Islamic Investment and Development

By Lahem al Nasser
When Islamic investment funds first emerged the objective was to help rid the Muslim society of usury by creating [religiously] permitted investment channels. Another aim was to contribute towards developing Muslim societies through the redistribution of wealth from the class with financial surplus to the class facing financial deficit in a just and balanced manner that would ensure the fairness of the process of loss and gain.

Shariah provisions stipulate that there are "no rewards without risks" and that "profits must be accompanied with liability", in accordance with the Islamic hadith. Shariah law also ensures that securing returns is dependent upon the outcome of the return question [in terms of revenue]. An investor's capital is only insured in the case of transgression* which is why investors seek to invest their money in productive projects that aim at bettering society and answering to its needs whilst creating job opportunities away from the parasitical activities that offer no added value to societies or economies.

So, have investment funds fulfilled their function? And have they achieved the purpose on which they were founded?

A quick review of the list of Islamic funds in any Gulf market, abundant with immense financial resources and monetary surplus, would indicate how some of these funds have deviated from achieving societal aspirations and expectations (in which they operate). Instead, maximizing profit without any considerations for Shariah law and societal needs has been rampant heedless of societal needs, with most investors investing in stock markets or Murabaha* funds.

For example, the Saudi stock market, which is ranked second in terms of Islamic asset management according to the Global Competitiveness report issued by Mackenzie and Associates, constitutes 76 percent of the total existing funds which are approximately US $13.7 billion. Most of these assets are invested in Murabahat [funds] in collaboration with international companies in international markets or in stock markets – all of which are unproductive activities.

Perhaps some might say that this is what investors want! To which I would say: Were investors given the choice between various types of investment and have they rejected those? The answer is 'no'.

The best indicator for this is the investors' keen interest in real estate funds; shares were bought in record time. As for the banks that claim that investors do not accept the risks entailed in investing in productive projects or creative ideas, I would say that there is nothing more dangerous than stock markets; however notwithstanding, the number of investors in Saudi Arabia in 2006 was estimated at 663,000 with total investments exceeding 138 billion Saudi Riyals (SAR) – however, many investors lost their money as a result of the so-called unsuccessful investments.

So, how can we then say that investors are unwilling to take investment risks?

The inescapable truth that we must confront is that some Islamic funds have lost their identity and the basis on which they were founded upon because of attempts to seek fast and easy profits made through commissions of circulation, management and arrangement fees, in addition to other fees. As such, profits are reaped while investors suffer losses, in addition to the finance profits that are guaranteed through the clients' investments in the fund.

Another reality that cannot be overlooked is that fund trustees and managers are incompetent in the field of investment both in theory and in practice – they lack innovative abilities and do not keep up with developments in the industry on an international level. There are thousands of active funds worldwide in diverse fields that may be appropriated to conform to Islamic Shariah requirements, such as risk capital funds. It is funds such as these that would contribute to nurturing innovation.

Suffice it to mention that companies such as Microsoft and Google are products of risk capital, in addition to investment funds in infrastructure projects and private investment funds, whether in the freight sector, real estate financing or the investment funds of private companies.

Today, Islamic investments funds are in more need than ever to return back to the foundation on which they have been established so that the purposes of Shariah may be fulfilled by qualified parties in the contemporary world.

Society is in need of these funds and it is shameful to see that traditional funds are more productive and effective in our societies than Islamic funds.

Lahem al Nasser is an Islamic banking adviser.

* Commercial insurance is prohibited by Shariah law, according to the majority of Muslim scholars because it contains the following elements: 'riba' (usury), 'al gharar' (uncertainty) and 'al maisar' (gambling).

* Murabaha: financer, such as a bank, buys a commodity and sells it to the purchaser at a higher

Mauritus to host Islamic finance week 15-18 April

Port-Louis, Mauritius - An Islamic finance week will hold 15-18 April in Port Louis, the Mauritian capital, the International Islamic Financial Services Ltd (IIFS) Chief Executive Officer, Najmul Hussein Rassool, said here Monday.

He said the event was aimed at providing the public with all information on local Islamic financial institutions.

"Islamic finance is developing gradually in Mauritius but many people still don't understand it," Rassool noted.

He claimed that Islamic finance "is just another way of making business based on some principles and parametres".

According to him, this financial system is based on trust, honour, sincerity, justice and fairness.

"If the Mauritian financial centre wishes to develop new products, there is a huge potential from Islamic finance on the whole," the CEO maintained.

NBK Plans to Open Islamic Private Bank in Switzerland, FT Says

By Sarah Shannon

(Bloomberg) -- National Bank of Kuwait SAK, one of the Middle East's largest lenders, is planning to open an Islamic private bank in Switzerland, the Financial Times reported, citing the bank's Chief Executive Ibrahim Dabdoub.

Dabdoub said the bank has applied for regulatory approval in partnership with an undisclosed Saudi financial institution, according to the newspaper.

National Bank would target wealthy individuals looking for bank products compliant with Islam, the FT said. Islamic finance is one of the fastest growing areas of banking in the Arab world, the newspaper reported.

To contact the reporter on this story: Sarah Shannon in London sshannon4@bloomberg.net.

Africa will be next big growth area for Islamic finance

Dubai: The Islamic finance market in Africa is potentially worth close to $235 billion, conservatively assuming that banking entrenchment represents an average 50 per cent of total GDP produced by African Muslims, according to Moody's Investors Service.

Sharia-compliant banking is a recent phenomenon in Africa, discovered by most Muslim Africans only over the past decade.

In a recent special comment entitled Islamic Finance Explores New Horizons in Africa, Moody's said that the expansion of Islamic banking and finance has accelerated in recent years, with the industry diversifying out of pure lending into new business lines and new territories beyond the natural borders of the Muslim world.

Although a country such as Egypt has been familiar with Islamic finance since the 1960s, overall Sharia-compliant banking is in its infancy across the continent. Today, 37 Islamic fin-ancial institutions operate in Africa, serving a Muslim population of 412 million inhabitants.

'Not insignificant'

"Average per capita GDP on the continent was a low $1,137 in 2007, but given the fact that Africa is host to the second-largest Muslim population in the world, the absolute size of its economic production reached $469 billion last year," said Anouar Hassoune, a Moody's analyst and author of the report. "This is not insignificant, as it is on par with the combined GDP of Saudi Arabia and the United Arab Emirates, two of the dominant economies of the Muslim world," he said.

Can Islamic Investment and Banking Appeal to Non-Muslims?

Islamic Finance News
Almost three decades ago, the concept of Islamic finance was considered wishful thinking. Today, more than 400 Islamic financial institutions are operating worldwide and managing funds of about US$1.3 trillion.

The bases of these Islamic financial institutions are global and their markets are growing aggressively. It attracts Muslim investors, especially those from the Middle East, as well as non-Muslims and is growing aggressively. But can ethically-based banking compete with the global debt-based system, which has been around for more than 400 years?

Some commentators consider judgments on the potential of Islamic banking to be premature as it is an industry that is still in its infancy, while others consider Islamic financial practice to be the answer to problems created by the conventional debt-based money system.

Which group is right? Could both be right? And how realistic are Islamic bankers’ dreams of penetrating non-Muslim markets as a global alternative to conventional finance?

Essence of Islamic finance

At the risk of oversimplifying, the essence of Islamic finance is that all parties engage in trade without any use of riba (interest). The Shariah rules governing the prohibition of riba are well known to most, and the values underpinning the rules are righteousness, benevolence and fair profit. Muslims and non-Muslims share these values, with most people wanting to govern their personal and business affairs in accordance with basic, yet extremely important, ethics.

While the majority of conventional bankers will of course conduct their business in a principled manner, the nature of the interest-based money system is nonetheless at odds with the Shariah.

Conventional finance models treat money as a commodity; the global foreign exchange markets see billions of dollars traded every day, but the majority of these trades are speculative and often underpinned by complex derivative structures. In reality, these trades are “virtual” trades and nothing more.

In contrast, the Shariah prohibits the trading of money as a commodity for several different reasons. First, money is considered not to have any intrinsic value. Second, whereas commodities can be of different qualities, the same cannot be said of money.

Third, units of money of the same denomination cannot be identified in any given transaction; i.e. the US$100 bill shown at the time of negotiating a sale need not necessarily be the same US$100 bill used to complete the transaction. In simple terms, the Shariah distinguishes between money and commodities because the intended use of money is to act as a measure of value rather than to be the subject matter of a trade.

Debt begets debt

Goldsmiths of medieval Europe first employed the concept of creating money out of money. Through their simple system of lending gold, the goldsmiths realized that they had the ability to lend more than they actually had. Their lending was therefore increased in the form of gold deposit receipts. It is this basic principle that has been followed over the years and, as we see now, has evolved into the modern debt-based money system.

Analysis of various economic data shows that the volume of coins and notes issued by some governments as debt-free money is much lower than the money actually in circulation, the balance being “virtual” money created in the form of loans advanced by institutions. In short, the debt-based money system creates money in parallel to an equivalent quantity of debt with interest.

The problem is that the impact of a debt-based money system has been devastating. The World Bank’s global finance development report shows that total debt continues to rise. Despite ever-increasing payments, the debt obligations of some countries far outstrip their total income, meaning that citizens of all religions and ethics suffer economically under their national debt burden.

The list of shocking statistics in respect of debt and interest payments is long and well documented, yet relatively few alternative solutions have been offered and, often, the best creditors can come up with is to restructure repayments or to waive portions of state debt in times of crisis.

The Shariah principles governing financial transactions, on the other hand, promote an equity-based and asset backed financial system by abolishing the concept of money production and by prohibiting riba on the advancement of money.

Islamic finance is built on the principles of exchange, rather than creditworthiness and the ability to repay loans. This means that a system based on Islamic principles will neither punish people who need access to capital for not having it already, nor allow them to take on the burden of debt.

Conventional economists and writers have already recognized the benefits of some of the principles that the Islamic system of finance follows. One of them is John Tomlinson, chairman of the Oxford Research and Development Corporation Limited, which explores the use of equity instruments and the development of equity markets for areas of finance currently served by debt.

In his book Honest Money, the Oxford-based economist presents strong arguments for the conversion of the current system to an equity-based one. In building his case for a change in the system, Tomlinson cites reasons that are similar to the principles present in the rationale employed for prohibiting riba, not least of which is the value of focusing on real as opposed to theoretical assets.

Of course, while Islamic banking could make excellent sense as the foundation of a new money system, the conventional debt-based system is deeply entrenched in every sphere of life, and an overhaul would take many years and require substantive reviews of legal, accounting and regulatory structures.

That said, if Islamic banks and institutions continue their aggressive growth and development of innovative and competitive products, it will be difficult for the wider non-Muslim audience to ignore the benefits of such a system.

It may be too late to entirely replace the debt system, but on the face of it, there is no reason the Islamic system cannot be offered in parallel and promoted as the preferred system. Non-Muslims who are fed up with punitive interest payments — and who are attracted to a system that imposes ethical practices on business leaders — might well be the first to sign up for such services.

If the Shariah principles employed by Islamic banks have allowed them to be profitable, — and, more recently, to achieve double-digit growth figures — then the argument for expanding the net of Islamic banking is a compelling one.

Growing sector

On the investor front, market studies have repeatedly shown that given the option to invest in Shariah products with competitive performance, Muslims prefer to do so. As the Shariah sector moves forward, advancing financial education for investors and improving product distribution will stimulate a response from the retail sector.

Today, the institutional market and the ultra high net worth in numerous family offices already deploy assets according to the Shariah, many in the real estate and private placement market.

A breakout opportunity for the Islamic asset management business is possible, particularly after 2007, which is considered a “stage-setting” year for many financial institutions in both the capital markets and asset management businesses.

General market consensus suggests growth rates of between 15% and 20%. International finance consultant Celent feels the global market could average 38% over 2007-10, with greater momentum in 2009.

Equity fund assets are expected to jump from US$15.5 billion to US$53.8 billion by 2010, not including the vast amount that will make its way to private placements in alternative investments by institutions and family offices.

More financial firms implementing investment programs, growing awareness of investment options and cash-rich investors are the drivers of this growth. The Shariah compliant industry is formalizing its infrastructure and building up assets quickly. It will become a significant and profitable component of the financial services industry globally.

Dr Aly Khorshid is an Islamic finance scholar and Shariah consultant with Elite Horizon Economic Consultant, based in the UK.

Salam Bounian raises $137.5mn from sukuk for ‘The Gate’ project

DOHA: Salam Bounian Development Company, a subsidiary of Salam International Investment, has raised $137.5mn through Islamic bonds, which would be listed on the Luxembourg Stock Exchange.

Qatar Islamic Bank (QIB), along with QNB Al Islami and Al Safa, the Islamic banking division of Commercialbank, had arranged and closed the Musharaka sukuk for the Salam Bounian, which would use the proceeds for the construction of ‘The Gate’, a mixed-use real estate project coming up in West Bay.

“This marks the first time ever that a sukuk issue was managed completely by Qatari banks, without the involvement of any foreign institutions,” said Jean-Marc Riegel, General Manager, Investment Banking and Development Group, QIB.

On the listing of the sukuk, QIB said internationally, the bond is tradable through its trading desks in Doha and in London through European Finance House (EFH) and in Kuala Lumpur through Asian Finance Bank (AFB). Both EFH and AFB are subsidiaries of QIB.

Qatar Islamic Bank closes $137m sukuk

Qatar Islamic Bank (QIB) has closed a $137m sukuk for Salam Bounian Development Company to finance the construction of The Gate project in the West Bay area of Doha. This is the first entirely Qatari-led sukuk issue.
QIB arranged the sukuk with the Islamic banking divisions of Qatar National Bank and Commercial Bank of Qatar acting as mandated lead arrangers and bookrunners. Jean-Marc Riegel, general manager of investment banking and development group at QIB, says: "This marks the first time ever that a Sukuk issue was managed completely by Qatari banks, without the involvement of any foreign institutions."

He adds: Now that the Qatari Riyal can be cleared through [transaction settlement systems] Clear Stream and Euroclear, we are optimistic that we will be issuing the next Sukuk in Qatari Riyals."

The Gate is a mixed use real estate project being developed by Salam Bounia

Millennium Finance Corporation announces major new shareholder

Dubai Islamic Bank PJSC (DIB), United Gulf Bank BSC (UGB) and the management of Millennium Finance Corporation (MFC) announced today that UGB is to become a significant shareholder in MFC.

MFC, a Dubai Financial Services Authority (DFSA) licensed investment bank, was established by an experienced team of bankers from major international investment banking firms, in partnership with DIB. Since inception, MFC has become one of the most active investment banking companies in the region, and advises prominent corporations and governments on major M&A transactions, private equity placements and capital market operations in the GCC region and other geographies. MFC recently launched a family of private equity funds: Millennium Private Equity (MPE).

UGB is the investment banking arm of the KIPCO Group – one of the most successful and highest-rated investment companies in the MENA region. KIPCO recently reported the highest ever profits of any listed company on the Kuwait Stock Exchange.

At a recent signing ceremony held in Dubai, Khaled Al Kamda, Chief Executive Officer of DIB said he welcomed the inclusion of UGB and KIPCO Group into its subsidiary: “We are pleased to expand MFC’s shareholder base by the inclusion of one of the largest private diversified holding companies in the MENA region and look forward to its active involvement and contribution to MFC’s development.”

Masaud Hayat, Managing Director of UGB, thanked DIB for its initiative and said: “We are fortunate to become associated with a leading provider of Sharia-compliant financial services in the region and anticipate a very active product offering by our newly acquired associated company. KIPCO’s investment in MFC reflects the rapid development and breadth of business the company has established in a short period of time. With its regional experience in financial services, media and technology, KIPCO will support MFC in its expansion plans across the Middle East, Africa and Asia.”

The sale and purchase agreement, which became effective on February 25, 2008, was signed by Khaled Al Kamda, Group MD and CEO of DIB, Keba Keinde, Chief Executive Officer of MFC, and William Khouri, Chief Executive Officer of UGB.

Keinde said: “The investment by UGB in MFC underscores MFC’s development into one of the leading investment banks in the region. MFC’s reputation for cross border M&A transactions and its ECM capabilities has allowed it to become one of the premier financial institutions in the GCC. We welcome KIPCO to our shareholder group, and look forward to leveraging the opportunities DIB, KIPCO and UGB can collectively bring.”....More

KFH wins key global Islamic banking award

MANAMA: Kuwait Finance House (KFH) was voted the Best Overall Islamic Bank in the World for last year at the most comprehensive Islamic Finance News annual poll.

The announcement came during the awards ceremony held in Kuala Lumpur, Malaysia, where KFH was also announced the "Most Innovative Islamic Bank" and "Best Islamic Bank in Kuwait".

The awards were received by KFH Group treasury head Abdul Wahab Al Rushood.

Islamic finance issuers, investors, non-banking financial intermediaries and government bodies from around the world were invited to take part in the poll.

KFH group general manager and chief executive officer Mohammed Sulaiman Al Omar dedicated the award to the continued patronage of the bank's loyal customer base, and attributed it to the forward-looking vision of the board.

He said the award reflects the recognition of KFH as a growing leader in Islamic and commercial banking.

KFH-Bahrain general manager Abdulhakeem Alkhayyat said the award was in recognition of KFH's strategic vision, execution expertise, management depth and belief in Islamic banking principles.

"The award is also a manifestation of the hard work and innovation that KFH is known for. It also validates our efforts towards creating a strong institution with best international practices and standards," Mr Alkhayyat said.

Power Arabs in Islamic finance revealed

By Talal Malik

Billionaire businessman Sheikh Saleh Abdullah Kamel and Noor Islamic Bank CEO Hussain Al Qemzi have been revealed as the World's Most Powerful Arabs in Islamic Finance, according to ArabianBusiness.com's Power 100 list for this year.

Kamel, who is the chairman of the General Council of Islamic Banks, came in at number 47 of the Power 100 list, the most comprehensive compilation of the world's most influential Arabs, whilst al-Qemzi, chief executive of Dubai's newest Islamic bank, came in as a new entry at number 93.

Kamel, who heads up the world's largest Islamic banking group AlBaraka Banking Group, last week said that a new Islamic bank with a total market cap of $321 billion would be launched by the fourth quarter of 2008, reported Arab News.

The new bank's initial capital would $11 billion, with $110 billion raised from funds and almost twice that from Islamic bonds (sukuks), Kamel said at ABG's annual general assembly. The Saudi businessman has also been promoting the creation of an Islamic stock exchange in Bahrain.

Kamel, who dropped 31 places from number 16 overall in the Power 100 , also holds the position of the President of the Islamic Chamber of commerce and Industry, an organ of the pan-Islamic governmental body, the Organisation of the Islamic Conference (OIC).

Hussain Al-Qemzi, from Dubai-based Noor Islamic Bank, enters the Power 100 list this year for the first time at number 93 - making him the powerful Arab executive in the Islamic finance sector.

Noor Islamic Bank began operations on January 6 this year, with US$861 million of capital and is half-owned by the Dubai Government.

Two days later, Al Qemzi said he planned to create the world's largest Islamic bank within five years, spending as much as as $1 billion on individual acquisitions in countries as far apart as Indonesia, Egypt and Britain.

"Acquisitions will be the main way because there is no time to grow organically," Qemzi said at the time, about Noor's ambitions.

Published on Sunday in Arabian Business and on ArabianBusiness.com, this year's list includes influential Arabs from the whole gambit of fields including sport, finance, medicine, entertainment, science and technology and real estate.

Mawarid Finance launches its finance services for small and medium enterprises

Mawarid Finance announced today the launch of its services for small and medium enterprises (SMEs) that include a list of different finance solutions for this vital sector in the UAE to meet its demands.

These services include goods finance, car finance, machinery finance, office purchasing finance, investments, Fixed Deposits, banking guarantees, labour guarantees and stock buying finance.

The announcement was made at the conclusion of the '2nd Young Businessmen Forum' held in Ras Al Khaimah from 23-28 March. Mawarid Finance was the event's exclusive sponsor, as part of its aim to interact with young businessmen and to know their finance needs in order to best create services to meet these needs, in line with , Mawarid's mission to provide creative products with respect to the market's needs. A number of experts from Mawarid's team, from different specialties, attended the forum to advise ambitious entrepreneurs who are interested in improving their business or launching new projects.

Mr. Mohammed Al Neaimi, CEO of Mawarid Finance, made the announcement in his speech in the forum's closing ceremony on March 29. Al Neaimi emphasized that Mawarid Finance focuses in a continuous way on creating initiatives that contribute to promoting the advancement of the UAE in various fields and providing support to all sectors of society. Mawarid Finance's active participation in this forum is part of the company's main objectives to provide support to local organizations and to improve the local community, following the example of their highnesses, the leaders of UAE and the heads of local authorities, Al Neaimi explained.

'Small and medium enterprises, collectively, are the largest contributor to the development and growth of the local economy. Mawarid Finance launched a package of creative services during this forum and the main one was 'E-Murabaha, which will be available soon. It's considered the first of its kind in the world. We aim through it to provide support and facilities to small and medium enterprises in an inventive way through electronic disciplines that provide convenience and all the necessary facilities for business transactions.'

Al Neaimi added: 'What distinguishes Mawarid Finance from other companies is its great focus on providing Islamic finance products and solutions that suit small and medium enterprises that comply with the principles of Islamic Sharia'a. We also provide Islamic finance products and services.'

Al Neaimi concluded: 'I confirm to you that Mawarid Finance's initiatives to serve society are continuous, we've started by launching the Tamaiaz Award, to encourage national students and graduates. That was followed by our participation in the National Career Exhibition for the banking and finance sector in Sharjah, to support Emiratisation in this sector and to encourage young, UAE nationals to be more involved in the private business sector, especially banking and finance by providing promising employment opportunities and continuous training programs.'

$3bn Islamic bank and stock exchange planned

Gulf banks and individual investors are planning to set up a $3 billion Islamic investment bank and an Islamic stock exchange in Bahrain by 2009, the chief executive of Albaraka Banking Group said.

"It will be the largest bank in the region for the issuance of sukuk and will create a secondary market for sukuk," Adnan Yousif told newswire Reuters on Wednesday. Sukuk are bonds that comply with Islam's ban on interest.

The bank, which is aiming to be a global player, would also take projects from a conceptual stage to financing and eventually flotations, Yousif said.

Albaraka is one of the lenders that is looking to invest in the new bank, which will have a paid-up capital of $3 billion and plans to start operations in 2009.

The bank will have a targeted capital of $11 billion, Yousif said.

Other banks that have shown an interest include Saudi Investment Bank and Bahrain Islamic Bank, Yousif said.

"We are in discussions with the central bank of Bahrain and regulators and hope to finalise the details by the end of the year," he said.

Ernst & Young has been appointed to advise on the bank's establishment.

The project is being promoted by the chairman of the General Council of Islamic Banks, Sheikh Saleh Abdullah Kamel, Yousif said.

Value of assets under management in Islamic institutions has been growing at over 20% a year and reached $900 billion in 2007 and is set to hit $2 trillion by 2010, Ernst & Young said in February.

Yousif said Bahrain also planned to set up a secondary stock market in Bahrain complying with Islamic law to encourage regional investment.

Islamic funds outperform conventional ones in 2007

Shariah-compliant investment funds outperformed conventional ones last year and totalled more than $19 billion (Dh70bn) in assets.

The Dow Jones Islamic Market (DJIM) World Index, for example, recorded a gain of 17.2 per cent in the third quarter of 2007 compared to DJIM US which rose by 15 per cent.

Islamic funds have escaped the worst of the economic turmoil that has left Western banks reeling from the credit crunch, high write-downs for bad debt, falling market valuations and bad decision-making.

That is because investing in banks is not considered halal under Shariah principles and is therefore largely prohibited.

“Overall Islamic funds have outperformed the conventional funds in 2007,” Mark Smyth, managing director of research firm Failaka, told Emirates Business.

“The Islamic fund market has tripled in size over the past five years with much of the growth coming from Gulf investors and directed towards funds investing in the GCC markets.

“More than 50 per cent of the funds are invested in the GCC, about 30 per cent are in Asia – primarily Malaysia – and the rest are sprinkled in the US and Europe.

“Funds investing in the GCC markets represent over half the entire Islamic equity fund industry. This is where the growth in the industry has come from. Five years ago there were only a few funds investing in the GCC but today there are more than 50."
Smyth said the numbers still told a relatively small story as Islamic funds were equal to less than one per cent of the total value of the world’s conventional investment funds.

“But the growth has been steady and gradual both in the number of funds and the amount of assets,” he added.Investment funds form only a part of the whole Islamic financial market, which has grown dramatically in recent years.

Uae And Saudi Firms Shine At Failaka Awards

Firms from the UAE and Saudi Arabia dominated the third Failaka Islamic Fund Awards held in Dubai last night.

The awards, presented for the best performance or the most noteworthy achievement, have been coveted by financial institutions and their fund managers as a high-water mark in their careers.

Out of the 21 categories, five firms from Saudi and four from the UAE went home with the laurels. This year’s awards saw the addition of new categories that include a one-year, three-year and in some cases a five-year performance award.

“This is a reflection of the increasing transparency and availability of information from fund managers and thus a reflection on the growth of the market generally,” a Failaka spokesman said.

The award for Best Islamic Fund Manager in the GCC was awarded to NCB Capital of Bahrain, while the title for the United States and Asia regions were awarded to Saturna Capital of the US and Public Mutual – Malaysia, respectively.

IFC-IFSB seminar participants discuss governance issues for institutions offering Islamic Financial Services

The IFC Global Corporate Governance Forum, the Islamic Financial Services Board, and the World Bank Group Corporate Governance Department recently organised a seminar in Manama, Bahrain, to increase awareness of corporate governance issues in Islamic finance.

The Central Bank of Bahrain hosted the seminar on March 11 and 12, 2008. Participants included more than 60 senior bankers from Bahrain, other Gulf Cooperation Council countries, Indonesia, Malaysia, and Sudan. Topics focused on banking, insurance, and capital markets-particularly collective investment schemes.

Peter Dey, Chairman of the Forum's Private Sector Advisory Group, emphasised the connection between good corporate governance and proper functioning of the economy. He also addressed the main challenges in corporate governance and suggestions on how to overcome them. Participants' discussions focused on corporate governance standards that have been developed by IFSB, with insights provided by regulatory officials, corporate governance specialists at international multilateral agencies, and industry practitioners.

Professor Rifaat Ahmed Abdel Karim, Secretary General of IFSB, said, "We recognise the challenges of good governance, and have thus prepared several principle-based corporate governance guidelines, covering institutions that offer Islamic financial services as well as Islamic collective investment schemes. We are also developing corporate governance guidelines for takâful operations and Sharî`ah governance. We trust these guidelines will inculcate strong governance in Islamic financial services and contribute to confidence and financial stability in the industry."

"The IFSB has drafted a series of principles on Islamic finance. This event was designed to raise awareness of these issues and to advance discussions on appropriate modalities for ensuring good governance," said Eugene Spiro, Senior Projects Officer of the IFC Global Corporate Governance Forum.

This was the first joint seminar that IFSB, the World Bank Group, and the IFC Global Corporate Governance Forum have tailored to corporate governance practice and related regional issues. The seminar attracted regional and international experts' attention to key issues that will be addressed going forward.

Notes and contacts
About IFC

IFC, a member of the World Bank Group, fosters sustainable economic growth in developing countries by financing private sector investment, mobilising private capital in local and international financial markets, and providing advisory and risk mitigation services to businesses and governments. IFC's vision is that people should have the opportunity to escape poverty and improve their lives.

In FY07, IFC committed $8.2 billion and mobilised an additional $3.9 billion through syndications and structured finance for 299 investments in 69 developing countries. IFC also provided advisory services in 97 countries. For more information, visit www.ifc.org

The IFC Global Corporate Governance Forum is an IFC multidonor trust fund facility. It was cofounded by the World Bank and the OECD in 1999. Through its activities, the forum aims to promote the private sector as an engine of growth, reduce the vulnerability of developing and transition economies to financial crisis, and provide incentives for corporations to invest and perform efficiently in a socially responsible manner.

It sponsors regional and local initiatives that address the corporate governance weaknesses of middle- and low-income countries in the context of broader national or regional economic reform programs. Its donors include IFC and the governments of Canada, France, Luxembourg, the Netherlands, Norway, Sweden, and Switzerland. For more information, visit www.gcgf.org

About the Islamic Financial Services Board

IFSB is an international standard-setting organisation that promotes and enhances the soundness and stability of the Islamic financial services industry by issuing global prudential standards and guiding principles for the industry, broadly defined to include banking, capital markets, and insurance sectors.

IFSB also conducts research and coordinates initiatives on industry-related issues, as well as organises roundtables, seminars, and conferences for regulators and industry stakeholders. IFSB works closely with relevant international, regional, and national organisations; research and educational institutions; and market players. For more information, visit www.ifsb.org.

Britain blazes a trail for Islamic investments

LONDON, England (CNN) -- Known for its support of Sharia-compliant banking, the British government is continuing to make legislative changes to level the playing field for Islamic instruments. One of the most revolutionary has been the foundations the Chancellor laid in the latest budget for "sukuk" or Islamic bonds.

This would be the first time a Western country has raised money by issuing Sharia-compliant investment certificates in the Middle East. These certificates make similar payments to investors as conventional bonds but are not interest-based.

"Sukuk" are the most high-profile financial instruments in the Sharia-compliant world, having grown from almost nothing five years ago to a market of $70 billion in outstanding issues today.

Currently more money flows through London in the most commonly used instrument, "murabaha" -- a Sharia version of the conventional money and syndicated loan markets where banks lend and borrow to meet their short and medium-term financial needs.

In addition to these instruments, a handful of Sharia-compliant hedge funds and platforms have been established, despite the tight Koranic restrictions on their activities.

Investors are barred from selling something they do not own, undermining "shorting," the cornerstone of the hedge fund industry, and cannot earn interest.

Despite these constraints, Barclays Capital (the investment banking division of the UK bank) has teamed up with U.S.-based Sharia adviser, Sharia Capital, listed on London's AIM market, to develop the Al-Safi Trust.

It is a groundbreaking independent investment platform for Islamic finance, according to Richard Ho, head of fund-linked derivatives

This would be the first time a Western country has raised money by issuing Sharia-compliant investment certificates in the Middle East. These certificates make similar payments to investors as conventional bonds but are not interest-based.

"Sukuk" are the most high-profile financial instruments in the Sharia-compliant world, having grown from almost nothing five years ago to a market of $70 billion in outstanding issues today.

Currently more money flows through London in the most commonly used instrument, "murabaha" -- a Sharia version of the conventional money and syndicated loan markets where banks lend and borrow to meet their short and medium-term financial needs.

In addition to these instruments, a handful of Sharia-compliant hedge funds and platforms have been established, despite the tight Koranic restrictions on their activities.

Investors are barred from selling something they do not own, undermining "shorting," the cornerstone of the hedge fund industry, and cannot earn interest.

Despite these constraints, Barclays Capital (the investment banking division of the UK bank) has teamed up with U.S.-based Sharia adviser, Sharia Capital, listed on London's AIM market, to develop the Al-Safi Trust.

It is a groundbreaking independent investment platform for Islamic finance, according to Richard Ho, head of fund-linked derivatives.


"This is the first platform of its kind for alternative investing. It is the first one which goes right back to basics with the aim of making -- in the short-term Sharia -- and more generally ethical investing a scaleable reality," Ho told CNN.

Al-Safi has reworked the traditional investment platform infrastructure to make it compliant from the ground up.

The aim has been to create a Sharia-compliant tool that can be used by investment specialists -- those people who are very good at earning investment returns but less good at interpreting how to invest in compliance with Islamic principles.

By teaming up with Sharia Capital, Al-Safi aims to provide a platform that is constantly monitored for compliance by a Sharia board. It's a complex issue. Unlike the rule of law, Sharia is open to interpretation: for example, what might be acceptable in Kuwait might not be under Saudi Arabia's much stricter terms.

"With our Sharia advisor, we have ensured the robustness of the fund platform to facilitate efficient due diligence by both managers and investors," Ho continued.

Ho hopes the platform will smooth the investing process for both managers and investors. "Managers that use the platform don't need to know that much about Sharia compliance framework and process. You start with an approved investment universe and a well-defined strategy implementation process from which you can build a Sharia-compliant fund easily," he explained. The fund launches publicly in a few.

Devon Bank In Chicago Ventures Into Islamic Banking

Chicago, IL (AHN) - Like a growing number of British banks which have discovered it pays to lend to Muslims, a bank in Chicago has recently ventured into Sharia banking. No interest loans now comprise 75 percent of the bank's mortgage portfolio.

With a neighborhood made up of Middle Eastern and Pakistani immigrants, the bank has its hands full of Muslim clients amid a slowdown in the U.S. banking sector. David Loundy, vice president and legal counsel of Devon Bank, told USA Today, "People started coming out of the woodwork" after word spread around the community that the bank was Sharia-compliant.

While Americans are grappling with home mortgage payments, Muslims are awash with cash from the spiraling oil prices, providing them financial means to acquire new homes.

According to Moody's Investors Service, the Islamic finance market has expanded by 15 percent annually since 2005 and is now valued at $700 billion. Major global banks such as the Deutsche Bank, Citigroup and the Hong Kong and Shanghai Banking Corporation had forayed into Sharia banking through affiliates. Major industrialized countries like the U.K. and Hong Kong are bidding to be Islamic banking hubs in their regions.

Other financial institutions have also discovered the good bottom line behind Sharia-compliant business practices. Mortgage investor Freddie Mac started to purchase Sharia-complaint mortgages in 2001. Like Devon Bank, Freddie Mac purchases mortgages from the American Finance House Lariba, University Bank and Guidance Residential.

Islamic mortgages works on a lease-to-own scheme. The bank purchases the house, leases it to the buyer over a period of time until he has paid the full amount. It has double paperwork as the transaction involves two houses.

Local colleges too, like the DePaul University, are catching up by including Islamic banking in some courses. Amir Davoodi, a student at the university, began a course on Islamic banking recently. Davoodi told the Chicago Tribune, "They're saying there's a market out there for it. I know I can learn a lot and it will help with my career."

UAE set to centralise Zakat management

By Samir Salama

Abu Dhabi: The UAE's Zakat Fund, which collects zakat (alms) from Muslims as a percentage of their wealth, has said local Islamic banks and companies will have to pay 2.5 per cent of their net operating capital to the fund from the beginning of next year.

Abdullah Bin Aqeeda Al Muhairi, secretary general of the fund, said eight Islamic banks and 13 Islamic finance and insurance companies are among those that will have to make their zakat payments.

The fund's bylaws will be amended to make it obligatory for these companies to submit audited accounts and pay 2.5 per cent of their net operating capital to the fund, Al Muhairi told Gulf News in an interview.

The move, he said, is meant to streamline the distribution of zakat to needy people and charities.

SC Initiatives To Boost Role As Advocate Of Islamic Capital Mart Development

KUALA LUMPUr -- The Securities Commission (SC) today announced three new initiatives to reinforce its role as a leading advocate of Islamic capital market (ICM) development.

"The initiatives are strengthening partnerships through collaborative efforts, establishment of an international advisory committee (IAC) and convening of the semi-annual ICM forum," SC chairman Datuk Zarinah Anwar said at the opening of International Islamic Capital Market Forum here Thursday.

The forum was officiated at by Deputy Finance Minister 1, Datuk Ahmad Husni Hanadzlah.

Zarinah said these initiatives would have a positive and significant impact on the overall Malaysian capital market.

"We are aware that there remains much to be done. For instance, the talent pool for Islamic finance remains shallow worldwide," she said.

She said reference materials and scholarly articles were also thin.

"More applied research is required to be undertaken in this area. And certainly, there must be more coordinated and concerted efforts among regulators, industry and academia towards promoting and developing Malaysia as an Islamic financial centre.

"It is for these reasons that the SC has embarked on an ICM plan," she said.

On the strengthening of partnerships through collaborative efforts, she said the SC has signed two memorandums of understanding (MOUs) with Universiti Sains Islam Malaysia (USIM) and University of Malaya (UM).

"The MOU with USIM involves the compilation and publication of world's first syariah rulings (fatwas) and with UM, it involves the establishment of a Visiting Scholar (VS) programme.

"The publication of fatwas will provide academics and practitioners a single source of references of all rulings culled from major jurisdictions worldwide," she said.

Zarinah said the first volume of the compilation was expected to be produced by early next year.

On the VS programme, Zarinah said renowned scholars and visiting professors in Islamic finance would be sponsored and attached with UM for up to three months in a move to promote and enhance research in ICM.

As for the IAC, she said, the establishment of the committee would provide strategic guidance and international perspectives in ICM.

The six-member IAC is chaired by Zarinah and comprises Dr Mohamed Ali Elgari (Saudi Arabia syariah scholar); Iqbal Khan (founding board member/chief executive officer (CEO) of Fajr Capital, UK); Abdulkader Thomas (president/CEO of Shape Financial Corp, US and Kuwait); Sheikh Nizam Yaqubi (Bahrain syariah scholar); and, Datuk Sulaiman Younis (managing director, Kuwait Finance House Malaysia).

New DIFC Guide Explains The Intricacies Of Islamic Finance

The first comprehensive guide to Islamic finance has been produced by the Dubai International Finance Centre (DIFC), filling a long-felt need in one of the world's fastest growing economic sectors.

The 40-page Guide to Islamic Finance - in or from the DIFC' is designed to help all who are interested in learning more about the subject.

It provides a summary of the underlying concepts in Islamic finance, as well as examines the issues facing the Islamic financial services industry regionally and internationally.

The guide places specific emphasis on "Tayyab", an underlying principle of Islam which is emerging as a new concept in Islamic finance. Tayyab ensures that Islamic financial products are developed with a focus on holistic, equitable Islamic criteria of transparency, accountability and fairness so as to ensure credibility is maintained.

The booklet also details the DFSA regulatory environment for Islamic finance and the requirements applying to Sharia'-compliant operations and the products they offer. The only financial jurisdiction in the world that has a modern-day world-class regulatory structure for Islamic finance .

Nasser Alshaali, CEO of DIFC Authority described the new guide as: "an invaluable source of information for everyone involved in Islamic finance or those who simply want to understand the subject better."

Until now, he said, such a comprehensive guide had not been available in one single volume, although the Islamic sector is estimated to be worth $400 billion worldwide.

"DIFC plays a leading role in providing an infrastructure and environment that is helping the Islamic financial sector develop," he explained and highlighted four core strengths:

provision of a Sharia' systems model which not only clearly defines the role of the Regulator, the institution and the scholars; but is based on a unique model which combines the recognised international standards and practices with modifications to reflect the specifics of Islamic finance;

providing clarity and certainty of regulations across wholly Islamic financial Institutions, and also Islamic windows;
providing a responsive and integrated regulatory structure conducive to the cross-sectoral nature of Islamic finance; and
ensuring that all institutions operating within the DIFC and other financial centres are subject to the same standards of regulation.

"Commissioning and publishing this guide marks another important step in our mission to foster the growth and understanding of Islamic finance regionally and internationally."

A Guide to Islamic Finance - in or from the DIFC' has been written by Hari Bhambra, head of DIFC-based firm Praesidium LLP a newly established regulatory, compliance and client advisory firm which specializes in helping clients with DFSA regulations, compliance and training services for conventional and Islamic Institutions. She was formerly a regulator with the Dubai Financial Services Authority.

Hari Bhambra is an acknowledged authority on Islamic finance, having set up the "Sharia" Systems' regulatory regime for the DIFC and authored a number of articles internationally on Islamic finance.

She sits on a number of committees dealing with Islamic finance and was recently appointed sole adviser to a secular Islamic state on the introduction of Islamic contracts into their market for the first time.

Islamic Banking: Size Matters

An IMF study of Islamic and commercial banks has found that large Islamic banks are less stable than small Islamic banks or large conventional banks. As a result, large Islamic banks may face credit risk management challenges.

Institutions offering Islamic financial services constitute a significant and growing share of the financial system in several countries. Since the inception of Islamic banking about three decades ago, the number and reach of Islamic financial institutions worldwide has risen from one institution in one country in 1975 to over 300 institutions operating in more than 75 countries.

In Sudan and Iran, the entire banking system is currently based on Islamic finance principles.

Islamic banks are concentrated in the Middle East and Southeast Asia, but they are also present as niche players in Europe and the US. According to McKinsey & Company, Islamic banking assets and assets under management reached US$750bn in 2006 and the Islamic finance sector is expected to reach US$1 trillion by 2010.

Reflecting the increased role of Islamic finance, the literature on Islamic banking has grown. A large part of the literature contains comparisons of the instruments and discussions of regulatory and supervisory challenges related to Islamic banking.

Also, there is a growing literature discussing various Islamic finance instruments. However, there has been relatively little empirical work on Islamic banking and financial stability. This is something that a new IMF working paper attempts to target.

Specifics of Islamic Banks from a Prudential Perspective
Are Islamic banks more or less stable than other banks? A majority of the relevant literature suggests that Islamic banks pose risks to the financial system that in many regards differ from those posed by conventional banks.

Risks unique to Islamic banks arise from the specific features of Islamic contracts, and the overall legal, governance, and liquidity infrastructure of Islamic finance.

For example, profit and loss-sharing (PLS) financing shifts the direct credit risk from banks to their investment depositors, but it also increases the overall degree of risk of the asset side of banks' balance sheets, as it makes Islamic banks vulnerable to risks normally borne by equity investors rather than holders of debt.

Also, Islamic banks can use fewer risk-hedging instruments and techniques than conventional banks and traditionally have operated in environments with underdeveloped or nonexistent interbank and money markets and government securities, and with limited availability of and access to lender-of-last-resort facilities operated by central banks.

However, the significance of these differences has decreased due to recent developments in Islamic money market instruments and Islamic lender of last resort modes, and the implicit commitment to provide liquidity support to all banks during exceptional circumstances in most countries.

There are also several features that could make Islamic banks less risky than conventional banks. For example, Islamic banks are able to pass through a negative shock on the asset side to the investment depositors. The risk-sharing arrangements on the deposit side thus arguably provide another layer of protection to the bank, in addition to its book capital.

Also, it could be argued that the need to provide stable and competitive return to investors, the shareholders' responsibility for negligence or misconduct (operational risk), and the more difficult access to liquidity put pressures on Islamic banks to be more conservative. Furthermore, because investors (depositors) share in the risks (and typically do not have deposit insurance), they have more incentive to exercise tight oversight over bank management.

Finally, Islamic banks have traditionally been holding a comparatively larger proportion of their assets than commercial banks in reserve accounts with central banks or in correspondent accounts. So, even if Islamic investments are more risky than conventional investments, the question from the financial stability perspective is whether or not these higher risks are compensated for by higher buffers.

Whether Islamic banks are more or less stable than conventional banks therefore is an empirical question. The answer to the question depends on the relative sizes of the effects discussed above, and it may in principle differ from country to country and even bank from bank.

Islamic Banks and Financial Stability

Defining large banks as those with total assets of more than US$1bn, and small banks as all others, the paper finds that

(i) small Islamic banks tend to be financially stronger than small commercial banks;

(ii) large commercial banks tend to be financially stronger than large Islamic banks; and

(iii) small Islamic banks tend to be financially stronger than large Islamic banks. Figure 1 provides a summary. The results from this comparison are valid also when the data are subjected to a more formal regression analysis....Read More

Brunei To Create Niche In Global Market For Halal Products

By Sobrina Rosli

Bandar Seri Begawan - The Brunei Government has tapped the services of a UK-based consultancy in drawing up the master plan for an agro-technology park that is deemed critical for the sultanate to create a niche in the global market for halal products.

The Ministry of Industry and Primary Resources' Department of Agriculture recently drew up an agreement with SQW Consulting to assist the department in developing the Brunei Agro Technology Park.

SQW Consulting will help the government conduct studies on the agro-technology park - and give recommendations for its establishment.

Its work is expected to be completed between six and nine months.

Under the Brunei's halal brand initiative, the development of the agro-technology park will facilitate local and foreign businesses who want to build their products with the Brunei Halal Brand.

The project will be located on a 263-hectare land in Tungku, Gadong. The park's development will be in two phases. The first will involve the completion of 50 hectares of land, available with full basic infrastructure and facilities for investor.

The area can house up to 50 companies. Phase One is expected to be completed in 18 months.

The park will offer potential tenants the flexibility to choose from a range of property specifications. There will be choices of small to large sized property units including laboratory and office buildings. There is also the option for custom-made buildings to be developed on allocated areas.

Local and foreign investors can look forward to using research and innovative technology applications that focuses on science-based activities such as agriculture, fisheries and forestry.

The approach will involve the development of Brunei's New Halal Science Centre, a research institute aiming to become a pivotal global ground for halal related activities.

Another venue is also allocated for the Food Development Centre value-added processing of agriculture products as well as incubator programmes. The Agribusiness Incubator will facilitate the setting up of agriculture-based companies allowing them to tap into the scientific and managerial resources and develop them into viable ventures.

The Brunei Agro Technology Park aims to become a globally renowned park for halal food products as well as providing access for local and foreign businesses to exploit the knowledge and technology offered within the park.

QIB arranges $137,500,000 Musharaka Sukuk for Salam Bounian company

Doha • QIB arranged and successfully closed Musharaka Sukuks worth $137,500,000 on behalf of the ‘Salam Bounian Development Company Limited’.

The capital raised will be used to finance the construction of ‘The Gate’, a mixed use real estate project being built by Salam Bounian in the West Bay area of Doha.

Qatar National Bank Al Islami, the Islamic branch of Qatar National Bank and ALSAFA, the Islamic banking division of the Commercialbank of Qatar QSC, were joint lead managers and bookrunners for the issue.

“This marks the first time ever that a Sukuk issue was managed completely by Qatari banks, without the involvement of any foreign institutions,” said Jean-Marc Riegel, General Manager, Investment Banking and Development Group, QIB. “This paves the way for more Sukuk mandates for QIB in the future.” He added: “Now that the Qatari Riyal can be cleared through Clear Stream and Euroclear, we are optimistic that we will be issuing the next Sukuk in Qatari Riyals.”

The Sukuk will be listed on the Luxembourg Stock Exchange for secondary market trading. Internationally, the Sukuk is tradable through QIB trading desks in Doha, in London through European Finance House and in Kuala Lumpur through Asian Finance House.

Moody's points to huge potential of Islamic finance

The Islamic finance industry in Africa is set to expand to as much as $235 billion as economic growth accelerates and the continent attracts investments, Moody's Investors Service said.

Islamic banking in Africa is still in its "infancy" with 37 financial institutions providing financial services compliant with Shariah law, Moody's analyst Anouar Hassoune said in a report yesterday.

The Shariah-compliant banking industry was valued at $18 billion at the end of last year, less than 8 percent of the potential market size, Moody's said.

The global Islamic financial market may expand to $2.8 trillion by 2015, from between $750 billion and $1 trillion Currently, according to an estimate by the Kuala Lumpur-based Islamic Financial Services Board.

"The potential value of the Islamic banking and finance market in Africa is huge," Paris-based Hassoune wrote. If the "continent continues to grow at its current pace, which is the fastest in decades, incremental wealth creation will make it easier for the Islamic financial services sector".

Gulf investors betting on the continent's economic expansion have started banks and real estate projects in Africa, where 412 million Muslims live, second only to Asia, which is home to about half of the world's Muslim population of 1.5 billion. Bahrain's Gulf Finance House EC plans to spend $3 billion developing an economic zone in Algeria.

'Not insignificant'

The size of Africa's combined economic production reached $469 billion last year, Hassoune said.

"This is not insignificant, as it is on par with the combined GDP of Saudi Arabia and the United Arab Emirates, two of the dominant economies of the Muslim world," Hassoune said.

Challenges to growth for Islamic financial institutions in Africa include their limited geographic reach, Moody's said. More than half the region's Islamic finance assets are located in Sudan and Egypt holds about one fifth, the rating company said.

Sudan was the third-biggest oil producer in sub-Saharan Africa last year, after Nigeria and Angola. The country may increase output to an average 565,000 barrels a day this year, the International Monetary Fund said on Oct 11, 13 percent more than in 2007.

Shariah, or Islamic law, bans charging of interest as well as investments in industries such as alcohol, gambling and tobacco.

Islamic banking a vibrant alternative system

THE Islamic banking system has emerged as a vibrant alternative financial system in Malaysia.

Islamic banking assets (including Islamic assets held by development financial institutions (DFIs)) currently accounts for 15.4% (11.5% in 2003) of the total banking assets (including assets held by DFIs) of the Malaysian financial system.

Capitalising on the ready infrastructure and comprehensive Islamic financial system locally, the strategic development of Malaysia as an international Islamic financial centre was taken to a new level with the launch of the Malaysia International Islamic Financial Centre (MIFC) initiative in 2006.

To accelerate the development of Islamic finance, new banking and takaful licences were offered to attract leading global players to establish operations in Malaysia.

During the year, 16 approvals were granted for international currency business operations.

Two additional retakaful licences were also granted in 2007 to local and foreign players, further consolidating Malaysia’s position as an international retakaful hub, while contributing to the development of enhanced underwriting and claims practices, and product innovations in the takaful industry.

To further facilitate the conduct of takaful business, a tax treatment that recognises the unique characteristics of takaful operators had been introduced.

The tax treatment provides for the appropriate recognition of income and expenses arising from takaful business, having regard to the distinct role of takaful operators as risk managers in contrast to conventional insurers, which are risk underwriters.

Other current initiatives include the review of the tax treatment for the business of leasing which aims to address taxation issues that currently impede the development and growth of leasing and ijarah business.

The Government continues to provide strong support for the MIFC vision by granting flexibilities to improve business efficiencies and to attract the best talent to Malaysia.

In 2007, the Government introduced an “executive green lane” for immigration procedures for foreign experts in Islamic finance, and made available long-term employment passes with multiple entry visas and professional visit passes.

The Government had also relaxed several Foreign Investment Committee rules for MIFC players.

These include allowing 100% foreign equity ownership in Islamic financial institutions established under the MIFC and granting flexibilities in the acquisition of properties and land, both for own use and commercial purposes.

Further tax incentives were also granted to promote Malaysia as a centre for origination, distribution and trading of sukuk.

Gulf FIs invited to set up Islamic banks

MUSCAT � As part of its long-standing policies to liberalise Islamic banking, the Malaysian central bank Bank Negara Malaysia (BNM)will issue three new Islamic banking licences to qualified foreign players.

Sources said financial institutions (FIs) and Islamic banking institutions in the Gulf are also invited to set up Islamic banks in Malaysia. The Gulf region has more than a dozen Islamic banks with major markets being Bahrain, Saudi Arabia, the UAE, Kuwait, Qatar, etc.

Some banks in Oman are also offering Islamic financial services, and Oman had been a shareholder of Islamic Development Bank (IDB) since 1975. Besides a full range of commercial, retail and wholesale banks, Bahrain has more than 20 local, regional and international institutions offering Islamic financial services.

Speaking to Times Business from Kuala Lumpur yesterday, BNM sources said this move will bring forward the liberalisation of the Islamic banking industry to 2004 with respect to issuance of new licences, three years earlier than the envisaged recommendation of the financial sector master-plan.

The new Islamic banks must be locally incorporated and licensed under the Islamic Banking Act 1983 as full-fledged Islamic banks. The new Islamic bank will be required to have a minimum capital of $78.95 million (RM300 million).

Malaysian central bank said the following criteria will be adopted in assessing the merits of applicants:

Applicant must be a financially sound licensed foreign Islamic banking institution or a foreign financial institution with experience in Islamic banking business.

Applicant must be regulated and supervised by a competent home regulatory authority and preferably, with a strong reputation in own national jurisdictions.

Applicant must be able to demonstrate, through its business plans, that the new Islamic bank in Malaysia will have the expertise and resources that can contribute constructively to the development of the domestic Islamic financial sector and the economy of Malaysia.

The business plan should include, among others: details on the competency, integrity, qualifications and experience of the proposed senior management team (including the board of directors); the proposed operating plan and internal controls (including the corporate governance structure and risk management framework); and the projected financial condition and proforma financial statements for the new Islamic bank for the first three years (including its capital adequacy status).

Apart from the above criteria, the applicant must submit the proposed ownership structure of the new Islamic bank, including the source of capital, its direct and indirect controlling and major shareholders (shareholders with a minimum equity interest of 10 per cent), their financial strength, the review of their previous banking and non-banking business ventures, their integrity and reputation, the central bank told Times.

Similar to the incumbent locally incorporated licensed foreign banks in the conventional banking system in Malaysia, the new Islamic bank may have a foreign equity interest of up to 100 per cent. This can take the form of a wholly owned subsidiary or a joint venture with domestic investors or other foreign financial institutions that fulfil the BNM criteria, the central bank added.

The move is part of the overall efforts to strengthen the global integration of the domestic Islamic banking system and increase the potential to tap new growth opportunities as well as facilitate international trade and investment flows between Malaysia and the rest of the world. It is also a step forward in the development of Malaysia as a regional financial centre for Islamic banking and finance. Submission of applications to BNM should be made by March 31, 2004.

It is said that Malaysia and Turkey are the strongest markets for Islamic banking. In two countries with Islamic regimes, Iran and Sudan, all domestic transactions are governed by Islamic banking rules.

Today, more than 250 Islamic banks are operating from China to USA, managing funds to the tune of $200 billion. Banks in the West through their Islamic units in UK, Germany, Switzerland, Luxembourg, etc. also practice Islamic banking. Moreover, Islamic funds have found a flourishing market in USA and Europe.

The revival of Islamic banking coincided with the worldwide celebration of the advent of the 15th century of Islamic calendar (Hijra) in 1976.

At the same time financial resources of Muslims particularly those of the oil producing countries, received a boost due to rationalisztion of the oil prices, which had hitherto been under the control of foreign oil corporations. These events led Muslims to strive to model their lives in accordance with the ethics and philosophy of Islam.

Islamic banks appeared on the world scene as active players over two decades ago. But many of the principles upon which Islamic banking is based have been commonly accepted all over the world, for centuries rather than decades. According to the Institute of Islamic Banking and Insurance, the basic principle of Islamic banking is the prohibition of Riba(interest).

While a basic tenant of Islamic banking the outlawing of Riba, a term that encompasses not only the concept of usury, but also that of interest � has seldom been recognised as applicable beyond the Islamic world, many of its guiding principles have. The majority of these principles are based on simple morality and common sense, which form the bases of many religions, including Islam.

The universal nature of these principles is immediately apparent even at a cursory glance of non-Muslim literature. It is claimed that Islamic finance was practised predominantly in the Muslim world throughout the Middle Ages, fostering trade and business activities.

In Spain and the Mediterranean and Baltic States, Islamic merchants became indispensable middlemen for trading activities. It is also claimed that European financiers and businessmen later adopted many concepts, techniques, and instruments of Islamic finance.

The Islamic financial system employs the concept of participation in the enterprise, utilising the funds at risk on a profit-and-loss-sharing basis. This by no means implies that investments with financial institutions are necessarily speculative. This can be excluded by careful investment policy, diversification of risk and prudent management by Islamic financial institutions.

The concept of profit-and-loss sharing, as a basis of financial transactions is a progressive one as it distinguishes good performance from the bad and the mediocre.

This concept therefore encourages better resource management. Islamic banks are structured to retain a clearly differentiated status between shareholders' capital and clients' deposits in order to ensure correct profit-sharing according to Islamic Law.

Malaysia eyes Islamic pvt banking

BANGKOK: Malaysia plans to develop its Islamic wealth management and investment fund services in a bid to attract overseas investors and tap the $1tn global market for products that comply with the religion’s Shariah law.

There are 16 Islamic banks licensed in Malaysia, including four that will start offering financial services in 2008, Malaysia’s central bank said in a report in Kuala Lumpur today. The nation had 11 Islamic banks last year.

Bank Negara Malaysia will encourage “further innovation in products and services to support specialized Islamic fund and wealth management services”, the central bank said.

Islamic banks operating in the Southeast Asian nation “are positioned to take on a more pivotal role in the development of the Islamic capital markets.”

Tax breaks and incentives for Islamic financial products have lured investors such as Kuwait Finance House, the world’s second-largest Islamic bank, and Qatar Islamic Bank.

Malaysia also introduced in January an 840mn ringgit ($257mn) Shariah-compliant exchange-traded fund, the first of its type in Asia.

The wealth of high net-worth individuals in the Asia-Pacific region may grow by 8.5% a year to $12.7tn by 2011, the second-fastest increase after the Middle East, Merrill Lynch and Capgemini said in a 2007 report.

CIMB Group, the arranger of the most Islamic bonds worldwide last year, started Islamic private banking services in Malaysia last year for wealthy Muslims who invest in accordance with their faith, Badlisyah Abdul Ghani, chief executive officer of CIMB’s Islamic banking unit, said in January.

Malaysia, where 60% of its 27mn people are Muslim, is the Asia-Pacific region’s Islamic finance hub. Newcomers such as Singapore, Hong Kong and Japan are also vying for a market estimated by the Kuala Lumpur-based Islamic Financial Services Board to expand to $2.8tn by 2015.

“Closer linkages are also being fostered with other Islamic finance centers to promote” Shariah-compliant services including agreements signed with Dubai and Qatar financial authorities, the central bank said.

Islam bans the payment and receipt of interest, prohibits investment in businesses such as gambling and alcohol and stresses profit sharing.

Malaysia, where companies sold nearly two-fifths of Islamic bonds globally last year, expects more overseas borrowers to sell such debt as it eases regulations and as Gulf investors look to Asia, the nation’s Securities Commission said February 6. Japan and China are showing “interest” to sell Islamic bonds, it added.

The global Islamic bond market stood at $82bn last year, growing an average 40% a year from $336mn in 2000, the central bank said. Global sales rose to $30.8bn in 2007 from $18.1bn a year earlier, data show.

Islamic banks post 26.7% growth rate

The world’s 100 largest Islamic banks have outpaced conventional banks with an annual asset growth rate of 26.7 per cent, according to a new study.

The Islamic institutions reported a growth to nearly $350 billion (Dh1.28 trillion) in assets, beating the 19.3 per cent growth rate of mainstream banks, says the Asian Banker research group.

This growth rate is well above previous estimates of 15 to 20 per cent.“We’ve seen a rise in the number and size of Islamic banks across the world and they are growing popular in non-Muslim countries as well,” Asian Banker research manager Benny Zhang Wei told Emirates Business.

“I do not expect any slowdown in growth in the long term. There is enormous wealth coming from oil and gas in the Middle East and 1.5 billion Muslims worldwide make a good customer base.”

Dr Taha El Tayeb – who heads Mashreq’s Islamic banking division, Badr Al Islami, in the UAE – is a little cautious about the reported growth rate. “I’m a little surprised by the 26 per cent figure because I thought it was about 20 per cent,” he told Emirates Business.

“I believe this growth rate is sustainable in the short term but it may come down owing to the growing base of Islamic banking. Overall the prospects seem bright as a large number of corporates and family businesses in the region are moving to Islamic banking for religious reasons,” he added.

Zhang Wei said: “The potential [of Islamic banks] to eat into a conventional bank’s business model is huge and should not be underestimated. The threat will only get worse as Islamic banks grow organically or as a result of intensive mergers and acquisitions.”

Islamic banks’ expansion plans are paying off. The most successful international Islamic banking player, Albaraka Banking Group of Bahrain, is a good example. It has 11 Islamic banking licences in 10countries in the Middle East, North Africa, South Asia and Europe.

Albaraka sources more than 90 per cent of its revenue from overseas – a ratio even higher than Citi’s, said Zhang Wei.
An analyst at Standard & Poor’s in Singapore believes that Islamic finance has reached a critical mass and the level of interest means it makes sense to reach out beyond the predominantly Muslim countries.

Asia is a lucrative market for Islamic banks. According to Merrill Lynch and Capgemini the total wealth of high-net-worth individuals in the Asia-Pacific region may grow by 8.5 per cent a year to $12.7trn by 2011, the second-fastest increase after the Middle East, making it highly lucrative for Islamic banks.

Islamic banks are performing well in financial centres such as Singapore and London where they are trying to earn oil and gas dollars by encouraging the handling of cross-border financial deals through Shariah-compliant instruments.

But despite the impressive growth of Islamic banking in recent years it remains a niche segment in the global financial services industry. The largest company in the Asian Banker’s list of the top-100 Islamic banks is Iran’s state-owned BMI, which has total assets of $39.4bn.

This is equivalent to the size of Chang Hwa Bank in Taiwan, the 75th largest bank in the Asia-Pacific region and 395th in the world, said the report.

In Malaysia, where the number of Islamic banking players has almost doubled and their aggregate size has more than tripled in the last two years, Islamic banks account for only 5.2 per cent of the country’s banking assets.

Even if Islamic banking services offered by conventional Malaysian banks were included, the percentage of financial intermediations handled in a Shariah-compliant manner would not exceed 10 per cent.

And even in more developed Islamic banking systems such as the UAE, Bahrain, Saudi Arabia and Kuwait, intermediation through an Islamic bank or Islamic windows of a conventional bank accounts for less than 50 per cent of the total, said the report.

The Middle East is a major player in Islamic banking. Of the top-100 Islamic banks worldwide, Iran dominates with 14 players, followed by Saudi Arabia, Malaysia and the UAE.

Top-ranked BMI and the other 13 Iranian state-owned and privately managed banks in the list hold aggregate assets of $162.2bn, accounting for nearly 50 per cent of the world’s 100 largest Islamic banks’ assets. Saudi Arabia’s Al Rajhi Bank is in second place.

The story of Islamic banks in Iran differs from other countries as most banks there are state-owned. Government efforts to transform all financial institutions into Islamic ones drove the intense growth of Iran’s Islamic banking system.

Banks were nationalised as early as 1979 and regulations changed with the approval of an Islamic banking law. In 1983 the country made a wholesale switch to Shariah-compliant Islamic banking.

Sudan followed a similar policy, adopting Islamic banking practices as early as 1990. Today all banks are Shariah-compliant and despite their small scale, 19 of them figure in the top 100.

Pakistan is a mixed bag as the banking sector still runs on the dual system of both Islamic and conventional practices. The Islamic banking sector is driven by the government but at a relatively slower pace than elsewhere, even though 97 per cent of the population is Muslim.

Saudi Arabia, a big player in Islamic banking, has only three banks in the list that are wholly Shariah-compliant – Al Rajhi, Al Bilad and Al Jazira. With an aggregate 10 per cent of the total assets, they make it to the first quartile of the top 100. As many as eight Saudi commercial banks have begun to make their deposit taking and financing Shariah-compliant.

In the UAE, Dubai Islamic Bank was set up in 1975 to drive the sector’s growth and is in seventh place. Abu Dhabi Islamic Bank is ranked tenth. A lot is expected from Noor Islamic Bank, which was established recently.

With a paid-in capital of $1.09bn, the bank is expected to become the world’s largest Islamic player within five years by acquiring other institutions in countries such as Indonesia and Egypt.

Abu Dhabi plans to launch another Islamic bank, Al Hilal, in June, taking the number of dedicated Islamic banks in the UAE to seven.

“Consolidation could be a possibility,” says Zhang Wei.

IKSA: Islamic economics can solve world problems

MENAFN - Arab News) Islamic economics presents viable solutions to many problems facing the world, says Abdul Rahman Al-Jeraisy, a leading businessman and chairman of the Riyadh Chamber of Commerce and Industry. "There are a number of successful experiments in the field of Islamic economics," Al-Jeraisy said, emphasizing the importance of applying Islamic methodology in utilizing and managing material resources.

In a statement on the occasion of the seventh Islamic Economic Conference, which opens at King Abdul Aziz University (KAU) in Jeddah on April 1, he said the conference would shed more light on the growing significance of Islamic economics. "The Shariah has given utmost importance to economic matters and warned against financial dealings that would have dangerous consequences on the Ummah and moral values," said Al-Jeraisy.

He underlined the importance of the conference as it comes at a time when many Muslims have drifted away from Islamic teachings in dealing with their economic and financial matters.

"The conference also offers a good opportunity for interested people to become aware of new research in the field of Islamic economics," he said. Jeraisy Group is one of the conference's main sponsors.

The three-day conference will examine the findings of numerous studies in Islamic economics to counter challenges posed by the modern world and help poor Muslim countries develop their economies. Dr. Abdullah Muhammad Bafel, vice-president for higher studies and scientific research at KAU, said the conference would formulate a futuristic economic vision from an Islamic perspective.

The conference will bring together economists, business leaders, entrepreneurs, thinkers and journalists. It will be a forum for Islamic economists, bankers and financiers to discuss the intricacies of Islamic finance and examine the dynamic nature of Islamic economies. "It is vital to examine why the vibrant principles of Islamic economics have not been implemented over the past few years and no viable method has evolved to invest the wealth of rich Muslim countries in poorer Muslim countries," Bafel said.

Participants will also discuss the development of natural resources in Muslim countries in the light of the challenges and opportunities posed by globalization. The conference will also help develop strategies to create a better understanding of business opportunities in emerging markets.

The conference will discuss as many as 50 research papers on various topics presented by experts from different parts of the world. Dr. Abdullah Al-Musleh, secretary-general of the International Organization for Scientific Miracles in the Holy Qur'an and Sunnah, will present a paper on "Miraculous Economic Teachings in the Qur'an."

Al-Musleh will focus on the economic problems being caused by the interest-based banking and financial system that obstructs investment, causes inflation and expands the divide between rich and poor. "Zakah encourages investment, controls inflation and contributes to solving unemployment problems," he added.

The 1st Annual World Islamic Banking Conference: European Summit - Tuesday 8th - Wednesday 9th July

The 1st Annual World Islamic Banking Conference: European Summit - Tuesday 8th - Wednesday 9th July

Over the past 15 years, the World Islamic Banking Conference (WIBC) has proved a phenomenal success in the global Islamic banking industry, attracting each year 1000 participants from over 40 countries.

The launch of the 1st Annual World Islamic Banking Conference: European Summit (Euro WIBC) on 8th July 2008 will bring to London a regionally focused platform with a world-class speaker line-up and more groundbreaking debate for industry leaders looking to seize the emerging opportunities for Islamic finance in the European markets.

Some of the key topics to be addressed at this major conference will include:

Critical issues facing the European Islamic financial markets
Assessing the dynamically developing regulatory environments in Europe.

Tapping into the rapidly emerging growth opportunities for Islamic finance in Europe: What products will work in this market?
The outlook for new institutions based in the UK and Europe
The event will be addressed by a faculty of both regional and international experts and is expected to attract more than 400 international delegates.

Jersey Finance participation at this event will be based on the level of interest and support shown by Members. If you are interested in attending please email: nicola.connolly@jerseyfinance.je to discuss.

Dubai Bank 'fastest growing' Islamic lender

Since its conversion to a Shariah-compliant institution on January 1, 2007, Dubai Bank has not faltered in its ambition to become the region’s fastest growing Islamic bank. Ahmed El Shall, Dubai Bank’s Chief Financial Officer, gives an insight into the phenomenal growth of the banking sector.

What sort of growth are you predicting for the Islamic finance institutions in the Gulf region?

The Gulf Islamic finance industry has been growing at rates in excess of 40 per cent per annum for the past three years. I expect this will continue because of the high level of liquidity currently floating in the Gulf. My guess is that this will be channelled into the banking system.

In which industries do you predict the region’s Islamic finance industry will experience most growth?

All three main segments: corporate, retail and investment banking should see healthy growth because of the boom in housing and related sectors such as construction, real estate services and the sale of durable goods.

Other boom sectors will be tourism related sectors such as airlines and hotels, as well as infrastructure, particularly oil and gas capacity expansion, and the domestic capital markets.

Thani Investments was one of the region’s first privately owned companies to use sukuk. Do you predict that more family businesses will follow its lead?

We see sukuk picking up for private family businesses only if the banks’ capacity to lend becomes constrained due to regulatory ceilings or otherwise, or if the pricing of bank credit becomes clearly more expensive than going to the debt capital markets. We don’t foresee either of these situations happening in the near term.

In the past significant funds have gone to the United States or Europe. How big is the desire for individual investors to invest their assets locally?

Due to the stellar performance in recent times of Asian markets, including the Gulf markets, we expect more funds to stay close to home in the foreseeable future.

At one point Muslims forewent Shariah-compliant investments because of a lack of availability of products. Is this changing in the Gulf? Who finds Shariah products attractive?

it is no longer the case that Shariah-compliant products are not available. There are many compliant products that compete effectively with their conventional counterparts. Today both Muslims and non-Muslims bank with Islamic banks with the choice being made on the basis of the quality of service, convenient location and pricing.

If there is a different level of Shariah compliance for conventional and Islamic banks, does it matter? Do you think that Islamic financial products offered by a conventional bank are equally acceptable to Muslims as those offered by fully complaint Islamic financial institutions?

In theory there should be no difference in the level of Shariah compliance between conventional banks with Islamic windows and fully-fledged Islamic banks. However, in practice, it is quite difficult for conventional banks with Islamic windows to ensure compliance due to the potential for commingling Islamic and non-Islamic assets and liabilities.

But is “bigger better” in the sense that a commercial bank has a proven track record and higher degree of certainty than a newly established Islamic bank? Does it matter that Islamic banks are smaller and less diversified than conventional banks?

In the case of the competition between the Islamic banks on one side and the conventional banks on the other, bigger is not necessarily better for a number of reasons. First, Islamic banks are a new phenomenon and could not have started big from day one.

Secondly, Islamic banks are niche players and this justifies their smaller size. Interestingly, despite their newness and small size, Islamic banks have managed to raise their market share in the UAE market from less than one per cent in the late 1990s to more than 15 per cent today.

The Islamic private equity system is still at a very early stage of development. Many of today’s private equity transactions rely on leverage – a debt to equity ratio higher than 33 per cent. Would you like to see the Islamic financial system develop Shariah-compliant alternatives that can ape conventional instruments?

Newly launched Shariah-compliant private equity funds are arranging leverage through Shariah-compliant structures that will allow them to lever much higher than the constraining 33 per cent.

There are also ongoing discussions among banks about setting up Shariah-compliant mezzanine financing funds to aid the development of the Islamic private equity business.

As home markets mature and new players enter the space, is there an increasing need for regional and international expansion into new markets that can provide sustainable growth?

There is no doubt that the UAE banking sector is already overcrowded and that the need for expansion across the borders is already recognised by many senior bankers in the country. We have been hearing about cross-border M&A deals by local banks. Many local banks are planning regional acquisitions to expand outside the UAE.

In Europe, Islamic finance is growing at a rapid pace, but tax hurdles remain. What about regulatory conditions in the Gulf?

The regulatory schemes to which Islamic banks are subjected across the Gulf vary from country to country. For example, in the UAE, Islamic banks are treated in exactly the same manner as conventional banks with a couple of exceptions that allow for Islamic banking transactions to be processed in a Shariah-compliant manner.

But in Saudi, despite the presence of two of the world’s largest Islamic banks and many Islamic banking windows, there are no clear promulgations for Islamic banking. Bahrain has an elaborate regulatory scheme for Islamic banking, while Oman simply does not allow Islamic banking. The Qatari model is between those of Bahrain and the UAE.

Nonetheless, across the Gulf, Islamic banking customers are awarded the same protection given to conventional banking customers. However, when it comes to Shariah compliance, the models implemented by the Shariah boards of the various banks differ and could leave the consumer confused and perplexed.

We hope for a convergence of the Shariah principles applied by Gulf banks under the surveillance of a unified Shariah body.

Is it a problem that some Shariah rules create a particular challenge for financial institutions?

There have been some recent developments that cast doubt about the true nature of compliance of some of the sukuks currently on issue.

However, we are quite confident that this matter will be resolved to the satisfaction of all interested parties, as there is a taskforce that is currently working on recommendations to resolve this matter.

Growth Doubles

Profits of Dh211 million last year – 102 per cent higher than 2006 –reflect Dubai Bank’s ever strengthening retail, corporate and investment banking divisions.

Shareholders of Dubai Bank such as Dubai Holdings and Emaar will be pleased with the results as both have benefited from a tripling of the bank’s share capital from Dh500 million to Dh1.5 billion. The bank recently won Best Islamic Bank in the Middle East and Best Islamic Product Provider from World Finance, London.