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 

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

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

Dubai Islamic Economy Development Centre to launch State of the Global Islamic Economy Report 2014

The report will also highlight key local and global findings of the Global Islamic Economy Indicator (GIEI), a numeric measure representing the overall health and growth of the Islamic economy. An independent multi-dimensional barometer, the GIEI defines the development of the global Islamic economy beyond the growth of its assets, focusing on awareness, governance and social metrics.

His Excellency Mohammed Abdullah Al Gergawi, Chairman of the DIEDC Board, said: “The UAE and more specifically Dubai’s Capital of Islamic economy model mandates us to assume a leadership role in developing knowledge and cultivating an understanding of the Islamic economy and the various forces driving its growth. The 2014 State of the Global Islamic Economy report provides fresh insight into the challenges and opportunities emerging within economic sectors that are critical to the long term prosperity of Muslim majority countries and the wider global economy.”

Commissioned by the DIEDC, the 2013 edition of the State of the Global Islamic Economy Report that was also developed in association with Thomson Reuters, was a ground-breaking report that, for the first time, took a holistic view of the global Islamic economy across the seven key Islamic economy sectors, highlighting the convergence opportunities globally. The report, which was launched at the Global Islamic Economy Summit (GIES) in Dubai, in November 2013, received industry-wide attention regionally and globally and has been used as a reference point for understanding the impact of the Islamic economy on the global economy.

His Excellency Essa Kazim, Secretary General of DIEDC, said: “The State of the Global Islamic Economy Report 2014 will be a guiding tool for all stakeholders and investors to further understand the huge economic potential, as well as the challenges of building an Islamic economy hub. The findings of the 2014 report will define a new wave of opportunities for commerce within the Islamic economy.”

Abdulla Mohammed Al Awar, CEO of the Dubai Islamic Economy Development Centre, said: “The State of the Global Islamic Economy Report 2014 will catalogue the developments that have taken place within the Islamic economy over the past 12 months, as well as providing a comprehensive picture of the important trends that are gathering momentum across the full spectrum of the Islamic economy. I am confident that its findings will help facilitate investments and industry growth, providing a solid framework for businesses to assess and evaluate market opportunities for each sector of the Islamic Economy.”

SOURCE: http://www.cpifinancial.net/news/category/islamic-finance/post/28419/dubai-islamic-economy-development-centre-to-launch-state-of-the-global-islamic-economy-report-2014

Islamic Finance goes Global, but Malaysia still leads the way

Islamic finance is going global. South Africa has joined the UK and Hong Kong to become the third non-Muslim country to issue an Islamic bond or sukuk. And this follows American investment bank Goldman Sachs raising US$500m from its first Islamic bond sale. These moves reflect the desire to effectively tap into the wealth of Muslim investors around the world.

Fuelled by booming industries in the Middle East and South-East Asia, the Islamic finance industry is booming. Forecasts estimate it will double over the next five years to more than US$3.4 trillion. The two global centres for it are currently Malaysia and the UAE (where Goldman is issuing its sukuk). But London too has staked its claim on standing alongside Dubai and Kuala Lumpur.

Playing host to the 9th World Islamic Economic Forum last year, London appeared to make a deliberate challenge to rival the traditional Islamic financial powers. Opening the forum, David Cameron said:

"London is already the biggest centre for Islamic finance outside the Islamic world … I want London to stand alongside Dubai and Kuala Lumpur as one of the greatest capitals of Islamic finance anywhere in the world"

London followed this up by launching a £200m sukuk in June 2014 and a groundbreaking new Islamic index on the London Stock Exchange. But can the non-Muslim power really challenge the traditional centres and how do they compare?

Malaysia’s market share

In terms of market share, Malaysia leads the pack with 16 fully-fledged Islamic banks including five foreign ones. Its total Islamic bank assets total US$135 billion (£82.7 billion), which accounts for 21% of the country’s total banking assets. By comparison the UAE has seven fully-fledged Islamic banks accounting for US$95 billion of assets and this represents around 19% of its total banking sector. Meanwhile, the UK has just six Shariah-compliant financial institutions, with total assets of US$19 billion.

If we focus on Islamic capital market development, Malaysia is once again a long way ahead of its competitors. The country boasts more than 60% of the global sukuk market amounting to US$164 billion worth of outstanding sukuk in the first half of 2014. London on the other hand has US$38 billion of outstanding sukuk raised through 53 issues on the London Stock Exchange since 2009. Dubai fares the worst with just US$21.08 billion as of May 2014 in sukuk on its exchanges. In fact state-owned companies in the UAE have gone to London to seek further capital.

But Goldman Sachs' debut sukuk was, of all the favourite Islamic finance locations, listed on the Luxembourg Stock Exchange. Intent on avoiding the controversy of their failed 2011 sukuk, Goldman this time adjusted the sukuk structure and enlisted several heavyweight Gulf banks including Abu Dhabi Islamic Bank, the National Bank of Abu Dhabi, Dubai’s Emirates NBD Capital and the investment banking arm of Saudi Arabia’s National Commercial Bank to arrange the sale.

This is only the second such deal from a conventional bank outside a predominantly Muslim country and so a significant step in Islamic finance going mainstream. It will also act as a big boost for GCC investment banks and give one more thumbs up for Dubai as the centre for Islamic finance.

Malaysia is also way ahead when it comes to regulating Islamic finance. Malaysia passed an authoritative Islamic Financial Services Act in 2013, which built on its earlier Islamic Banking Act of 1983 to oversee operations within the country. Dubai, London and other would-be centres meanwhile both rely on their common banking law with some Islamic finance add-ons to govern Islamic finance operations.

Islamic finance future

In relation to the Islamic finance education infrastructure, the UK is actually ahead of the game. The UK has been ranked as the global leader in Islamic finance education with more than 60 institutions offering Islamic finance courses and 22 universities offering degree programs specialising in Islamic finance.

Malaysia and the UAE followed. Malaysia has 50 course providers and 18 universities offering degree programs, while the UAE has 31 course providers and nine universities offering degree programs. But when it comes to research output in Islamic finance, Malaysia stood first with more than 100 peer-reviewed research papers released in the past three years. The UK followed with 56 peer-reviewed research papers and there was no data available for the UAE.

Under threat

Based on the above observations, it is apparent that Malaysia is still the superpower of Islamic finance. But with the recent developments in the rival centres this position is going to be under continuous threat.

The Islamic Development Bank has set up a US$10 billion sukuk issuance program on the Nasdaq Dubai exchange that will be a big boost to Dubai’s efforts to become a top centre for Islamic finance. And London, which is already a global financial centre, is making its moves to bolster Islamic finance from education to cultivating relationships with Muslim banks and investors.

Malaysia, however, still has the advantage of a vibrant market in sukuk issuance, thanks to the Islamic hinterland of southeast Asia and a good reputation for strong Islamic finance regulation. So, it’s not a surprise that other international banks are going there to do business. And we can expect this to continue for the foreseeable future. But how Malaysia reacts to its competitors and can maintain its position is another matter.

Source: http://theconversation.com/islamic-finance-goes-global-but-malaysia-still-leads-the-way-27347

Major opportunities with Islamic Finance: Maldives Monetary Authority (MMA) Governor Dr Azeema Adam

Speaking at opening ceremony of Maldives Islamic Banking and Finance Industry (MIBFI) conference on Wednesday, Chief Guest of the ceremony, MMA Governor Dr Azeema Adam said that Islamic finance models were being successfully implemented all over the world and that the start of Islamic financing in Maldives looked promising for the future of Maldives finance industry.

“Islamic finance provides solutions to problems in conventional financing models. It is therefore something that needs to be developed in Maldives. There is room for development [with Islamic finance] in Maldives as well,” said Dr Azeema.

She said that discussions and new ideas were needed to develop Islamic financing and noted the need for future plans to do so.

The governor noted the geographical distribution of Maldives as the major obstacle to providing banking services to all citizens of the country. She said that they had not been able to cover all areas of the country as Maldives was distributed into hundreds of islands, and because it wasn’t feasible to establish a bank in each and every island.

She said that the solution to the problem was in applying modern innovative principles in providing banking services, and called out to financial industry to adopt such principles in providing banking services to the remaining islands.

“Banking services can be widened to the whole country through innovative thinking. Financial industry should, too, look to expand services through modern ideas and philosophy,” she said.

Organized by UTO EduConsult, the conference is being attended by both Maldivian and international financial institutions.

Shariah Gets Hotter as Kazakhs Revive Islamic Bank Plan

Kazakhstan is reviving plans to develop Islamic finance, joining nations from South Africa to the U.K. in targeting an industry that’s forecast to reach $3.4 trillion during the next four years.

The majority Muslim central Asian nation is “fine-tuning” legislation for Shariah-compliant banking, central bank Chairman Kairat Kelimbetov said at an Islamic finance conference in Almaty last week. Some lenders are seeking to convert into Islamic banks, he said.

Borrowing costs for sellers of Islamic securities have tumbled this year as investors snap up debt from first-time issuers including Britain. South Africa, Luxembourg and Goldman Sachs Group Inc. are also preparing sales. The drive by Kazakhstan comes two years after its debut sukuk, which was denominated in Malaysian ringgit.

“The sovereign sukuk may not be quite ready, but there are other financial institutions who may be looking at issuing sukuk,” Rizwan Kanji, a Dubai-based partner at King & Spalding LLP law firm, said Sept. 9 in an e-mail following his first visit to Kazakhstan. They may use structures that appeal to Gulf Cooperation Council investors, he said.

Global Capital

The Islamic finance industry is expected to double in the five years through 2018, according to Ernst & Young LLP. The U.K., which is vying to establish itself as a global hub for Shariah-compliant financing along with Dubai and Kuala Lumpur, received orders for more than 10 times the 200 million pounds ($322 million) it raised in its inaugural sale in June.

The debt will contribute to a 30 percent surge in global sovereign Islamic bond issues to $30 billion this year as investors clamor to take advantage of lower yields, according to Moody’s Investors Service.

Average sukuk yields worldwide declined 65 basis points in 2014 to 2.77 percent on Sept. 9, Deutsche Bank AG indexes show. That compares with a 30 basis-point drop to 4.77 percent in average yields for the Bloomberg Emerging-Market Sovereign Bond Index.

The U.K. was the first non-Muslim government to sell a sovereign sukuk. The issue’s success has tempted other nations to tap Islamic capital markets, according to Sheikh Bilal Khan, a co-chairman of Dome Advisory Ltd.

Following Suit

“There’s no doubt that the U.K. sovereign sukuk has encouraged many countries to follow suit,” Khan said by e-mail last week. “Kazakhstan and Kyrgyzstan are looking to become Islamic finance hubs of” the region, he said.

Kazakhstan first explored sukuk as early as 2010, when the government said it sought to make Almaty an Islamic finance hub for Central Asia. Abu Dhabi’s Al Hilal Bank opened a branch in Kazakhstan that year, and remains the only Islamic lender in the oil-rich nation.

“We look forward to additional players coming into the market,” Prasad Abraham, chief executive officer of Al Hilal Islamic Bank JSC of Kazakhstan, said in an interview with Bloomberg Television Sept. 2. The bank plans to double its assets to $300 million over the next three years, he said.

Legislative Hurdles

Al Hilal Islamic experienced difficulties in generating business after setting up in Central Asia’s biggest energy producer because of a lack of understanding of Shariah-compliant products by customers, Chief Financial Officer Aidyn Tairov said in 2012.

Kazakhstan will face legislative hurdles as it seeks to promote the industry and the nation is experiencing the early stages of development, Central Bank chairman Kelimbetov said last week.

“We have a roadmap for development of Islamic finance until 2020, adopted by the government,” Kelimbetov said. “We have a number of Kazakh banks seeking to convert to Islamic banks.”

The economy of Kazakhstan, which has the third-lowest investment-grade credit rating at Standard & Poor’s, grew 5.95 percent last year from 5 percent in 2012, data compiled by Bloomberg show. Gross domestic product will slow to 4.7 percent this year before accelerating to 5.8 percent in 2015, according to a Bloomberg survey of 12 economists conducted in late June.

“There’s a bit more of a systematic approach now, rather than rushing in to issue a sukuk,” Kanji said of the latest drive from senior government officials to develop Islamic finance. “It makes sense for them to look at the Middle East, attract funding and establish a track record.”

Kazakhstan Islamic bank eyes regional expansion

Kazakhstan's Al Hilal Islamic Bank, the only Sharia-compliant lender in the country, may expand into neighbouring countries as legislative efforts to develop Islamic finance gather pace across the region, its chief executive said.

Fresh Islamic finance legislation is being developed in Azerbaijan, Kyrgyzstan and Tajikistan, creating a more welcoming framework for the industry in countries which have secular regulatory regimes.

Legislation is also being redrawn in Kazakhstan, the first former Soviet country to introduce Islamic finance rules in 2009; the initial set of rules failed to spur much activity.

Almaty-based Al Hilal, whose parent is wholly owned by the Abu Dhabi government, is considering increasing its geographical presence as part of its 2015 business plan, chief executive Prasad Abraham said on the sidelines of an industry conference.

"Our medium-term strategy is to test the effectiveness of the Kazakhstan model, and then use that as a base for further expansion to other regions of the CIS (Commonwealth of Independent States) as appropriate.

"An important precondition for any expansion is the existence of a proper legislative framework for Islamic finance in the respective countries."

A draft amendment, currently awaiting discussion in Kazakhstan's parliament, would provide the bank with a clearer framework that could translate into better commercial opportunities, Abraham said.

This could spur new entrants into the sector, such as Zaman Bank, a local bank which is working to convert itself into the country's second Islamic bank. It has not given a time frame for that plan.

In addition to Zaman, the regulator has now received an application to operate another fully-fledged Islamic bank, Abraham said without elaborating.

Launched in 2010, Al Hilal is on target to see asset growth of 70 per cent this year, with similar growth expected for 2015, he said, adding this was partly because growth was from a low base; it is expected to slow as the bank gains size. The bank posted a 46pc increase in assets in 2013, reaching 16.7 billion tenge ($92 million), financial statements showed. Its business is focused on government and large corporate clients, and after conducting a feasibility study earlier this year it has decided to wait for legal issues to be resolved before offering retail banking services. Islamic banks in Kazakhstan are categorised on a par with other commercial banks, known as Tier 2 banks, but current law does not extend to them all the tax privileges that conventional banks have.

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.

Kenya's KCB to offer Islamic banking in all its branches

Kenya's KCB Bank, the country's largest lender by assets, plans to offer Islamic banking products through its entire branch network, accelerating the expansion of sharia-compliant banking in east Africa's biggest economy.

The move comes after Kenya's Capital Market Authority proposed a separate regulatory framework for Islamic finance, part of a broader strategy designed to boost the country's capital markets.

KCB has received all necessary approvals to launch Islamic banking across its 182 branches in the country, chief executive Joshua Oigara said in a statement. "In the long term, the product will...promote development in the marginalized areas of our country," Oigara said.

The lender will initially roll out Islamic banking services through seven branch centers, beginning from next month.

KCB joins Standard Chartered in offering Islamic banking services in Kenya, after the British lender launched its "Saadiq" brand in March.

Islamic finance, which follows religious principles such as bans on interest payments, accounts for roughly 2 percent of total banking business in Kenya, where Muslims make up about 15 percent of the population of 40 million.

There are currently two full-fledged Islamic banks in Kenya - Gulf African Bank and First Community Bank (FCB) - as well as Islamic banking services at several conventional lenders.

KCB, which operates across east Africa from Burundi to South Sudan, already offers Islamic banking services in Tanzania.

Islamic finance is also being developed by several other sub-Saharan countries in Africa such as Nigeria and Djibouti.

In June, Kenya's finance minister said the government would consider issuing Islamic bonds, or sukuk, after a successful debut $2 billion Eurobond.

EiD Greetings from AlHuda Centre of Islamic Banking & Economics

Islamic Banking VS Conventional Banking

Islamic banking has developed  recently.  Put forward  to be having high ethical criterions, the banking system upraises questions from many.  First of all, we should answer some questions like that in this field.   Are these standards just a sham —a smart  way to hide  that Islamic banks are basically like any other?  Are they a real attempt to reunite religious principles with finance in a capitalist world?

To answer if Islamic banking is totally different from the conventional banking system, we  should know the history of  this  interest-free  banking system.

Origin of Islamic banking

The most important property  of Islamic banking is its banning  of  interest. Doing business  without the use of interest-bearing loans, in the form of Mudaraba rules, advances the coming  of Islam.

Before Islamic period, Arabs  in Mecca, close to the crossroad  of old commerce  routes, coordinated  caravans to carry  goods between Syria and Yemen.  The Meccan merchants  sometimes  used agents to deliver the goods, buy, sell and report back with the numbers for profit or loss.  Later on, it  was  shared according to the traditional  principles  of Mudaraba.

When a merchant  united with others in a shared trading initiative, the profits or losses were shared, under an another principle called Musharaka, suitable  for an agreement between participating sharers in a trade.  Therefore,  the trading caravans were capitalized with  the principle of  sharing profits or losses, not by interest-bearing loans.

Smaller communities

Before modern banking system becomes popular, Mecca was a quite small town, and the forming  a trade caravan was a principal  occasion.  The travelers and their patrons were acquainted  with one another’s general fame  and status, and possibly knew each other as a  person.  That continued true of societies in the early Muslim period.

But, society is more disunited in today’s world.  Rich people  to invest do not need to know anybody  with an  initiative  that requires capitalizing, and people who have trade thoughts may have no contact  with possible investors.

The conventional banking system has grown up to intercede  between the groups of people, enterprisers and investors.  To exist, the banks obviously  have  to make a profit.

Prohibition on interest

The prohibition of  interest (riba) on loans in Islamic banking system is well known.  Riba is considered as haram, or forbidden in Islam.  But to operate  a bank needs  to charge some fees for its services.  For conventional banks, a principal  of profit is from revenue that is obtained from charging interest.

In contrast, Islamic banks make their profits in other ways such as ‘profit-sharing’.  Is it possible for Islamic principles of profit-sharing rather than interest taking to transfer from the  trading caravans to the anonymous banking system that we experience now?

The old systems of Musharaka and Mudaraba survive in the modern Islamic banking system.  They both refer to ways of sharing risk and reward in place of remuneration at a fixed interest rate.

Mudaraba is used for a more passive kind of investment or participating, in which  one side supplies capital or goods, and  the other side  carries out the work necessary  to gain  a profit.

Musharaka presents  a more active investment style by a person  who is either a partner in the business or  a supplier of money.

A very distinct  difference of the Islamic banking system over conventional banks is on the sharing of risk, that is equally spread to either the lender or borrower.

Islamic Banking Sector in South Africa shows healthy growth

ABOUT half of Africa’s population is Muslim and businesses are gearing up to meet the needs of this growing market with Islamic finance and banking products.

Just less than a decade since the market was created, the local Islamic banking sector is estimated to be worth R80.6-billion in terms of assets under management.

On the African continent, the market’s assets are estimated to be more than $1.6-trillion (about R17-trillion) and are expected to surge to more than $5-trillion by 2020. These numbers may seem a stretch, but Africa is home to more than 500 million Muslims — about a quarter of the world’s Muslim population.

The growth of Islamic banking has not gone unnoticed by the National Treasury. Earlier this year during the budget speech, former finance minister Pravin Gordhan revealed that South Africa will launch Islamic bonds — better known as sukuk — before the end of the year. Sukuk are normally based on property or infrastructure and are designed to pay a fixed profit rate rather than a coupon.

Absa, FNB, Al Baraka Bank and HBZ Bank offer Islamic commercial and corporate banking products in South Africa.

Standard Bank has Islamic banking offerings in other countries on the continent, and Nedbank is rumoured to be assessing the possibility of dipping its toes into the market.

Islamic banks do not require their clients to be Muslims. “We are not pushing a religion here. We are pushing a [financial] product that has certain requirements,” said the head of Islamic banking at Absa, Uwaiz Jassat.

Those requirements have to be compliant with sharia law, which prohibits the taking and receiving of interest and also rules out certain other practices in conventional banking.

For example, when Islamic banking clients deposit money in their savings accounts, the lender will then trade the money to earn a return on it and those returns are shared with the customers.

Jassat said this method sometimes beat the return on a conventional interest-bearing savings account.

Last year, the returns for Absa Islamic banking saving accounts were 2% higher than for conventional ones.

So it is not surprising that more people are opting to switch to Islamic banking. About 10% of Absa’s Islamic bank customers are non-Muslim. Although Absa’s Islamic banking division is relatively small, its contributions are quite significant to the parent company’s bottom line, according to Jassat.

Al Baraka, the first stand-alone Islamic bank to operate in South Africa with a full bouquet of financial products, has more than 40 000 customers.

Al Baraka, whose parent company is based in Bahrain, has eight branches nationwide, most of them in Muslim communities. Last year, total assets grew 18.7% to nearly R4.4-billion, and advances swelled 13.1%. Al Baraka’s deposit book grew 18.6% to R619.1-million and the equity finance book increased 23.1% to R126.6-million.

Al Baraka’s CEO, Shabir Chohan, said about 30% of the Muslim population — which is estimated to be more than two million strong in South Africa — was using Islamic banking products provided by local banks.

The total Islamic banking sector in South Africa is estimated to be worth as much as R12-billion. Chohan said this meant his bank had the potential to grow eight to 10 times its current size.

Absa’s Islamic banking division is eager to introduce vehicle and home-loan products. Jassat said that once more products were introduced, “customer numbers will skyrocket”.

However, if it does not move fast, it might end up eating its rivals’ dust. FNB’s Islamic banking unit already offers these products and recently launched a term-deposit product.

The CEO of FNB’s Islamic banking unit, Amman Muhammad, attributed the success of FNB’s Islamic banking products to the fact that they were underpinned by strong values and principles that, he said, covered much more than just finance.

Much like Absa, which is controlled by Barclays, FNB has its sights set on expansion beyond South Africa’s borders.

“Africa provides a large opportunity for growth,” said Muhammad. “Muslim entrepreneurs play an important role in the African economy, so the need to provide appropriate financial services through the correct channel is paramount.”

Al Huda CIBE offering "Free Shariah Advice" in this Holy Month of Ramadan

MoU signed to promote Islamic Finance in France Al Huda CIBE and SAAFI France will jointly initiate various projects

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Lahore - Islamic finance is not confined to Middle East or Muslim countries rather it has gripped its roots in European countries and America as well. And the determination and efforts to become financial hub of London is the distinct example of the promotion of Islamic banking and finance. There is no denying the fact that the organizations of Islamic finance are rapidly growing in European countries and France is one of the destinations of the list. AlHuda Centre of Islamic Banking and Economics and Solutions d'Acce's a I'Assurance et la Finance Islamiques (SAAFI) have signed an MoU in Paris France that was signed by Mr. Muh. Zubair Mughal, CEO, AlHuda CIBE and Mr. Ezzedine Ghlamallah, Director, SAAFI.

While addressing to the ceremony, M. Zubair Mughal said that France is the country that identifies the largest Muslim community in Europe with nearly 6 million Muslim residents that is 9% of the total population of France. It is to be noted that Islamic finance is not only the interest of Muslim population rather non Muslim are taking good interest in Islamic finance. There are various non Muslim countries where Islamic banking and finance is providing their customers state-of-the-art services above all religious differences.

He added that according to this MoU, both organizations will work together to strengthen the abilities of Islamic banking and finance in France, and to provide technical and Shariah advisory, trainings and other services. He said that AlHuda CIBE is keeping an eye on Islamic banking and finance of European countries and AlHuda CIBE and SAAFI will mutually conduct training workshops on Islamic banking and finance on 23rd & 24th June in Paris.

In the MoU singing ceremony, Mr. Ezzedine Ghlamallah said that Takaful, along with Islamic Banking, is also growing with rapid pace in Europe and particularly in France where it has enough potential. He added that AlHuda CIBE's entry in Europe is a constructive initiative which will strengthen the diversified Research, Trainings and Shariah advisory in Islamic Banking and Finance in European countries i.e. Germany, France and Switzerland and it will definitely result in the ultimate growth of Sukuk, Takaful and Islamic Microfinance Industry.

Source:http://www.zawya.com/story/MoU_signed_to_promote_Islamic_Finance_in_France_Al_Huda_CIBE_and_SAAFI_France_will_jointly_initiate_various_projects-ZAWYA20140417085526/?v=87

Islamic banking to be promoted under strict Sharia Laws

KARACHI: Islamic banking industry could develop at faster pace under true spirit and principles of sharia by professionals of banking and religious scholars of the field of finance.
Speakers at the concluding session of third Islamic Finance Exhibition and Conference (IFEC) held on Friday, said that they lauded the efforts of scholars, Islamic bankers and regulators in the promotion and development of Islamic banking as a replacement of riba or interest-based banking.
They praised the efforts of State Bank of Pakistan (SBP) for devising a five-year strategic plan and sharia guideline framework for the Islamic Banks, which they term, will expand Islamic banking industry with check and balance.
Saeed Uddin Khan, Head of Islamic Banking Division, Sindh Bank, said the promoting Islamic banking for meeting the need public financial needs could be possible if products and services should be completed based on sharia complaints.
He said customers at large could be attractive through boosting their confidence in Islamic banking, its offers and products must be truly in accordance with principle of Islam.
The high confidence of customers in Islamic banking will guarantee expansion of Islamic banking industry and its business throughout the country. It could be done through building a strong perception of Islamic banking in line with its sharia framework, he added.
Mufti Ahsan Waqar Ahmed, Sharia Adviser of National Bank of Pakistan, said the research and development work on the products and services should be continued for the improvement in the system, and gearing up the penetration of the sharia based banking in the society.
The Islamic banking professionals in the bank should be well trained of the principles of Islamic banking and financing from top level to grass root for real change and betterment in the banking practices.
The board of directors makes development plan and business strategy of the bank hence their decisions should be highly influenced under the guidelines of Islamic banking for its successful penetration across the board of financial institutions.

Source: http://www.dailytimes.com.pk/business/26-Apr-2014/islamic-banking-to-be-promoted-under-strict-sharia-laws