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Wednesday, 19 February 2014

India takes key step toward full-fledged Islamic banks

THIRUVANANTHAPURAM: India is planning to set up a body to fine-tune and promote Islamic finance before issuing license to start full-fledged banking operations, according to one of the country's senior ministers.

“The formation of the entity is an important step forward. We need to set a framework for rules for different financial products to be offered by these banks or through the Islamic banking windows,” said Rahman Khan, India's minister for minority affairs.

He was talking to Arab News on the sidelines of the international seminar on Interfaith Harmony and Tolerance in Kuala Lumpur organized by the International Islamic University Malaysia (IIUM) in association with Kerala-based Ma'din Academy recently.

“We will introduce a financial product like Tabung Haji which would be a great relief to those who want to undertake the pilgrimage,” said the minister, who has aggressively been pursuing the idea ahead of the general elections two months away.

Tabung Haji, Malaysia’s Haj management system, provides an opportunity for Haj aspirants to systematically invest money that grows and allows the depositor to undertake the pilgrimage to the holy cities of Makkah on its maturity.

The money is reinvested in Shariah-compliant vehicles that give reasonable returns.

“It mainly goes into infrastructure funding. We build roads, bridges and other basic infrastructure using this fund. There are big office complexes and housing projects that it has funded,” said Rajah Mohammed Abdullah, chairman and chief executive officer of the Muslim World Biz, which holds global summit on Islamic finance here every year.

Last year, India's central bank, Reserve Bank of India, decided to give license to non-banking financial companies to offer Shariah-compliant products and Cheraman Financial Services Limited (CFSL), launched by Kerala with the support of prominent expatriate entrepreneurs in the Gulf, was first to get the RBI license.

Khan wrote to the RBI Governor, Raghuram Rajan, saying it was the duty of the State to facilitate every citizen to practice and follow their religion under the Constitution and the governor, while accepting his view, wanted certain amendments to the laws concerned. Khan has urged the ruling party leadership to expedite the process before the elections.

“This is a great development everybody was looking forward. It'll help India attract a lot of foreign and domestic investments in infrastructure development and other core areas,” said Siddeek Ahmed, one of the directors of the CFSL.

India needs huge investments to put its economy back on track and to give the much-needed push to its ambitious infrastructure development plans. The Islamic finance is estimated to be a US$2.1 trillion industry by the end of this year and it is seen as a small but decisive step towards opening up the sector to interest-free banking.

“I personally hope that the proposed Haj fund will ultimately lead to the undesirable practice of government offering subsidy to Hajj pilgrims,” said Ahmed, who heads the Saudi-based ITL-Eram group.

“Cheraman did not to set up such a fund because we found the government funding was not desirable as its sources of income include liquor and gambling”.

Nonresident Indian billionaires based in the Gulf, P Mohammed Ali, PNC Menon and CK Menon, are among other directors of the NBFC that follows Islamic principles in which the state government holds 26 percent equity.

It was not allowed to accept deposits from the public or offer retail banking services, which needs amendments in Indian laws, making it inaccessible to ordinary citizens who want to make small investments.

In fact, Raghuram Rajan, the chairman of the RBI, was serious about banking sector reforms that would pave the way for full-fledged Islamic banks and Islamic banking counters at commercial banks like in many other countries, especially in Europe.

In 2008, a high-level committee on financial sector reforms headed by Rajan recommended interest-free finance and banking in the “interest of inclusive and innovative growth” and suggested taking measures “to permit the delivery of interest-free finance on a larger scale, including through the banking system”.

Islamic banking and finance is now present in over 75 countries including Australia, France, the UK, Hong Kong, Singapore, Luxembourg, South Africa, Sri Lanka and Malaysia, which claims to be its capital.

In India, there are a lot of Muslims who did not claim interest on deposits or give them in charity and, according to a 2009 study there are unclaimed interest worth Rs50bn lying in Kerala banks alone.

Cheraman, named after the king who is believed to have built India’s first mosque in the Kerala town of Kodungallur, plans to offer leasing and equity-finance products under Islamic principles to begin with.

It has already started funding startup companies and infrastructure projects and floated the Rs 2.5bn Cheraman Fund, a private equity fund with a minimum of Rs10 million set by Securities and Exchange Board of India (SEBI) per investor.

It also has a subsidiary Cheraman Infrastructure for “channelizing ethical investments for developing world class industrial, social and residential infrastructure” in Kerala.

This business vertical focuses on infrastructure development activities through Build Operate and Transfer (BOT) and other related modes.

The company targets development of industrial and knowledge parks, standard design modules, logistics parks, special economic zones, electronic parks, roads and urban transportation, social infrastructure like hospitals and educational institutions, housing and shopping malls.

(Arab News / 18 Feb 2014)
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AIG Lured to Malaysia by Growing Takaful Market

American International Group Inc. is plotting its entry into Malaysia’s Islamic insurance market, lured by the country’s economic expansion and an industry that has grown more than fivefold in less than a decade.

The insurer, the world’s largest before being bailed out by the U.S. government in 2008, will start a Shariah-compliant reinsurance business by June and may eventually offer a fuller range of services, Antony Lee, chief executive officer at AIG’s Malaysian unit, said in a Feb. 11 interview in Kuala Lumpur. Rising affluence in the Southeast Asian nation will spur increased demand, he said.

Malaysia accounted for 11 percent of the $20 billion of Islamic insurance, or takaful, contributions in 2013, a Feb. 13 report from the Malaysia International Islamic Financial Center shows. New business will increasingly come from outside the Middle East, said Hatim El-Tahir, director of the Islamic finance group at Deloitte & Touche in Bahrain. New York-based AIG follows Munich Re and Swiss Re AG into the retakaful market in Malaysia, whose economy has had only three quarters of economic growth below 5 percent in the last four years.
“In line with the continuing expansion of the takaful business, the demand for retakaful is expected to expand between 15 percent and 20 percent on an annual basis,” Bahrain-based El-Tahir said in a Feb. 15 e-mail interview. “The geographical concentration in terms of global contribution is expected to shift from the Gulf Cooperation Council countries to the Asia- Pacific region by 2015.”
Mutual Assistance
The GCC consists of Saudi Arabia, United Arab Emirates, Kuwait, Bahrain, Qatar and Oman.
AIG’s Malaysian unit, which was set up in 1953 and has 14 offices, currently offers non-Islamic coverage for property, electronic equipment, medical and personal accidents, according to its website. The company’s venture into retakaful will help it assess the potential of the Shariah-compliant insurance market, according to Lee.
“There’s a whole segment of the market, which is the rural areas, that really is where there’s a much lower penetration rate,” he said. “As you get rural people moving into the cities, the affluence starts coming into it.”
Islamic insurance is based on the Koranic principle of mutual assistance. Policy holders contribute a sum of money to a common pool managed by the company, which is used to pay for claims and any excess is returned to customers. Retakaful is insurance for takaful companies and consists of Shariah insurers contributing to a fund managed by the retakaful operator, who’s paid a management fee.
Growth Rates
Malaysia has 11 takaful companies and the market recorded a compound annual growth rate of 18.7 percent in the four years through 2012, the MIFC estimated in its report. The nation has four Islamic reinsurers, according to the central bank’s website.
Global takaful contributions reached $24.3 billion last year from $4.7 billion in 2005, according to a separate estimate in the World Islamic Insurance Directory 2013 published by Takaful Re and the Middle East Insurance Review. Takaful still accounts for just 1.13 percent of the world’s Shariah-compliant financial assets, according to the MIFC report. A growing Islamic insurance industry will support demand for sales of sukuk, which have increased 0.7 percent to $3.9 billion this year.
The Bloomberg Takaful Index, which tracks the share prices of Islamic insurance companies worldwide, has fallen 1.3 percent this year, following a decline of 3.8 percent in 2013.
A key challenge for retakaful companies is their limited ability to compete with their larger non-Islamic counterparts for business that requires a bigger balance sheet, Munich Re Retakaful Chief Executive Officer Mohamed Rafick Khan Abdul Rahman said in a Feb. 14 interview in Kuala Lumpur.
‘Limited Capacity’
“There is limited capacity to insure things like airplanes and ships,” he said. “Conventional insurance has been in the market for the last 400 years. Retakaful is 15 to 25 years old. So we are pretty young, relatively speaking.”
AIG is cutting about 3 percent of its global employees after divesting units to help repay the $182.3 billion bailout in 2008, according to a Feb. 13 statement. Chief Executive Officer Robert Benmosche said last year the insurer is considering shifting some jobs to lower-cost locations including Malaysia and the Philippines.
Malaysia’s economy is forecast to expand 5 percent in 2014, after growing 4.7 percent last year, according to the median estimate of economists surveyed by Bloomberg. The government has a $444 billion 10-year plan to build roads, ports and power plants to elevate the country to developed-nation status by 2020.
Penetration Rates
Insurance premiums and contributions amount to 5 percent of Malaysia’s gross domestic product, according to the MIFC report. That compares with 10.1 percent and 11.5 percent in the more developed Asian economies of Japan and Hong Kong.
“Recent forecasts estimate that the takaful market will grow by over 10 percent a year for the next five to 10 years,” Marcel Papp, head of retakaful at Kuala Lumpur-based Swiss Re Retakaful, the Shariah-compliant unit of the world’s second- biggest reinsurer, said in a Feb 17 e-mail interview. “This in turn should help to grow the retakaful market by a similar percentage.
(Insurance Journal / 18 Feb 2014)
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