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Wednesday, 26 August 2015

Islamic banks need liquidity management tool, skilled workforce

MUSCAT: Islamic banks in Oman need a liquidity management tool, relaxation of certain restrictions and skilled workforce to prosper further, says a senior official at Bank Nizwa, Oman’s first fully-fledged Islamic bank.

“Islamic banks need a liquidity management tool, such as short-term sukuk by the government. This is not necessarily for profitability, but mainly for the proper functioning of a banking system,” DrJamil El Jaroudi, the bank’s chief executive officer, said in an exclusive interview with Times of Oman.

The official believes that the issuance of Oman’s first sovereign sukuk would positively affect the Islamic banking sector.

“The issuance should be well-welcomed, as more products that rely on Islamic investment are required to support the Islamic banking sector in Oman. Given that the government is a major market player and influences the market confidence, this step will increase liquidity levels and provide a pricing benchmark that is still missing in a new market,” El Jaroudi added.

Certain restrictions

“We also need to look into relaxing certain restrictions in light of the need and experience within the sharia-approved schemes and AAIOFI (Accounting and Auditing Organisation for Islamic Financial Institutions) standards,” El Jaroudi noted.

According to Bank Nizwa’s CEO, apart from the typical challenges facing Islamic banking as a new industry such as the understanding and acceptance of the concept and products, the main challenge in Oman is finding manpower with the necessary knowledge and skillset in Islamic finance.


“It has also proven more challenging with the Omanisation policy where it would take years for the industry to develop the local talent. With that said, we are overcoming this hurdle by focusing on training programmes for our employees and support of educational institutions that specialise in this field,” he said.

Fledgling industry

El Jaroudi added that other common challenges lie in the fact that the industry is considerably novice in the Oman market so it has been a steep learning curve for all.

“In addition, the local rules and regulations would take time to be adjusted to suit the specific needs to grow the industry. However, Oman, in its short history in Islamic banking, has made tremendous progress in this respect and has benefitted from other markets’ experience,” the official noted.

Remarkable growth

Both fully-fledged Islamic banks in Oman and Islamic windows combined have seen an average growth rate of over 40 per cent year-on-year in terms of total assets, he said, adding thatthe average growth for conventional banks on the other hand was around 9 per cent for the same period.

“In terms of financing portfolio growth, it is even more remarkable, as we have grown by more than 300 per cent on average during the same period compared to the conventional banks’ average of approximately 15 per cent for the same period,” El Jaroudi stated.

Public awareness

In addition, the official said that public awareness about Islamic banking has definitely increased, which can be seen from the growth in its performance on all levels.

“The retail sector has been straight-forward, thus you could see the initial growth mainly stemming from that sector. The corporate and wholesale were more challenging due to the slightly more complex nature of the transactions but has since also seen tremendous growth,” added El Jaroudi.

Educational campaign

Bank Nizwa’s CEO also noted that the bank is doing its best to speed up this process and embarked on a series of lectures and workshops to raise and enhance awareness of the market about Islamic banking.

“The response was excellent and we also believe that being the first Islamic fully-fledged bank in Oman, it is our responsibility to continue leading the way,” said El Jaroudi.

(Times Of Oman / 26 August 2015)
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Malaysia’s Islamic financing sector is under pressure amid market woes

The broad sell-off triggered by the continued stock market slump in China is rattling across Southeast East Asian economies. In particular, the Malaysian bond and sukuk market has been badly hit by selling pressure, causing yields to surge and bonds indexes registering their biggest losses year-to-date.

Malaysia, the world largest sukuk issuer, is under particular and multiple pressures. Not just the weakening economy in China, one of its largest trading partners, is stepping on the brakes of Malaysia’s economic growth, it is also the rapidly falling value of the country’s currency, the ringgit, the tumbling oil price – a major setback for Southeast Asia’s largest oil exporting nation –, heavy capital outflows, as well as Malaysian Prime Minister Najib Razak being embroiled in controversy over alleged misallocation of funds by state-owned investment firm 1Malaysia Development Berhad, which has built up some $11bn in debt.

Of Malaysia’s four outstanding dollar-denominated government sukuk only one due 2016 is in the green since April with a meagre 0.3% as per the end of last week, while the others, due 2045, were down between 0.24% and 3.6% in the period. Heavy selling pressure was triggered mainly due to the continuous depreciation of the ringgit against the US dollar. Since April alone, the ringgit dropped 13%. Sukuk sales in Malaysia fell 34% to $6.5bn at current rates so far in 2015 from a year earlier, while the nation’s Islamic banking assets have reached a record of around $150bn in dollar terms – which brings with it an ever-increasing obligation to return profits to investors.
Economists say that this situation – a multitude of negative macroeconomic factors – will show whether the notion is true or not that sukuk and other Shariah-compliant investment instruments are more stable and reliable in times of market turmoil than conventional finance products.

For example, while the International Monetary Fund (IMF) is actually endorsing Islamic finance as an alternative to conventional finance, it is also sending out warning signs.

“Islamic finance may help promote macroeconomic and financial stability,” argues Christopher Towe, deputy director at the IMF’s monetary and capital markets department, adding that “the principles of risk-sharing and asset-based financing can help promote better risk management by both financial institutions and their customers, as well as discourage credit booms.”

However, the global lender also warns that, with the Islamic finance industry being relatively young, there are also “systemic vulnerabilities” especially in case Islamic finance does not fully fulfil its key criteria to be truly asset-based and the requirements for risk-sharing. Other systemic risks remain liquidity-related, mainly stemming from a shortage of tools for short-term funding of Islamic banks, and with it a limited scope of Shariah-compliant financial safety nets for banks, Towe said.

When problems in the financial markets congregate like they do in Malaysia this year – falling oil prices, falling prices for other export commodities, weakening trade with China, capital outflows as the US prepares to raise interest rates, massive slump of the domestic currency’s value, dwindling currency reserves, a bearish stock market, and on top of that a loss in confidence in the government’s ability to properly manage public finances, then this is a matter of real concern for a country that is heavily reliant on Islamic finance-based debt. Higher borrowing costs – unavoidable at the current state – would make it much more expensive and thus highly risky, if not unaffordable, to finance the government’s ambitious $444bn development plan to build rail, roads and ports as it seeks to become an advanced economy by 2020, a core strategy of the current government.

(Gulf Times / 25 August 2015)

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