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Friday, 15 November 2013

Turkey: Islamic banking in need of money


Turkish “Participation banks,” or what Islamic banks are termed in Turkey, are look set to keep increasing their market shares over the medium term, after posting exceptional growth between 2008 and 2012. 

However, sluggish domestic savings and intensifying competition from conventional banks will likely limit the sector’s progress without fresh capital and funding, Standard & Poor’s Ratings Services said by the latest sector report released on Nov. 12.

Several factors contributed to the growth of the country’s four participation banks, not the least of which is the supportive stance of local authorities toward the sector, the report noted. 

The Turkish Treasury’s debut of revenue-indexed bonds in 2009 and issue of “halal bonds” or sukuk in 2012 were indicated as major examples of the fiscal approach authorities took. 

Gov’t to continue to support the system 

These developments have not only attracted more funds to the sector from cash-rich member nations of the Gulf Cooperation Council (GCC), but also facilitated participation banks’ diversification of their balance sheets. 

“Over the past four years, the banks have extended their branch networks, which contributed to market-share gains of about two percentage points in deposits and 1.5 percentage points in assets. The sector’s current market share, in terms of assets, stands at 5.4 percent. 

Nevertheless, we believe that further gains would require additional capital,” S&P said. 

The ratings agency believed the government would continue to take steps that help the segment capture a larger share of Turkey’s relatively under-banked market. This year, for example, the government has announced its intention to launch greenfield Islamic banking subsidiaries within state-owned banks. 

“In our view, this would boost the aggregate market share of the still-tiny sector over the long term, although the new entrants, including any owned by foreign parties, will compete against existing players. We believe the growth momentum that participation banks have been experiencing can only continue if their capital bases widen and they achieve some competitive advantage,” read the report of the ratings agency.



(Daily News / 14 Nov 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

London, Dubai, Kuala Lumpur in three-way fight for Islamic finance crown

(Reuters) - When the British government said last month it would issue its first Islamic bond, the implications went far beyond the debt market: it was a signal that London will not back down in an escalating tussle among cities for Islamic financial business.
London has long been the default center for international firms to issue sharia-compliant bonds, part of a fast-growing Islamic finance sector that will be worth $2 trillion globally next year, according to consultants Ernst and Young.
But it faces a mounting challenge from two centres: Dubai and Kuala Lumpur.
Dubai, at the heart of the wealthy Gulf, announced a push into Islamic finance this year. It has an entrepreneurial culture which has already made it the Middle East's top conventional banking center, and big state-run firms which can be expected to support the government's strategy.
The Malaysian capital has a reputation for efficient regulation of Islamic finance and a huge domestic market for local-currency Islamic bonds, which is now starting to attract foreign issuers.
The final result of the three cities' rivalry may not be known for years, but thousands of jobs and large amounts of direct investment in companies and real estate are likely to depend on the outcome.
"You need a critical mass of borrowers and investors," said Khalid Howladar, senior credit officer at Moody's Investors Service. "You have multiple centres that are looking to establish their pre-eminence in the Islamic space."
GROWTH
Islamic banking, which obeys religious principles such as bans on interest and pure monetary speculation, is still dwarfed by conventional banking with over $100 trillion of assets.
But the top 20 Islamic banks have been growing 16 percent annually in the last three years, far outpacing their conventional rivals, according to Ernst and Young. That makes Islamic finance tempting for many non-Muslim institutions.
In an unstable global market environment, the conservatism of Islamic financial structures may be helping the industry. Its access to big pools of Islamic investment funds in the Gulf oil-producing states and southeast Asia is certainly a factor.
Over the past year, the industry has been expanding from its traditional bases in those two regions across many nations with significant Muslim populations, from North Africa and Kazakhstan to Nigeria and Djibouti. European financial firms have tapped Islamic funds by issuing sharia-compliant bonds, known as sukuk.
That promises big rewards for the financial centres which arrange issues of sukuk and other Islamic products, employ the experts who structure them, and host the scholars who vet them for religious permissibility.
"The pent-up demand for short-term papers to manage liquidity in Islamic finance is huge, and to meet this will require other market players to come in," Malaysia's central bank governor Zeti Akhtar Aziz told Reuters.
Dubai laid claim to such business in January this year when its ruler, Sheikh Mohammed bin Rashid al-Maktoum, announced a drive to develop the emirate as an Islamic financial center.
Its main competitors responded. In March, Britain launched a publicity campaign involving government junior ministers and private sector executives to burnish London's Islamic credentials.
In May and June, Malaysia took steps to strengthen its regulation of the industry while making it easier for its Islamic insurers to invest their money overseas.
SUKUK
The most high-profile - and most cut-throat - area of competition between the three centres is arranging sukuk. London has led in attracting issues by big international companies because of the massive size of its conventional financial markets and its globally respected legal system.
Malaysia, however, has the advantage of a vibrant market in local-currency sukuk, thanks to a Muslim-majority population; Kuala Lumpur has accounted for about two-thirds of all sukuk issued globally this year. That is persuading some foreign firms, from as far afield as Kazakhstan, to issue in Malaysia.
Dubai lists relatively few sukuk on its exchanges; traditionally its state-owned companies have gone to London to issue. But a determined campaign by Dubai's government is now convincing its companies to issue at home, and could attract business from firms in neighboring Gulf states.
British Prime Minister David Cameron appeared to be trying to head off that threat last month with his plan for Britain to become the first Western country to issue a sovereign sukuk.
"The UK sukuk announcement has really helped to galvanize the market," said Farmida Bi, European head of Islamic finance at law firm Norton Rose Fulbright in London, predicting the sovereign issue would help to trigger corporate issues.
However, Dubai won a victory this month when the Jeddah-based Islamic Development Bank, which has long operated sukuk issuance programs in London and Kuala Lumpur, said it would set up a $10 billion program on the Nasdaq Dubai exchange.
"I do believe Dubai can reach a leadership position, although progress has been slow and it will take a few years to reach the level of Malaysia," said Apostolos Bantis, emerging markets credit analyst at Commerzbank in London.
Because London is not located within a natural pool of sukuk issuers and European customers will remain a limited group, its position looks weakest among the three centres from a long-term perspective, Bantis added.
TAKAFUL
Other areas of competition include Islamic insurance, known as takaful, and asset management. Once again, London's sheer size gives it an advantage, while Kuala Lumpur benefits from its location in a vast, predominantly Muslim area of southeast Asia.
British-based firm Cobalt struck a blow for London earlier this year by developing a novel syndication model for takaful. The model offers A-rated capacity which most carriers in the Gulf lack, said chief executive Richard Bishop.
This could clash with Dubai's plans to expand in takaful. Abdulaziz al-Ghurair, head of the authority overseeing Dubai's financial center, said last month that since there were only 19 Islamic re-insurance firms globally, takaful firms were forced to transfer some of their risk to conventional re-insurers.
That creates a window for Dubai to set up Islamic re-insurers, he said without detailing how this would be done.
Ultimately, much will depend on which financial center can establish "thought leadership" in Islamic business, creating standards and structures which come to be accepted across regions and, ideally, across the global industry.
Traditionally, Malaysia has been influential because of its centralized model of regulation, which minimizes disputes among different boards of Islamic scholars. But some Gulf scholars view Malaysian regulation as too liberal, arguing that it permits structures which too closely mimic conventional finance.
Dubai has a chance to chart a path between these two camps; it has said that after consulting the industry, it will issue sukuk standards that are more detailed and comprehensive than others, hopefully resolving conflicts between the regions.

"This is very important. We think it's a basic requirement but it doesn't exist as we speak. But this will not come from the sharia scholars - it has to come from the industry," said Hamed Buamim, director-general of the Dubai Chamber of Commerce & Industry, which is promoting the emirate's Islamic push.
(Reuters / 12 Nov 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

UK: Osborne sukuks up to Islamic finance

Ensuring that the sukuk are watertight in their compliance with sharia will be the acid test for the Chancellor.
The government could soon issue its first taxpayer-guaranteed sukuk, marking the UK’s entry into the lucrative, rapidly expanding market of Islamic finance, which was until now exclusive to Muslim countries. But what are sukuk and why are they important?
Sukuk (plural of ‘sakk’) are essentially government bonds that must comply with the moral code and religious law that comprises sharia (as any part of the holistic system of Islam must). This word will probably generate some trembling articles in the right-wing press, but sharia’s main stipulation in terms of finance is simply a ban on riba (interest). Since Islam sees money as a pure measure of value, and not a profitable asset in and of itself, the charging of interest on money is haram (forbidden). In lieu of interest, the issuer of a sukuk (in this case, the UK government) sells an investor or group the bond, who then rents it back to them for an agreed-upon rental fee. The issuer also signs a contract promising to buy back the bonds at a future date at par value. Sukuk are traded on 'real' assets, not risk and futures.
The first sukuk (which translates as 'cheques' or 'certificates') proposed by Osborne would only be valued at £200m, a miniscule amount in the context of the total Islamic finance market (currently valued at around £750bn and expected to double in value by 2017 according to the 2012 Global Islamic Finance Report), leading Jonathan Guthrie in the Financial Times to call it little more than an "amuse bouche". Issuing them is not about to end Britain’s economic woes with a tide of oil money from the Gulf.
Sukuk are at this stage a marketing tool: a gesture to the Muslim world that London is open for business. Whoever you are, we’ll suit your conditions (if you have cash). Osborne wrote an article to this effect in the FT last week, stating his ambition for London to be "the unrivalled western centre for Islamic finance". It would make Britain the first non-Islamic country in the world to issue sovereign sukuk, joining Egypt, Malaysia, Kazakhstan, Qatar and Turkey. As London is already a global finance capital whose stock market dwarfs those of all these other countries put together, the potential for growth in a new sector of culturally-sensitive investment funds (another example would be green investment) is not to be underestimated.
But ensuring that the sukuk are watertight in their compliance with sharia will be the acid test for Osborne. If they’re not, they are rendered pointless and a huge waste of time and money. In the winter of 2011, Goldman Sachs proposed to debut a $2bn sukuk al marabaha (deferred payment) program, but it was judged non-sharia compliant and was aborted, causing a lot of red faces in some quite altitudinous boardrooms. Since sharia works horizontally rather than hierarchically – that is, fatwas (judgements on points of sharia) can be issued by anyone with the recognised Islamic qualifications and then debated on equal terms – scholars can often differ irrevocably on the finer points.
But even in the event that the government’s sukuk are eagerly snapped up, it is not going to revolutionise our financial relationship with the Islamic world. London is already a piggy bank for the world’s elite, whatever their religion, because, as Michael Goldfarb recently argued in the New York Times, skyrocketing prices and a tax law which is only able to skim British earnings mean that London property has now all but become a "global reserve currency" – a sort of hyper-money only accessible by the global super rich, most of whom don’t live here and don’t intend to.
And as the New Statesman has already shown, the Middle East in particular has been enthusiastically pouring cash into the UK (well, London) for the past decade anyway. Qatar alone owns 95% of the Shard, Harrods, over a quarter of Sainsbury’s, a fifth of the London Stock Exchange itself, the Chelsea Barracks, the Olympic village, 20% of Camden market, No. 1 Hyde Park (the world’s most expensive block of flats), and the US embassy building.
So if Osborne’s sukuk have a successful debut, it will herald a greater level of fiscal openness and consensus between the Islamic world and Britain, and it will make it easier for some of Britain’s own 2.7 million Muslim citizens to decide upon halal (permitted) domestic investments. As far as Treasury policy can be, this is socially inclusive. But that’s about it. Even in the case that a new enthusiasm for religiously-influenced investment boosts GDP, as each day passes we see that the previously accepted link between GDP and living standards has all but dissolved anyway.
It is highly unlikely this policy will make a difference to the life of the average British Muslim, and issuing a few culturally-catered bonds will not even begin to address the rampant inequality and instability of a British economy increasingly leaning on the crutch that is the trickle-down of elite foreign capital. The extent to which Osborne’s financial policy adheres to the central Islamic idea of maslaha (public interest) is, to put it mildly, up for debate.
(The Staggers / 14 Nov 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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