Category Archives: Innovations and developments

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

BankIslami Pakistan acquires Citibank’s house financing portfolio

BankIslami Pakistan acquires Citibank’s house financing portfolio

BankIslami has signed a first-of-its-kind deal to acquire Citibank Pakistan’s house financing portfolio amounting to Rs953 million. This is the first time an Islamic bank has acquired mortgage assets of a conventional bank.

“This acquisition will serve as a milestone for the Islamic banking industry in Pakistan and elsewhere,” said BankIslami CEO Hasan Bilgrami. He added that the acquisition of the housing portfolio is in line with BankIslami’s growth strategy in this segment.

Citibank’s house finance customers will now be required to switch to the Islamic mode of financing. “The transition for customers to BankIslami will be made easy and convenient,” said the CEO. Despite a general slowdown in the banking industry, BankIslami has expanded to 100 branches in less than three years.

A compound annual growth rate of 72 per cent over the last two years has made it one of the fastest growing banks in the country.

Source: http://tribune.com.pk/story/95697/bankislami-acquires-citibanks-house-financing-portfolio/

Bombay Stock Exchange launches Islamic index

Bombay Stock Exchange launches Islamic index

Stock Exchange

The Bombay Stock Exchange (BSE) in the Indian city of Mumbai has launched a new index which consists of companies that meet the Islamic legal code.

The Tasis Shariah 50 was formed using guidelines from an Indian Shariah advisory board.

Studies have found that most Muslims in India are excluded from the country’s formal financial sector.

That is because Islamic law does not allow investment in companies that sell goods like alcohol, tobacco or weapons.

Neither does it allow investment in companies that derive significant profit from interest.

The index is intended to be the basis for other Shariah-compliant financial products.

‘Come and invest’

BSE Managing Director and Chief Executive Madhu Kannan said that the new index would attract Islamic and other "socially responsible" investors both in India and overseas.

"This index will create increased awareness of financial investments among the masses and help enhance financial inclusion," he said in a statement.

Companies included in the index have been screened by Tasis, which is based in Mumbai and whose board members include Islamic scholars and legal experts.

"Before anyone can attract investors, we need to put in place institutional infrastructure, and having an index to track Shariah-compliant stock is important," MH Khatkhatay, senior adviser to Tasis, told the Reuters news agency.

"If you have an ETF (exchange traded fund), for example, you need an index, or if overseas investors want to invest in Shariah index in India, this is an invitation for people to come and invest."

Tasis said the index would "unlock the potential for Sharia investments in India".

"The BSE has the largest number of listed Sharia-compliant stocks in the world," said Shariq Nisar, director of research and operations at Tasis.

"All Muslim countries of the Middle East and Pakistan put together do not have as many listed Sharia-compliant stocks as are available on the BSE."

Stocks will be reviewed every month to ensure they continue to meet the criteria – any which do not will be removed, officials say.

Source: http://www.bbc.co.uk/news/world-south-asia-12083190

Basel III in support of the Islamic banking principal

Basel III in support of the Islamic banking principal

By Dr. Aly Khorshid

basel iii

The Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced a substantial strengthening of existing capital requirements and fully endorsed the agreements it reached on 26 July 2010. These capital reforms, together with the introduction of a global liquidity standard, deliver on the core of the global financial reform agenda and will be presented to the Seoul G20 Leaders summit in November.

The Committee’s package of reforms will increase the minimum common equity requirement from 2% to 4.5%. In addition, banks will be required to hold a capital conservation buffer of 2.5% to withstand future periods of stress bringing the total common equity requirements to 7%. This reinforces the stronger definition of capital agreed by Governors and Heads of Supervision in July and the higher capital requirements for trading, derivative, and securitization activities to be introduced at the end of 2011.

Islamic banks are among the best capitalized banks in the world, and historically comply with inflexible standards of capitalization, Islamic Bank for capital requirements means that local banks already exceed norms set by the Bank for International Settlements (BIS) as part of the Basel III accord.

Islamic banks already have stricter capital requirements than what are proposed in Basel III. With the Islamic banks being amongst the best capitalized on a global scale, they are on the safe side compared to their European or US counterparts, Tier 1 and total capital requirements currently stand at 8 per cent and 12 per cent, respectively, which are already higher than the target 2019 ratios set by Basel III.

The BIS reported this week that it has reached an agreement to increase key capital ratios for banks. The minimum requirement for common equity, the highest form of loss absorbing capital, will be raised from the current 2 to 4.5 per cent after the application of stricter adjustments. This will be phased in by January 1, 2015. The total Tier 1 capital requirement, which includes common equity and other qualifying financial instruments based on stricter criteria, will increase from 4 to 6 per cent over the same period. There will also be a ‘buffer requirement’ of 2.5 per cent that can be drawn down to the 4.5 per cent minimum requirement during times of stress. This effectively will raise common equity requirements to 7 per cent.

If a bank draws below the 7 per cent common equity requirement, including the buffer, distribution of earnings must be curtailed until the 7 per cent level is recovered. These restrictions would apply to dividends and executive compensation, including bonuses.

These changes are intended to reinforce banks’ capacity to absorb future potential losses. The transition period for the world’s banks to comply with these rules has been extended to January 2019 vs. the end-2012 deadline set by the regulators last year. This news was positively welcomed by the investor community as evident through the climb in banks share prices in Europe and Asia.

President of the European Central Bank and Chairman of the Group of Governors and Heads of Supervision, said that "the agreements reached today are a fundamental strengthening of global capital standards." He added that "their contribution to long term financial stability and growth will be substantial.
The transition arrangements will enable banks to meet the new standards while supporting the economic recovery. The Chairman of the Basel Committee on Banking Supervision and President of the Netherlands Bank, added that "the combination of a much stronger definition of capital, higher minimum requirements and the introduction of new capital buffers will ensure that banks are better able to withstand periods of economic and financial stress, therefore supporting economic growth."

Islamic Banks comply with Basel III
Islamic banks are among the best capitalized in the world, and historically stringent standards set , Islamic Bank for capital requirements means that local banks already surpass norms set by the Bank for International Settlements (BIS) as part of the Basel III accord, which has a 2019 deadline.

Islamic Bank already has stricter capital requirements than what is proposed in Basel III.

With the Islamic banks being amongst the best capitalized on a global scale, they are on the safe side compared to their European or US counterparts, Tier 1 and total capital requirements currently stand at 8 per cent and 12 per cent, respectively, which are already higher than the target 2019 ratios set by Basel III (of 6 per cent and 8 per cent, respectively)."

The BIS reported this week that it has reached an agreement to increase key capital ratios for banks. The minimum requirement for common equity, the highest form of loss absorbing capital, will be raised from the current 2 to 4.5 per cent after the application of stricter adjustments.

This will be phased in by January 1, 2015. The total Tier 1 capital requirement, which includes common equity and other qualifying financial instruments based on stricter criteria, will increase from 4 to 6 per cent over the same period. There will also be a ‘buffer requirement’ of 2.5 per cent that can be drawn down to the 4.5 per cent minimum requirement during times of stress. This effectively will raise common equity requirements to 7 per cent.

If a bank draws below the 7 per cent common equity requirement, including the buffer, distribution of earnings must be curtailed until the 7 per cent level is recovered. These restrictions would apply to dividends and executive compensation, including bonuses.

These changes are intended to reinforce banks’ capacity to absorb future potential losses. The transition period for the world’s banks to comply with these rules has been extended to January 2019 vs. the end-2012 deadline set by the regulators last year. This news was positively welcomed by the investor community as evident through the climb in banks share prices in Europe and Asia.

It appears that while actual implementation won’t start until 2013, the accords will not be fully implemented until 2018.

At this point we believe it is too early to assess the full consequences of these new regulation changes especially that Islamic banks have been complying with Basel II.

"However, until further analysis is made, we believe local banks could elect to conserve capital through constrained dividend payout," they said.

Source: http://www.english.globalarabnetwork.com/201012228432/Finance/basel-iii-in-support-of-the-islamic-banking-principal.html

Dubai’s first Shariah compliant REIT launched

Dubai’s first Shariah compliant REIT launched

cottage

Dubai Islamic Bank (DIB) launched the emirate’s first Shariah-compliant real estate investment trust to aid in the recovery of the country’s battered real estate sector, top executives said on Tuesday.

Emirates REIT, a joint venture between DIB and French property firm Eiffel Management, looks to attract Shariah-compliant property such as office buildings, warehouses, schools and car parks and convert the rental income into dividends for investors, said Adnan Chilwan, chief of retail banking at DIB.

Around 80 per cent of the REIT’s annual profit will be distributed to shareholders as a dividend.

The initiative was a move by DIB to help fuel growth in the UAE’s struggling real estate market by allowing investors to take income-producing real estate assets from their balance sheets and receive tradeable shares in the REIT, Chilwan said.

"We are cautiously optimistic but, of course, much depends on the acceptance in the market," he said.

Mark Inch, chairman of Eiffel Management, said the firms expect the REIT to generate 5 to 10 per cent in returns over time and the companies expect the REIT to come to market "in the near future."

DIB provided the seed financing by moving seven of its own properties throughout the UAE into the REIT, executives said. Properties will be based in the Dubai International Financial Center.

DIB’s chief executive Abdulla Ali Al-Hamli said the REIT will initially look to draw capital from the local market but plans to expand to attracts funds throughout the region and then globally.

Executives said that 51 per cent of investors must be from the Gulf Cooperation Council but all investors would have access to non-freehold real estate invested in the REIT.

In September, Dubai Islamic Bank raised its stake in troubled Islamic lender Tamweel to 57.33 per cent, effectively rendering the mortgage lender a subsidiary of the bank, in a move that was expected to help revive lending in Dubai’s property market.

Source: http://www.emirates247.com/property/real-estate/dubai-s-first-islamic-reit-launched-2010-11-24-1.320578

Islamic finance body to revise its capital rules to fit Basel III

Islamic finance body to revise its capital rules to fit Basel III

basel iii

he Islamic Financial Services Board, an association of regulators in Muslim countries, will revise its rules next year to enhance Shariah banks’ capital in line with Basel III reforms, its secretary-general said.

Rifaat Ahmed Abdel Karim said IFSB would seek its council’s approval in December to begin work next year on amending the regulations, with the process expected to be completed around 2013.

“We are revising the standard of capital adequacy to look into the need for more capital and in what form will that additional capital be,” Abdel Karim said in an interview, adding that this could take the form of contingent capital.

He said the aim of the changes was “not to put the Islamic financial services industry at a disadvantage and to provide them with a level playing field” relative to conventional banks but did not elaborate on possible revisions.

Global regulators of convention banks, seeking to prevent a repeat of the global credit crisis, agreed recently to force banks to more than triple the amount of top-quality capital they hold in reserve, though they were given time to raise funds.

Islamic banks are governed by the respective regulatory authorities in the countries where they operate and compliance with IFSB’s guidelines is voluntary.

The Kuala Lumpur-based IFSB, whose members include central banks, the International Monetary Fund and lenders such as Kuwait Finance House and Sharjah Islamic Bank, is one of two standards-setting bodies and issues guidelines on the banking, capital markets and insurance sectors.

The other is the Accounting and Auditing Organisation for Islamic Financial Institutions in Bahrain, which traditionally issued guidelines on accounting standards but has more recently ruled on Islamic bond structures.

Abdel Karim said the IFSB’s liquidity management Corp, which will issue short-term instruments to help Islamic lenders manage their cash, would give banks an alternative to the widely used commodity murabaha money market instrument.

“This will hopefully give depth to the capital market,” he said. “Liquidity management hasn’t been addressed in a more concerted way. This is the first time we see a number of regulatory authorities cooperating to address the issue.”

A lack of liquidity management tools is seen as one of the key challenges to the emerging Islamic finance industry, with Shariah banks handicapped partly due to the limited range of products they can invest in.

The liquidity body may issue highly rated sukuk that would be backed by central bank and corporate assets as early as next year to help Islamic banks manage their liquidity and create a liquid cross-border market for Islamic instruments.

It would have $1bn in authorised capital and has $75mn in paid-up capital so far.

Islamic banks are now often forced to place the reserve liquidity they need to maintain under central bank requirements with international conventional banks through commodity murabaha, as there are not enough highly rated sukuk issues.

But some Islamic scholars say commodity murabaha is a mere paper trail replicating conventional money market instruments and only grudgingly accept its use as there is no alternative.

Source: http://www.gulf-times.com/site/topics/article.asp?cu_no=2&item_no=401843&version=1&template_id=48&parent_id=28

SWIFT goes Shariah compliant for interbank Murabaha transactions

SWIFT goes Shariah compliant for interbank Murabaha transactions

SWIFT

SWIFT has announced that ISO 15022 message standards for the processing of treasury murabaha transactions have been certified compliant with the international Islamic finance standards issued by AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions). This certification paves the way towards the automated processing of murabaha treasury transactions, said to represent 60 percent of all Islamic financing.

Murabaha includes money transfer and commodity trade. While SWIFT has carried the money transfer for many years, commodity trade has been completed manually, usually by fax without any globally agreed standard. SWIFT’s solution uses the ISO 15022 message standards within the guidelines of a murabaha standards rulebook (the guidelines can be downloaded from http://www.swift.com/IslamicFinance).

“AAOIFI is responsible for global Islamic finance industry standards and we establish best practices for the industry”, says Mohamad Nedal Alchaar, AAOIFI secretary general. “Our collaboration with SWIFT aims to build a well-structured and well-regulated international Islamic finance infrastructure.”

Alain Raes, SWIFT’s chief executive for Europe, the Middle East and Africa, who accepted the compliance certificate on SWIFT’s behalf at the recent Sibos conference in Amsterdam, adds: “Murabaha automation is the first step on a long journey of collaboration with the Islamic financial community.”

The use of ISO 15022 messages over SWIFT does not change the current process between banks, their customers and brokers. However, the data defined in the schedules under the terms of the master murabaha agreement is now exchanged using standardized messages via SWIFT as opposed to bilaterally agreed confirmations exchanged manually. Participants involved in murabahawill benefit from a globally agreed electronic standard, automation which will lead to a reduction in costs and risk, and an audit trail for Sharia compliance.

More than 240 Islamic banks representing 84 percent of global Sharia compliant assets are members of SWIFT.  Islamic finance is growing at more than 20 percent per annum, and the demand for Shariacompliant messaging standards is increasing as a result. SWIFT is working with the Islamic financial community to address this demand, both at the level of individual banks, and with organizations such as AAOIFI and AIBIM (the Association of Islamic Banking Institutions Malaysia).

Source: http://www.theasset.com/article/18683.html