Category Archives: Malaysia

Malaysian Shariah Governance Framework can be blueprint for industry: Arabnews interview with Dr. M. Elgari

Malaysian Shariah Governance Framework can be blueprint for industry: Arabnews interview with Dr. M. Elgari
by Mushtak Parker| Arab News

At a time when the global Islamic finance industry is debating whether Shariah advisory should be regulated and scholars restricted to advising only a small number of institutions, Malaysia almost in passing adopted on Jan. 1 a new Shariah Governance Framework (SGF) for Islamic financial institutions (IFIs) that supersedes the Guidelines on the Governance of Shariah Committees of IFIs introduced by Bank Negara Malaysia (BNM), the central bank, in 2004.

According to the Malaysian central bank, the primary objective of the SGF is to enhance “the role of the board, the Shariah committee and the management in relation to Shariah matters, including enhancing the relevant key organs having the responsibility to execute the Shariah compliance and research functions aimed at the attainment of a Shariah-based operating environment.”

One prominent international Shariah advisory to the Islamic finance industry, Muhammed Elgari of Saudi Arabia, who sits on several Shariah committees of such organizations as the Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), the Dow Jones Islamic Market Indexes, and a number of banks, agrees that Malaysia’s Shariah Governance Framework for IFIs could become a blueprint for other countries to follow.

In an exclusive interview with the author, Elgari stressed that he can see the need for such a framework, which “most certainly” can be developed into a blueprint, even though he has yet to study the full details of the SGF.

Shariah advisory has been in the news in recent weeks following reports that the AAOIFI is in the process of drafting rules to regulate the shareholdings and the number of supervisory boards individual Shariah advisories can sit on. Market players have long been concerned by the small pool of experienced Shariah advisers serving the Islamic finance industry and that an elite few sit on multiple Shariah advisory boards, a practice which they claim could lead to conflicts of interest and is not consistent with best practice in terms of advisory.

Research by entities such as Funds@Work have added fuel to the fire, although the methodology of the research is not very detailed and transparent. According to Funds@Work, there are 1,141 overall Shariah advisory board positions available in 28 countries. The average board size is 3.33 scholars per board, across the entire universe. Perhaps more importantly, the Top 10 scholars hold 450 out of 1,141 board positions that are available and represent 39.44 percent of the universe. Two Shariah advisories sit on a staggering 85 boards while another on 79 boards.

Some of the top Shariah advisers, not surprisingly, have reportedly spoken out against any efforts to restrict their trade by restricting the number of boards on which they can sit.

“There is no justification in my mind to single out a profession to set rules that are not applied to any other. There is no dispute about the fact that a human being does have a limited capacity or let us say a finite one. But this can’t be measured by the number of boards. The real test is quality of work and ability to meet the expectations of the other party. It should be self evident that if one lacks both, it will not help him to have a limited number of boards,” said Elgari.

Elgari, who also has a doctorate in economics from the prestigious University of California in Berkeley, dismisses any suggestions that Shariah advisories “make too much money” and “they are monopolizing the trade” which he maintains are both lies and naive.

In his experience, none of the banks and organizations he serves as an advisory have expressed any concerns to him about the above issues. In fact, his relationship with his clients remains cordial and commands the utmost professionalism. As such, these supposed concerns are a smokescreen and are really serving the agenda of certain groups who are keen to get a slice of the Shariah advisory business in Islamic finance.

“What is being observed lately is that certain groups want to intermediate between banks and Shariah scholars. In other words they would like to ‘broker’ the Shariah advisory and they believe, correctly, that their negotiating power with the banks is much stronger than individual scholars. Hence they can extract much more from banks. They tell us why should you be concerned, you will not suffer any reduced income (negating the very argument that we make too much). But in principle we do not see it fitting to create an exchange where we sell our services to someone to sell them to a third party at a higher price,” he said.

Elgari, who is one of a very few number of foreign Shariah advisories registered with the Securities Commission Malaysia to give Shariah advisory to the Islamic finance industry in the south east Asian country, maintains that nobody is more concerned about bringing up the second generation of Shariah scholars in the global Islamic finance industry than the current scholars. As such, it is wrong to think that they are threatened by the thought of restrictions and regulation.

“On the contrary our nightmare is for Shariah boards to disappear when we cease to exist. We always request institutions to include in their Shariah board a younger scholar so that the next generation is brought up by the current generation. Recently, we met with the officials from the Waqf Fund (set up by Central Bank of Bahrain) to try to design a program that can be adopted by an academic institution for this purpose,” he said.

Some observers, including regulators, invoke the “conflict of interest” argument to support their desire to restrict the number of boards Shariah scholars can sit on. Elgari in fact believes this is a fair concern and in several instances he has emphasized that Shariah board members should be conscious of it and try to avoid it. He confirms that in several instances he was offered shares in companies he was giving Shariah advisory but he has always declined because he was always aware of a potential conflict of interest. He suggests greater transparency by fellow Shariah advisories, especially in showing their awareness of the issue of potential conflict of interest.

For Elgari, who has also been an economics don at King Abdul Aziz University in Jeddah for many years, the contemporary Islamic finance industry has witnessed over the last three decades the emergence the birth of a new discipline, which combines Shariah, economics and law. “Unless universities recognize this as a new discipline, not much will be done by them. If these professors themselves can’t do it, how can they teach it? The most effective way is apprenticeship, or a program for study designed by the current Shariah scholars,” he said.

The fact remains that the Shariah governance process in Islamic finance has been steadily evolving and gaining maturity. Last year, for instance, Elgari was the first prominent scholar to emphatically call for a scientific approach to Shariah compliance. This follows a similar call by another prominent Shariah scholar, Sheikh Esam Ishaq of Bahrain, that Shariah advisories serving the Islamic finance industry should be regulated.

Elgari then called on fellow Shariah advisories to adopt a scientific methodology in reaching their deliberations on Islamic finance. “To be respected,” said Elgari, “Shariah scholars should follow scientific methods to reach their conclusions. We have seen many mistakes where declarations have been issued. Only the correct resolutions will prevail. Shariah is not a group of infallible people. It is a science. It requires methodology, and resolutions require peer review and market consultation.”

He is also a big supporter of the codification of Fiqh Al-Muamalat, which could contribute immensely to clarifying the rubrics and the contentious issues relating to products and services in the nascent Islamic finance industry. Similarly, he believes that greater transparency in the Shariah governance process; more professional articulation of the resolutions and statements; and prior debate and consultation between scholars and other stakeholders in the industry, could go a long way in mitigating the misconceptions and confusion that has arisen as a result of some recent Shariah rulings.

Source: http://arabnews.com/economy/islamicfinance/article236465.ece

Islamic U.S. Mutual Funds Flocking to Malaysia Seeking Returns

Islamic U.S. Mutual Funds Flocking to Malaysia Seeking Returns

petronas-towers

Malaysia is attracting Islamic investment funds from the U.S. seeking higher returns in Asia as growth in developed economies slows.

“Emerging markets is where we see global growth going for the next couple of decades and the source for a lot better opportunities,” Bryce Fegley, chief investment officer at Saturna Sdn., the Malaysian unit of Saturna Capital LLC, the biggest Shariah-compliant stock fund in the U.S., said in an interview on Aug. 10. Saturna’s expertise in Islamic finance “steered us to Kuala Lumpur as opposed to Singapore, Hong Kong or other emerging markets,” he said.

Saturna, the Bellingham, Washington-based company that oversees $2.7 billion of assets, set up Saturna Sdn. in March and obtained an Islamic finance management license in May, Fegley said. Franklin Templeton GSC Asset Management Sdn. got approval to offer services that comply with religious principles in January, according to the Malaysian Securities Commission’s website.

The 14 licenses issued by the Malaysian government allowing international companies to form Islamic fund-management businesses give tax exemptions until 2016. Foreign-ownership rules have also been eased in the global financial hub for services that meet Shariah guidelines.

Growth in developing economies in Asia will quicken to 9.2 percent this year, the International Monetary Fund said on July 7, three times faster than advanced countries. The U.S. economy may expand 3.3 percent after shrinking 2.4 in 2009, according to the Washington-based lender.

Nomura, Aberdeen

Islamic law bars funds from investing in industries such as gambling, alcohol and banking services that don’t adhere to the religion’s ban on interest. Companies with debt exceeding 33 percent of equity or accounts receivable of more than 45 percent of total assets are deemed as non-Shariah compliant, said Fegley.

The Dow Jones Islamic Market World Index of stocks, which has a market capitalization of $12 trillion, has climbed 10 percent in the past 12 months, while the Dow Jones Global Index gained 9.3 percent.

Asia’s accelerating growth is also encouraging HSBC Holdings Plc and Standard Chartered Plc to set up Islamic units in Malaysia, the world’s biggest market for sukuk and home to more than 16 million Muslims. Funds that have obtained Islamic asset-management licenses in Malaysia include Nomura Islamic Asset Management Sdn., OSK-UOB Islamic Fund Management, Reliance Asset Management (Malaysia) Sdn., and Aberdeen Asset Management Plc, according to data on the Securities Commission’s website.

‘Comparative Advantage’

Overseas investors can own as much as 70 percent of Islamic investment banks and sellers of takaful, or insurance that complies with religious tenets, up from 49 percent.

“Malaysia has a comparative advantage because the Islamic finance infrastructure was in place much earlier than other countries,” said Scott Lim, chief executive officer of Kuala Lumpur-based MIDF Amanah Asset Management Bhd., which oversees the equivalent of $670 million including Shariah-compliant equity and debt funds. “Malaysia has a big Muslim population looking for Islamic instruments compared to Hong Kong and Singapore, where there is no such demand,” he said in an interview from Kuala Lumpur on Aug. 13.

Malaysia’s $93 billion of Shariah assets account for 19.6 percent of the country’s total banking industry, according to Bank Negara Malaysia’s website. The nation has 279 billion ringgit ($87 billion) of outstanding Islamic debt, according to data compiled by Bloomberg.

Sukuk Issuance

Global sales of sukuk fell 28 percent to $7.9 billion so far this year, according to data compiled by Bloomberg. Asian issuers sold $5.5 billion compared with $8.1 billion in the same period a year earlier.

The government began a 230 billion ringgit, five-year development plan on June 10, which may revive offerings, according to Malaysian rating company RAM Holdings Bhd.

The yield on Malaysia’s 3.928 percent note due June 2015 rose five basis points to 2.84 percent today and reached 2.79 percent on Aug. 13, the lowest level since the securities were sold in May, according to prices from Royal Bank of Scotland Group Plc.

The difference between the average yield for emerging- market sukuk and the London interbank offered rate narrowed three basis points on Aug. 13 to 398, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. The spread has narrowed 69 basis points this year.

Shariah-compliant debt returned 9 percent this year, according to the HSBC/NASDAQ Dubai US Dollar Index, while debt in developing markets gained 12 percent, JPMorgan Chase & Co.’sEMBI Global Diversified Index shows.

Diversification Process

Saturna Capital started the Amana Developing World Fund in the U.S. in September to invest in global emerging-market Islamic assets. The company bought Malaysia’s Alpha Asset Management in March and changed the name to Saturna Sdn.

Saturna Capital manages Islamic funds including the Amana Income Fund, Amana Growth Fund and the Amana Developing World Fund. Amana Income, which invests in dividend-paying corporations globally, gained 5.6 percent annually over the past decade, compared with the 0.8 percent drop in the Standard & Poor’s 500 Index over the same period, according to the company’s website.

“We’re all seeing that in the developed world there are major structural issues, demographically, with politics and with macro-economic factors that are really causing those economies to stagnate,” Saturna’s Fegley said. “It’s partly a diversification of our business interest” launching into the Malaysian market, he said.

Source

IslamicAdvisory.com: Dr. Mahathir Mohamad speaks on Islamic finance

IslamicAdvisory.com: Dr. Mahathir Mohamad speaks on Islamic finance

IslamicAdvisory.com interviews Dr. Mahathir Mohamad as part of their “Meet the Market” podcasts and discuss the global financial crisis, capitalism, and the role of Islamic finance.

Access the podcast here.

Three-tier banking model proposed for Islamic banking in Malaysia

Three-tier banking model proposed for Islamic banking in Malaysia

three steps

A three-tier banking system is needed in Islamic banking to further strengthen the industry, an economist suggested.

"The first tier is to be like the conventional bank, where people put their money in the bank, and where the bank gives money to meet their type of transactions.

"The second tier is like a Mudarabah type of institution or Mudarabah company, where people put their money and combine it and try and develop different things. This model is very much applicable for SME financing, where a person has the idea but does not have the money, (while) and another person has the capital. They can combine using the Islamic principle.

"The third tier is like the venture capital or Musyarakah, where big infrastructure projects financing (is involved)," Professor Dr. M. Kabir Hassan of New Orleans University said.

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Development of Islamic finance critical to Malaysia’s success: PM Abdullah Ahmad Badawi

Development of Islamic finance critical to Malaysia’s success: PM Abdullah Ahmad Badawi

petronas-towers

At the opening dinner of the Bank Negara’s 50th anniversary conference in Kuala Lumpur in February, Malaysian prime minister Datuk Seri Abdullah Ahmad Badawi told the audience of visiting central bankers and economists that the development of Islamic finance will be critical to the country’s future success.

The prime minister stressed the importance of Islamic finance as an alternative channel for intermediation and its competitiveness in terms of products and services. He was also keen to point out that Malaysia intends to leverage its experience in the sector as it continues to build the country as a regional – or even global – hub.

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Bringing Islamic finance back to its roots in a regulated manner

Bringing Islamic finance back to its roots in a regulated manner

 

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Islamic Finance is in vogue. Various financial centres around the world are vying with each other to assume the mantle of pre-eminence in Islamic finance, challenging upstarts with a wider variety of Islamic finance and product “innovation”

In the Gulf, Bahrain has tried to develop such a niche, while Malaysia has been a pioneer in the Far East. But it is London, with five licensed Islamic finance institutions, that has been making the running, and the finance institutions located in that city have been vigorous in lobbying the UK government to treat Islamic finance products on a par with non-Islamic offerings.

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U.S And Malaysian Banks Can Join Forces In Islamic Financial Services

U.S And Malaysian Banks Can Join Forces In Islamic Financial Services

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.