Category Archives: Growth

French Banks Plan to Develop Islamic Finance

French banks plan to develop Islamic finance

France plans to develop Islamic finance and attract investment from the Gulf to its economy, State Secretary for Foreign Trade Pierre Lellouche said.

“We’ve had some delay, compared to the British particularly,” Lellouche said in an interview inAbu Dhabi today. “The legal mechanisms are getting in place and French banks are very capable and they are at it.”

The first Islamic bond from France may be sold in early 2011 after the government introduces guidelines for sukuk offerings, Thierry Dissaux, chief executive officer of the French Deposit Guarantee Fund said in an interview Dec. 15.

France is seeking to increase investment in its high-tech industry from Gulf states includingKuwait, Qatar and the United Arab Emirates, and aims to boost exports to the region by coordinating them with small- and medium-sized enterprises, Lellouche said.

“We should better organize the association between the large groups and small and medium enterprises” when seeking contracts, he said. “We are less efficient than the Germans who hunt in groups, and the Italians too; they are more cohesive.”

The total wealth of the Middle East’s more than 400,000 millionaires grew 5.1 percent in 2009 to $1.5 trillion, Cap Gemini SA and Bank of America Corp. Merrill Lynch said in June 2010.


To contact the reporter on this story: Maher Chmaytelli in Dubai

To contact the editor responsible for this story: Claudia Maedler at

Sukuk issuance to reach pre-crisis level by end 2011: Daud Vicary Abdullah

Sukuk issuance to reach pre-crisis level by end 2011: Daud Vicary Abdullah

Global issuance of Islamic bonds will take another year to reach pre-crisis levels as new markets in Europe and Asia have yet to make up for the slump in the Gulf, said Deloitte’s head of Islamic Finance on Tuesday.

Underwritten issuance of Islamic bonds, or sukuk, reached $14.3 billion last year, according to Thomson Reuters estimates, well below the $20-30 billion in annual issuance before the global financial crisis.

Malaysia, the industry’s biggest market, held up well in 2010 but issuance in the Gulf Arab region has been hurt by some sukuk defaults and investor confidence has yet to return.

“I think it’s going to be another year or so before (sukuk issuance) gets back to pre-crisis levels,” said Daud Vicary Abdullah, head of Islamic finance at advisory firm Deloitte.

He said that new markets will help a come back in sukuk issuance, as governments in Brazil, Australia, Western Europe and Central Asia are considering issuing sukuk to tap the Muslim wealth pool and nurture their own Islamic financial industries.

He said that American re-insurers are considering entering Islamic re-insurance business, or re-takaful, which would also increase demand for Islamic bonds.

The global financial crisis popped a Gulf real estate bubble in 2008, severely hitting regional investors and pushing the region’s business hub Dubai to the brink of default.

Investors are still holding back their funds as the full extent of the damage took long to surface due to a lack of strong and transparent regulations in the region.

“This market is always much more sensitive to economic ups and downs…there is still some ground to make up and people are sort of nervous about what they have seen in Dubai,” said Abdullah.

The Gulf saw a modest revival in sukuk issuances in the last quarter of 2010 but market experts fear it could be a fragile recovery with investors fearful of any more bad news. [ID:nLDE69618P]

Sukuk issuance has also been hurt by a debate about the compliance of some of its structures with Islamic law. Sukuk are structured around underlying assets, from which returns to bondholders are derived.

Estimates of sukuk issuance can vary significantly depending on the methodology applied.

Experts polled by Reuters in October estimated that sukuk issuance will likely be less than $25 billion as Gulf debt restructurings and state deficit constraints dampen borrowing.


Islamic banking thriving

Islamic banking thriving

Islamic banking has emerged as one of the most rapidly expanding sectors of the global financial industry, with expectations that it will play a growing role in the years to come.

Banks and financial institutions that comply with Islamic law (sharia) showed impressive resilience during the financial crisis that hit the world economy at the end of 2008, knocking out dozens of conventional banks, particularly in the United States.

This encouraged even countries with Muslim minorities, such as Britain, Germany, the US and France, to add Islamic banks to their conventional banking industry.

The size of the global Islamic banking industry is believed to have grown from about 820 billion dollars at the end of 2008 to more than 1 trillion dollars in 2010.

Latest studies indicate that the steadily growing Islamic banking system could reach 1.5 trillion dollars in 2012 and 3

trillion dollars by 2015.

“I believe Islamic banks stand to gain more ground in future, thanks to the confidence they have come to enjoy during the financial crisis,” Jordanian economist Jawad Anani told the German Press Agency dpa.

He attributed their recent successes to the abundant liquidity that they managed to secure in spite of the financial meltdown.

“The successful performance of Islamic banks during the world crisis enabled them to attract funds from foreign conventional banks, which hurried to open windows for Islamic finance and bonds,” said Anani, who runs an economic consultancy bureau in Amman.

Islamic banks play a similar role to those performed by conventional banks. But there are fundamental differences.

The underlying concept in Islamic banking and finance is justice, which is accomplished through the sharing of risk. Stakeholders are under obligation to share profits and losses and to refrain from dealing with exorbitant interest rates, which Islam consider tantamount to usury.

The Islamic financial system emerged more or less unscathed from the global financial crisis, mainly due to its strict prohibition of investments in risky instruments like toxic assets and derivatives, which have adversely affected their conventional competitors.

“The Islamic financial system has proved to be the least affected by the fallout of the global crisis, thanks to its strict management of financial instruments, its focus on financing real operations and keeping away from speculation,” Kholoud Saqqaf, deputy governor of the Central Bank of Jordan said in early December during a conference in Jordan to assess the success of the Islamic financial system.

Not only rich countries were impressed by the performance of the Islamic finance. Cash-stripped states have also shown interest in the fledgling system.

Jordanian Finance Minister Mohammad Abu Hammour said recently that his government was mulling the issuance of hundreds of millions of dollar-denominated sukuk Islamic bonds “as a new window of borrowing on the basis of the Islamic sharia.”

According to a recent study by the International Monetary Fund (IMF), Islamic banks “contributed to financial and economic stability during the crisis, given that their credit and asset growth was at least twice as high as that of conventional banks”.

The IMF attributed this growth to the Islamic banks’ “higher solvency, and to the fact that many Islamic banks lent a larger part of their portfolio to the consumer sector, which was less affected by the crisis than other sectors in the countries studied.”

Despite the strong growth displayed by Islamic banks in the first year of the crisis, they suffered a significant decline in profitability in 2009, mainly due to what economists describe as a weakness in risk management.

“I believe one of the challenges facing Islamic banks is innovating methods for developing the management of risks that face the application of Islamic law to the financial industry,” Anani said.

“If Islamic banks fail to develop such mechanisms, I think they will continue to attract deposits but will be unable to lure clients and investments, particularly when global interest rates go up with an economic upturn,” he added.

Anani, a previous cabinet minister and economic advisor to the Jordanian government, detected another shortcoming for the Islamic financial industry – a failure by Islamic banks to improve understanding with central banks regarding certain issues.

“A problem still exists with the insistence of central banks to treat Islamic banks as ordinary commercial banks that should abide by their monetary policy rules,” he said.


First French Islamic bond seen early 2011

First French Islamic bond seen early 2011


The first Islamic bond issue out of France could happen early next year, the chief executive of the French Deposits Guarantee Fund said on Wednesday.

Thierry Dissaux, also a former special adviser for financial affairs at the French Treasury, said at a conference in Dubai: "At the beginning of 2011 we could see the first sukuk under French law."

Dissaux said guidelines for certain financing structures including sukuk, ijara and murabaha were approved in August by the tax regulators. Approvals for other structures, such as the investment agency, wakala, and limited partnerships known as mudaraba should be passed in the coming weeks, Dissaux added.

He said once the legal framework was approved, it would open the door for corporates to issue sukuk in France.

Declining to be more specific, Dissaux said: "These issuers could be corporations already active here in the GCC."

Dissaux said sharia scholars at the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), the industry’s regulatory body, had approved the French sukuk issuance model in November, with minor adjustments.

France and Britain are keen to take a lead on sukuk issuance in Europe, although appetite on the continent has been dampened in the wake of wranglings over debt in Dubai.

Dissaux said while Britain had been far ahead, the gap had closed in recent months.


Brunei eager to move forward in Islamic finance

Brunei eager to move forward in Islamic finance


Brunei’s involvement in Islamic finance came about by way of the establishment of Tabung Amanah Islam in 1991. Tabung Amanah, the country’s first Islamic trust fund, was established to help local Muslims undertake their holy pilgrimage. Not long after, it was followed by the county’s first Islamic bank, the Islamic Bank of Brunei (IBB).

Currently, Bank Islam Brunei Darussalam (BIBD), a merger between IBB and the Islamic Development Bank of Brunei, is the largest and only Islamic banking provider in Brunei with assets totaling BND4.98 billion (US$3.81 billion).

Despite a large Muslim majority, (about 67% of the population), this oil-rich nation did not see much development in the area of Islamic finance until 2006 when the ministry of finance launched the Banking Order and Insurance Order, established the Brunei International Financial Centre, launched its first Sukuk and introduced the Shariah Financial Supervisory Board on a national level. This was seen as a much needed boost to open the Islamic banking industry in Brunei for its locally based companies and for foreign Islamic banks to plant their operations in the country. For the Takaful industry, the Takaful Order 2008 provided regulation to the industry that helped create a level playing field with the conventional insurance companies.
Similarly, tax incentives play an important role in creating a level playing field for Brunei’s Islamic finance industry. Previously, the taxation imposed on Islamic banking was similar to its conventional peer. This caused Islamic financial institutions to once be subjected to a 30% corporate tax and an additional 2.5% zakat contribution. According to Sri Anne Masri of ETHICA Consultants, the tax incentive now allows Islamic financial institutions (IFIs) in the country to deduct the 2.5% zakat contribution from the required 30% corporate tax while receiving an exemption from stamp duty as well. Javed Ahmad, BIBD’s acting managing director, said that there were concerted efforts by the government to make Islamic banking attractive in Brunei.

Brunei does not have a central bank and as such, all formulation of policies and supervision of financial services are regulated by the ministry of finance. The country’s Shariah Financial Supervisory Board approves all Islamic financial products and services offered at national level.

The bulk of the Islamic banking assets are from the institutional sector, which in turn derives its assets from the retail market. Financial institutions in the Sultanate are known for their excess liquidity. According to Sri Anne, statistics provided by the ministry of finance’s financial institutions division (FID) revealed that the loan-to-deposits ratio (LDR) has been quite low compared to that of international standards. “At the moment the IFIs in Brunei are still in the developmental stage of growing their investment banking sector. Hopefully, infrastructure development projects in Brunei will assist in the growth of the investment sector as it calls for an active participation locally and regionally. This is a growing challenge for IFIs as Brunei is a small player in the international arena,” she said.
On the surface, there seems to be a lack of innovative products being offered in Brunei’s Islamic finance industry. Javed explained that product development was determined by market demand. On a retail level, the market demand of Brunei differed from many others in the region because there is no personal income tax or capital gains tax. He believes product innovation takes place as a result of tax requirement. At the corporate level, he said the bulk of companies – mainly oil and gas – did not generally borrow, resulting in very little requirement for debt capital.

“So it is not that we are complacent but it depends entirely on customers’ needs. They have not been very demanding due to the no-income tax regime, while large industries are very high cash generators; and should the need for expansion arise, it would normally be obtained through internally generated funds,” he said. However, he explained, as privatization of public sector services such as telecommunication, electricity and water in Brunei occur, so too will the opportunities of borrowings from banks.

On the other hand, Sri Anne offers an alternative insight on what she terms as “the uniqueness” of the financial scene in the country. She explained that the government is focused on developing and shaping its society into the culture of saving and being debt-free, a truly Islamic concept. Among the government’s initiatives is the reduction of consumer lending by 30% and the curb on credit card spending.

Sri Anne believes that before innovative products — retail or institutional — can be introduced, Bruneians have to be educated on how to save and invest wisely while Islamic banks would have to deliver products that are truly Islamic. She feels that these symbiotic elements need to exist to make Islamic finance successful and meaningful. “I believe Brunei cannot compete with the likes of Malaysia or Singapore as an Islamic financial center. However, Brunei can create its own unique brand for its own people (market) then export the model to other Islamic centers globally,” she said.

Sukuk in Brunei continues to be dominated by sovereign issuances, with the first coming in 2006 based on the Ijarah concept. To date, there has been only one corporate Sukuk issuance, Brunei LNG’s BND100 million (US$71.7 million) Ijarah issue.

According to Sri Anne, Sukuk issuance has been solely driven by the government to lower excess liquidity in the market although there are no regulatory restrictions on corporate Sukuk issuance. “Maybe in the near future, with the upcoming infrastructure and development of Brunei and a good understanding of the process from corporate players for alternative financing, increased market players and participation from other than the few financial institutions, I am sure there are endless possibilities given the right ingredients,” she said.

The progress of Brunei’s Islamic finance industry is due to its want of size, noted several of the country’s academicians. There is a need to enhance Islamic banks and Takaful companies in terms of product offering and innovation, corporate governance and human capital. Local analysts say an overseas expansion would be the appropriate next step for this oil-rich nation. When asked, Javed did not dismiss this proposal but said BIBD would have to first strengthen its base by investing in its human capital and technology, something that has been ongoing for the bank over the last two years. Javed said: “We do not want to rely on manual processes so a lot of the investment we are making is really for state-of-the-art technology that will truly transform the bank in terms of how we serve our customers.”

He added that despite having several opportunities come its way, there was nothing, the bank felt, worth venturing into. Javed said the criterion for expansion was having investments that would be independently managed due to BIBD’s lack of management capacity.

According to Brunei’s ministry of finance, Islamic banking assets in 2009 stood at about BND6.3 billion (US$4.81 billion), or 40% of the total banking sector growth in Brunei. This percentage, which rose from 33.9% in 2008, is expected to grow to 55%–60% over the next three to five years. If positive statistics are of any indication to the sign of the times, then Brunei Darussalam is slowly but surely setting the stage for exponential growth in Islamic finance.