Islamic finance news needs to catch up

GULFNEWS:News is an important asset for capital markets and the finance industry, and in Islamic finance it is the sunlight needed to "disinfect" accusations of opaqueness.

But today's Islamic finance "news" is often a mix of press releases, articles which repeatedly interview the same subjects, and old information.

It also shows little understanding of the economic environment in which Islamic finance news operates. Islamic finance blogs and chat rooms do a good job of reporting the news, but at times turn into personal attacks which result in electronic bullying...continue

Islamic finance makes a move into the mainstream

There has been a substantial Muslim community in the UK for at least 300 years, so UK financial companies may have been a little slow to cater for their monetary needs. But mainstream financial groups are quickly waking up to the fact that there are some 2 million Muslims in the UK whose financial needs must be met, as well as many more non-Muslims who agree with the ethics promoted by Islamic law, or sharia.

Sharia governs, among other things, a Muslim's economic and social life, dictating how believers should conduct themselves. It forbids certain activities and transactions: those involving alcohol and pork-related products, but also armaments, gambling, pornography and other activities deemed socially detrimental.

Crucially, Islam places no intrinsic value on money, so earning or paying interest (riba) is prohibited – ruling out the majority of traditional mortgages, investments, savings and insurance products. So financial providers have had to do some creative thinking. The result, however, has been the launch of a wealth of new interesting and innovative products - some of which are now starting to capture the attention of non-muslims as well.

Mortgages

Buying a home under sharia usually involves one of two types of Home Purchase Plan. Under an ijara or lease option, the bank buys the property and the client pays rent to the bank. At the end of the term, the bank hands the ownership of the property over to the client. Alternatively, a murabha or partnership approach means the bank buys the property with the client who then makes regular payments to gradually assume ownership. In both cases, the bank simply adds its costs to the price of the property which the client pays back as part of the whole.

Both options could prove interesting propositions in an uncertain economic climate, regardless of your religious inclination, says Peter McGahan of the independent financial adviser Worldwide Financial Planning. "These approaches could mean that a home owner may not have to worry about the uncertainty of interest rates. You know exactly how much you will need to regularly budget and how much your property will cost you in the end." But, he adds, there are potential pitfalls.

"Bear in mind that, particularly with murabha, you are paying a higher price for a property in a falling market. You are increasing your risk of negative equity, and this could mean you will be unable to move again in the short term." Sharia-compliant mortgages are available from a number of providers, including Lloyds TSB (www.lloydstsb.com) HSBC (www.hsbcamanah.co.uk) and the Islamic Bank of Britain (www.islamic-bank.com).

Current accounts & savings

An Islamic current account will give you the same benefits as a standard account when it comes to cheque books, debit cards, access to ATMs, online banking and regular statements. But no interest is paid on balances or charged on overdrafts, so banks will go after you on borrowing fees. You will often have to keep a significant amount in the account to avoid being charged. The minimum input for savings accounts can be far higher than other products and the "profit" rate – generated from sale and lease schemes rather than interest-based borrowing – is rarely market-leading. Once again, providers include Lloyds TSB, HSBC and IBB, but The Children's Mutual (www.thechildrensmutual.co.uk) also offers a sharia-compliant child trust fund.

Investments

Islamic investment products are booming and even the UK Government is rumoured to be considering a sukuk, or sharia-compliant bond. Conventional Western-style bonds offer investors interest payments on the sums invested. Sukuk bonds represent partial ownership of the underlying asset. Because the focus is on real assets, sukuk bonds protect investors from gearing or leverage – when the bond provider borrows against it to try to boost returns.

Meanwhile, Islamic-oriented equities seem to be weathering the economic storm far better than their mainstream counterparts, according to Standard & Poor's. "Equity markets around the world have experienced a turbulent start to 2008, with the S&P World BMI Index falling by 1.49 per cent in the second quarter of 2008," says Alka Banerjee of S&P. "But the S&P BMI Global Shariah Index delivered positive returns of 3.61 per cent over the same period. Financial stocks, whose poor performance has affected other indices, are largely excluded from sharia indices as they do not comply with Islamic law, so sharia investors have benefited."

Other products

New sharia-compliant products are now appearing in other areas of the market, too. This month has seen the official launch of Britain's first Islamic insurance company. Salaam Insurance (www.salaaminsurance.com, 0800 980 2445) offers sharia-compliant motor insurance policies by sharing the risk between policy holders. The takaful insurance allows participants to pay their contribution into a pooled fund which is then invested in sharia-compliant investments, with any profits put back into the fund.

Claims are paid from the fund, and if there is any extra cash at the end of the year, it is distributed as a discount for the next year's premium. It has a more positive spin than the majority of insurance products on the market, as you may get something back for your money, rather than parting with your cash in the "hope" that you never have to claim it back. Salaam will offer home insurance, too, later this year.

There is also Cordoba Gold, a sharia-compliant prepaid card that is to be launched in mid-August. Targeting frequent travellers or those who often transfer money overseas, the card will have no interest payments, and will offer a credit-builder facility to help boost the client's credit rating by adding positive information to their credit file, using a gradually repaid loan rather than a monthly fee. More information will be available starting next month at www.cordobagold.com.

If you are looking for an easy list of what sharia does and does not mean for your finances, there is no straightforward answer. For most Muslims, the Koran and Sunna, the holy books, are open to interpretation by everyone. Although UK domiciled financial companies are regulated in their business dealings by the Financial Services Authority, they are guided in their sharia compliance by various scholars. This means that there is no absolute definition of what is and what is not considered sharia-compliant personal finance. So it's important to check each providers' processes before signing up.

Malaysia: U.S and Malaysian banks can join forces In Islamic Financial Services

By Nor Baizura Basri

Malaysian International Trade and Industry Minister Tan Sri Muhyiddin Yassin called on American bankers Monday to join forces with their Malaysian counterparts in the area of Islamic financial services.

Urging them to cooperate to enter markets in Asean and the Middle East, Muhyiddin said demand for Islamic financial products and investments was increasing, especially in the Middle East.

In addition, demand for such products was also on the rise in the non-Muslim economies in the West, he said at an investment seminar here.

The Malaysia-US Business Opportunities seminar, attended by about 200 representatives from the business sector, was held in conjunction with a trade and investment mission led by the minister.

Covering Detroit and New York in one week from May 13, the 46-member mission comprises government officials and representatives of the private sector. "Malaysia is keen to capitalise on these growth trends and has since positioned itself as an international hub for Islamic banking," Muhyiddin said.

He said Islamic finance has evolved to become an integral part of the international financial system and was now being offered in more than 75 countries with an asset size of over US$1 trillion (US$1.00=RM3.25).

"It is envisaged that by 2010, Islamic banking will constitute more than 20 percent of the global Islamic banking," he added.

Muhyiddin also said that Malaysia has been cited as a model for good governance and has one of the most extensive and effective regulatory Syariah and legal framework for Islamic banking and finance.

He also encouraged American businessmen to source halal products from Malaysia as well as to explore new market opportunities with their Malaysian counterparts.

The minister said Malaysian halal products were gaining international recognition and they were able to meet stringent benchmarks such as Hazard Analysis Critical Control Points (HACCP) and Good Manufacturing Practices (GMP).

Malaysia has distinct advantages in the supply of halal products, he said. On another note, Muhyiddin said Malaysia's trade with the United States increased four-fold to US$43.4 billion in 2007 from US$9.9 billion in 1990.

Malaysia's total trade with the US, through the Port of New York and New Jersey in 2007, was valued at US$2.4 billion, up by 20 percent compared with US$2 billion in 2006.

New York, the last leg of the trade and investment mission, is the leading centre of banking, finance and communications in the US.

Developers: Rebrand KL As Islamic Finance Leader

By Sharen Kaur

PROPERTY developers said Malaysia should rebrand itself not just as a pioneer, but as a leader in Islamic finance in building the local property market.

"We should market and position Kuala Lumpur and establish it as the international Islamic financial hub. The city must also be "live- able"," said Glomac Bhd group managing director, Datuk Fateh Iskandar Mohamed Mansor at The Edge Investment Forum on Real Estate 2008 in Petaling Jaya on Saturday.

"We should focus our efforts and attention as the preferred destination to attract global investors, issuers and high net-worth individuals to take advantage of their surplus private and sovereign funds. With them coming in, demand for residences would increase," he said.

Other speakers at the forum were Glomac group executive vice- chairman Datuk Richard Fong, Bandar Raya Developments Bhd (BRDB) chief executive officer (CEO) Datuk Jagan Sabapathy, Beneton Properties Group executive chairman Datuk Chan Sau Lai, Zerin Properties Sdn Bhd CEO Previndran Singhe, Hall Chadwick Asia Sdn Bhd chairman Kumar Tharmalingam, and Ho Chin Soon Research Sdn Bhd director Ho Chin Soon.

Fateh suggested that the private sector work with the government to promote Malaysia, adding that Malaysian My Second Home (MM2H) should be placed under the Prime Minister's Department to ensure efficiency, speedier approvals and seamless inter-ministry coordination instead of Tourism Malaysia.

On prices of condominiums in Kuala Lumpur, Fateh said a shortage of land would drive the prices higher, adding that properties have gone above RM2,000 per sq ft in the Golden Triangle.

"(For instance,) when we launched Suria Stonor in 2004, we sold the units at RM650 per sq ft. Now they are going for RM1,600 per sq ft.

"(In addition,) YTL Corp Bhd recently paid a record RM2,000 per sq ft for a piece of land in Jalan Stonor, Kuala Lumpur," he added.

Jagan concurs.

He said the company's The Troika condominium project in KLCC, which started at an average price of RM950 per sq ft, is now selling at RM2,500 per sq ft.

Meanwhile, Chan cautioned investors who buy properties in the KLCC area for yield or capital gains, to consider the state of the rental market.

"We are targeting expatriates with housing allowance of RM8,000 to RM16,000 per month for the properties but there's only a small group here.

"But now we have buyers who work in Kuala Lumpur moving into the city to avoid traffic congestions," said Chan.

Cashed-up emirates beckon Aussies

By Chris Nicholson
THE Middle East has emerged as the last great hope for Australian lawyers seeking their fortunes offshore.

Flush with cash from high oil prices, the booming Gulf states have an insatiable appetite for lawyers who can help them become global commercial and financial hubs.

Relatively junior lawyers can take home up to $210,000 tax-free.

Building modern diversified economies virtually from scratch has provided enormous opportunities for the international law firms that have descended on the region.

"The Middle East market has been the most voracious in its appetite for lawyers in the last 24 months," says Cam Thomson, associate director at legal recruitment firm Naiman Clarke.

"If you look at what's going on there, in terms of the nature and type of the economic activity, if there was to be a market where there is a recession-proof boom, then that's where it's occurring."

And Australian lawyers have been flocking to the Middle East, drawn not only by the generous salaries but the opportunities to work on some of the biggest and most complex deals in the world.

Demand for lawyers is strongest from high-profile Dubai, says Jennifer Lee, of recruitment firm Naiman Clarke. It is closely followed by the neighbouring emirate of Abu Dhabi, which relaxed operating restrictions on foreign law firms last year.

In Dubai and Abu Dhabi, the strongest demand is for lawyers with experience in the sectors closely allied with building modern commercial and financial centres from the ground up.

Other Gulf states are seeing an increased demand for international lawyers. Qatar is also repositioning itself as a commercial and financial services centre and has huge demand for lawyers with experience in the energy, construction, technology, media and telecommunications, corporate and banking and finance sectors.

Bahrain is a financial centre with demand for project finance and general banking and finance specialists, especially those with experience in Islamic finance.

And the huge Saudi energy industry continues to fuel demand for corporate and project finance lawyers in the capital, Riyadh.

Local candidates with hands-on transactional experience, particularly those coming from a top-tier law firm in Australia, are the most sought-after in the Middle East.

But experience is very important and employers are becoming more open to candidates from smaller firms.

Salaries throughout the region are generous and tax-free, but they are subject to major variations, even within the most popular markets of Dubai and Abu Dhabi.

Firms elsewhere in the region have raised their salary packages to attract quality candidates, Lee says.

In such a competitive market for legal talent, most firms offer attractive bonus packages that can add up to 30 per cent to a lawyer's base salary.

But for many lawyers, the prospect of working on some of the biggest transactions in the world is an even more attractive proposition than the salaries.

That was the case for Stephen Webb, a former consultant at Mallesons Stephen Jaques in Brisbane who accepted an offer from DLA Piper a year ago to move to the Gulf.

He is now managing partner of the firm's Abu Dhabi office. "I'm a projects lawyer, in the construction and project finance area, and this is the centre of the universe for what I do. There's just so much going on and the scale of the work is quite phenomenal," Webb says.

Before joining Mallesons in 2005, he was a partner in the Hong Kong office of London-based firm Clifford Chance, and he believes the growth prospects of the Middle East considerably outpace what is happening in Asia.

"It's something that I can't see happening anywhere else," he says. "I lived in Hong Kong when the whole China boom was under way but I've never seen anything quite like this."

Webb says much of his time is taken up by interviewing candidates.

"The growth is quite phenomenal. We opened our office in Dubai just over two years ago and the plan was to have 30 lawyers after three years but we're very close to hitting 100 now," he says.

"For Abu Dhabi, we've now got 10 lawyers on the ground, with another five on the way.

"We're building up our clients and firm size as there is a real desire on the part of clients to now have work done here on the ground.

"Our plan is to double or triple in size by the end of the year."

London-based firm Trowers & Hamlins opened an office in Dubai in the early 1990s, and with that head start it has become one of the leading international law firms in the Middle East.

It has five offices and 160 staff in the region.

The Middle East is so important to the growth of the firm that in January, the firm's head of human resources, Malcolm Lewis, moved from London to Dubai.

Lewis says the firm's demand for new lawyers will continue for the foreseeable future, and that Australian lawyers remain at the top of his wish list.

"There really is very strong demand here right across all areas and we've got a pretty successful track record with Aussies."

Another factor in favour of Australian lawyers is that Gulf states have generally adopted a legal framework based on common law, with former British chief justice, Lord Woolf, setting up Qatar's new civil and commercial court.

Into the great unknown

By Daniel Stanton
Financial institutions in the region need to be ready for developments in law, regulation and Sharia standards.

It is tough enough to plan for the future in an established industry based in a mature market, but it is almost impossible in the Gulf's financial sector.

Last year's announcement by Sheikh Muhammad Taqi Usmani, chairman of the Sharia board at AAOIFI (the Accounting and Auditing Organisation for Islamic Financial Institutions) that he considered capital-protected sukuk structures to be in violation of Sharia principles has sent shockwaves through the Islamic finance industry. Delegates at the recent Takaful 08 conference in Bahrain expressed concern that other widely used Islamic finance products could be the next to be discredited by industry bodies.

This has caused uncertainty and could slow the growth of Islamic finance: no one wants to invest in developing new products if they might later have to be withdrawn. The continuing move towards a common set of Islamic finance standards, however, led by Bank Negara Malaysia in the East and by bodies like AAOIFI in the Gulf, looks like it could clarify the situation in the coming years.

It is incredibly difficult to plan for future changes in the law. Mortgage providers in Saudi Arabia opened for business before the Kingdom's mortgage law was put in place; properties in Dubai were sold to foreigners on the understanding that they would be transferred into the buyer's name when the law allowed it; and Emcredit, intended to be the UAE's first credit bureau, was established in 2006, only to spend months in limbo when the government decided a federal credit bureau was needed.

There are bound to be further changes in the law after GCC governments indicated they are committed to a single currency, presumably with a common legal and regulatory framework for the financial sector. Many of the laws and regulations being formulated today could yet end up being rewritten or scrapped in a few years' time.

With so much uncertainty surrounding the region's legal framework and Sharia compliance, coupled with the ever-changing nature of a booming economy, financial institutions have to prepare for factors that might affect their business. Many of these are beyond their control - inflation springs to mind - but some can be influenced.

The Central Bank of Bahrain, Dubai International Financial Centre and Qatar Financial Centre all have transparent systems for consulting on proposed new regulations, allowing financial institutions to have their say before rules are finalised.

When it comes to Sharia guidelines, there are signs that the GCC - and perhaps the global Islamic finance community - is moving towards a common set of standards. Banks and other finance providers need to ensure that they are involved in the debate and have the chance to steer it.

Legal Lip Service

Both Middle Eastern and Western banks spend much time analyzing Islamic financial law these days, as they create instruments that comply with religious rules. The spirit of Islamic finance--as opposed to the letter--often goes undiscussed.

Yet any review of religious texts, Friday sermons or contemporary debate on the subject shines light on Islamic finance's true intentions: infusing commerce with social justice, so that the pursuit of profit is tempered by concern for the welfare of the most disadvantaged. From radicals to moderates, traditionalists to fundamentalists, South Asians to Arabs, the notion of Islamic finance realizing social justice is absolutely central.

Thus, for example, the ban on interest is justified as an attempt to prevent one party from guaranteeing his return in a venture, irrespective of whether or not the venture is financially successful. (Never mind that any Western economist would argue that there are no foolproof loans.) Islam also makes the reverse case, namely that interest sometimes lets entrepreneurs earn huge profits, paying nothing to their vitally important investors but a small interest rate.

Islamic finance levels a similar criticism at certain forms of speculation. If one purchases, for example, the right to fish in my lake for an hour, the potential exists either for the purchaser to gain excessively at my expense, or vice versa. True, the parties agreed to the transaction ahead of time, but the arrangement can nonetheless become exploitative, or so it is argued. Enmity, the theory goes, is often an inevitable result.

In place of this type of winning and losing, Islamic finance purports to promote sharing. Parties may not speculate, and they may not fix returns. Instead, they may invest together, win together and lose together. Brotherhood is strengthened, the rich never prosper at the expense of the poor and social justice is thus achieved. Early Islamic banks tried operating on these bases, with risks and losses shared among bank, depositor and borrower alike. Unsurprisingly, they failed miserably.

There is much that is misguided about this well-intentioned set of ideas, and social justice can probably best be achieved in other ways. But, more important, any conventional financial institution would conclude that Islamic finance--if true to its spirit--cannot possibly work. The idea that Citigroup (nyse: C - news - people ) or HSBC (nyse: HBC - news - people ) or Lehman Brothers (nyse: LEH - news - people ) will hear about this social justice agenda, and show any proclivity toward fulfillment of it, is preposterous.

But these institutions, as well as others in the Muslim world, would like to pick up where the first Islamic banks failed, to tap into a promising market of pious Muslims, in some cases flush with petrodollars. What then to do? How to breach this divide, between those who want Islamic finance and those who want to provide it, but not on terms that reflect the spirit of the law?

Enter here the "letter" of Islamic finance. To turn to a specific, currently relevant example, if fixed-interest bonds are bad, but equity investments are acceptable, then what if an investor buys a non-voting equity instrument whose return is based on profit shared between him and the venture--with any profit above 6% given to the venture as a "reward"? Further, what if any return below 6% is made up by "interest-free loans" given by the venture to the investor, that may be paid back solely from subsequent profits that exceed the 6% mark? Finally, what if the stock was bought back by the venture at the amount paid?

Combine these elements--equity, interest free loans, rewards and sales--any one of which on its own is absolutely not controversial under Islamic law, and, it is argued, the "letter" of Islamic finance has been followed. No rules have been explicitly broken. This is largely the premise upon which the instrument known as the sukuk, or the Islamic bond, operates.

These sukuks have proved enormously popular among large banks for obvious reasons--they are bonds in all but name, and therefore familiar and acceptable. Yet they also make a plausible claim to Islamicity on the basis of the letter, if not the spirit, of Islamic finance.

But it is not so easy to rid Islamic finance of its spirit. Recently, a premier Islamic finance scholar, Mohammed Taqi Usmani, declared some aspects of sukuk to be un-Islamic, specifically the buyback at cost and the interest-free non-recourse loans. He did not take issue with sales per se, nor interest-free loans per se, but felt that Islamic finance did not permit them to be combined and qualified in a manner that clearly thwarted Islamic finance's central requirement of profit sharing. He saw a violation, in other words, of the spirit of the law.

Usmani's objection would seem to make it impossible to remedy--that is, Islamify--the massive number of already issued sukuk. This is because any remedy would require that the sukuk be changed so that the sukuk holder shoulders a risk of loss, or of lower return, in years where the venture did not meet earnings expectations. It is hard to see how this could appeal to large numbers of investors who currently view the sukuk as a bond equivalent.

Certainly this ruling seems to have had a significant effect on the sukuk market. According to a recent report, sales of sukuk have dropped sharply over the past year, from $4.7 billion in the first quarter of 2007 to only $856 million in the first quarter of this year. This drop may be related to any number of factors, including an economic slowdown and new caution by both Western and Middle Eastern investors. However, the concerns raised by Usmani over the permissibility of sukuk almost certainly played a role.

Whether or not a solution might be reached to defuse this current crisis remains to be seen; certainly a great deal of attention is being given to it within Islamic finance circles. Regardless, the issue helps to demonstrate a larger point. Given the strong desires of so many Muslims to achieve Islamic finance in spirit, and the willingness of so many financial institutions to provide it only in letter, the tension between the two is not likely to go away soon.

By:Haider Ala Hamoudi is an assistant professor of law at the University of Pittsburgh. He writes on Islamic finance in law review articles and on his blog, Muslimlawprof.org, and is the author of Howling in Mesopotamia.

The Enforcers

Islamic finance is booming. There are at least $500 billion worth of Sharia-compliant assets globally, up from just $150 billion a decade ago. But just 20 men (and, yes, they are all men) are the gatekeepers to this lucrative realm. These are the top-tier Islamic scholars whose stamp of approval is required before the world's banks can market a new financial product as being consistent with Islamic law.

Why so few? First of all, it can take 15 years of studying Islamic law--and years more of financial training--before one can make a ruling with any authority. There are probably no more than 260 scholars, worldwide, that have the necessary knowledge. And only a handful of these have the combination of business savvy and linguistic skills needed to work with top-tier financial institutions like Citigroup Barclays or HSBC.

"It's a limited specialization with limited practitioners, and even among the people with the specialization only a handful are suitable for working with international financial institutions," said Yusuf Talal DeLorenzo, a U.S.-based scholar who is one of the chosen few. "A passing knowledge of English is generally not enough when a scholar has to wade through hundreds of pages of a prospectus or legal documents."

Additionally, major banks prefer to--and in some cases are required to--turn to people who are already well established.

"Western institutions tend to go with big names who have been working with them and have built up a reputation over the past 15 or 20 years partly because their risk management systems require them to do so," explained Humayon Dar, chief executive of BMB Islamic, a London-based consultancy.

As a result, the top scholars can sit on anywhere from 10 to 40 "Sharia compliance" boards each. The limited supply of experts is reflected in their outsized compensation. Estimates of compensation for each board seat range from between $10,000 to $1 million annually, meaning top-tier scholars are likely earning eight-figure incomes.

"They are certainly pricey by reputation but they never talk about remuneration," said Joseph Connolly, professor of Islamic finance at the École Nationale des Ponts et Chausées in Paris.

The scarcity of scholars poses major ethical challenges, argues Connolly. While it is not entirely unusual in the U.S. for prominent corporate executives to sit on multiple boards, they are not spread nearly as thin as their Islamic scholar colleagues. By way of comparison, there are more than 50,000 directors of public companies in the U.S. Just over 200, or less than one-half of 1%, sit on six or more boards.

"If you are on the board of the bank that is bidding on a multibillion-dollar banking deal, which is being financed according to Sharia law, and you sit on the board of a competitor that is also bidding, there is a real concern about insider information," said Connolly.

So far the dearth of scholars doesn't seem to have held back growth of the industry. "The banks are using these scholars very effectively," said Connolly.

Specialized consultancies such as BMB Islamic and Sharia Capital have sprung up, which do a large part of the groundwork on the products and help banks liaise with the scholars.

But with Islamic finance projected to grow to up to $1 trillion within the next few years, according to McKinsey & Company, an American consultancy, banks are very aware of the importance of bringing in new scholars. "Banks would like to see the number of scholars double within the next year or two," said Connolly.

Rather than training new students in Islamic law, banks are pushing for finance programs targeted at existing Sharia scholars. Connolly will be launching a course in capital markets and treasury products, at the American University in Cairo, specifically targeted at Islamic scholars. The one-week intensive course will be held in Europe, most likely in Switzerland, this summer, with sponsoring banks putting up their own candidates. Connolly is expecting around 25 scholars to take part.

"We will explain complex financial instruments to them and we can leave it up to them to decide whether these are sinful or not," he said.

Aldar signs $600m Islamic loan facility

Aldar Properties, Abu Dhabi's largest developer by market value, said on Monday it had agreed on a Dh2.2 billion ($599.1 million) Islamic lending facility from a group of United Arab Emirates (UAE) banks.

State-controlled Aldar, which is spearheading a construction boom in the UAE's capital city, said the four-year ijara facility would be used for general corporate purposes, without elaborating.

The property firm with about $65 billion worth of projects in the pipeline last year sold $2.53 billion of five-year bonds that comply with an Islamic ban on the payment of interest. It also took out a $2.1 billion four-year loan last June.

Abu Dhabi Commercial Bank, National Bank of Abu Dhabi's Islamic finance unit, Mashreqbank's Islamic finance unit, Dubai Islamic Bank, First Gulf Bank and Noor Islamic Bank will participate in the loan, Aldar said.

Ijara refers to a lease agreement complying with Islam's ban on paying interest, which it equates with usury.

'The success of this transaction, particularly given the challenging global financial environment, is an important endorsement of Aldar's track record,' Aldar chairman Ahmed Ali Al-Sayegh said in the statement.

Investors in the world's biggest oil-exporting region have spurred demand for Islamic finance, helped by a five-fold increase in oil prices since 2002.

But Gulf Arab issuers had put borrowing plans on hold as spreads on Islamic bonds widened amid a global credit crisis spurred by defaults on US subprime mortgages.

Through its holdings in Aldar and other companies, Abu Dhabi, the world's fifth-largest oil exporter, is spending billions of dollars on real estate, tourism and cultural projects to help diversify its economy away from oil.

Qatar Commercial, Qatar Islamic post record Q1 profit

DUBAI - Commercial Bank of Qatar and Qatar Islamic Bank, two of the country's three biggest lenders by market value, posted record profit in the first quarter as the stock market recovered and economy grew.

Commercial Bank, the bigger of the two, posted its second record profit in three quarters after generating more income from fees, commissions and investments.

Net income in the three months to March 31 surged 64 percent to 436.4 million riyals ($119.9 million), or 2.4 riyals per share, from 266.43 million riyals, or 1.46 riyals per share, the bank said.
At Qatar Islamic, profit surged 69 percent to a third consecutive record of 455.5 million riyals ($125.2 million), or 2.48 riyals a share, compared with 270.2 million riyals, or 1.47 riyals per share in the year earlier period.

"The results are good," Bashar Issa, investment analyst at Dlala Brokerage & Investment Holding said of Commercial Bank. "I expect they will be the best performing bank in Qatar this year. Commissions and fees will drive its growth."

Net fees and commissions surged 38.5 percent to 208.26 million riyals, and profit from investments almost five-fold to 38.8 million riyals, Commercial Bank said. Profit from affiliates jumped almost 68 percent to 47 million riyals.

At Qatar Islamic, net income from lending jumped 54 percent to 254.1 million riyals, and net income from investing activities almost doubled to 353.7 million riyals.

EXPANSION

As in other Gulf states, Qatar's main stock index collapsed in 2006 before starting to recover in the second quarter of last year. The index traded as high as 10,730 points in the first quarter, compared with 7,140 points in the year-earlier period, according to Reuters data.

The economy of Qatar, the world's largest exporter of liquefied natural gas, may grow 9.9 percent this year, according to a Reuters survey of economists in December, compared with an average during the last six years of almost 9 percent.

Commercial Bank owns almost 35 percent of National Bank of Oman and in February raised its stake in Sharjah, United Arab Emirates-based United Arab Bank to 38.2 percent.

Gulf Arab banks have boosted their lending businesses in the world's top oil-exporting region, buoyed by a more than fivefold rise in oil prices in the last six years.

Banks have also been expanding through acquisitions as they face greater competition in their home markets. Commercial Bank said last month it planned to continue regional acquisitions.

Shares of Commercial Bank have risen almost 21 percent this year, about in line with the Qatar banking index. Shares of rival Qatar National Bank -- the country's biggest lender -- have climbed almost 26 percent.

Qatar National posted its biggest profit ever in the first quarter on higher revenue from foreign operations after buying into a Jordanian lender last year.

Robust growth for UAE banks

Goldman Sachs, the world’s largest global investment bank, has forecast robust structural momentum in the UAE banking sector.

The global investment bank, which began coverage of nine UAE banks, in its report “Oiling a virtuous banking cycle”, said UAE banks offer relatively low risk in relation to their peers in similar market and earnings growth is expected to remain strong in the medium term.

“Given their profitability and growth outlook, they should trade at a premium to peers,” the report said, which calculated that UAE banks are trading merely in line with banks in new markets.

Banking profits have bounced back strongly in the UAE against a backdrop of high oil prices, robust economic growth and a resilient real estate sector, Goldman said in its research note.

Goldman initiated on five banks in Abu Dhabi and four banks in Dubai with a ‘Buy’ rating on First Gulf Bank and Union National Bank, and a ‘Sell’ rating on Mashreq bank.

Goldman added First Gulf Bank and Union National Bank to its Pan-European ‘Buy List’ and said growth and profitability for the banks would be supported by solid funding trends, growing participation in Islamic finance, rapidly expanding international operations and potential to increase their exposure to Abu Dhabi’s real estate sector.

INFLATIONARY PRESSURE

Growing inflationary pressure could ultimately result in higher operating expenses, deteriorating asset quality and slower retail loan growth, the report warned.

Due to the UAE’s high economic concentration in the oil industry and the real estate sector, any developments resulting in sharp weakening of oil and real estate prices will negatively affect banking activity. The UAE’s strong economic links with Iran could result in slower trade finance growth and higher cost of equity (CoE), should geopolitical tensions in the region emerge, the report said.

“Based on net asset value (NAV), we value UAE banks on 14.5x 2009E earnings. We reached this conclusion by using a 10 per cent cost of equity (CoE) and five per cent long-term growth rate. The 12-month price targets suggest significant upside from current levels for most banks in its UAE coverage universe with the exception of Mashreqbank, which offers only 10 per cent upside.

“We believe that as domestic exchanges mature and economic diversification broadens, lower levels of volatility will justify UAE’s relatively low CoE when compared with most of its developing markets peers, thus providing strong support for UAE bank valuation,” the report said.

Justifying the valuation premium, Goldman said the 12-month NAV-derived price targets indicate that on an average the UAE banks under its coverage offer an attractive 35 per cent potential upside.

“We screen banks for exposure to real estate and Islamic finance, corporate relationships and liquidity. As a result, we added First Gulf Bank and Union National Bank to our ‘Buy List’ and Mashreq bank to our ‘Sell List’,” the report said.

Returns in the UAE banking sector will be closely linked to three key drivers: exposure to real estate, corporate relationships and Islamic finance. Goldman’s valuation methodology captures these aspects through company-specific estimates, which it uses to derive its valuation of the banking business.

“Volatility in global capital markets is mostly to blame for the unjustified convergence in multiples. Indeed, as recently as the beginning of February, UAE banks traded at more than a 20 per cent premium to the same group of banks based on 2009E P/Es.

“We believe that as external factors normalise, investors should find the UAE bank valuations compelling based on stronger fundamentals and attainable growth expectations,” the note said.

REAL ESTATE OPPORTUNITY

Goldman said real estate represented a substantial opportunity for banks in the UAE. Mortgage and housing finance has only been a small part of UAE banks’ participation in the real estate sector. Tamweel and Amlak, two large Islamic mortgage finance companies, control around half of the market. Nonetheless, mortgage penetration is low at around eight per cent of GDP.

“Our forecasts suggest that this could be as high as 15 per cent by 2010, based on demographic changes, expectations of property delivery and mortgage take-up.

“We quantify this at around Dh60bn incremental lending for UAE banks in the next three years, representing a meaningful opportunity for growth.”

Banks are also likely to continue benefiting from the real estate boom directly, as most of them have real estate subsidiaries, own significant investments in land and properties and/or have close links to the government and members of the ruling families. With a total project pipeline hovering at the $400bn level this will continue to have a material impact on earnings.

CAPITAL LEVELS

The report said UAE banks’ capital levels remain adequate but doubts for how long.

Even though profitability in the UAE banking system is in line with the average for banks included in its new markets universe, asset growth has been significantly higher. This has translated into a constant need for additional capital.

UAE banks have recently raised capital through rights issues (eg Abu Dhabi Islamic Bank, Dubai Islamic Bank), subordinated debt (eg National Bank of Abu Dhabi, Mashreqbank), and convertible debt (eg Abu Dhabi Islamic Bank, First Gulf Bank).

The latter has become particularly popular with banks. National Bank of Abu Dhabi, First Gulf Bank and Abu Dhabi Commercial Bank have all recently announced their intention to issue significant amounts of convertible debt this year.

A combination of high market volatility and increasing demand for bonds in the region has made this choice a relatively low cost and practical alternative. Unless profitability increases, dilution risk will continue to be a tangible possibility, especially on the back of significant operating cost pressure, the report warned.

With the exception of Dubai Islamic Bank, capitalisation levels as of year-end 2007 were comfortably above the minimum required level of 10 per cent under UAE standards.

As banks will need to comply with Basel II guidelines in 2008, there has been much speculation about the impact on capitalisation. For instance, after accounting for market and operational risk, Turkish banks registered a drop in total capitalisation in the region of 200 bps last year.

Lack of disclosure in the UAE makes it nearly impossible to calculate the estimated impact with accuracy.

RETAIL LENDING

Goldman finds that retail lending is not in the driving seat yet for the UAE banks.

Excluding lending to high net-worth individuals, consumer loan penetration to be around five per cent of GDP as of the end of 2007. This low level is not surprising given the UAE’s economic structure.

Domestic economic growth is mainly driven by real estate,
construction, trading flows and oil production.

Nonetheless, fast population growth, which is estimated at around eight per cent in 2007, is fuelling demand for retail banking products. Convergence may be an important driver of loan growth in the future, given that banking assets penetration in the UAE is estimated to be around half that of Europe’s today, based on banking assets to GDP
in PPP terms.

However, this process may be delayed by significant differences in demographics with UAE nationals only representing about one-quarter of the population.

Low participation of women in the work force and higher levels of inequality, as measured by wealth distribution when compared with Europe, may also contribute to a slower development of the retail banking sector.

Therefore, in the medium term, corporate banking and lending to high net-worth individuals will continue to claim the lion’s share of asset growth in the sector, highlighting the importance of corporate relationships.

The risk factors

Goldman has cited the following risks, which could lead to lower earnings growth and profitability estimates and higher levels of cost of equity, all of which could negatively affect UAE bank valuations.

ECONOMIC DEPENDENCY ON THE OIL INDUSTRY: Although we expect oil prices to remain supported at high levels, any developments leading to a sharp fall in oil prices would negatively affect earnings growth and valuations.

REAL ESTATE CONCENTRATION: Even though we have a constructive view on the real estate sector, any developments negatively affecting asset prices in this segment would put pressure on earnings growth and valuation multiples.

STRONG TRADE FLOWS WITH IRAN: Strong economic links with Iran could result in a sharp deterioration of trade finance and higher cost of equity, should political tension in the region emerge.

DEPOSIT CONCENTRATION: Due to the structure of the economy and a small retail sector, banks exhibit a high concentration of deposits among a few large accounts.

MARGIN PRESSURE ON THE BACK OF WHOLESALE FUNDING COSTS: Although we expect deposit growth in local currency to remain robust, banks rely mostly on international markets for long-term financing and for debt in foreign currencies. This could put pressure on margins in certain segments.

HIGH INFLATIONARY PRESSURE: Resilient inflationary pressure may ultimately result in asset quality deterioration and operating cost pressure.

ACQUISITION RISK: Exceptionally high levels of liquidity due to high oil prices, increasing domestic competition and a relatively small retail market may encourage banks to look abroad for inorganic growth opportunities which, depending on acquisition multiples, could lead to earnings dilution.

MARGIN PRESSURE FROM INTERNATIONAL COMPETITION: International banks could initiate competitive pressure in certain segments including corporate finance and wealth management.


LACK OF DISCLOSURE: Publicly available financial information is in some cases insufficient to determine deposit concentration, adequate levels of capitalisation and asset quality.

REGULATION: In some aspects like real estate exposure, the regulatory framework has not been reviewed and may not provide banks with guidance to operate in a fast-changing environment.

Islamic finance industry sees high growth but remains fragmented - Moody's

MUMBAI (Thomson Financial) - Despite growth rates at least twice as high as those recorded on global conventional financial markets, the Islamic financial industry remains fraught with diversity and heterogeneity, Moody's Investors Service said.

While Islamic finance is becoming increasingly 'internationalised', it essentially remains a collection of disseminated and still weakly co-ordinated local operations, it said.

The core principles underlying Islamic financial products - although subject to vast consensus as to their formal content - remain differently interpreted and differently weighted in practice, the agency explained.

In addition, the lack of technical and contractual standardisation impedes the capacity of Islamic finance, Moody's noted, adding that initiatives aimed at either introducing Islamic finance or strengthening its position remain country-specific and weakly coordinated.

'Building in prospective views is not an easy task in such a young industry,' the agency said, adding that it nevertheless, expects the Sukuk market to become more complex, more structured, larger, more diversified and more liquid as it evolves over time.

The rating agency also noted that the current excess liquidity prevailing in Gulf economies since the September 2001 terrorist attacks has fuelled both sustained demand for the products supplied by Islamic financial institutions and the booming expansion of the market for Sukuk (Islamic bonds), while contributing to the creation of a very close link between Islamic banks and what remains to date a relatively illiquid compartment of the bond market.

Moody's expects liquidity in the Sukuk market to improve gradually as the variety of Sukuk issuances widens. Not only are volumes expected to exceed $150 billion by the end of the current decade, but the nature, geographic location and credit quality of future issuers are also expected to considerably evolve and diversify, it said.

Efforts needed to integrate Islamic finance with global financial markets, says Doha Bank chief

DOHA-Islamic finance has attained key significance in the regional and international financial markets due to its growing demand on account of its strong and ethical fundamentals, however, to integrate Islamic finance with the global financial markets strong efforts to develop various standards, namely, legal, regulatory, accounting and corporate governance frameworks are required at a faster pace. Such integration would subsequently promote adapting to changes in international standards,R Seetharaman, Group CEO-Doha Bank, said. He was delivering the keynote address on the five-day �The International Islamic Finance Forum� due to conclude tomorrow in Jumeirah Beach Hotel, Dubai.

The conference focuses on ethical financing, micro-financing, review of issues pertaining to Islamic financing, exploring alternative Islamic asset classes, examining new ideas, challenges and opportunities to further develop the expanding Islamic finance industry, learning major strides that have been taking place in Islamic retail finance and understanding the role of regulators, exchanges, and industry organizations from a practitioner�s perspective. The conference is being attended by renowned bankers, analysts, economists, regulators and legislators across the globe.

R. Seetharaman, Group Chief Executive Officer Doha Bank delivered the keynote address for the forum on Monday, on Seamless integration of Islamic Finance with the International Financial Markets.

The forum included sessions on Sukuk growth and development, Takaful growth potentials, Islamic Accounting Standards challenges and implementation, Islamic Treasury management liquidity and management, Shariah standards review, Islamic social responsibility, focus on Islamic alternative asset classes � scope, challenges and opportunities, Islamic Hedge funds, and Islamic retail banking. The conference also featured detailed presentation by Nobel Laureate Professor Muhammad Yunus on micro-financing.

Seetharaman explained the reforms taking place across the globe and highlighted the changes in the economic profile of countries and blocs. The world dynamics being radically redefined with significant events such as the sub-prime market turmoil in the West, strengthening of economies and bilateral trade ties among countries in Middle East and developing Asia were highlighted.

Further, he analyzed the financial leverage that had taken place in the West resulting in growth of hybrid products, like derivatives, the creative accounting practices evolved on account of these hybrid-products. Seetharaman said, though estimated loss on account of these are still debated, only 0.4% of the total bank assets in Middle East and developing Asian region represents holdings in these sub-prime securities.

He elucidated on the principles forming the basis for Islamic Finance that helped in countering situations like sub-prime currently disturbing these financial markets. Thereby, he highlighted the fact that Islamic Finance in all respects is the only solution to the current Global Financial Crisis as well as making it the ethical solution preventing future financial crisis.

Seetharaman continued to highlight the transition of Islamic Finance since 1970, capturing in specific the key developments that have taken place in Islamic Finance from just being operating as Commercial Islamic Banks in 1970s, to Takaful and Islamic Investment Companies in 1980s, to Brokers/dealers in 1990s, to Islamic Investment Banks, Asset Management Companies and E-Commerce in 2000s. He also emphasized that Islamic Finance from being centric to Middle East region in 1970s has spread its wings to Asia Pacific, European and American region by 2000s, thereby rightly fitting itself into the �globalization-era�.

Seetharaman continued highlighting the growth of Islamic finance within the GCC region, Asia Pacific region and the globe as a whole. Further, he drew attention on the multiple models and forms by which Islamic finance operate currently.

Explaining the innovations that had taken place in Islamic Finance, Seetharaman showcased the significant products structuring under Murabaha, Diminishing Musharaka, Islamic credit cards structured under Murabaha and Musawama, Tawarruq to address liquidity needs of the customers through commodity trade, leveraging Ijarah towards financing education, medical treatment etc., Murabaha based back-to-back financing, Commodity Murabaha placements and Takaful.

He also dealt in detail on Sukuks, being the Islamic finance mode for funding �big-ticket� infrastructure projects, structuring of Sukuks and underscored the growth of Islamic finance based Equity funds, real estate funds etc. Dwelling on the opportunities existing for Islamic Finance, Seetharaman said more Islamic products with high liquidity along with product diversification are the need of the hour.

Seetharaman explained the judicious utilization of Islamic finance based sovereign wealth funds. He underlined that these Islamic based sovereign wealth funds helped global financial institutions to tide the current sub-prime crisis to the tune of not less than US Dollars 30 billion. Further, he also said that these sovereign wealth funds have well diversified investment portfolios towards high yielding equities, alternative investments and emerging markets.

When talking on the challenges, Seetharaman said responsive time, high end technological deployment, processing standards, regulatory framework compatibility to Basel II, need for viable and alternate solutions and evolving risk management standards for Islamic Finance are being now addressed on a progressive basis.

Seetharaman also stressed the importance of Green-culture and went on to explain the concept of ECO-nomics. Further, he explained how Islamic Finance principles and Green-culture go hand-in-hand and how natural integration can be brought between Islamic Finance and �Eco-nomics�. He also explained how through Islamic finance significant contributions can be made towards promotion of Green-culture.

Islamic finance sector 'in danger'

The Islamic finance sector is in danger because both banks and Sharia scholars are not providing solutions which are Sharia-based, a senior Islamic finance expert warned on Tuesday.

"I believe that the Islamic finance sector is in danger," said Abdulazeem Abozaid, member of the Sharia department in UAE-based Emirates Islamic Bank, in an exclusive interview with ArabianBusiness.com.

"The banks have just one aim - to maximise profits. They know that there is no real difference between conventional banking and Islamic finance," Abozaid said, speaking at the International Islamic Finance Forum (IIFF) in Dubai.

"As for the Sharia scholars, then they have become corrupted. The ones who the banks seek are those who will be more flexible with their judgments, not those who are more strict."

A paradigm shift from Sharia compliance in the Islamic finance sector to basing banking on Sharia principles is one of the main themes of this year's IIFF.

Abozaid said that it will be consumers themselves who will demand that the Islamic finance sector reforms itself to meet the obligations of being "Islamic".

"We have to change - the industry will be pushed towards changing by the public, not by the banks or by the Sharia scholars," said Abozaid.

"When they see the controversies in the industry, they will demand that the products that are given are genuinely Islamic."

According to Thomson Financial, Islamic finance assets are growing at an annual pace of 20% and are set to hit $2 trillion in 2010 from the current $900 billion.

In a panel discussion about the future of Islamic finance, Rushdie Siddiqui, global director of Dow Jones Islamic Indexes, said he disagreed with the sentiment about doom-and-gloom for the sector.

“We are where we are supposed to be,” said Siddiqui, who set up the first Islamic index on Dow Jones in 1999. “You’ve seen a number of things stick and number of things exit."

In the short term, there were debates which are matter of time and those which will always be a source of controversy, Siddiqui added.

“We will always have a debate on halal [lawful in Islam] and haram [unlawful],” he said. “As for questions of standardisation and Sharia boards, then these are a function of time.”

Siddiqui also outlined what he believed are five “bottlenecks” which the Islamic finance sector has and which need to be resolved.

“We will always talk about Libor- i.e. why isn’t there an Islamic Libor," said Siddiqui, referring to the London Internbank Offered Rate, which refers to interest rates at which banks lend funds between each other on the London money markets.

The second issue outlined was on the human assets side, where women were not being utilised in the Islamic finance industry and which needed to be addressed.

Media communications surrounding the sector has also been inadequate, with both journalists and investors relations departments to blame, Siddiqui said.

“Islamic finance is much bigger than just being against interest in pork [as stated in most media],” Siddiqui said. “We have to better communicate what Islamic finance really is - in this regard, the financial journalism is just not there and investor relations at Islamic banks have frankly failed.”

There was also a need to discern stakeholders in the industry, who were not fully participating or being ignored, he added.

“We need to look at who the stakeholders are - regulators, central banks, Islamic banks and standard-setting boards like AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) - and how they can work together,” he said.

“The final issue is consolidation, which the central banks have to encourage,” said Siddiqui. “If you want to do the bigger deals it is going to have to happen.”

Emirates Islamic Bank and Standard Bank Group arrange $200m syndication for Qatar Energy City project-Qatar

Emirates Islamic Bank, one of the leading Islamic financial institutions of the region, together with other financial powerhouses has entered into a new strategic agreement with Energy City Development Company WLL to finance partially the prestigious Energy City project in Qatar originally sponsored by Gulf Finance House.
The $200m financing facility was jointly underwritten by Emirates Islamic Bank, Standard Bank Plc of South Africa and Khaleeji Commercial Bank of Bahrain.

Other participating banks in the deal are Abu Dhabi Commercial Bank, Bank of London and the Middle East (UK), United Bank Ltd (UAE), Affin Islamic Bank Berhad (Malaysia), Sharjah Islamic Bank and the National Bank of Umm Al Qaiwain. The deal was successfully closed with a high-level signing ceremony held on 8th April 2008 at the Head Office of Emirates Islamic Bank in Dubai, United Arab Emirates.

Speaking on the occasion, Mr. Ebrahim Fayez Alshamshi, CEO of Emirates Islamic Bank, said 'this new partnership involves some of the largest financial names in the region and beyond. The Qatar Energy City is a unique project that symbolizes the vision and futuristic plans of the region in general and Qatar in particular. It is also in line with Emirates Islamic Bank's core value of playing an integral part in the development of the GCC'.

Energy City Qatar is poised to become the region's first integrated business and residential hub dedicated to the hydrocarbon industry, targeting the oil and gas companies that have a presence in Qatar. The Energy City project is a $2.6bn project which was launched in March 2006. It is divided into two phases ECQ1 and ECQ2. ECQ1 will house corporate offices and other business related infrastructure and the second phase ECQ2 would provide residential facilities to these Corporates having base in ECQ1.

‘Islamic finance is key to solving credit crisis’

Doha: Doha Bank group CEO R Seetharaman yesterday said ethics-based Islamic finance is the only solution to the current global financial crisis and potential future fallouts.

Speaking at the International Islamic Finance Forum in Dubai on “Seamless Integration of Islamic Finance with the International Financial Markets, he highlighted the growth of Islamic finance in the GCC and Asia Pacific regions as well as the world as a whole.

Explaining the innovations that had taken place in Islamic finance, Seetharaman showcased the products structuring under Murabaha, diminishing Musharaka, Islamic credit cards structured under Murabaha and Musawama and Tawarruq among others.
He spoke about sukuk, which are the Islamic finance mode for funding “big-ticket” infrastructure projects.

Seetharaman said more Islamic products with high liquidity and product diversification are the need of the hour. Shariah-based sovereign wealth funds helped global financial institutions to tide subprime crisis to the tune of not less than $30bn, he added.
He said these sovereign wealth funds have well diversified investment portfolios towards high yielding equities, alternative investments and emerging markets.

“Islamic Finance has attained key significance in the regional and international financial markets due to its growing demand on account of its strong and ethical fundamentals.

However to integrate Islamic finance with the global financial markets, strong efforts to develop various standards, such as legal, regulatory, accounting and corporate governance frameworks are required at a faster pace.

Such integration will subsequently promote changes in international standards,” he said. The conference focuses on ethical financing, micro-financing, review of issues pertaining to Islamic financing and exploring alternative Islamic asset classes among other issues.

Reem Finance secures approval to start operations

Abu Dhabi-based Reem Finance said on Sunday it has secured approval from the central bank to start operations which will focus on property, corporate and consumer lending.

Reem, with a paid-up capital of 400 million dirhams ($108.9 million), said it also had plans to offer Islamic finance services.

"Our future offerings will include end user mortgages where we may support or complement parallel bank finance or where we are a partner in a property development," said Chief Executive Nicholas Lehmann.
The company plans to open branches across the UAE before the end of 2008, he said.

The bigger picture

The unravelling of the US credit markets is being called the biggest disaster to hit the financial industry since the Great Depression of the 1930s. Costs are now estimated at around $1 trillion, according to the IMF. On Friday, the normally publicity-shy think tank the Financial Stability Forum - a sort of Opus Dei of the financial world - gave a series of recommendations to the G7 nations.

It was hardly earth-shattering stuff. Key nuggets of advice include improved oversight of the behaviour of financial institutions and greater transparency all round. But the FSF advisory was a good opportunity for the people running the world's biggest economies to reassure each other that there is a way out of this mess; that there is light at the end of the tunnel. More than that, the real purpose of the G7 meeting was to restore credibility to the Western financial system as a whole.

These are great days for the anti-capitalist movement. Indeed, for anyone who has ever owned a mortgage or had to take out a student loan, there has been a whiff of schadenfreude in the air as the credit markets have unravelled (provided, of course, you are not the end of a receivership). Only in this atmosphere would the French public hail as a hero Jerome Kerviel, the rogue trader who allegedly brought Societe Generale to its knees.

And Kerviel is only the tip of the iceberg. Despite the best attempts of governments to bolt the barn door, it is already apparent that some very weird things have been lurking in the Augean stable of finance, and not only in the housing and loan markets.

Take black box trading, or statistical arbitrage. Back in the 1970s and 1980s, trading became increasingly automated as it became clear that computers controlling a big fund of stocks did a far better day-to-day job of following and responding to market patterns than human beings. Until the market took a wrong turn, that is, prompting Wall Street's army of clones to all head in the same direction: off a cliff. Of course, black boxes are far more sophisticated these days, but then again so are our globalised markets.

And it seems that the chaos in the US stock markets last August was partly caused by worried traders switching off their auto-pilots en masse, creating some truly bizarre (ie human) trading patterns.

Before we take too many pot-shots at the Western financial system, however, it is worth remembering the old adage about throwing stones in glass houses. Like it or not, most of us live in that system. And there are very few plausible alternatives.

Islamic finance is one. But even Islamic banks cannot entirely escape exposure to the international markets. Yes, many Sharia-compliant finance houses can claim with good reason that they are not exposed to derivatives markets and so are protected from the fall-out from the credit crunch. Their insistence that every transaction has an underlying asset prevented them on getting involved in the market for IOUs.

One upshot of this, however, is that many Islamic banks are now heavily invested in the commercial real estate market. And however much liquidity is sloshing about the Gulf, there is some distinctively western-style speculation going on that market.

So now is not the hour to be complacent, or to indulge in the misfortunes of Western financiers. It is instead time for us all to learn from the numerous cases of Emperors being exposed in public, and to double-check our own suits of clothes. It may seem a bit lacklustre, but the advice from the FSF may the best we have to go on.

Nigeria: Islamic Finance - Bridging the Gap Between Real And Financial Sectors

By Olufemi Sunmonu

At the Islamic Business Law session during the recently concluded conference of the Section on Business Law of the Nigerian Bar Association, participants discussed how to strengthen the national economy through providing Shari'ah compliant business solutions in the arena of Islamic financial services.

When the breakout session on Islamic Business Law was proposed as part of the just concluded NBA-SBL business law conference, it seemed as if the Chair of the Section and his council members were overreaching themselves by planning a sail of uncharted waters. Thursday, March 27 disproved that thesis from every angle.

The attendance and quality of presentation and discourse at the session once again affirmed that the SBL annual conference is the place to be if you are interested in new concepts and articulation of the paradigms that would impact the business and legal landscapes in the years ahead.

The session was chaired by Justice 'Wale Abiru of the High Court of Lagos and had in attendance all the scheduled speakers in the persons of: Mr. Nathif Jama Adam, CEO of First Community Bank Kenya, Mustapha Bintube, CEO of the Jaiz International and Hajara Adeola, CEO of Lotus Capital who deflected from her gruelling schedule of marketing the Lotus Halal Fund to complete the stellar panel.

In his presentation titled Islamic Business Law - Alternative Ethics and Practices for Development, Mr. Nathif Adam set the tone for the day by drawing attention to the following facts: Prophet Mohammed PBUH was first a businessman before his call to prophethood. He was popularly known as Al-Amin (the trustworthy) due to his refined manners and the transparent sincerity with which he conducted trade.

His first wife - Khadijah was his employer before she proposed marriage to him; Documented mutuality, equity, moderation, compassion and ethical dealing in trade and social matters were recurrent features in the Quran and the authenticated sayings and practices of the Prophet; Islamic ethics and business concepts are not new to global commerce - for example the hawala system practiced by Medieval Muslims allowed remote payments for goods purchased in spatial locations. Instead of carrying heavy and vulnerable instruments of exchange like gold, international traders used Sak (a form of paper checks) to make payments. These concepts were taken by to Europe by the invading Crusaders.

With illustrations, he explained the centuries old Islamic heritage of Islamic ethics and values that governed personal, professional and business life. For Mr. Adam, no system of governmental controls, corporate governance rules, however well conceived would influence organisational behaviour unless the people running these organisations imbibed the right moral conscience and ethical content. Segregating ethics from a free market was a call for socio-economic imbalance and hardships.

Emphatically, Mr Adam pointed out that the disconnection of spirituality from the post-modern business world were the primary causes of the corporate and economic meltdowns in the last few decades. He also argued that socio-economic development could not be sustained for long when spirituality and morality were divorced from the material and political.

Next to speak was Hajara Adeola. Her presentation was from the perspective of an investment manager trading based on Islamic ethical considerations. She lamented that as usual, whilst Nigerians were playing from the rear other jurisdictions (all with fewer Muslim populations) had entrenched Islamic Finance as alternative and 'must have' assets class.

She explained that what the Shari'ah prohibitions were as follows: Riba - the prohibition against the charging of interest but it is wider than this - usury or unjust enrichment; Gharar - uncertainty - there must be full disclosure (e.g. certainty as to the subject matter or price of a contract); Maysir - speculation or gambling; Unethical Investment - Islam is intolerant of certain products (e.g. alcohol, armaments & pork) and activities (e.g. gambling, adult entertainment) and any income derived therefrom.

For her, the fulcrum of ethical economic activity is the conduct of trade and enterprise to generate real wealth for the benefit of the community as a whole, with partners sharing profits and losses. Ethical finance is also a safeguard - against the negligence, wilful wrongdoing or breach of contract of customers/ partners.

She illustrated to the audience how a typical Islamic Finance House would sift its products and businesses through a Shari'ah supervisory board made up of independent Islamic scholars with experience in Islamic commercial jurisprudence. The primary function of Shari'ah Committee is to review activities of the Islamic financial institution to ensure compliance with Islamic Shari'ah principles.

Mrs. Adeola enumerated the economic consequences of Islamic finance for an emerging economy such as Nigeria's to include: a more equitable allocation of risk in the finance system - rate of interest is replaced by the rate of profit on equity and profit-sharing finance, by mark-ups on credit-purchase finance and by rental rates on leasing finance; a curb on excessive credit creation and curtailment of speculative trading due the disapproval of margin trading and derivatives; the minimization of bankruptcies as banks, savers and investors jointly absorb losses - because a profit-loss sharing system essentially spreads the net positive or negative outcomes of the business between money capital and human capital.

Furthermore, Islamic finance portends for better integration of the real and financial sectors of the economy - banks and savers, investors and fund owners are all strongly tied together leading to an economic system with a high degree of integrity that can withstand shocks; better business ethics - banks only entertaining economically viable financing requests; transparent transacting with clients, depositors as well as fund-seekers - due to compliance with the avoidance of gharar (ambiguity) resulting in clear contracts for every transaction; greater economic stability - it is well known in traditional finance literature that interest based debt finance is an important source of economic instability when compared with equity finance.

Finally, she was of the opinion that Islamic finance was crucial to the alleviation of poverty - it would ensure equity through income redistribution through the mobilization of idle resources to more dynamic recipients.

Last but not the least to speak was Malam Mustapha Bintube, CEO of Jaiz International Plc, promoters of Jaiz Bank, soon to be Nigeria's first wholly Shari'ah compliant banking institution. Coming from a background of conventional banking, Malam Bintube spoke with the passion of a convert.

His presentation was from the perspective of a banker offering Shari'ah compliant banking services and products albeit in an environment unaccustomed to the offerings.

After taking the audience through the spectrum of Shari'ah compliant techniques and the typical product and service offerings by an Islamic bank, Malam Bintube delved into the background of Jaiz Bank and the reasons why it was slow in taking off.

Primary was the lack of a legal and regulatory framework for the operation of Islamic banks. Prospective technical partners cum investors invariably developed cold feet for the Nigerian market whenever they were confronted with the reality that the regulatory institutions were yet to lay down the operational parameters for the sector.

He explained that due to the peculiarities of Islamic finance, adjustments would have to made to monetary and tax policies to capture the returns from the sector appropriately. Happily, the CBN had taken up the task of sorting out the legal and regulatory matters and hopefully categorical pronouncements would be made in the foreseeable future.

Based on the background of presentations made by other speakers, Malam Bintube was of the opinion that given the weight of the Nigerian economy, our population of 140+Million people of which approximately 50% profess Islam (making 1 in 2 West African Muslims a Nigerian) Nigeria stood at the threshold of becoming a hub for Islamic financial services on the continent and beyond. Furthermore, the opportunity Shari'ah compliant financing mechanisms like the Sukuk offer could be a veritable tool for the settlement of the financial inadequacies clogging the development of infrastructure within the country.

In summation, all present agreed that Nigeria could not play laggard in a sector that was conservatively a $500Billion per annum affair. Lawyers were advised to rise to the challenge of acquiring the competencies to help strengthen the national economy through the whole gamut of providing business solutions that were Shari 'ah compliant particularly in the arena of Islamic financial services.

10,000 British Muslim Millionaires

CAIRO — British Home Secretary Jacqui Smith has lauded the valuable contributions of two million Muslims to every aspect of life in Britain, the Daily Mail reported on Tuesday, April 8.
"There are an estimated 10,000 Muslims millionaires in Britain," she told the Pakistan National Council of the Arts.

"The Muslim community as a whole is estimated to contribute 3.1 billion
pounds per year to the British economy."

The secretary confirmed the figure widely used by Muslim organizations on the Muslim population in Britain.

"…1.6 million declared themselves Muslims in the 2001 census, and that figure may now be as high as 2 million," said Smith.

This means Muslims now make up nearly 3.3 percent of Britain's total population.

The multi-ethnic Muslim minority is mainly from Pakistani, Bengali and Indian backgrounds.

The government's estimate confirms that the number of Muslims has went up by 400,000 since 2001 - adding more than 50,000 each year.

"Islam is one of many faiths which are practiced in UK communities," Secretary Smith told her Pakistani hosts.

"After Christianity, Islam is the largest faith community in the UK."

Valuable

Secretary Smith insisted that Muslims are making valuable contributions to their society, not only economically.

She noted that such contributions have expanded to almost all walks of life in the UK.

"Muslims play a full and active part in British society: in politics, from Parliament to local government, in the armed forces, policing, the professions, the arts and sports, and of course in business," said the home secretary.

"We are proud to live in such a diverse country."

There are two Muslim ministers in the government of Prime Minister Gordon Brown.

Muslim MP Shahid Malik was named last June as a minister at the Department for International Development.

His fellow MP Sadiq Khan was also named as a government assistant responsible for parliamentary affairs.

There are also four Muslim lawmakers and 220 local councilors in Britain.

A recent ICM/Guardian poll showed that 91 percent of British Muslims are "loyal" to Britain and 80 percent wanted to live in and accept Western society.