Tag Archives: Finance

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.

Testimony
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.

Benefited
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.

Sukuks: new finance era

Sukuks: new finance era

The Islamic financial services industry has witnessed a frenetic pace of growth during the last decade. Since its inception three decades ago, the number of Islamic financial institutions worldwide has risen to over 300 at present in more than 75 countries. They are concentrated in the Middle East and Southeast Asia, and they are also expanding into Europe and the United States. According to Standard and Poor’s, the Islamic finance industry is worth about $500bn in assets, and has been growing at about 10 percent a year for the last decade. Conservative sources put total assets of Islamic financial institutions at $230bn, and they are expected to grow by over 15 percent during the next 5 years. The fact remains that the industry is too small compared to the size of its potential market. The Sukuk market has emerged in 2002 where with the Malaysian government’s $600mn Sukuk issue; Sukuk issuance has been concentrated in parts of Asia and countries of the GCC. There, the development of the Sukuk market has been facilitated by sovereign benchmark issues that have been growing strongly (up 40 percent in the first 6 months of 2007 compared to 2006 as a whole). In value terms, about 36 percent of these issues originated in Asia, primarily Malaysia , Pakistan and Brunei, and 62.1 percent in the GCC during the period 2001-2007.

Contributed
In terms of countries, the UAE was leading in terms of issues’ size during 2001 till 2007, where it contributed 36.2 percent of total world Sukuk issuance. Malaysia contributed 32.1 percent in the same period despite the fact that Malaysia had the largest number of Sukuks issued amounting to 137 issues, as compared to the total number of issues of 29 in the UAE. It is important to note that the UAE had a few huge Sukuk issues in 2006 and 2007 which helped the UAE surpass Malaysia in total Sukuk size. A few examples of these are the $3.52bn Nakheel Sukuk, the $3.5bn PCFC Sukuk, and the $2.5bn Aldar Properties Sukuk. The demand for sukuk has grown exponentially since 1988. Many sukuk offerings have been made by governments, notably in the Gulf States and Malaysia. Marking the first sukuk offering by a Western government, the German sukuk of Saxony Anhalt raised £100mn from both Middle Eastern and European investors through the issuance of a AAA-rated, five-year, Shari’ah-compliant bond backed by real estate assets held in a trust organized in the Netherlands.

Increased
Corporate issuance has expanded rapidly where they increased from $0.4bn in 2003 to $9.9bn in 2006. While Asia, specifically Malaysia, accounted for the bulk of all Sharia-compliant corporate issues in 2004 (close to 90 percent), issuance in the GCC has picked up rapidly. Most recently, sukuk offerings have been shifting to the utilization of musharaka- and wakala based structures as opposed to the more popular ijara-based structure. In terms of the types of Sukuks issued, Sukuk al Ijara was the most popular amongst corporate and governments wanting to raise funds in the Islamic debt markets. Sukuk al Ijara issues contributed 43.6 percent of total issues, followed by Sukuk al Musharaka at 27.5 percent, and then Sukuk al Mudaraba at 18.4 percent. The total number of Sukuks issued in the world during the last six years is close to 360 Sukuks. Industry experts predict Sukuk issuance will reach $100bn in the next five years. According to recent statistics, Islamic Sukuk issuance worldwide have reached $39bn in the first 10 months of 2007.

Despite the strong potential for the Sukuk market, as is the case with any evolving securitization market, a number of economic, legal, and regulatory challenges remain, irrespective of Shariah compliance. These include the substitution of standard structural features in conventional securities, such as credit enhancements, which are not normally contractually permissible in the Islamic context; legal uncertainty arising from the fact that the transaction structure needs to satisfy commercial as well as Islamic law, in particular in non-Islamic countries; and, regulatory differences between national regulators. Ongoing efforts by key Islamic regulators — notably the Accounting and Auditing Organization for Islamic Financial Institutions, the International Islamic Financial Market, and the Islamic Financial Services Board — to facilitate harmonization of standards and practices should help overcome some of these teething pains.