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Friday, 5 April 2013

Islamic finance market likely to grow in Pakistan

KARACHI: Pakistan’s Islamic finance market may continue to mature and expand in the years ahead given growing investment by the Islamic banking industry in federal government securities through ijara sukuk (Islamic bonds), said bankers.

Recent statistics issued by the State Bank of Pakistan (SBP) suggest Islamic banking institutions (IBIs) invested Rs266 billion in government securities during the third quarter of 2012 against Rs154 billion over the same period in the last fiscal year, showing a year-on-year growth of 73.2 percent.

Of a total of Rs266 billion investments, more than Rs47 billion were provided by the Islamic banks via ijara sukuk to the government for project financing.

Bankers said that if the government of Pakistan ijarah sukuk are to be issued in the usual manner, Islamic banking liquidity will be directed towards sovereign investments to earn risk-free and government-guaranteed profits. This is mainly due to the weak risk management of Islamic banks, as they are not willing to take risk-based exposure with better pricing. By definition, interest should not be charged or collected and profit and loss is equally shared between lender and borrower in Islamic finance.

They further said that despite excess liquidity in the Islamic banking industry, the focus is on taking risk-free exposure in sukuks or with other financial institutions.

Investing in low-yield, risk-free investments may also be considered the reason for less return on assets (ROA) of Islamic banking than the overall banking industry.

The latest SBP report on Islamic banking said that the financing by IBIs remained stagnant at Rs209 billion from July to September 2012.

President and CEO of Bank Islami, Hasan Aziz Bilgrami, said that credit demand by the private sector remained low in the quarter under review due to energy shortages and heightened security concerns that pushed up the cost of doing business.

“Deposits of Islamic banks were higher than the advances during the quarter,” he said.

“The clean up periods of seasonal financing of various industries (such as sugar, cotton and rice) were observed during the third quarter and therefore adjustment in financing in the Islamic banking segment is seen in the same period,” said Vice President, Head of Credit Islamic Banking Group, MCB, Haroon Siddiqui. “Due to fragile economic conditions and less than expected growth, one Islamic bank had to be merged with anther one,” he said.

The prospect of change in the financing trend of Islamic banks appears bleak. Nevertheless, Islamic financing growth will remain better than overall financing growth of the banking industry, he said.

“This pattern stands to improve after the confidence of foreign investors is restored and policies have been formulated to direct financing towards the private sector, with better earning opportunities,” he said.

“The major Islamic financing portion is expected to be continued with the corporate sector, as these are considered less risky propositions while financing, than SME, consumer and agriculture sectors,” said Siddiqui.

He said that further movement to other sectors with large shares like consumer, agriculture and SMEs is not possible in the short term even though the SBP has encouraged banks to finance the agriculture and SME sectors. However, with the decrease in overall discount rate in the last half year, it is expected that the share of consumer financing may be increased in coming years, subject to improvement in economic conditions.

“Limited availability of Islamic banking financing products (especially for short term) to cater to the needs of various trades, SMEs and agriculture-based customers may also be a reason for sluggish growth,” said Mubashar Bashir, a senior banker at a leading commercial bank.

“Availability of Islamic banking branches in major cities is another reason for the lack of financing in the agriculture and SME sectors, as 65 percent of branches of IBIs are operating in only seven large cities – and 43 percent of these branches are concentrated in Karachi and Lahore,” he added.

(The International News / 04 April 2013)

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Saudi Arabia sells share in Islamic finance body

Saudi Arabia’s central bank has sold its shareholding in the International Islamic Liquidity Management Corp (IILM), an unexpected blow to a body which aims to create a liquid cross-border market for Islamic financial instruments.

The decision was announced by the Kuala Lumpur-headquartered IILM late on Wednesday, in a statement which did not give a reason. IILM officials declined to comment, while officials from the Saudi central bank, the Saudi Arabian Monetary Agency (Sama), could not be reached for comment on Thursday, a holiday in their country.

One member of the IILM executive board said he was unaware of the pull-out when contacted by Reuters yesterday. “You will have to ask Sama for their reasons,” the official said.

Saudi Arabia’s stake in the IILM was bought by the central banks of Qatar and Malaysia, bringing the number of the body’s shareholders down to ten and casting doubt on the timing of its first issue of sukuk (Islamic bonds). The IILM’s statement did not reveal the purchase price.

It was not clear whether Saudi Arabia’s pull-out was prompted by management frictions at the IILM — the body changed its chief executive late last year — or by deeper disagreements over policy.

A Dubai-based managing director of a European bank said the IILM was viewed by some critics as too Malaysia-centric, adding that some countries were in greater need of Islamic liquidity management tools than others, which could be a reason for the rift.

The IILM was founded in October 2010 to address one of the main weaknesses of the fast-growing Islamic finance industry: its shortage of liquid financial instruments that banks and other firms could use to manage their funds. Instruments must be structured to obey Islam’s ban on interest.

The body’s shareholders are the central banks of Indonesia, Kuwait, Luxembourg, Malaysia, Mauritius, Nigeria, Qatar, Turkey and the United Arab Emirates, as well as the Islamic Development Bank Group, a Jeddah-based body. Iran is a founding member but not a shareholder of the IILM.

The body intends to issue short-term sukuk in reserve currencies that can be held and traded by Islamic investors around the world. It has not yet managed to make an issue, however.

Malaysia’s central bank governor said in late March that the IILM was in the “final stages” of issuing its maiden sukuk, and was identifying underlying assets for the issue. The likely value of the sukuk was between $300mn and $500mn.

Since its inception the IILM has had to grapple with the laws of the many jurisdictions to which it wishes to cater, its chief executive at the time, Mahmoud AbuShamma, told Reuters in early October last year. AbuShamma was hired in 2011 on a three-year contract from HSBC in Dubai.

A few weeks after the interview, AbuShamma was replaced by Rifaat Ahmed Abdel Karim, former secretary-general of the Malaysia-based Islamic Financial Services Board, a standard-setting body for the global industry.
The Dubai banker said Saudi Arabian banks had relatively little need for the IILM because in recent years they had managed to shift funds from cash into other asset classes. Over the past year, sukuk issuance within Saudi Arabia has increased, providing banks with a supply of domestic instruments.

Countries with smaller or less-developed Islamic capital markets are more likely to need instruments from the IILM, and may therefore be keener to push the project forward.

One such country is Qatar, which last month said it was starting quarterly issues of sovereign sukuk in its domestic market. Qatar’s central bank governor, Sheikh Abdullah bin Saud al-Thani, is current chairman of the IILM’s governing board.

(Gulf Times / 04 April 2013)

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Research Partnership Takes on Islamic Finance

A research partnership has been formed to create case studies for business school programs, spelling out the commercial implications of Islamic finance.
Deloitte’s Islamic Finance Knowledge Centre (IFKC), a think tank based in Bahrain, is partnering with INCEIF, the Global University of Islamic Finance in Malaysia, and the University of Reading’s Henley Business School in England, says IFKC Director Hatim El Tahir.
Islamic finance refers to banking activity that follows the principles of Islamic religious law, or sharia, which prohibits practices that are common in the rest of the world, including charging interest for loans. Instead of a standard mortgage, with the property as collateral, for example, a sharia-compliant bank would take ownership of the property and lease it back to the original owner.
El Tahir says the new research initiative will focus on four key areas: regulation and governance, risk management and internal controls, product strategies and marketing, and talent leadership programs.
The goal, he says, is operational excellence and viable business models for sharia-compliant businesses. Research on pricing strategies, for example, might focus on the challenge of matching prices offered by conventional banks within a sharia-compliant framework. Research on the insurance industry, a further area in which Islamic law requires changes to standard practices, might focus on improving Takaful (Islamic insurance) products and the potential for growth.
With big banks and accounting firms now catering to those seeking sharia-compliant products and services, a number of business schools are incorporating Islamic finance into their programs. Geneva Business School offers a master’s in Islamic Finance, and Bangor Business School in London offers an MBA in Islamic Banking and Finance.
The partnership will create case studies for use in business schools and professional development education. “We wanted to develop cases that we can share with industry stakeholders around the world,” El Tahir says. “Hopefully this will be feeding back into the educational side.

(Bloomberg Business Week / 03 April 2013)

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