dubai government.
Malaysia's securities exchange, by contrast, lists dozens of corporate sukuk. Several UAE-based firms have listed their shares in Dubai but gone to the London Stock Exchange to list their sukuk because of London's superior reputation for liquidity and regulation.
"If a company has shares listed in the DFM, then intuitively you would think they would list their sukuk in the DFM. But that has not been the case - the majority of issuance has gone through European exchanges," said Paul McViety, legal director at law firm DLA Piper in Dubai.
Whether Dubai's new sukuk standards can lure issuers away from a range of competing standards issued by national regulators and Islamic bodies elsewhere remains to be seen.
Malaysia is known for active, consistent regulation of Islamic finance through its central bank. Bahrain has been hurt as a financial centre by two years of political unrest, but it still hosts the influential Accounting and Auditing Organisation for Islamic Financial Institutions, whose standards are used in whole or in part by regulators around the world.
Dubai has advantages, however. Located at the centre of the Gulf, it is the main transit point for air traffic between Europe, Asia and Africa and is a more international city than most of the other centres.
It also claims to offer a new approach. Islamic finance is riven by confusion over conflicting product standards and perceived conflicts of interest among scholars who oversee the industry; reform has been slow, thanks to entrenched interests in key bodies.
Dubai says its new sukuk standards will be more detailed than other centres' standards, potentially resolving some of the controversies and giving traders and investors more certainty.
The city state's entrepreneurial approach has proved the sceptics wrong in the past. The Dubai International Financial Centre has developed into the Gulf's top financial hub less than a decade after its launch.
Sheikh Hussein Hamed Hassan, managing director at Dar Al Sharia Legal and Financial Consultancy in Dubai and one of the most influential scholars in Islamic finance, said the sheer scale of the emirate's ambition would help to drive change.

(Trade Arabia / 07 Feb 2013)

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Islamic finance a boost for USAID's Afghan farm fund

SYDNEY, Feb 7 (Reuters) - Economic instability and legal
obstacles have slowed the introduction of modern forms of
Islamic finance in Afghanistan. But sharia-compliant loans are
Islamic finance in Afghanistan. But sharia-compliant loans are
beginning to play a role in the farm sector through a
U.S.-funded aid programme.

The Afghan government is using Islamic financial contracts
to extend credit to farmers in areas where conventional banking
has not fully satisfied demand for funds.

The Agricultural Development Fund (ADF), set up in 2010
through a $100 million grant from the U.S. Agency for
International Development (USAID), offers both conventional
credit and Islamic financing.

About $11 million of its loans approved between May 2011 and
April 2012, or 70 percent of them, were sharia-compliant, the
ADF says. Islamic finance obeys a religious ban on payment of
interest and instead pays lenders with returns on real assets.

Demand for such financing has been particularly strong in
rural communities because people there tend to be conservative,

(Chicago Tribune / 07 Feb 2013)

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