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China sets sights on Islamic finance

China sets sights on Islamic finance

CHINA, the new economic powerhouse and one of the world’s fastest growing economies, has set its sights on Islamic banking and finance.

The US$3.43 trillion (RM11.11 trillion) economy plans to woo Islamic banking and finance institutions to the country by establishing an Islamic finance hub.

Islamic finance, with global assets worth over US$1 trillion (RM3.24 trillion), is now among the fastest growing sectors in international finance.

Shenyang, the largest city in northeast China, has started the ball rolling by seeking Malaysia’s expertise in Islamic banking and finance to help establish an Islamic finance centre in the region.

If the plan materialises, Shenyang will become the first Islamic banking and financial hub in the country of 1.3 billion people.

The plan to establish Islamic finance centre would complement Shenyang Finance Development Target 2010.

Under the target, Shenyang, which is the capital city of Liaoning province, will be developed into a regional finance centre that houses financial institutions, financial markets, advanced financial facilities and efficient financial services by 2010.

With a population of 7.2 million and relatively high income per capita, Shenyang itself provides a ready market for Islamic banking and finance products.

Shenyang, which was the capital of China until the relocation of the capital to Beijing after the fall of Ming dynasty, is now the base for equipment and manufacturing industry.

Islamic Banking and Finance Institute (IBFIM) managing director and chief executive officer Datuk Dr Adnan Alias said if the Chinese community in Malaysia adopts Islamic financial products, imagine the market in China if the people there become aware of the products.

“After all, the Chinese are known to be rational consumers, especially in the financial sector,” he said.

On January 29, the Shenyang authority inked a memorandum of collaboration with its Malaysian partners, IBFIM and the Kuala Lumpur Chinese Assembly Hall (KLCAH).

Under the agreement, IBFIM will work with KLCAH to provide the Shenyang authority with syariah advisory and consultancy services and training in Islamic banking and finance.

They will also provide education to Shenyang’s people and the authority on the awareness of Islamic finance as well as the significance of Islamic finance to the society and business.

IBFIM will also conduct various domestic and international training and development programmes on Islamic banking, takaful and Islamic capital markets.

Adnan said currently, there are no Islamic banks in Shenyang and this is the first time the authority is collaborating with any party on Islamic finance.

Director of administrative committee of Shenyang Finance and Trade Development Zone’s investment bureau, Yin Hongwu, said initially the Islamic banking and finance products would be targeted at over 100,000 Muslims in northeast China.

Later, it would be spread to the 100 million people in northern China.

He said the Shenyang authority has no targeted time frame for the establishment of an Islamic finance hub in the city or the targeted size of investment that it expects to attract in the Islamic finance sector.

“It is in the planning stage,” he said.

The introduction of Islamic banking and finance products to Shenyang is expected to benefit the industrial players and complement the conventional banking and financial products there.

Among the industries in Shenyang include mechanical processing, metallurgy, chemical industry, medicine, light textile, electron, car, aviation and construction materials.

Currently, Shenyang has 59 financial institutions including 25 banks, 25 insurance firms, seven securities branch agencies, two futures agencies, with more than 40,000 practitioners engaging in finance.

Since the opening-up of financial industry of Shenyang in 2004, nine foreign-funded banks and five wholly foreign-owned insurance companies have set up branches or representative offices in the city.

Elaborating on the collaboration with Shenyang authority, Adnan said IBFIM will help Shenyang authority to set up an Islamic financial community on the allocated 120ha site.

“We have been invited by the Shenyang Province Authority. They will give us a piece of land to conceptualise and develop it into an Islamic financial community complete with commercial and residential entities within the enclave,” he said.

He said IBFIM would submit the proposal for the development of the community in the third quarter of the year.

Meanwhile, KLCAH secretary general Ng Thien Phing told Business Times that three months ago, Shenyang authority has asked KLCAH to look for an adviser to help them establish Islamic banking and finance.

“They plan to set up Islamic banking and financial centre in Shenyang, so they need to understand how Islamic banking works,” he said.

As a start, IFBIM and KLCAH will come out with a series of articles on understanding Islamic finance in Chinese dailies.

Ng said in May this year, a seminar on trade promotion will be held in Kuala Lumpur to introduce Shenyang to potential investors in Islamic banking and finance.

A month later, IBFIM’s Adnan will lead a delegation, comprising bankers and businessmen, to Shenyang to explore the potential in the province.

The delegation is expected to include bankers and businessmen from Middle East.

“They want Malaysia to be a platform to attract Middle Eastern Islamic banking and finance institutions to Shenyang. This is because Malaysia has good relations with Middle East and the country is also the chairman of OIC (Organisation of Islamic Conference),” he said.

Ng said Shenyang has also asked KLCAH to establish relations between the Muslim community there and the Malays in Malaysia.

They also invited Malaysian ministers to visit Shenyang, he added.

Sharia industry needs supports, association says

Sharia industry needs supports, association says

Although Indonesia has experienced rapid growth in its sharia-based banking and financing industry, its overall market share remains fairly low.

From October last year, the total asset of sharia banks in Indonesia was 1.77 percent, or Rp 33 trillion (US$3.51 billion), of the country’s total banking assets.

This was despite a rapidly increasing number of sharia bank offices, which grew by 14.3 percent throughout the year — higher than conventional bank offices, which grew by 9.5 percent, said the Indonesian Sharia Banks Association (Asbisindo).

Speaking over the weekend at a finance event, Asbisindo chairman A. Riawan Amin said the growth was expected to further increase, eventually achieving a 5 percent market share by the end of this year, in line with the government’s target.

“The sharia banking industry is still quite small, but all stakeholders, especially the central bank, have committed to give continuous support to boost it,” Riawan said.

He was speaking at a five-day sharia economic festival, which included seminars, workshops and bazaars at the Jakarta Convention Center, Central Jakarta, which ended Sunday.

The central bank organized the event which was aimed to help speed up the growth of the industry.

Another move taken by the central bank to help develop the industry is called office channeling, Riawan said, which allows a sharia bank to be owned by a conventional bank.

For example, Bank Mandiri, the country’s largest bank by assets, owns Bank Syariah Mandiri, which in November 2007 had a 36.06 percent market share in sharia banking assets.

Bank Indonesia deputy governor Siti Ch Fadjrijah said while still holding a less-than-significant market share, sharia banking had developed rapidly.

The growth would be faster still if the country managed to lure cash-abundant Middle East investors, who are now looking to invest in countries where a sharia banking and financing system has been put in place, she said.

But for this to be realized, Siti said the country needed a sharia banking law, a draft of which was scheduled to be submitted to the House of Representatives this week.

Some House members said they would deliberate the draft together with the sukuk bill, which has now been with the House for discussion for some two years.

The sukuk bill originally aimed to provide a legal basis for the issuance of sharia bonds.

Anis Baridwan, head of the accounting and openness bureau at the Financial Institutions and Capital Market Supervisory Agency (Bapepam-LK), said through the sharia banking and sukuk laws, the country could become an Islamic finance hub in Asia, attracting investors from Europe, Middle East and the United States.

The central bank has said it would push the amendment of some related laws later this year to help accelerate the growth of sharia banking system in the country.

HSBC to capitalise on Islamic banking

HSBC to capitalise on Islamic banking

HSBC Bank Malaysia Bhd, which has been in the country for more than 120 years, has joined the fray when it comes to expanding its market.

Deputy chairman and chief executive officer Irene M. Dorner said the bank would continue to capitalise on its lead position across the Islamic and investment banking services segments.

“With the upcoming establishment of the Islamic banking subsidiary, we plan to introduce new and innovative products to our clients with a view to be a one-stop financial supermarket,” she said.

Dorner added that after-sales services were still a crucial factor and this would be another facet that would be addressed in the bank’s strategy.

For Kuwait Finance House (M) Bhd, which was only established two years ago, the decline of the traditional bank has led to new opportunities and challenges.

Group chief economist and global research head Baljeet Grewal said that with the blurring of distinctions between retail, merchant and investment banks due to deregulation, innovation and sound industry knowledge were important, especially in the bank’s area of expertise – Islamic banking and financial services, particularly for the real estate sector.

“This means a focus on human capital and the enhancement of product knowledge, risk management, distribution channels and new products to ensure that clients receive a commensurate degree of syariah-based expertise,” she said, adding that the bank would aggressively roll out more real estate projects locally and in the region.

Baljeet said the bank’s strategy for the retail segment would also come to fruition this year, in conjunction with other investment banking products.

For Middle Eastern banks that have opened branches here, the strength may well lie in their network at home, which these banks use as leverage.

Al Rajhi Banking & Investment Corp (M) Bhd corporate and investment banking head Asim Basharullah said the strength of the bank lay in its ability to play a prominent role in cross-border trade and investment flows between the Middle East and the South-East Asian region.

“We’ll continue to strengthen our position in this area and we also intend to follow our Malaysian clients wherever they go for business in the region because we believe there’re ample opportunities for all financial institutions to play a role,” Asim said.

Growing Interest in No-Interest Bonds

Growing Interest in No-Interest Bonds

The events of Sept. 11 raised the profile of all things Islamic. And now every major financial institution is quickly forming its own Shariah-compliant department.

Since 2001, the Islamic banking industry has boomed as more of the world’s 1.3 billion Muslims seek financial services that comply with Islamic law, which bans interest. Islamic finance, instead, pays a return derived from underlying physical assets.

Seizing the opportunity, some 300 Islamic financial institutions are now spread among 75 countries compared with almost none 30 years ago, Kuwait’s Global Investment House (GIH) said recently in a report. And as economic developments go full blast, especially in oil-producing countries, something brought about by the quadrupling of oil prices in the last six years, the demand for cash — both by the investors and consumers — grows more intense.

Islamic financial services are gaining popularity that even conventional banks and financial institutions patronize. Gulf investors are also attracted by higher returns from Islamic finance over conventional banking, while Western investors are drawn to Islamic investment products as a way to diversify their portfolios, said the GIH report.

One of the much sought-after Shariah-compliant financial instruments is the Islamic bond, or sukuk. In finance, a bond means a debt paper in which the authorized issuer, usually banks or governments, owes holders a debt and are obliged to repay the paper at a later date, termed maturity. Bonds enable the issuer to finance long-term investments with external funds.

Hence, Islamic bonds are those that operate under Islamic rules. Sukuk are attractive, as they bring a new source of funds at a favorable rate, as they adhere to Shariah law.

As there is a great deal of surplus cash in Islamic institutions waiting to be tapped by new financial instruments, sukuk can allow this pot of gold to be unlocked.

Management consultants McKinsey & Co. in December predicted the assets held by Islamic banks would hit $1 trillion by 2010.

According to the latest GIH reports, the United Arab Emirates was the world’s top issuer of Islamic bonds during the last seven years, contributing 36.2 percent of global sale value. The world’s largest Islamic bond, worth $3.52 billion, was sold by Dubai property developer Nakheel in 2006.

Global sales of sukuk have surged during the past year due to greater demand from Muslims and from Western and Asian investors looking to tap Gulf economies that are booming.

Analysts say that Gulf-issued sukuk overtake their Malaysian counterparts amid a perception that the principles used to structure their products are not as stringent as in the Gulf. “Some sukuk structures are popularly accepted in Malaysia but not necessarily in other jurisdictions,” they said.

“One factor that is limiting sukuk issuance in Malaysia from growing substantially and acquiring a global investor base is the fact that most issues out of Malaysia are denominated in Malaysian ringgit due to tax incentives,” they added.

While Malaysia’s sukuk market is mainly domestic, foreign investors have bought as much as 80 percent of recent Gulf sales, which are generally denominated in dollars.

Corroborating the GIH report, Moody’s Investors Service said Gulf Arab sales of Islamic bonds overtook those in Malaysia for the first time, rising to $13.2 billion so far in 2007.

At the end of August last year, sales by governments and companies in the UAE, Bahrain and four other Gulf countries accounted for 55 percent of the global total for bonds that comply with Islamic law. That compared with $9.7 billion sold in Malaysia, Moody’s Middle East and Islamic Finance analyst Faisal Hijazi said earlier.

Malaysia, which along with the Gulf is one of the world’s Islamic banking hubs, came second, contributing 32.1 percent of Islamic bonds by value, though Malaysia issued far more individual bonds, it said.

“The Middle East, mainly the Gulf, is progressing quickly to become a global leader in the provision of Shariah-compliant sukuk structures and products,” Hijazi added.

However, at present there is a catch here blocking the growth of the Islamic financial industry.

The report said the main obstacles to the growth are a lack of awareness among Muslims of the products and services on offer, and a lack of standardization of the laws governing Islamic banks.

“Unless there is a general consensus among the major players of Islamic banking on creating a universally accepted set of regulations that are clear to the masses … the popularity of this concept will become a lingering challenge,” said GIH.

London aims for key Islamic finance Centre

London aims for key Islamic finance Centre

With three fold growth of the global market for Islamic financial services over the past decade to a whopping US $ 531 billion up to 2006, the British capital is seeking to become the key Western centre in this regard.

According to a new report by IFSL (International Financial Services Limited) on Islamic Finance – co-sponsored by UK Trade and Investment – the cluster of expertise in London is represented by 23 banks, nine fund managers and a number of international law firms offering Islamic service while there is a secondary market in Sukuk valued at US $2 billion a month and a growing market for retail mortgage business.

IFSL’s report also found that daily trading in commodity-based agreements through the London Metal Exchange is a key mechanism for the
management of assets and liabilities by Islamic financial institutions and the 23 UK banks outnumber more than four times those of any other country in Western Europe as compared to Switzerland with five and France and Luxembourg four each

The UK is also ahead of the rest of Western Europe in establishing fully Sharia compliant banks with three of the 23 UK banks having set up there since 2004. These are The Islamic Bank of Britain, The European Islamic Investment Bank and The Bank of London and The Middle East.

Duncan McKenzie, IFSL’s Director of Economics said “Evidence of London’s growing role in Islamic finance is shown in the UK being the only Western country to feature prominently, 9th with $10bn, in a global ranking of Sharia compliant assets by country.”

The report further said UK educational institutions are taking the lead in positioning the Britain as a leading centre of learning in Islamic finance.

The Securities and Investment Institute, the Chartered Institute of Management Accountants and Cass Business School have each worked collaboratively with overseas partners to offer qualifications that can be accessed by students around the world.

The British Minister for Trade and Investment, Lord Digby Jones termed the report as ‘in depth and informative’ and said London’s position as the premier Western centre and partner of choice for Islamic finance is a huge step in the right direction.

Islamic Finance From Faith To A Global Industry

Islamic Finance From Faith To A Global Industry

Six years ago, Malaysia launched a US$600 million bond and sold it to the world.

It was more than two times oversubscribed, and attention would have passed if not for a difference — it was the world’s first sovereign sukuk or bond issued according to the tenets of Islam.

Bank Negara Malaysia’s governor Tan Sri Dr Zeti Akhtar Aziz remembers the overwhelming response at the first roadshow in Hong Kong and ultimately, a third of the investors came from this region.

“Six years on, the Islamic financial landscape has been dramatically transformed into a vibrant, dynamic and competitive global intermediation mechanism that is supported by more than 300 Islamic financial institutions in more than 75 countries,” she said at an Islamic finance seminar in Hong Kong this week.

These days, “tremendous” is the word to describe the demand for sukuk, evidenced by oversubscriptions of between two and 13 times by both Islamic and conventional investors.

Islamic finance has become the fastest growing sector in the financial services industry. It has been dubbed the new “Silk Road”, the new link between Asia and the rest of the world.

It is not difficult to fathom why. Take a look at the numbers and see why international financial centres like Hong Kong, Singapore and London are getting into the queue.

The global Islamic financial empire is estimated at US$700 billion and expected to double in the next two years to US$1.4 trillion by 2010.

Total value of Islamic assets has surpassed US$250 billion, more than 40 times over since 1982 and growing at 15 percent a year. Islamic equity funds have expanded by than 25 percent over the past seven years.

“Obviously, Islamic finance has become part of the global financial system and it offers huge potential for development and growth,” said Hong Kong Financial Secretary John Tsang.

The rapid growth of Syariah-compliant products and services is speeded by the huge pool of petrodollars in the Middle East of about US$1 trillion in annual revenue.

And Asia has overtaken Europe as the second most popular region for investment from the GCC after the United States.

GCC is the acronym for Gulf Cooperation Council comprising Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.

Salman Younis, managing director of Kuwait Finance House (Malaysia), said about US$1.5 trillion of GCC funds are held in assets worldwide vested in treasuries, corporate bonds, equities and funds.

“Recent trends in investment activities have been equally significant, investment projects amounting to more than US$160 billion to be financed by GCC countries in Asia have been announced since 2005,” Younis said.

Islamic finance is managed according to the tenets of Islam which forbid interest or investments such as in gambling or alcohol counters.

Inevitably, the new “Silk Road” leads to Malaysia which ventured into the relatively unchartered territory of Islamic banking way back in 1983 and now distinguishes with an Islamic financial system in parallel with convention banking.

Malaysia boasts of having the most comprehensive range of Islamic products and services from everyday banking and family needs such as deposits, credit cards, pawnbroking and insurance to sukuk and other wholesale capital.

Malaysia is also the global top sukuk issuer with over US$52 billion or 62 percent of world’s total, boosting its position by opening its bond market to allow outsiders to raise ringgit or foreign denominated funds.

Increasingly sophisticated Islamic financial products are coming into the market with the development of comprehensive regulatory and supervisory regime under the Malaysia-based Islamic Financial Services Board (IFSB) that was established in 2002.

Islamic hedge funds and Islamic benchmark indices have made their debut.

“There has also been increased listing of Islamic financial instrument in international exchanges. This has enhanced the depth of the Islamic financial markets and increased its attractiveness of an asset class for investments,” Zeti said.

By 2020, the global Muslim population is estimated to grow to 2.5 billion from the current 1.5 billion, to underline the huge potential ahead of the industry, and not forgetting the growing number of non-Muslims, for instance in Malaysia, who are turning to Islamic finance.

Having only a tiny Muslim population is no obstacle for Hong Kong which is keen on developing a wholesale Islamic finance market, said Tsang.

The island city recently launched its first Islamic retail fund for sale and retail investors. Hong Kong has also decided to upgrade its observer status to become an IFSB associate member.

London bid to be key centre for Islamic finance

London bid to be key centre for Islamic finance

As the global market for Islamic financial services has grown three-fold over the past decade, so London is setting out its stall to be the key, according to a new report Monday.

The study by the International Financial Services London (IFSL) on Islamic finance, co-sponsored by the UK Trade and Investment Department, said the expertise in London is represented by 23 banks, nine fund managers and a number of international law firms offering Islamic service, while there is a secondary market in Sukuk valued at two billion dollars a month and a growing market for retail mortgage business.

IFSL’s report also found that daily trading in commodity-based agreements through the London Metal Exchange is a key mechanism for the management of assets and liabilities by Islamic financial institutions and the 23 UK banks outnumber more than four times those of any other country in Western Europe.

Britain is also ahead of the rest of Western Europe in establishing fully Sharia compliant banks, with three of the 23 UK banks having set up there since 2004.

These are The Islamic Bank of Britain, The European Islamic Investment Bank and The Bank of London and The Middle East.
Britains Minister for Trade and Investment Lord Digby Jones welcomed the report and congratulated IFSL for producing an in depth and informative report.

He said in a statement “London’s position as the premier Western centre and partner of choice for Islamic finance is a huge step in the right direction”.

“The results of this report will help shape UK Trade and Investment strategies to position the UK as a world leader and investment destination of choice”, he added.

The global market for Islamic financial services, as measured by Sharia compliant assets, is estimated to have reached 531billion dollars at end-2006, having grown by over 10 percent a year from about 150 billion dollars in the mid-1990s.

Islamic commercial banks accounted for 75 percent of the assets 397 billion dollars, and investment banks 13 percent, 66 billion dollars.
The British Government takes a view that developing Islamic financial services helps to combat social exclusion while also giving additional weight to London’s status as a global financial centre.