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Wednesday, 22 May 2013

New proposal for Islamic investment funds

It is time for Islamic investment funds to start offering some real value addition to investors beyond just Shariah compliancy. Islamic investing so far has by and large been concerned with assurance of Shariah compliancy by screening out forbidden activities (such as gambling, interest-based financial services, liquor, pork and adult entertainment); it also excludes some other activities deemed undesirable for social responsibility or political correctness (like tobacco and arms).

In addition, it also ensures that balance sheets of the companies chosen are in compliance with Shariah. There is, however, a growing need for a detailed set of rules and regulations to be developed to categorise Islamic investment funds into merely Shariah-compliant and purely Islamic funds.

As a starting point in this direction, a fund may be called a Shariah-compliant fund if:

1. It does not invest in the companies involved in production, distribution, marketing and sale of Shariah repugnant goods and services; and

2. It does not get involved in Shariah-repugnant activities to conduct its finances (both in raising and deploying funds).

A fund may be categorised as an Islamic fund if:

1. It is Shariah-compliant in its product offering and in terms of its finances and operations, and;

2. It promotes any or all of the broader objectives of Shariah, which include promotion of the well-being of all mankind in terms of safeguarding faith, life and self-esteem, intellect and human capital, and posterity and wealth.

The term Islamic Shariah funds industry can be used for both Shariah-compliant and Islamic funds.

While a Shariah-compliant fund may not take a political view on its investments, it is important that an Islamic fund ensures that its investment strategy promotes at least one of the objectives of Shariah.

Thus, prohibition of investing in companies that support movements and ideologies against Islam and Muslims may fall under screening of Islamic funds. On a company level, while a stock like Starbucks Corp can be included in a Shariah-compliant fund (if it comes out of the chosen Shariah screens successfully), it must not be included in the portfolio of an Islamic fund, because Starbucks publicly supports an ideology blameworthy for the killing of innocent people including women and children in the West Bank and Palestine.

It is also important for the Islamic financial services industry to start taking a view on the Islamicity of the fund manager.

After all, if an ethical fund manager is not committed to the ethical values, its credibility as an ethical fund manager must be questioned. Similarly, an Islamic fund manager must demonstrate its full commitment to the objectives of Shariah (as outlined above).

The above proposals are not meant to bring a hostile investing culture in the Islamic Shariah funds industry; rather they simply point to the need for developing this industry on the pattern of investors activism.

This is important for the very sustainability of the Islamic financial services industry as a whole.

It is also important to emphasise that the proposed Islamic Shariah funds industry should not be a platform for political Islam. What is being suggested here is that the Islamic fund managers must accommodate the Islamic political views in their investment strategies and processes to win business from the Shariah sensitive investors who have strong political views on some international issues and phenomena that are deemed anti-Islamic.

One may like to argue that this will help the radical Islamic movements. On the contrary, this will provide the Shariah sensitive Islamic investors an opportunity to express their preferences in financial markets to influence some of the phenomena and activities in light of their faith and political views.

At this early stage of development of Islamic banking and finance, it is absolutely important that the Islamic Shariah funds industry remains completely independent of the political movements and parties. Failing to do so may adversely affect the industry in its infancy.

It is critical that the Islamic financial services industry enjoys government support and patronage, in the absence of which it will be almost impossible for it to grow substantially.

Although Islamic banking and finance is a demand-driven phenomenon, it has taken off only in those countries where the governments have supported and promoted it. Malaysia provides the best example in this respect. Needless to say, that the future of Islamic Shariah fund industry and Islamic banking and finance as a whole relies on the government support.

Therefore, the non-political nature of Islamic banking and finance must be retained and further developed. Furthermore, it is definitely the right time to start looking into creating alliances with the Western ethical and socially responsible investments movements to learn effective tools of investors activism and shareholders advocacy in the Islamic Shariah funds industry.

Combining the Shariah principles articulated hitherto as well as garnering the support of governments and alliances with ethical movements will lead to a dynamic and vibrant Islamic funds industry.

(The Malaysian Reserve / 20 May 2013)

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Malaysia: RM1.6b sukuk proposal by for gas-fired power plant in Penang

KUALA LUMPUR: Tenaga Nasional Bhd's (TNB) wholly owned subsidiary TNB Northern Energy Bhd (TNB NE) has proposed to issue RM1.625bil in nominal value sukuk based on the syariah principles of ijarah and wakalah.
In a filing with Bursa Malaysia yesterday, TNB said the proposed sukuk TNB NE will be issued in one lump sum and will consist of 39 series with tenors ranging from four years to 23 years from the date of issuance.
The proposed sukuk TNB NE will be issued on May 29.
Malaysian Rating Corporation Bhd (MARC) has assigned a final rating ofAAAIS to the sukuk TNB NE.
“The proceeds to be raised from the proposed sukuk will be utilised for the construction and delivery and working capital requirement for the 1071.43 MW combined cycle gas-fired power plant in Prai, Pulau Pinang,” TNB said.
Upon issuance of the proposed sukuk TNB NE, TNB's consolidated borrowings will increase by RM1.625bil.
Based on TNB's audited consolidated balance sheet for the financial year ended Aug 31, 2012, TNB's consolidated gearing would then increase from 0.39 times to 0.40 times.
The proposed sukuk TNB NE will not have any impact on the earnings and earnings per share and net assets per share of TNB for the current financial year.
HSBC Amanah Malaysia Bhd and KAF Investment Bank Bhd are the joint lead arrangers and the joint lead managers for the sukuk issue.
HSBC Amanah also acted as the Shariah Adviser for the sukuk Issue while HSBC Bank Malaysia Bhd acted as the financial adviser for the project financing.

(The Star Online / 21 May 2013)

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Turkey Seeks to Benefit From Islamic Banking Sector

ISTANBUL — With the international economic crisis continuing to bite, the Turkish government has announced it will be seeking to tap into the $1 trillion Islamic financial industry.

Although Turkey is a secular state, it is overwhelmingly Muslim. Under the decade-long rule of the country's Islamist rooted AK Party, Muslim-compliant businesses have flourished.

Thee government move into Islamic finance is a smart strategy, said Attila Yesilada, an Istanbul-based political analyst with Global Source Partners, a political consultancy firm.

"There were people and institutions who refused to take interest and these people kept their money in non-interest safe deposits," he said."They suffered huge losses just because they genuinely believed interest is sinful as defined by the Koran. So there is a lot of demand for Islamic banking products in Turkey --  both from...devout Islamic client base as well as from the Gulf kingdoms."

Islamic banks operate in compliance with Islamic financial rules which ban interest. But Islamic banking firms use Islamic-compliant financial instruments to generate income. In the past decade, that sector has rapidly grown into an estimated $1 trillion industry.

Most of that growth has happened in the energy rich Gulf states and North Africa. In Turkey, the growth has been less impressive, with only four institutions currently offering Islamic finance, though these banks have seen some growth.

Omer Bolat, the CEO of the conglomerate Albayrak and former head of the Islamic business confederation Musiad, said the government's decision to enter the Islamic finance market provides an important political guarantee given that previous Turkish governments, which were staunchly secular, viewed it with suspicion.

"Before this [present] government came to power, the outgoing governments were not sympathetic to Islamic banking sector and the government could shut them down with a decree or law easily," Bolat said. "And depositors feared if these banks were shut down [they] might have to lost their deposits."

Stronger Islamic banks would enable Turkey to attract more cash from the Gulf and Asia, where the appetite for Sharia-compliant products far outstrips the existing supply, according to observers.

This could potentially make Istanbul a regional financial hub, said Inan Demir, chief economist at Istanbul-based Finansbank.

"If the government and economic administration has ambitions of being a regional financial center, then that financial center will have to take in the Middle Eastern and North African regions as well, where Islamic practices dominate," Demir said.  "So in that sense, it could have some response with the Middle Eastern and North Africa markets."

For now, Europe still accounts for the lion's share of trade with Turkey's financial institutions and wider economy. But with Europe still in the grip of financial woes, the Turkish economy is diversifying and looking at alternative markets in the Middle East or North Africa. The development of Islamic finance could become an increasingly useful instrument in that strategy.

(Voice Of Amarica / 21 May 2013)

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