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Tuesday, 4 June 2013

Islamic Financial Planning & Wealth Management by Ahmad Sanusi Husain


"Islamic Financial Planning & Wealth Management... by AhmadSanusi
AhmadSanusi: videos on Dailymotion

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

What do 7 billion people do?


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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Growth in cross-border sukuk points to greater convergence

MANAMA: Growth in cross-border Islamic bond issues points to greater convergence in an industry that has been divided by tensions between the Middle East and Asia over sukuk rules, opening the door to a much wider pool of investors.
The Islamic finance industry is centred in the Middle East and South-East Asia, but for the most part those regions have developed independently of each other. The past year, however, has seen a number of cross-regional sukuk, mostly by Gulf issuers tapping Malaysia's highly liquid market, the world's biggest for sukuk issuance. Malaysia's sovereign wealth fund has also launched a Chinese yuan sukuk.
“Diversification of funding sources is extremely important, that is a big driver for cross-border sukuk,” said Ahmed Abbas, chief executive of Liquidity Management Centre, a Bahrain-based Islamic investment bank.
National Bank of Abu Dhabi tapped the Malaysian market with a 15-year, RM500mil sukuk in November, its third issue in that currency. Bahraini sovereign wealth fund Mumtalakat issued a five-year, RM300mil sukuk in September.
Sukuk are investment certificates which follow religious guidelines, including a ban on interest and pure monetary speculation, and pay a profit rate based on an underlying asset rather than an interest rate as in the case of conventional bonds.
However, their structures are not standardised, and some Gulf-based syariahscholars have objected to certain structures used in Asia, a region which has proven to be more flexible in its transactions.
“Malaysia and Singapore are far more open and forgiving on syariah aspects,” Abbas said. In the latest cross-border sukuk, Al Bayan Group, a private holding company, became the first issuer from conservative Saudi Arabia to tap the Malaysian market, with a small RM200mil private placement last month.
The development of syariah-compliant hedging tools was making it easier for issuers to invest in foreign currency assets, said Ijlal Ahmed Alvi, chief executive of Bahrain-based International Islamic Financial Market (IIFM), an industry body which develops specifications for Islamic finance contracts.
Last year, IIFM launched a standard contract template for Islamic profit rate swaps, with others in the pipeline including cross-currency swaps and forex forwards, Alvi said.
Sukuk issuance in the Middle East outside of the Gulf is also becoming more attractive, notably Turkey, which was recently elevated to investment grade credit status. 
(The Star Online / 03 June 2013)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Bringing benefit to mankind by staying true to Shariah in Islamic banking


Last week, Shariah scholars from across Asean congregated in Singapore for the annual “Muzakarah Cendekiawan Shariah Nusantara” organised by the Malaysia-based International Shariah Research Academy for Islamic Finance.

This wonderful annual event brings regional industry players, Shariah scholars and regulators together to exchange views on the practical applications of Shariah in the Islamic financial market.

I thought I should pay homage to the muzakarah in my column by discussing this year’s talking points centred on fees and charges chargeable in Islamic finance. I will focus the discussion here on the most important issue that keeps every industry player awake at night, which is the charging of an Islamic bank’s financial costs to customers.

Currently, any cost that is considered to be financial in nature is not accepted as real or actual cost of the bank, and therefore has not been allowed to be charged to customers by many learned Shariah experts.

It has been said that financial cost in the form of the forced unwinding of hedging and funding arrangements arising from the early termination or default of a fixed rate financing is not an actual cost because many see it as an opportunity loss rather than an actual loss to the bank.

Many make the assumption that every non-consummated fixed rate Islamic financing contract is replaceable with an equivalent transaction immediately. Many say that the hedge is something that the bank has to do anyway as part of prudent business undertaking, so it should not claim from customers. Many forget that the bank had to enter the hedging because the customers demanded an affordable fixed rate, long-term Islamic financing. Without the hedging, the cost of the financing to the customer would be more expensive.

Worse, many seem to have forgotten that Islamic banks do not give loans like conventional banks. An Islamic bank gives financing but it is done by way of a real trade contract. If the trade contract is unreal then it would not have attracted double stamp duty, real property gains tax or other relevant tax to the extent that the Islamic bank requires tax neutrality be provided under law by the government in every tax jurisdiction.

This blinked view of the situation caused many Islamic banks to absorb the losses suffered due to the inability to charge a break funding fee.

I guess this is the true problem statement. This makes Islamic banks totally inefficient and disadvantaged compared to conventional riba-based bank. Globally, this is one reason why Islamic banks’ return on equity is, on average, inferior to conventional banks’ with a few exceptions like Al-Rajhi Bank in Saudi Arabia and CIMB Islamic Bank Bhd in Malaysia.

Islamic banks are licensed to do banking business. Some Islamic banks in Asean do carry a universal banking licence but most are just licensed to do traditional regulated banking activities such as taking deposits and providing financing to customers.

Under such approved activities, the full set of banking business requirements have to be fulfilled by Islamic banks for them to fulfill their obligations under the licence. Any intervention that interrupts this would be detrimental to Islamic banks and causes many to fail the fundamental objective to facilitate financial inclusion and effective distribution of wealth.

Generally, financial costs are real costs of the Islamic banks in doing their function as the mobilisers of funds. Real costs in Islamic banking business can be easily equated with the real costs under non-financial businesses. Although Islamic banking business is purportedly a financial business in nature, it does carry the same financial costs as any normal trade that is non-financial in nature.

An exporter of goods may enter into a hedging contract to mitigate the risk of the sale arising from currency risk, funding risk and so on, in the event of cancellation, early payment or default of the sale contract and to provide best pricing for the buyer. They may also enter a specific funding arrangement just because of the specific purchase by the buyer.

Based on fair trade practice and a willing buyer, willing seller basis, the exporter could charge a break fee to discourage or to incentivise the buyer not to cancel, early pay or default the contract. There is no known Shariah reason to prohibit this, even from an ethics’ perspective.

Financial costs such as break funding costs caused by the unwinding of risk management tool for the trade entered by an Islamic bank are similarly very real under banking business.

Without it, customers will never get access to affordable financial solutions, which is the hallmark of banking as a public good.

We must always remember that Islamic banking with its two-part fund mobilisation system has long been approved as activities consistent with Shariah by many qualified Shariah scholars globally. As long as there is no contradiction with clear express prohibitions in the Quran and legitimate Hadith, any activity under the Islamic banking practice that is a prerequisite business requirement, should not be disallowed and continue to be disallowed.

I believe one cannot invite someone for dinner and then say he can eat the food but cannot drink, or worse, he can chew the food but cannot swallow. Such invitation is incomplete. The same incompleteness exists when allowing a licensed Islamic bank to do Islamic banking business but not allowing it to charge the consequential financial cost it has to incur to make it affordable to the customers.

Having said all of the above, many would still have difficulty accepting the need to allow an Islamic bank to charge financial cost. However, going back to basics, what right does anyone have to deny a seller of goods (in this case Islamic banks) the ability to get the full selling price that has been contracted with the buyer (ie the bank’s customer) if all conditions are met? The answer here is none. I would even go as far as saying it compromises the very basic principle of Muamalat. Of course this does not preclude the bank from giving rebate or discount.

An Islamic bank has the absolute right to the full sale price of a trade contract so the discussion on break funding cost rightly is superfluous in the first instance. However, we are forced to discuss it because people have accused Islamic banks of doing interest-based lending business.

We should never lose the plot of what Islamic banking business is all about. People need to stop this misplaced accusation against Islamic banks when fundamentally it is not and cannot do so under Shariah.

A forced lifting of the veil in the underlying transactions to supposedly expose the purported characteristics of the Islamic banking instruments will only defeat the very purpose of the original application of Shariah principle to provide traditional banking services to principally alleviate poverty among the two billion Muslims globally. If murabahah transaction is stripped off from murabahah financing for example, what is left is the outright lending with the charging of interest, which is unlawful under Shariah.

The net effect might be the same, but financing or monetisation using proper Shariah trade structure is very different from conventional riba-based financing. The former, which is trade, is encouraged under Shariah, while the latter, which is riba, is clearly prohibited.

The confusion between the two is already foreseen in the Quran.

All in all, Islamic banks undertake trade as approved banking activities under financial regulation allowing its customers to own, say a house or a car on fixed term and deferred payment basis. Islamic banks do have flexi rate financing but the issue of financial cost charges is not relevant. The financial cost arising from any hedging or funding arrangement entered to allow an Islamic bank to sell a house or a car on an affordable, fixed-term basis is typically built into the financial obligations of the customer under the underlying Shariah based contracts.

I sincerely hope my hoopla here on the issue of chargeable fees and charges in Islamic finance helps elicit a deeper thought process and brings us back to the reality of the issue. There are many things that we do not know and not sure of but if we stay true to Shariah, we will not lose sight of the ultimate objective of Shariah, which is to bring benefit to all mankind and prevent them from harm.

In the end, not allowing the charges of financial cost within the sale price under a sales contract entered by an Islamic bank with a customer brings more harm to society than good.

Just remember that Shariah has always given the right to the full sale price to a seller of goods to start with but some of us in the context of Islamic banking business seem adamant to change the rule of sale, that has stood for millennia, to the detriment of the Islamic finance industry.



(The Malaysian Reserve / 03 Jun 2013)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Growth potential for Islamic finance in Singapore still strong: experts

SINGAPORE: Islamic capital instruments or Sukuk have been gaining prominence in the global financial market.
More than US$11 billion worth of Islamic bonds (Sukuk) was issued in January 2013 alone, according to the 3rd Edition Sukuk report by the International Islamic Financial Market.
The momentum is set to continue, leading to more financial centres eyeing a slice of the Islamic financial pie, say experts.
They add that the growth potential for Islamic finance in Singapore is still strong.
Sukuk or Islamic bond issuances totalled US$137 billion in 2012, up from US$92b in 2011.
This is just one part of the entire Islamic finance market, which has assets of about US$1.3 trillion to date with instruments varying from Sukuk, Takaful to other equities.
And this market is set to grow at an annual rate of 25%, according to Bank Indonesia's deputy governor, Halim Alamsyah.
Yet there is still a gap to fill in the Islamic capital market.
Mr Ng Nam Sin, Assistant Managing Director (Development) at the Monetary Authority of Singapore, said: "The increased volume of issuance is still insufficient to meet the huge demand for: one, Islamic assets for investments and two: Islamic financial institutions to manage their liabilities.
"Within the Islamic capital market, there is also a need to broaden the range of Islamic capital market products available to address various investments and financing needs."
This is a gap that has not gone unnoticed by potential entrants.
Gatehouse Bank's Chief Representative (Malaysia) and Senior Advisor to the Board,
Mr Richard Thomas, said: "Practitioners talk a lot about Indonesia. A lot of excitement there.

"They talk about what's happening in Central Asia and Central Europe, the markets in South America.
"Brazil has always had an interest in Islamic finance and it has been looking at what it can do in terms of trade. For them, that would be a trade financing market.
"Canadians are also very interested. It's a universal opportunity. New Zealand is launching the first New Zealand domicile Islamic equity fund, global fund.
"There are no markets closed to Islamic finance. The most exciting ones are the ones that bring product to the market first."
Ijlal Ahmed Alvi, CEO of International Islamic Financial Market, said: "Turkey and others are now issuing at the sovereign level, which we hope (will happen in) Singapore.
"We have seen now in GCC (Gulf Cooperation Council). GCC corporates are now issuing, and you have large-cap corporates issuing Sukuk, mid-sized and small-cap Sukuk are also being issued, which is also a good development."
According to Ernst & Young's Global Islamic Banking Center, Islamic trade finance could provide new opportunities and become the preferred choice for emerging rapid growth markets (RGMs) such as Turkey, Indonesia, Malaysia, Qatar, Saudi Arabia and the UAE.
As the growth in Islamic finance continues, standard documentation has also been introduced to harmonise practices across the globe.
At the 4th Annual World Islamic Banking conference on Monday, the International Islamic Financial Market published documentation to be used in the Islamic inter-bank market between financial institutions in order to manage their liquidity requirements.
Some markets like Singapore already have an edge in that respect with the right infrastructure.
Ijlal Ahmed Alvi, CEO of International Islamic Financial Market, said: "Singapore has good regulations already in place. In our work, also, for our standard documentation, we require that.
"I hope Singapore looks into it and start using it. That's one way for Singapore to remain...a hub...so that other jurisdictions, if they can't work because of the law and if the regulatory framework is not there, then naturally they will look to Singapore. So it can maintain its hub position, which it has for conventional (banking)."
Gatehouse Bank's Mr Richard Thomas said: "The development of Islamic financial market in London, Dubai and Malaysia is a natural development of natural requirements and Singapore should be looking at its natural advantages and develop an Islamic platform around those advantages."
The global Sukuk market is set to see double-digit growth this year.
Experts say Singapore's strong regulatory environment and the depth and diversity of its capital markets will enable it to capture a bigger slice of the Islamic financing market. 

(Channel News Asia / 03 Jun 2013)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

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