Tag Archives: Finance

Islamic Finance: Strategic tie-ups will boost industry globally

Islamic Finance: Strategic tie-ups will boost industry globally

Malaysia’s top banker said on Tuesday strategic alliances among Islamic finance players will help realise the global potential of the industry in the wake of increasing interest by several financial centres including Hong Kong in Islamic finance.

Addressing a two-day Islamic finance seminar here, Bank Negara Malaysia Governor Tan Sri Dr Zeti Akhtar Aziz said the tie-ups will lead to a more integrated international Islamic financial system and enable players to tap the immense markets of both Muslim and non-Muslim communities.

She said conventional financial institutions can also work together with Islamic financial institutions to raise sukuk or Islamic bonds, or structure other Islamic products which are syariah-compliant.

“The wide-ranging availability of such assets and the massive financing needs of the new growth areas in the region such as in China, Indonesia and Vietnam will be attracting funds from surplus economies such as from the Gulf economies,” she said in a keynote address on “Towards Gaining Global Growth Potential of Islamic Finance”.

Noting that the setting up of an Asian Sukuk Fund could be explored as an extension of the Asian Bond Fund, Zeti said: “Potential issuers may leverage on Malaysia’s sukuk platform and its strength as the world’s largest sukuk issuance centre with over US$56 billion (RM184 billion) or 62 per cent of the world’s sukuk issues.”

The sukuk market is the fastest emerging form of Islamic finance, increasing at an annual average rate of 40 per cent spurred by high levels of surplus savings and reserves in Asia and the Middle East.

In Malaysia, sukuk bonds had surpassed conventional bonds for three years running with an annual turnover of RM135 billion.

Zeti said Malaysia, with three decades of Islamic finance experience, is entering a new phase in developing the country as an international Islamic financial centre and becoming more integrated with the international financial system.

“This aims at strengthening our economic and financial linkages and thus promoting greater trade and investment across borders,” she added.

Zeti was optimistic that Islamic finance this year and beyond will remain positive despite the challenging global environment as it has the ability to meet changing economic demands, apart from being cost-competitive and having well-supported legal and regulatory frameworks.

“Islamic finance as a new industry requires more initiatives to expand the horizon of business parameters and innovative product offerings. There is a need to conduct further in-depth research on syariah issues relating to risk mitigation, liquidity management and hedging,” she said.

Sukuk to lead bond mart

Sukuk to lead bond mart

Sukuk or Islamic bonds will remain the debt security of choice this year among companies involved in infrastructure and property projects, amid robust demand for the instrument.

Companies prefer sukuk as it could attract both conventional and Islamic investors, said a fund manager. He sees fewer corporate bond issuances going forward.

Rating Agency Malaysia (RAM) chief economist Dr Yeah Kim Leng said he expects a higher take-up of sukuk issues, particularly among Islamic investors from the Middle East.

Local companies would therefore be encouraged to raise funds via Islamic-based debt instruments as opposed to conventional bonds, to attract these investors, he said.

The prevaling trend was to go for asset-based Islamic instruments, he added.

Last year RM54 billion worth of corporate bonds were issued, in what was deemed a record year by local ratings agencies. Some 70% of these issuances were structured based on Islamic principles, and the trend is expected to continue this year, according to Malaysian Rating Corporation Bhd (MARC).

Malaysia is the world’s largest sukuk issuer, with over US$56 billion (RM184.8 billion) or 62% of the global sukuk base, according to the central bank.

Yeah also said the market would see a more diversified base of debt instruments this year, with private debt securities (PDS) issuances shifting towards convertibles.

“We’re likely to see a broadening of the instrument types involved. We’re also seeing more convertible loan stocks and asset-backed securities,” Yeah said.

Last week IOI Resources (L) Bhd’s US$600 million exchangeable bonds were snapped up in 90 minutes.

The bonds, convertible into IOI shares, were launched at an initial size of US$500 million and exercised in full for US$600 million on Jan 10.

UAE the world’s biggest Islamic bond issuer

UAE the world’s biggest Islamic bond issuer

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, Kuwait’s Global Investment House (GLOB.KW: Quote, Profile, Research) said in a report on Thursday.

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, Global said.

The world’s largest Islamic bond or sukuk, worth $3.52 billion, was sold in 2006 by Dubai property developer Nakheel.

The Islamic banking industry has boomed as more of the world’s 1.3 billion Muslims seek financial services that comply with their beliefs, especially since Sept. 11 2001, Global said.

“As a result of the U.S. policy towards certain financial organisations and charitable foundations, the Muslim world has reacted by expanding the demand for more Islamic banking,” the investment house said in its report.

Gulf investors are also attracted by higher returns from Islamic over conventional banking, while Western investors are drawn to Islamic investment products as a way to diversify their portfolios, Global said.

There are now at least 300 Islamic financial institutions spread among 75 countries compared with almost none 30 years ago, Global said.

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

The main obstacles to the growth of the industry are a lack of awareness among Muslims of the products and services on offer, and a lack of standardisation of the laws governing Islamic banks, Global said.
“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.”

Islamic law bans interest and instead pays a return derived from underlying physical assets.

Hong Kong To Ride On Mainland For Its Islamic Finance Growth

Hong Kong To Ride On Mainland For Its Islamic Finance Growth

Hong Kong’s access to mainland China will be key in its ambition to develop an Islamic financial hub, Financial Secretary John Tsang said Tuesday.

“We are moving full steam ahead,” he told a two-day seminar on Islamic finance which was also attended by Bank Negara Malaysia governor Tan Sri Dr Zeti Akhtar Aziz and other central bankers from Gulf countries and the region.

Hong Kong announced its foray into Islamic banking late last year and Chief Executive Donald Tsang said yesterday he will lead a mission to three Middle East states – Kuwait, Saudi Arabia and United Arab Emirates – from January 25 to February 1.

John Tsang underlined Hong Kong’s intention to get a slice of the huge pool of the oil-driven liquidity in the rapidly growing Islamic funds valued at between US$700 billion and US$1 trillion, saying: “I believe Hong Kong can play an important role in generating new, reliable and potentially lucrative investment opportunities for this capital.”

Hong Kong, according to him, is aiming to be a wholesale player and in structuring Islamic products to seize on the global strong demand, including for sukuk or Islamic bonds.

“And China will be key,” he told the seminar co-organised by the Hong Kong Monetary Authority (HKMA) and the Malaysia-based Islamic Financial Services Board (IFSB).

“The unique advantage for Hong Kong is our access to the markets of the mainland of China. Hong Kong is the only jurisdiction outside of the mainland in which banks may transact in the reminbi.”

He pointed out that a quarter of the banks in Hong Kong are authorised to offer services using the Chinese currency and last year, Hong Kong was the first place outside China to offer a reminbi bond market.

The access to the mainland provides Hong Kong with the opportunity to develop syariah-compliant instruments for mainland-based issuers with Hong Kong as the bridge between the world’s fastest growing economy and the international Islamic finance market, he said.

To shore this up, he added, HKMA will apply to raise its status in IFSB to associate member from its current observer status.

Financial institutions must comply with Islamic laws: Sheikh Abdul Sattar Abu Ghudda

Financial institutions must comply with Islamic laws: Sheikh Abdul Sattar Abu Ghudda

Systems and standards of Islamic financial institutions and the mechanisms imposed faced heated debate in the first session of the Eighth International Forum of Islamic Finance Institutions, especially as opinions varied in recent years over the compliance of some tools with Islamic Sharia (law). Head of the jurisprudence panel at Albaraka Banking Group, Dr Abdulsattar Abu Ghudda, said all tools used in Islamic finance had to observe one important aspect, and that was to avoid anything forbidden by Islam through juristic reasoning by analogy. He noted the need for commitment on the part of the financial institutions to complying with Islamic laws, while maintaining the quality of services provided to clients. On his part, Dr Esam Al-Enizi of Kuwait University’s Sharia College, noted the need for further developing tools that assisted in the Islamic finance sector, and explained that standards imposed in this sector helped minimize violations.

Meanwhile, jurisprudence supervisor at Ernest and Young, Abdulnasser Al-Mahmoud, said there were certain criteria that guaranteed quality of services, including clear advisories. According to international reports published recently, Kuwait is leading the world in the number of Islamic financial institutions and the volume of assets these bodies manage, stressed Minister of Commerce and Industry Falah Al-Hajri Sunday. The minister, inaugurating the eighth international forum of Islamic finance institutions said Kuwait is among the states quick to support the Islamic financing industry through both legislation and creation of friendly operating atmosphere.

Al-Hajri further remarked leading international banks are now seeking to offer Islamic banking products and services, which is testimony to the growth and importance of the field. In figures, over 300 Islamic finance bodies are operating in 75 states, managing some $500 billion amid expectation the figure would go all the way up to over a trillion by 2015. On issues to be discussed, Al-Hajri mentioned quality control and Shariah (Islamic Jurisprudence) compliance, which is the main concern, due to the very nature of these bodies as providers of Shariah-compliant services. There is also the issue of sovereign rating, as this rating determines these institutions’ competitive edge as they seek international expansion, Al-Hajri noted. Intellectual property rights would also come up in terms of how it applies to financial products and services.

The two-day conference is a most important venue for Kuwait, as the Islamic finance sector is the state’s most developed and fastest growing sector. Addressing the forum, participant Ahmad Al-Yaseen said the growth seen in the sector is due to the reliability and quality of the services and products and the full and careful implementation of Shariaah guidelines. He said Islamic financing offers satisfactory solutions and alternatives to interest rate on transactions. Kuwait Finance House General Manager Mohammed Sulaiman Al-Omar on his part said, on behalf of the sponsors, that the industry is now before a historical opportunity amid the current developments which create favorable conditions for further growth and development in Islamic financing. He said that as local opportunities are limited, Islamic financing bodies are seeking international and regional expansion to seize opportunities beyond the local market. This is the lone option the way things are, he stressed.

Representing participants, representative for National Bank of Kuwait Abdullah Al-Tuwaijri said Islamic banking and financing in the Arabian Gulf region benefited from the economic boom in the region and the increase in oil prices. He pointed out products and services saw marked growth, as sukuk, for instance, went up to $27 billion by September 2007 and it is expected the figure would reach $50 billion in 2008. On the industry in Kuwait, he said the sector is more advanced than in most states, and growth saw the number of companies go from 14 companies three years ago to a current 37 companies. These bodies are managing sums over KD 6 billion which is over 40 percent of the overall sums managed by investment companies in Kuwait.

Traditional finance and banking operators are starting to offer Islamic products and services, such as the National Bank of Kuwait, which currently runs more than one Islamic fund. In another development, Minister of Commerce and Industry Falah Al-Hajeri expressed hope on Sunday that the National Assembly will approve a bill for the establishment of authority of the stock market soon in line with the policy of transforming the country into a regional financial hub. Al-Hajeri, speaking to journalists on sidelines of the eighth conference of Islamic financial establishments, said the ministry has spared no efforts in backing Islamic financial institutions and removing all obstacles in their face.

The official pledged to support any local or foreign investor as long as he (or she) works under umbrella of the state legislations laws. On Islamic sukuks, the minister said concerned authorities started, nearly three months ago, implementing special regulations for this form of financial transactions. He praised the holding of the conference in Kuwait, noting that it constitutes “some of the vehicles to restore Kuwait’s distinguished economic role,” under leadership of HH the Amir. A special parliamentary panel is holding meetings to ponder proposals and draft regulations for establishment of the aspired authority.

As Islamic banking takes off, new courses are being set up in the universities

As Islamic banking takes off, new courses are being set up in the universities

It’s the fastest-growing sector of the banking industry, yet few City boys know much about it and hardly any finance students are being taught it. But Islamic banking’s mysteries are now beginning to be unveiled and just this last month a business school and an accountancy body have announced new postgraduate programmes specialising in it.

There are more than 250 Islamic banks worldwide, with at least £300bn in assets, up from £5bn in 1985. Small fry in the global economy, but growing at an astonishing 15 to 20 per cent a year. Rising oil prices and Europe’s growing Muslim population are driving an extraordinary surge in financial products compliant with Islamic law, eschewing interest and respecting Islamic ethical norms in investment.

Just a few years ago, Islamic banks stood accused of funding terrorism. Now Gordon Brown has promoted London as a hub for Islamic finance, three British Islamic banks have been set up, and big players such as HSBC and Lloyds TSB have started offering Islamic financial products and services. To train bankers to develop these products, Bangor University’s business school is starting up a fully fledged Islamic banking Masters this September, the only university so far to offer one.

Islamic banking is, on the surface, something of a paradox. Islam forbids usury, the accumulation of interest, the cornerstone of the banking system. And holy law also prohibits Muslims from profiting from taboo industries, such as alcohol, gambling, and pornography.

At the same time, Islamic banks must offer competitive rates of interest and turn a profit. At present, banks take several approaches, taking a fee for matchmaking investors and borrowers, buying into the venture themselves, or buying and leasing assets to potential borrowers.

Teaching the complexities of the markets and the Byzantine mass of Islamic scripture is impossible in a year, so Bangor’s course will balance finance and Islam, with the emphasis on the first. “You have people who take the religious approach, where a lot of the debate is about the semantics,” says Phil Molyneux, professor of banking and finance and head of Bangor Business School. “We won’t be spending a lot of time on that.”

The new course has already attracted applications and interest from the Muslim world and even from non-Islamic financial hubs such as Hong Kong. Still, it is a fairly daring move. Most students are expected to come from overseas and the university faces stiff, and cheaper, competition from courses elsewhere, in particular the International Islamic University Malaysia.

Two specialist Islamic Masters programmes running in the UK a few years ago, at the University of Durham and Loughborough University, were cancelled. Durham still offers a summer school and is the world’s largest research hub for Islamic finance, with 25 PhDs at work at the university, but Rodney Wilson, professor of economics at Durham, says there was simply not enough demand from the right students.

Islamic finance is, inescapably, a complex business. There are thousands of pages of fiqh, the Islamic jurisprudence that has emerged around interpreting the Koran and sharia. It is not simply a matter of sneakily dodging interest payments. “Structures ought to be quite different,” says Professor Wilson. By law, they have to be to qualify as Islamic. That does not mean that Islamic finance is just for Muslims. Many students from other faiths and none are attracted by the chance to build a more ethical banking model, he says.

If Islamic finance’s complexity is hard to fit into a year, how about into a module? This year, Lancaster University Business School joined Cass Business School and SOAS’s Centre for Financial and Management Studies in offering an optional module in Islamic finance as part of its postgraduate training.

Is one module enough? “We are not saying that a course is enough, but a Masters is too much,” says Dr Marwan Izzeldin, course tutor at Lancaster. “A Masters will limit their chances. There are still more jobs in traditional banking than in Islamic banks.” The course will be sufficient, he says, for graduates to work in the sector, analysing Islamic financial products.

A course geared to mature students who have a strong background in finance also starts this year. The Chartered Institute of Management Accountants’ (CIMA) certificate in Islamic finance has been developed with a prestigious advisory group of sharia experts, so should be fairly comprehensive, but takes just two to six months of distance learning to complete.

“The certificate will assist employers in the City and other major financial centres throughout the world in equipping their employees to develop financial products,” says Robert Jelly, director of education at CIMA. In the Islamic banks, the final nod, however, will still go to the sharia scholars on their boards.

Standard and Poor’s voted best Islamic rating agency

Standard and Poor’s voted best Islamic rating agency

Islamic Finance News (IFN) annual reader survey voted Standard and Poor’s (S&P) the best Islamic rating agency, recognising the firm’s commitment to fostering the development of Islamic capital markets and their integration with global markets, Bahrain Tribune reported.

The survey by the world’s leading capital markets-focused Islamic-finance publication, recognised S&P in other award categories for its work assigning ratings on sukuk issues by DIFC Investments LLC and the Jebel Ali Free Zone which were named deal of the year and best sukuk, respectively.

It is worth mentioning that S&P opened a new office in Dubai, serving as a window through which Middle East companies can access international capital markets and through which international investors can gain insight into Islamic investment risks and opportunities.

Islamic finance experienced another breakthrough year in 2007 with the value of Shari’a-compliant assets worldwide estimated to have surpassed the $500 billion mark for the first time.

S&P is also the leading rating agency for Islamic insurers, with more credit ratings on takaful and retakaful firms in Africa, Asia and Middle East, more than any other provider.