Securities Commission Malaysia introduces new Sukuk framework

The launch of the SRI Sukuk framework is in line with the initiative set out under the SC’s Capital Market Masterplan two to promote socially responsible financing and investment. With the shifts in investor demographics, there are growing concerns over environmental and social impact of business and greater demand for stronger governance and ethics from businesses. The Malaysian capital market is well-positioned to capitalise on these changing trends and facilitate sustainable and responsible investing.

“The introduction of the SRI Sukuk framework is part of the SC’s developmental agenda to facilitate the creation of an eco-system conducive for SRI investors and issuers and is also in line with the rising trend of green bonds and social impact bonds that have been introduced globally to facilitate and promote sustainable and responsible investing. Combined with Malaysia’s leading position in the global Sukuk market, this framework will further enhance the country's value proposition as a centre for Islamic finance and sustainable investments”, said Datuk Ranjit Ajit Singh, Chairman of the SC.

The SRI Sukuk framework is an extension of the existing Sukuk framework and therefore, all the other requirements in the Guidelines on Sukuk continue to apply. The additional areas addressed in the framework for the issuance of SRI Sukuk include utilisation of proceeds, eligible SRI projects, disclosure requirement, appointment of independent party and reporting requirement.

Book Review - The History & Future of Islamic Finance

Yet today Islamic finance is a trillion-dollar industry with many financial institutions, corporations and governments keen to embrace it as a profit-making alternative to mainstream financial dealings.

Harris Irfan is an insider on two fronts. He is a Muslim and also an expert in finance and commerce. He has worked as an investment banker in Europe and the Middle East and been head of Islamic finance at Barclays; he also founded Cordoba Capital, an Islamic finance advisory firm.

Mr Irfan is a man with a mission: to show that Islamic finance might be able to make a real contribution to our economic woes. He asks the reader to consider whether the Islamic world can "bring something of benefit to the Western world, and vice versa".

This is no mean task, but Mr Irfan uses his own professional and personal experiences to weave together an accessible and interesting story.

We get an insight into the birth of the Islamic finance system in the fifties, to the establishment of the first Muslim banks in Saudi Arabia and the Gulf States and the gradual recognition by Western banks of the enormous profit potential in structuring products on a sharia-compliant basis.

Traditional clerics were flattered with the attention and remuneration offered by the giants of the banking industry in exchange for their expertise.

While this book isn't full of jargon, it helps to know something about how the investment industry works. You also need to have some sense of Islamic history and religious concepts. But the religious commentary does not overcomplicate the narrative. Anecdotes about the life of the eighth-century Muslim legal scholar Abu Hanifa, the financial workings of the Ottoman Empire and the modern controversial Pakistani scholar Taqi Usmani all add weight.

The last chapter ponders the future of Islamic banking after some sharia-compliant finances were unfairly equated with funding terrorism, Worth reading.

Indo Business

Govt taking steps to Promote Islamic Banking: Expert

The government is taking meaningful steps to promote Islamic finance which will soon transform Pakistan as a world leader in this sector, an industry expert said on Sunday.

Currently, Pakistan ranks ninth globally in terms of development of the Islamic financial services industry but some recent purposeful steps would prove to be a game changer, said Mian Shahid, Chairman United International Group (UIG).

Now, the conventional insurance companies in Pakistan are set to make major inroads into the Islamic insurance business with the active support of regulators, he added.

Mian Shahid said the size of the global Islamic financial industry has been estimated to touch mark of $1.8 trillion soon while Pakistan will become an important player in it due to the largest Islamic market in the world outside Indonesia.

Takaful in most markets is still in its infancy and its potential to supersede conventional insurance in Muslim world is still largely unexploited, he said, adding its premiums that exceeded $4 billion in 2007 is expected to reach $20 billion by 2017.

Saudi Arabia, UAE and Malaysia enjoy the lion’s share on account of their advanced Islamic finance sector while Pakistan would need more simplified regulatory frameworks to propel the industry’s expansion, the insurance veteran observed.

He said that United Insurance Company (UIC) had become first company to operate Takaful (Islamic Insurance) in Pakistan which had pushed us to look aggressively beyond the borders. Financial performance and proper handling of key strategic issues remained challenging for Takaful operators, he noted.

Making Pakistan a Centre of Excellence for Islamic Finance

Before the financial crisis ensued in 2007, there was an explosion of interest from a number of countries in becoming hubs for Islamic finance. These countries included Malaysia, Singapore and Hong Kong in the East; United Kingdom, France, Italy, Luxembourg and Ireland in the West; and Bahrain, Qatar and the UAE in the Middle East. Even countries like Japan and South Korea showed serious interest in Islamic finance in those pre-crisis days. Many of these countries, however, went cold on their claims during the financial crisis, leaving Malaysia as the most important global player in Islamic banking and finance (IBF).

Malaysia’s global leadership role is now once again being challenged by the likes of the UAE and Qatar, where the governments are actively supporting the promotion of the IBF. According to the Islamic Finance Country Index (IFCI) , published annually by Edbiz Consulting, Iran ranks number one in the global Islamic financial services industry. Malaysia and Saudi Arabia are second and third. Pakistan ranks ninth on the list. The current PML-N led government is the first democratically-elected government in the country which seems serious about promoting the IBF in Pakistan. The appointment of a dedicated deputy governor at the State Bank of Pakistan (SBP), with a focus on promotion of Islamic banking alludes to this fact. Apart from the developments at the central bank, advocacy of the IBF in Pakistan remains rather limited. The SBP has recently initiated a project to promote quality education in the IBF, by committing to invest in Pakistani universities and institutions of higher learning and develop them into centres of excellence.

In Malaysia, the prime minister himself keeps himself abreast of with new developments in the IBF. In the UAE, the ruler of Dubai is directly behind its initiative of making Dubai a centre of excellence for the global Islamic economy. In Pakistan, such a central leadership role has yet to emerge. Given the ongoing military operation in North Waziristan, political noise created by the likes of Imran Khan and Tahirul Qadri, and numerous other important engagements, the prime minister has not been able to embrace IBF fully. The finance minister also has a full plate and so has the secretary of finance. In such circumstances, there is a need that a full-time advisor be appointed to the prime minister, who should have multiple roles, including but not limited to, advocacy of IBF in Pakistan and overseas, liaison between different government departments (Ministry of Finance, Planning Commission, and SBP, etc) and international bodies like Islamic Financial Services Board and Accounting and Auditing Organisation of Islamic Financial Institutions for the promotion and development of IBF in the country, devising a national strategy on promotion of the IBF, developing a framework for enhancing the role of Pakistan as a global leader in the IBF and more specifically, preparing recommendations for the government to create a centre of excellence for the IBF in Pakistan.

It is absolutely imperative for Pakistan to work towards a leadership role in the global Islamic financial services industry to fully benefit from an industry that is fast approaching the important psychological mark of $2 trillion under management worldwide. This can be done by advocating the IBF nationally and by being involved in the decision-making of international forums related to Islamic finance. It should also look into hosting an international body related to Islamic finance. There are a number of other bodies that work for the promotion of IBF, including but not limited to the International Sharia Research Academy (ISRA)  for Islamic Finance and International Islamic Liquidity Management Corporation IILM — both hosted by Malaysia. The World Islamic Economic Forum (WIEF), supported by the Malaysian government, is also very active in advocating IBF. The Dubai Centre of Excellence for Islamic Banking and Finance is another body trying to pitch Dubai as the capital of the global Islamic economy. Pakistan, on the other hand, lags behind all these countries in such endeavours, despite having contributed significantly to the amount and quality of human capital to the global Islamic financial services industry.

There are a number of reasons behind this indifference to promoting and projecting Pakistan as a global leader in the IBF. First, the ongoing war on terror, and the law and order situation in the country did not allow the authorities to focus on this strategic area of paramount importance for the national economy. Second, the previous governments (the military government led by General (retd) Pervez Musharraf and the PPP-led government) shied away from anything Islamic, primarily due to the apologetic view of the Musharraf regime, and the aversion of the PPP government to be seen as promoting or backing any Islamic phenomena. Third, the lack of talent available in Pakistan was also responsible for not giving confidence to it to vie for a global role in the IBF. Finally, in the absence of a political push, the bureaucracy in the country has never considered the IBF with sympathy.

Despite all these obstacles, the share of Islamic banking in the banking sector has exceeded 10 per cent, and its growth is almost double of what conventional banking has witnessed in the last five years. Given this, it is recommended that Pakistan should now develop an international centre of excellence for Islamic finance, similar to the Dubai International Financial Centre (DIFC) and Qatar Financial Centre (QFC). These two centres are not exclusively for Islamic finance but are certainly engaged in the promotion of the IBF. The Malaysian International Islamic Financial Centre (MIFC), on the other hand, follows a different model to the DIFC and QFC, and is a virtual body connecting Ministry of Finance, Bank Negara Malaysia (the central bank), the Securities Commission Malaysia, other bodies in the government and international organisations. Pakistan should start with this model, eventually setting up a physical centre of excellence exclusively for IBF. This centre could be hosted on the outskirts of Islamabad as a ring-fenced financial centre like DIFC and QFC. The proposed special adviser to the prime minister on IBF should be given the task of developing a framework for setting up such a centre, among other things listed above.

The writer is an Islamic economist with PhD from Cambridge University.