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Friday, 1 November 2013

Kazakhstan reboots Islamic finance ambitions

This month, Kazakh President Nursultan Nazarbayev sacked central bank chief Grigori Marchenko and replaced him with Deputy Prime Minister Kairat Kelimbetov.
The move could herald a new start for Islamic finance, Yerlan Baidaulet, the Kazakhstan member of the board of executive directors at the Jeddah-based IDB, said on the sidelines of the World Islamic Economic Forum in London.
"Almost five years after introducing Islamic banking, the situation hasn't changed. The predecessor tried to stop everything," said Baidaulet.
Close to 70 percent of Kazakhstan's population of 17 million is Muslim. But even though the government has said it wants to make the country a centre for Islamic finance, progress has been slow, partly because the government also declares itself to be secular and officials do not want to appear overtly religious.
Currently, Abu Dhabi-based Al Hilal Bank is the sole Islamic bank in Kazakhstan, having opened its doors in March 2010; it has not so far tapped the retail market.
But a grant from the IDB, a multilateral lending institution, is now set to kick-start the drafting of a new Islamic banking law, superseding a law passed in 2008 which lacks sufficient detail to be effective, Baidaulet said.
"The Islamic banking law is but a package of different amendments. It's just phrasing but there is no depth, no structure, no mechanism. We hope to bring new legislation, a standalone law."
In March, the Islamic Corporation for the Development of the Private Sector (ICD), the private sector arm of the IDB, took a stake in Zaman Bank in order to convert it into an Islamic lender, a process which could be completed as soon as next year, Baidaulet added. "Hopefully next year this bank will start."
Also, the country will soon have a sovereign credit rating from the Bahrain-based Islamic International Rating Agency, another unit of the IDB, said Baidaulet.
In July last year, the Development Bank of Kazakhstan issued a 240 million ringgit ($75.5 million) Islamic bond in Malaysia, but no other Kazakh issuers have followed.
The ICD is in the process of launching an Islamic leasing company in Kazakhstan this year, with capital of $36 million. Meanwhile a Kazakh renewable energy fund managed by the ICD, currently in the closing stages of capital raising, aims to have up to $70 million in capital, Baidaulet said.

An Islamic mortgage company is seeking to attract foreign investors, with $50 million of capital already contributed by the ICD and a local partner. And in March, the ICD offered $20 million of Islamic financing for real estate development projects in Kazakhstan and earmarked $40 million for financing small and medium-sized businesses in the country.
(Reuters / 31 Oct 2013)
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Islamic Finance Can Save the World's Economy

The U.K. government's decision to issue a sukuk -- a bond that complies with Islamic Sharia law -- raises an interesting question: What if the U.K. and other non-Muslim countries switched fully to Islamic principles in finance?
I think the world might be a better place:
The U.K.'s planned $323 million issue is largely a political move, meant to establish London as a major Islamic banking center. In an article for the Financial Times, the U.K. finance minister, George Osborne, wrote of the British government's desire to become "the first sovereign to issue an Islamic bond outside the Islamic world." It won't be the first Western government to do so: In 2004, the German federal state of Saxony-Anhalt issued a $123 million sukuk, attracting investors from Saudi Arabia, Malaysia and Bahrain, as well as from the U.S., U.K., Germany, Japan and Hong Kong.
The first ever "Islamic bond" was probably issued in 1775 by the Ottoman Empire, which borrowed against future customs duties on tobacco. The 2004 Saxon bond was a contract known as ijarah, in which investors buy shares in a special purpose vehicle that collects rent on an asset, often a land parcel. Instead of interest payments, which are banned under Islamic law, the sukuk holders receive a portion of the rent. At the end of the contract's term, the asset is sold to repay the original investment.
In other words, sukuk are always tied to an underlying asset providing a certain revenue stream -- a feature that makes them particularly conducive to financial stability. If countries like Greece, Spain and Italy held to Islamic finance principles, they would not have been able to run up enormous unsecured debt burdens. They would only have been able to borrow against streams of revenue, such as taxes and customs duties, that they could reasonably expect to collect.
Such constraints would not necessarily have an adverse effect on growth. There are types of sukuk, such as musharakah and mudarabah, which allow holders to share in profits and even losses much as if they were equity investors. The main difference is that governments would be able to hold onto strategic assets no matter what. In that sense, the deals are akin to Western production-sharing agreements.
In the Islamic financial world, money is not a tradeable commodity, and it has no time value. It is merely a medium of exchange. As time goes by, all that changes is the level of risk: The longer an investor has to wait to be repaid, the greater the chance of an adverse event. Goods that do not exist at the time of the sale cannot be sold. These principles discourage speculation and the creation of derivatives without a deliverable underlying asset. Money is always tied to the real economy. If that relationship were always observed, energy prices, for one, might be much less volatile.

An Islamic mortgage bond, for example, would consist of Sharia-compliant mortgages, in which the borrower makes a large down payment and pays rent to the lender, who owns the property until the term runs out. Subprime mortgage bonds, along with the related derivatives that did so much damage during the 2008 financial crisis, would not be possible.

Islamic finance accounts for only about 1 percent of global assets, but as Osborne pointed out, it is growing 50 percent faster than traditional banking. According to Ernst & Young, the value of Sharia-compliant assets worldwide stands at $1.8 trillion, up from $1.3 trillion in 2011. Non-Muslim investors have a healthy interest in the instruments because of the security they offer. In Malaysia, 80 percent of Sharia-compliant assets are held by non-Muslims, accordingto a report by Infosys.
Religion notwithstanding, Islamic bankers might have something the world wants after the recent crisis: Finance that people can understand.

(Bloomberg / 30 Oct 2013)

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UK aims to become centre for Islamic finance

London, UK - Britain is set to the become the first non-Muslim nation to raise money by issuing a government bond-style "Sukuk" compliant with Sharia law as part of a bid to transform London into a global capital of the Islamic finance industry.

David Cameron, the British prime minister, unveiled the scheme along with plans to launch an Islamic market index at the London Stock Exchange as the British capital this week played host to the World Islamic Economic Forum (WIEF), an annual gathering of political leaders, chief executives and delegations from across the Muslim world.

"Already London is the biggest centre of Islamic finance outside the Islamic world, but today our ambition is to go further still," Cameron told the event. "I want London to stand alongside Dubai and Kuala Lumpur as one of the great capitals of Islamic finance anywhere in the world."

Established in Malaysia in 2006, the WIEF aims to embed Sharia principles at the heart of financial and economic affairs. Islamic finance requires that deals are based on real assets and forbids usury, the practice of lending money and charging interest, while risk must be shared between both parties to a transaction.

"It means you should not be involved with interest, uncertainty and speculation," Dzuljastri Abdul Razak, a professor at the International Islamic University in Malaysia, told Al Jazeera. "It's basically about building the real economy. You can only sell something that exists. If you treat money as a commodity then there's no asset."

Britain is the first non-Muslim country to host the WIEF, and Cameron's presence along with a gala dinner hosted by Prince Charles, the heir to the British throne, and cameo appearances by Boris Johnson, London's extrovert mayor, offered ample evidence of the event's significance to the government.

"It's all about sending a message. It's a message that says, 'Look guys, you want it this way, in London you can have it this way. We're quite relaxed. We're happy about it and we want you to come and do your business here.'" Edward Lister, London's deputy mayor, told Al Jazeera.

'The UK needs capital':

Cameron said the government was working on the practicalities of issuing a Sukuk - a bond-like financial certificate used to raise money that is based on shared ownership of an asset rather than a promise to pay interest - worth £200 million ($320m) by next year.

Though comparatively small, given that the UK currently owes investors more than £1.2 trillion ($1.92 trillion), Mehmet Asutay, an expert in Islamic finance at Durham University, said the announcement amounted to a "huge signal" of the government's commitment to attracting Islamic money, especially from wealthy Gulf states.

"Like most European countries, the UK needs capital. Everyone knows capital is essential for sustainable economic growth and since the global financial crisis the sources of capital in the western world have dried up, but in the Gulf of course there is huge capital available," Asutay told Al Jazeera.

But Asutay said global demand for Sharia-compliant financing was still relatively untapped, and the UK was also positioning itself to capitalise on a growing industry.

The global market in Islamic finance is currently estimated to be worth about $1.3 trillion, or just one per cent of the world's total financial assets, yet Muslims make up about a quarter of the planet's population.

Large Islamic countries such as Indonesia and Turkey are now developing their own financial sectors after years beset by political and economic instability, while potential markets in Africa were also opening up, Asutay said.

Asutay said the UK would face stiff competition from inside the Muslim world, with Kuala Lumpur having already established itself as an Islamic financial hub, and with the World Bank this week opening its first Islamic finance centre in Istanbul.

But he said London's traditional strengths as a financial capital and the legal and regulatory security it could offer foreign investors could give it an edge over its challengers.

"The reality is that London has always been an important financial centre regardless of crises and ups and downs. It is open, it is very liberal and it hasn't questioned the religiosity or the ideology of money. Its institutions have been around for longer than some of the countries we are talking about, so that gives London a lot of leverage."

Britain's burgeoning Islamic finance sector is already shaping the London skyline, having funded the construction of the Qatari-owned Shard, western Europe's tallest building.

Other major London property developments at Chelsea Barracks and Battersea Power Station are also based on Sharia-compliant funding, while 49 Sukuk issued through the London Stock Exchange since 2007 have raised $34bn.

Alternative funding:

Modern Islamic global finance is a relatively recent invention, dating to the establishment of the Saudi Arabia-based Islamic Development Bank (IDB) in 1975 as an alternative source of funding to the World Bank for Muslim nations.
Critics argue that the system amounts to an exercise in theological semantics, creating instruments that look and feel like conventional financial products and fall short of strict adherence to Sharia principles.
But Azmi Omar, head of the IDB's research and training institute, said the industry was working hard to address that criticism.

"There are fatwas to say that we have to move away from so-called legal tricks, and we have a financial product development centre that is working to resolve some of these issues," he told Al Jazeera. "Islamic banking is still new, so we are still trying to evolve and develop new products that meet the needs of the industry."

Advocates argue Islamic finance has the potential to radically transform the global economy, by rooting ethics and social responsibility at the heart of banking and financial affairs.

Dzuljastri Abdul Razak believes that a Sharia-based financial system would not have been prone to the sort of crisis triggered by credit-based speculation in sub-prime debt in 2007 from which the global economy is still recovering.

"Islamic finance has an answer to the issues that caused the crisis so it is fitting at this kind of conference that we explore these opportunities," he said. "The strength of Sharia is that there is an ethical dimension, and there is consideration of the people affected."

Iqbal Saqlain, a member of the WIEF's advisory panel and a former secretary general of the Muslim Council of Britain, said the endorsement of Islamic financing would also benefit British Muslims, many of whom have traditionally conducted their personal and business affairs beyond the reach of high street banks, by bringing them into the mainstream economy.

Britain has a Muslim population of about 2.8 million, including about one million in London, with a combinedspending power estimated at more than $20bn. The government has also launched schemes to offer Sharia-compliant student loans and business start-up loans.

"They were literally keeping funds in cash or in some dodgy investments in the name of Sharia, and people have lost lots of money," Saqlain told Al Jazeera. "Now you have legitimate Sharia-compliant investment opportunities and the Muslim community has been empowered.

(Al Jazeera / 31 Oct 2013)
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