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Saturday, 15 March 2014

Malaysia plans ethical sukuk guidelines as sector expands

KUALA LUMPUR, March 12 — Malaysia’s Securities Commission plans to introduce guidelines for the issuance of “socially responsible” sukuk, the regulator said today, in an expansion of the standards covering Islamic bonds.

Up to now, sukuk standards introduced by regulators and bodies of scholars around the world have focused on ensuring that the structures of the sukuk and the assets backing them comply with Islamic principles.
Malaysia’s initiative appears to go a step further by setting formal guidelines for the ways in which money raised by sukuk should be used.
The initiative, known as “SRI sukuk”, was announced by Prime Minister Najib Razak in his annual budget speech last October; he said funds raised by SRI sukuk would go towards “sustainable and responsible” investments.
The prime minister did not elaborate on how SRI sukuk would work, and the Securities Commission did not give any details. But the guidelines could attract to Malaysia issuers and investors from the West who are familiar with the concept of socially responsible investing but have yet to venture into the sukuk market.
The new standards may focus on ensuring that money raised is not spent in economic sectors banned by Islam, such as tobacco, gambling and banking based on interest payments. The SRI standards will not be compulsory; sukuk issuers can continue using their current formats.
In its 2013 annual report, the Securities Commission also said it would continue to encourage cross-border and multi-currency bond and sukuk issuance.
According to data released by the commission today, Malaysia retained its global lead in many areas of Islamic finance.
Malaysia accounted for 58.8 per cent of global sukuk outstanding and 69 per cent of sukuk issuance last year. It has been innovating with new sukuk formats: Malaysia became the first country in the region to see a sukuk issue designed to raise capital to meet global Basel III banking standards, and the second country to raise money by selling sukuk to retail buyers.
Last year the Malaysian regulator approved issuance of 49 local-currency sukuk worth a combined 99.1 billion ringgit up from 41 worth 71.1 billion in 2012.
Sukuk, while still dominated by short-term commercial paper and medium-term notes, accounted for two-thirds of total private debt securities issued in Malaysia last year.
Islamic assets under management in Malaysia grew 22.5 per cent last year to RM97.5 billion. There were 178 Islamic unit trusts as of December 2013 with RM42.82 billion in assets, up from 169 and 35.56 billion a year earlier.
In the wholesale fund sector, there were 52 Islamic wholesale funds holding RM16.43 billion of assets, up from 41 holding 16.22 billion.
Malaysia’s private retirement scheme (PRS), launched in mid-2012, posted a five-fold increase in Islamic assets under management and had 22,511 accounts at the end of last year.
A total of 17 Islamic PRS funds held RM79.52 million in assets as of December, up from nine with 14.45 million a year earlier. This represented roughly a quarter of all PRS assets.
(The Malay Mail Online.Com / 12 March 2014)
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Philippines: Islamic banking and finance anyone?

DURING our overview conference on the business and investment climate in Bangsamoro held in Davao last November, critical thematic areas surfaced as priority for the Bangsamoro as well as for the private sector. The concerns ranged from human and physical infrastructure, access to capital and credit, to security. Of these myriad issues, the conference organizers, the Foundation for Economic Freedom (FEF) and the Philippine Center for Islam and Democracy (PCID), have opted to focus on the areas that have not been adequately addressed: banking and finance, business and labor regulations, land and property rights, and revenue generation and fiscal management.

   On March 11 and 12, FEF and PCID, in partnership with the Bangko Sentral ng Pilipinas (BSP) and the Bangsamoro Development Agency (BDA), organized the Banking and Finance (BAF) Workshop at the beautifully appointed Executive Business Center of the BSP. The workshop is part of a series organized by the FEF and PCID to bring key stakeholders together to help strengthen the business and investment climate for the Bangsamoro. The success of the workshop we owe in large measure to FEF’s Cesar Virata (former Prime Minister and RCBC Vice-Chair), Tom Allen (former World Bank Director), Cayetano Paderanga, Jr. (former National Economic and Development Authority Secretary) and Gary Olivar (Consultant, BDO Risk Management Unit). 

The Bangsamoro now have a partner in BSP Governor Amando Tetangco, Jr. and Deputy Governor Nestor Espenilla, Jr., whose strong support for the workshop was key to gathering, in one forum, the key stakeholders from both regulatory and private sectors.

Autonomy for the Bangsamoro, the cornerstone of the peace process with the Moro Islamic Liberation Front (MILF), will be meaningless if business and investment continue to stay away from the region. The present Autonomous Region for Muslim Mindanao (ARMM) has suffered from this neglect, as shown by economic indicators. ARMM contributes less than 1% of the country’s GDP and poverty incidence there has worsened. The region’s rich natural resources are undeveloped due to armed conflict and lawlessness, the dearth of educated and skilled manpower, and inadequate infrastructure. 

In his overview of the banking and finance situation in the ARMM, Mindanao State University Professor Acram Latiph cited the dismal profile of the region -- lowest levels of investment and domestic trade, lowest number of private firms, commercial floor area, banks and other financial institutions. The region’s economy is dominated by the informal sector where informal lending is a major source of financial intermediation. Further, as confirmed by a 2011 JICA study, 83% of entrepreneurs use their own money as a source of finance. Pawnshops and moneylenders have proliferated, in spite of Islamic prohibitions of usury or "riba." If there are no other sources of financing, what choice do Muslims have?

A study conducted by the Institute for Development and Econometric Analysis for the FEF-PCID initiative revealed that the number of banks actually declined from 26 to 19 (2006 to 2012). Imagine, as of 2012, there were only 25 ATMs in ARMM (0.2% of the more than 12,000 ATMs in the Philippines). 

The JICA study also showed that only 32% of ARMM residents kept their cash in banks. As a consequence of the lack of access to banks, the majority keeps their money at home (under the mattress?) and in their stores/offices.

Prof. Acram clearly notes that the ARMM is "disconnected" from the rest of the country in terms of economic linkages.

The BAF workshop brought together more than 70 participants from major Philippine banks, government regulatory agencies, and Bangsamoro participants from the BDA (led by its Chair, Dr. Safrullah Dipatuan), Bangsamoro Transition Commission (BTC), ARMM regional government and private sector. As Mr. Dipatuan said, the Bangsamoro cannot develop its economy without the support of the country’s banking and finance sector.

The workshop was structured not just to address the region’s lack of access to banking and finance services and products, but also to gather support for developing a regulatory framework that would allow for Islamic banking and finance. Why Islamic banking and finance? 

For the Bangsamoro, it is a requirement that all our dealings in life be "halal," or legal and permissible under Shariah or Islamic law. In Islam, what is legal must be moral. In most Islamic countries, Shariah guides government, industry and business, setting the criteria for what is halal and what is haram (illegal, prohibited). Some actions that businesses must avoid in order to be considered halal or Shariah-compliant will be considered extreme, by conventional standards. For instance, funding that comes fromharam sources such as gambling is also haram. Thus, the Bangsamoro really cannot accept funding from the Philippine Charity Sweepstakes Office, which draws its funds from casinos and the lotto.

Given that Muslims in this country are a small minority (less than 10% of the population), why would Philippine banks be interested in investing capital, time and effort to be Shariah-compliant?

The surge in capital from oil rich economies has spurred activity in the ASEAN for Islamic banking and finance, export of goods, health and education services. However, this phenomenon has not catalyzed growth in the provision of those products and services from the Philippines. The Philippines is one of the first countries to open an Islamic bank -- the Philippine Amanah Bank, now the Al Amanah Islamic Investment Bank. Supported by then Finance Secretary Cesar Virata, Amanah Bank was established in 1973 by virtue of Presidential Decree No. 264, to provide banking services to Muslim Mindanao, which would accommodate the religious requirements of the Muslim population.

However, Amanah is in limbo. Ikram Tawasil (National Commission for Muslim Filipinos, formerly with the Amanah Bank) described how Amanah is unable to move from conventional banking services to the Islamic due to many problems, including government regulations that prevent it from offering Islamic financial products and services. Current legal and regulatory infrastructures that would enable -- given the right conditions -- the flourishing of Islamic banking and Shariah compliant microfinance and other financial institutions in the region are glaringly absent. (However, Rafael Morales -- Managing Partner of Sycip, Salazar, Hernandez and Gatmaitan Law Firm -- said that we may not need to amend laws. Securities and Exchange Commission Commissioner Manuel Gaite echoed that idea. More on this interesting line of thinking next week).

Meanwhile, other countries -- the United Kingdom, Malaysia and Singapore, for instance -- have aggressively run after the capital of the oil-rich Middle East by offering a wide range of Islamic banking and finance products and services. The Philippines still has not tapped the opportunities of different types of financial products, which would allow for a shift from a debt and interest-based financial system to one based more on equity and partnership. If we did, we could entice more foreign deposits and investments from the Muslim countries. 

Why should our banks consider opening up to Islamic systems? My question is this: is conventional banking so profitable that we don’t need to look at other opportunities? Is the pain of learning a new system not worth gaining new markets? 

Islamic banking and finance is still a young sector. The first Islamic bank was established in Egypt in 1963. Since then, Islamic finance has grown tremendously. Global Islamic banking assets held by commercial banks were set to cross $1.8 trillion in 2013, up from the $1.3 trillion of assets held in 2011 (Ernst & Young’s World Islamic Banking Competitiveness Report 2013). 

Citibank, Hongkong Shanghai Banking Corp., Standard Chartered Bank and other international banks have opened Islamic banking windows and subsidiaries. There are more than 300 Islamic financial institutions worldwide across 75 countries. The world’s 100 largest Islamic banks have set an annual asset growth rate of 26.7% and the global Islamic finance industry is experiencing average growth of 15-20% annually (Asian Banker Research Group).

At our BAF workshop, senior officials of Philippine banks -- BPI, PNB, DBP, RCBC, LBP, BDO, Amanah -- listened intently as CEOs of the Islamic bank groups of Malaysia’s top two banks shared their experiences on the growth and profitability of Islamic banking. Muzzafar Hisham (Maybank) and Badisyah Abdul Ghani (CIMB), gave valuable suggestions on how the Philippines can develop its own Islamic banking and finance sector. 

Perhaps our bankers will now be more encouraged to consider the opportunities available and provide Islamic banking services and products not just for the Bangsamoro but also the entire country. Certainly BSP Governor Amando Tetangco, Jr. and Deputy Governor Nestor Espenilla, Jr. are very supportive. 
(Business World Online / 13 March 2014)
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