Islamic Finance grows faster than Conventional Banking

MUSCAT — “Islamic finance is growing at twice the rate of the traditional banking industry in its core markets, which include Malaysia, Indonesia, Turkey and the GCC countries. The industry currently boasts $1.6 trillion in banking system assets,” said Mohammed Mahfoodh Al Ardhi, Chairman of the National Bank of Oman.

He added: “The GCC countries have committed to actively strengthening their positions in the Islamic finance market, with Saudi Arabia currently in the lead. We, at the National Bank of Oman, have been doing significant work in the Islamic finance domain and achieved considerable success as part of the broader plans to diversify Oman’s economy. Bahrain and Dubai are also emerging as notable offshore centers.”

Al Ardhi’s comments were made during a speech and interactive session at London Business School, where he shared his expertise with the faculty, students and alumni. 

Highlighting the practical implications of Islamic finance, current industry scenario, as well as opportunities, challenges and criticisms the sector faces, Al Ardhi drew out the distinctions between conventional and Islamic economic models. 

“Islamic finance is based upon the fact that money is not a source of potential capital or a commodity in itself but rather a medium, a facilitator, for trade and investment. Islamic finance is consequently built around the principles of risk sharing and shared investment, outlawing speculative activity and behaviors while discouraging debt to ensure the sanctity of contractual undertakings,” he explained.

He elaborated that the Islamic finance system is emerging as the more prudent, non-risky and ethical alternative to its conventional counterpart.

Professor Sir Andrew Likierman, Dean, London Business School, said: "London Business School, through its Executive MBA in Dubai and its close links with leading companies in Oman, Qatar, Kuwait and Saudi Arabia is committed to working with organizations in partnership to ensure world class leadership and enhance the prosperity of the region.  We are delighted that our links with the National Bank of Oman are so strong and appreciate Mr Al Ardhi coming to London to talk to our students here." — SG

Source: http://www.saudigazette.com.sa/index.cfm?method=home.regcon&contentid=20141026222317 

2nd Public Lender to set up Islamic Bank

The government sent Parliament a draft for a change in laws regulating the Turkish banking sector on Monday. The anticipated changes would involve plans to allow public bank Vakıfbank to set up the country's second anticipated Islamic public lender, after Ziraat Bankası. Ziraat received regulatory approval from the Banking Regulation and Supervision Agency (BDDK) last week to establish an Islamic bank. The moves are part of government efforts to develop the Islamic banking sector at home.

Ziraat, the country's largest state-run bank and its second-largest in terms of assets, will be allowed to set up a standalone Islamic unit with $300 million in capital, the regulator said late on Wednesday. Meanwhile, Turkish media speculated on Monday that, Emlak Bank, a lender which was transferred to Ziraat Bankası during Turkey's 2001 domestic financial crisis, would be reactivated as part of the Islamic bank plans. Emlak Bank, established in 1926, failed in 2001 and has since been in a liquidation process, with its operations being carried out under Ziraat.

There are currently four Islamic banks operating in Turkey, which hold a combined 5 percent share of total banking assets: Albaraka Türk, Bank Asya, Türkiye Finans and Kuveyt Türk, a unit of Kuwait Finance House.

Islamic finance has developed slowly in Turkey, the world's eighth most populous Muslim nation, partly because of political sensitivities and the secular nature of its laws. This changed in 2012, when the Turkish government issued its debut $1.5 billion Islamic bond and kick-started regulatory moves to allow wider use of Islamic finance contracts. The government has since issued dollar and lira-denominated Islamic bonds and is finalizing plans for another deal.

Source: http://www.todayszaman.com/anasayfa_2nd-public-lender-to-set-up-islamic-bank_362108.html

The Basics of Sharia Finance explained

Let’s say you need some money to start a business. You approach a bank offering conventional non-Sharia finance and they give you a loan. Whether or not you turn a profit or your business fails, you must still make payments to the bank with interest. With compound interest, the longer you take to pay off the loan, the more interest you pay. So if your business loses money, the financial difficulty you’ll face will be even more severe. You’ll have no income from your business and the bank can take legal action against you. This is the reality of debt. The bank earns a surplus without having to assume risks and obtains the added income through interest, making money on top of money; getting extra from the interest just because they were in the position to lend.

The distinction in Sharia finance is clear. It aims to protect all parties, ensuring that transactions are done according to Sharia principles, on fair grounds and for the benefit of the community. Profits must be generated through trades and economic activities in the real economy (see box). In addition, business risks must be shared rather than transferred to borrowers when they take out a loan.

Real Economy

This refers to sectors of the economy concerned with actually producing goods and services, as opposed to the part of the economy that is concerned with buying and selling on the financial market

Source: Financial Times

As the Sharia prohibits dealing with interest, the products that you see in Islamic banks are generally based on one of the following concepts:

Profit Sharing  – These are profit sharing arrangements in which the financier and the receiver of funds will share the profits and loss borne from the partnership. An example is a savings or current account called Mudarabah. When you deposit money into the account, profit is given to you based on the performance of the bank. The bank needs customers to place funds with them so that they can make a profit from having received customer deposits.

Buy and Sell – Charging a profit is justified when selling a product because of the risks associated with developing, sourcing and owning the product. Buying and selling of products can be done when you require funds. Because there is no borrowing or lending arrangement, the term ‘loan’ is not used in Islamic banks. Instead, the term ‘financing’ is preferred. For a personal finance arrangement, a bank generally follows a Murabahah contract where you agree to buy from the bank commodities – metal, for example.

This is how it’s done:

I. Let’s say you require $10,000 cash. You apply for personal financing from the bank, which sells you commodities worth this amount. They charge you, for example, $10,700, with $700 being the bank’s profit.

II. At this stage, you own $10,000 worth of commodities. Next, the bank arranges to sell these commodities to a third party on your behalf. The bank then gives you the $10,000 cash, providing you with the funds you needed.

III. You now owe the bank $10,700, which you will pay in instalments until the entire sum is paid off.

Unity and social cohesion are so central among the objectives of the Quran for humankind that all conducts prohibited may be regarded as those that cause disunity, and those prescribed are to promote social cohesion. It is a natural consequence of such a system to require risk sharing as an instrument for social integration. Therefore promoting maximum risk sharing is, arguably, the ultimate objective of Islamic finance.– From the book Risk Sharing in Finance:The Islamic Finance Alternative by Hossein Askari, Zamir Iqbal, Noureddine Krichene and Abbas Mirakhor

The system envisioned by the Qur’an does not reward the rich at the expense of those in need of funds

Instead of the financier just providing funds and expecting a payment, the parties of the contract are expected to cooperate and work together, ensuring solidarity is created in the community. Those in need of help in business or trade activities should be duly supported.

The system envisioned by the Qur’an does not reward the rich at the expense of those in need of funds. This is why compound interest is prohibited, as it ensures that a brother or sister who needs help is not exploited in times of hardship. In trade, there is real movement in economic activity. The buy and sell arrangement, for example, gives the supplier of the product a chance to earn an income from selling their goods.

Sharia finance also prohibits unfair practices in transactions. The notions of fairness and justice are the cornerstone of all its activities. Products that are full of uncertainty or based purely on chance, speculation or gambling one’s positions all boil down to making money on top of money without justification. This is unfair, and is evident in the global financial crisis. A group of people benefited from manipulating transactions, causing others to face financial difficulty as a result.

Another feature unique to Islamic banking is the presence of Sharia scholars who advise and govern matters relating to the Sharia. The extent of their involvement varies between regions. In the UAE, for example, scholars govern the products of the bank and how they are implemented. In Saudi Arabia and Malaysia, however, scholars oversee products and the bank’s entire operations to ensure that they do not contravene the Sharia. Regardless of the model adopted, whenever Sharia non-compliance is found, the bank cannot profit from a transaction that was done against Sharia principles. The profit would have to be purified by giving to charity.

The Islamic financial industry is still in a development phase and is a system that is not without its own set of issues. These include limited customised infrastructure to support its model, as well as differing regulatory standards that have resulted in different practices across countries. But in a world so heavily entrenched in debt and unfair practices, it may be worth our while to appreciate the potential that Sharia finance has for true risk sharing and mutual cooperation.

Source: http://www.aquila-style.com/lifestyle/sharia_finance/basics-sharia-finance/82533/?ref=sidebar

SUKUK PIPELINE - Issue plans around the world

DUBAI, Oct 12 (Reuters) - Following are major Islamic bond issues in the global pipeline.

The Thomson Reuters Global Sukuk Index is at 115.16353 points, up from 114.41171 at the end of last month and 109.78969 at the end of last year. The Thomson Reuters Investment Grade Sukuk Index is at 113.13021 points, against 111.97123 at end-September and 107.28036 at the end of 2013.

ETISALAT - Abu Dhabi-based telecommunications firm Etisalat is planning its first sukuk issue, bankers told IFR in early October. The company will have the documents ready in coming weeks, but the deal is more likely to be launched in early 2015, they said.

TUNISIA - Tunisia has sent banks a request for proposals for a debut U.S. dollar sukuk transaction, market sources told IFR in early October. The sovereign hopes to complete it by end-2014, one source said.

BANK ISLAM - Malaysia's Bank Islam, wholly owned by BIMB Holdings, has set up a 1 billion ringgit ($307 million) subordinated sukuk programme to boost its regulatory capital, RAM Ratings said in early October.

BINTULU PORT - Malaysia's Bintulu Port Holdings is expected to prepare for its planned Samalaju Port project with a proposed sukuk issue, likely to be 700-800 million ringgit, The Edge daily reported in early October.

TURKEY - Turkey wants to make an international sovereign sukuk issue annually, but has not yet made final plans for a sukuk this year, a Treasury official told IFR in early October.

1MDB - Malaysia sovereign fund 1Malaysia Development Bhd (1MDB) will raise 8.4 billion ringgit with Islamic bonds to build a power plant, IFR reported in early October.

WCT - Malaysian construction firm WCT Holdings will raise up to 1.5 billion ringgit through sukuk to refinance debt, pay working capital and capital expenses, Malaysian Rating Corp said in late September.

MALAYSIA MARINE - Malaysia Marine and Heavy Engineering said in late September it had received approval from the Securities Commission to establish a sukuk murabaha programme of up to 1 billion ringgit.

TURKIYE FINANS - Turkiye Finans Katilim Bankasi plans to issue $50 million worth of ringgit-denominated sukuk in Malaysia by year-end to diversify its funding base, chief executive Derya Gurerk told Reuters in late September.

DIFC INVESTMENTS - DIFC Investments, the investment arm of the company running Dubai's financial free zone, is looking to raise as much as $700 million before the end of October by issuing a sukuk to help repay existing debt and fund real estate development, its top executive said.

MAHCO MALAYSIA - Mahco Malaysia, a vehicle to issue sukuk for Mohammed Othman Al Houkail Trading & Contracting Co, a medium-sized contractor in Saudi Arabia, proposed an Islamic medium-term note programme of up to 300 million ringgit, RAM Ratings said in late September.

CENDANA SEJATI - Malaysia's Cendana Sejati, a unit of local bank Masraf Al Barakah, proposed a 360 million ringgit senior sukuk murabaha medium-term note programme, RAM Ratings said in late September.

INDONESIA - Indonesia's finance ministry will hold an auctions of project-based sukuk as well as six-month sharia T-bills on Oct. 21.

AGAOGLU - Turkish construction-to-energy Agaoglu Group plans to raise around $300 million by issuing sukuk, Niyazi Albay, Agaoglu's chief investment officer, told Reuters in mid-September. No specific time frame was given.

KUVEYT TURK - Lender Kuveyt Turk, 62 percent owned by Kuwait Finance House , plans to issue sukuk in Malaysia, aiming to raise as much as 2 billion ringgit, Turkey's Capital Markets Board said in mid-September. It gave no details.

AKTIF BANK - Aktif Bank, Turkey's largest privately owned investment bank, has received regulatory approval to issue 200 million lira ($91 million) in sukuk, the Capital Markets Board said.

IFFI - The International Finance Facility for Immunisation Co. (IFFI), for which the World Bank acts as treasury manager, has picked four banks for a potential U.S. dollar-denominated sukuk, a document from lead managers showed in mid-September.

ADVANCED PETROCHEMICAL - Shareholders of Saudi Arabia's Advanced Petrochemical Co gave approval on Sept. 15 for the company to issue sukuk in a total amount not exceeding its share capital.

OMAN - The government of Oman is expected to issue 200 million rials ($520 million) of sukuk early next year, its first issue of Islamic bonds, Jamil Al Jaroudi, chief executive of Bank Nizwa, told Reuters.

PAKISTAN - Pakistan's Ministry of Finance selected Citigroup, Deutsche Bank, Dubai Islamic Bank and Standard Chartered as bookrunners for a U.S. dollar sukuk issue, a ministry official said; the tenor of the bond and the format would be decided as soon as the week of Sept. 8.

DOGUS GROUP - Turkish conglomerate Dogus Group has received regulatory approval to raise $370 million by issuing the country's first U.S. dollar-denominated corporate sukuk, the Capital Markets Board said in late August. No time frame was given.

CIMB Islamic - CIMB Islamic, the sharia-compliant unit of Malaysia's second largest bank, is preparing an Islamic bond programme to raise up to 5 billion ringgit, ratings agency MARC said in late August.

SUNWAY - Malaysian property developer Sunway will raise up to 2 billion ringgit by issuing sukuk mudaraba, it said in August; short-term commercial paper under the programme will have maturities of between a month and a year, while medium-term notes will have maturities of one to seven years. Sunway will make its first issuance within two years.

MALAYSIA AIRPORTS - Malaysia Airports Holdings hired four banks for a subordinated perpetual sukuk musharaka to raise 1 billion ringgit; investor meetings would be held on Aug. 25.

RAS AL-KHAIMAH - The emirate of Ras al-Khaimah, part of the UAE, invited banks to pitch for arranger roles on a potential dollar-denominated sukuk, sources said in early June. However, bankers said in August that Ras al-Khaimah had sent out requests for proposals for a syndicated loan, casting doubt on whether the planned sukuk issue would now go ahead.

GULF FINANCE HOUSE - Bahrain-based Gulf Finance House said in mid-August it planned a $200 million sukuk issue to repay outstanding debt and for acquisitions. The deal would take place in coming months.

ADIRA DINAMIKA - Indonesia's PT Adira Dinamika Multi Finance plans to raise at least 500 billion rupiah ($42 million) with ringgit-denominated sukuk in Malaysia by the end of the year, bankers said.

K-ELECTRIC - Karachi-based utility K-Electric plans to raise as much as 22 billion rupees ($223 million) through sukuk to refinance existing debt, the company said in late June.

LIBYA - Libya's central bank is proposing to issue Islamic bonds to help fund the country's budget and offset a loss of oil revenues that could create a deficit of $25 billion this year, a bank official said in June.

KENYA - Kenya plans to issue another international bond and may consider a debut sukuk issue, the finance minister said in late June, after a successful debut $2 billion eurobond closed.

BANK MUAMALAT - Malaysia's Bank Muamalat, a unit of sovereign fund Khazanah and auto-to-property conglomerate DRB-Hicom Bhd, will raise up to 2 billion ringgit with Islamic bonds, credit agency Malaysian Rating Corp said in late June.

BAHRI - National Shipping Co of Saudi Arabia (Bahri) plans to arrange long-term sharia-compliant financing in the next year to replace a bridge loan backing its $1.3 billion acquisition of Saudi Aramco's marine unit, Bahri said in June. Banking sources prebiously told Reuters Bahri was looking at a potential debut sukuk issue to replace the bridge loan.

SOCIETE GENERALE - Societe Generale completed the roadshow for the first issue in its 1 billion ringgit multi-currency sukuk programme in Malaysia, and would decide on the size in days, the bank said on June 18. In early July, banking sources said Societe Generale was still seeking a window to launch.

IFC - The International Finance Corp, the World Bank's lender to the private sector, is considering a return to the Islamic bond market, an IFC official said. A sukuk issue is still in the early stages of discussion but would likely be in the fiscal year starting in July 2014.

JORDAN - Jordan's government is studying a proposal to issue its first Islamic bond as early as next year, possibly raising over $1 billion in multiple currencies, but a preference for concessionary loans from aid donor countries could hinder the plan, government sources said.

MALAYSIAN RESOURCES CORP - Malaysian Resources Corp, a local construction firm, said on June 12 it would issue Islamic bonds to raise up to 680 million ringgit for land acquisitions and working capital.

BANGLADESH - The central bank is seeking to amend rules on its existing sukuk programme to broaden its use and allow for sovereign issuance by the government, a central bank spokesman said in June.

AL OTHAIM - Saudi Arabia's Al Othaim Real Estate and Investment Co, owner of five shopping malls in the kingdom, plans to issue its debut local currency sukuk as early as in June, sources aware of the matter said at the start of the month. The transaction is likely to be worth between 500 million and 1 billion riyals ($133-267 million), one of the sources added.

JEDDAH ECONOMIC CO - Saudi Arabia's Jeddah Economic Co said in mid-May it was in talks with local banks to raise funds for the 14 billion riyal first phase of its Kingdom City project. For part of the money, "we are looking at the bonds and sukuk market but this will need a structure in place, which we are working on," chief executive Mounib Hammoud said.

BANK MUSCAT - Bank Muscat plans a dual-currency U.S. dollar and rial sukuk issue worth around $300 million that would be the first sukuk sale by an Omani bank. The issue, which could carry tenors of three to five years, would be part of a 500 million rial ($1.3 billion) sukuk programme which shareholders approved in March, Sulaiman Al Harthy, group general manager of Meethaq, Bank Muscat's Islamic operation, told Reuters in early May.

PELABURAN MARA - Malaysia's Pelaburan MARA, the investment arm of Majlis Amanah Rakyat, plans to issue sukuk worth up to 1 billion ringgit this year or next to finance its investments in the oil and gas and technology sectors, group chief executive Nazim Rahman was quoted as saying in April by The Edge Financial Daily.

HUA YANG - Malaysian property development firm Hua Yang Bhd said on April 29 it had won approval from the securities commission to raise up to 250 million ringgit with an Islamic bond programme.

FIRST GULF BANK - Abu Dhabi's First Gulf Bank, the third-largest bank by assets in the United Arab Emirates, plans to raise up to 3.5 billion ringgit with Islamic bonds in Malaysia, RAM Ratings said in March.

KILER REIT - Turkish real estate investment trust Kiler GYO plans to issue a five-year sukuk worth at least $100 million in the second half of this year, parent company Kiler Holding's chief financial Officer Kaan Aytogu said in February.

ACWA - Last December, Saudi Arabia-based water and power project developer ACWA Power said it had raised a 1.77 billion riyal Islamic loan from four local banks to help finance investments including acquisitions and act as a bridge to a sukuk issue in 2014.

ADB - The Asian Development Bank said in December that it was considering an Islamic bond issue as early as in 2014.

Source: https://en-maktoob.news.yahoo.com/sukuk-pipeline-issue-plans-around-world-050841558--sector.html

Interest Free Banking a Reality?

The Ugandan government has embraced Islamic banking as evidenced by Cabinet’s recent approval of the same with the proposed Islamic Banking Bill 2014 currently before the Uganda Law Reform Commission undergoing a few changes, and likely to be tabled on the floor of Parliament soon.

Islamic banking is Sharia-compliant banking based on the principles of trade, partnerships, Profit and Loss Sharing (PLS) and the prohibition of reckless risk. Specifically, it prohibits interest-based banking, speculation and financing of haram transactions such as gambling and alcohol. It has the same purpose as conventional banking: to make money for the bank by lending out capital. However, the Islamic economic system revolves around the prohibition of interest. Two of the several Islamic banking products that avoid the concept of interest are Musharaka and Murabaha.

Under a Musharaka contract, the bank provides the money while the client provides the business expertise, and profits are shared at a predetermined ratio while losses are borne exclusively by the bank, having provided all the capital initially. This is essentially a partnership loan between the bank and customer. The bank obtains ownership interests in the assets it finances, or earns a profit-share. Because of the bank’s involvement in the implementation of the project, it has a higher likelihood of success, which should see more successful investments.

On the other hand, Murabaha is cost-plus financing. Because Islamic banks are prohibited from making returns on money lending, these contracts provide for the bank to buy an investment good or commodity on behalf of the client and resell it to the client at a fee which enables the bank to make a profit. So, for example, an Islamic bank will not offer an interest loan to clients to buy a house, but will buy the house instead and sell it to the client for a profit.

Between 2010-2012, interest rates of some commercial banks in Uganda were as high as 30-32 percent. Islamic banking, being interest-free, should increase access to investment finance and see a rise in entrepreneurship projects, as well as boost competition in Uganda’s banking sector inevitably leading to provision of more efficient and better banking services.

Kenya and Tanzania have already embraced Islamic banking with banks such as Standard Chartered offering Islamic banking windows. Kenya’s central bank introduced Sharia-compliant bonds, also known as Sukuk which are bonds backed by an asset, with the bank sharing in the profits derived from the assets. Islamic finance currently accounts for about 2 per cent of the total banking business in Kenya, with corporations making up a considerable portion of the clientele. In Tanzania, Islamic banking gained such popularity upon its introduction more than seven years ago that demand for it eventually far exceeded supply. This was due not only to the large number of Muslims in the country, but also to the lucrative services and partnerships that Islamic banks have offered.

In Uganda, only 8.3 percent of the Ugandan population use banking products, and the Muslim population is only about six million of the total population. Islamic banking products would likely be particularly appealing to Muslims, but would also be available to all Ugandans and should be a viable option for the majority of youthful entrepreneurs and low-income earners, regardless of religious affiliation.

It is noteworthy that the Financial Institutions Act of Uganda (2004) neither envisages nor provides for Islamic banking. The proposed Islamic Banking Bill (2014), therefore, would provide a much needed regulatory framework to realise the benefits of this alternative banking model.

Source: http://www.independent.co.ug/column/comment/9392-interest-free-banking-a-reality-

National Bank of Fujairah offers sharia-compliant financial solutions in UAE

The new Islamic unit will initially offer retail banking products to customers, with plans to expand the offerings for companies and businesses in the region.

NBF retail banking head Sharif Mohd. Rafei said: "Over the years, we have been witnessing a growing demand for Islamic banking products as we broadened our personal banking footprint beyond our traditional home base of Fujairah.

"With NBF Islamic, we will not only be able to better serve the needs of our customers, but further establish our growing reputation as a well-respected local bank fully committed to preserving the values of the community."

To operate the new unit as per the principles of Islamic law, NBF Islamic will be helped by the Shariah Supervisory Board of Amanie Advisors.

According to a report from Ernst and Young, the Islamic banking assets in the UAE increased from $83bn in 2012 to $95bn in 2013, reported Gulf Business.

NBF CEO Vince Cook said: "We are pleased to contribute to the UAE's aspirations to becoming a hub for Islamic finance. Expanding our suite of client-centric solutions is crucial to the success of our customers and the bank, and we are confident that NBF Islamic will further establish our position as a reliable and trusted banking partner in the UAE."

Source: http://retailbanking.banking-business-review.com/news/national-bank-of-fujairah-offers-sharia-compliant-financial-solutions-in-uae-031014-4392007