Tag Archives: Islam

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.

Islamic banks’ assets to hit $1trn by 2010

Islamic banks’ assets to hit $1trn by 2010

Islamic banks are witnessing rapid growth and attracting more patronage worldwide, particularly in the Islamic world, said Al Salam Bank Managing Director and Board Vice-Chairman, Hussein Mohammed Al Meeza.

While addressing the Algeria Economic Forum, which opened on Tuesday in the Algerian capital, Algiers, Al Meeza said: “All financial institutions’ reports point to significant growth of assets and liabilities of Islamic banks in all Islamic countries, except in Iran. It is estimated that Islamic banks’ total assets are hovering around $450 billion (Dh1.6 trillion). It is highly expected that this figure would jump to about one trillion dollars by 2010.”

Al Meeza said Islamic banks are growing at higher rates than other banks and this is helping to create a conducive climate in the banking sector in most parts of the world.

He said profit margins being achieved by Islamic banks and financial institutions are better than those being achieved by their traditional counterparts in many Arab countries, adding that the sharp increase in the number of Islamic banks and financial institutions reflects the deep interest in Islamic finance and this is pushing for tough competition on this market.

“Financial statistics and studies show that there is an upward trend in the number of people who prefer to deal with Islamic banks. Islamic financial institutions’ deposits total $68bn. The assets of Islamic financial institutions have also witnessed rapid growth,” he said.

“In 1997 it was $20bn but this figure grew to $85bn in 2005. The growth rate in the Islamic finance industry in the Gulf region, for example, is about 35 per cent.

“There are about 270 banking and financial institutions in various parts of the world, including 34 in Bahrain, which is the main hub of these banking institutions in the region. The above statistics reflect a major switch from the traditional banking system to Islamic banking. This is why we see the free flow of investment in Shariah-compliant investment opportunities in the Gulf, Middle East and Asia,” said Al Meeza

He pointed to three potential areas in Islamic banking as including bonds paid by mega infrastructure and real estate projects, investors’ interest in looking for a variety of financial tools and asset management which is expected to witness a boom due to the huge wealth parked in the region, in addition to the fast growing markets of Islamic countries.

Al Meeza said the issuing of Islamic bonds continues to attract investors from Europe, the United States and Asia, in addition to the countries in the Gulf, which are enjoying an unprecedented economic boom.

“It is worth noting here that most Islamic bonds issued were rapidly covered totally due to the high demand for Islamic bonds, whose market has witnessed significant growth in 2007,” he said, adding that a number of institutions, particularly in the Gulf, have been shifting to Islamic bonds to finance their projects.

“We believe this market will witness major growth in the next five years,” he said and attributed the increase in the volume of bonds to the high oil prices, which recently hit a record high of $100 per barrel.

A report by Citigroup shows Islamic investment funds worldwide are estimated at about $3.3bn with growth expected to reach more than 25 per cent in the next seven years.

The Citigroup report estimated the deposits of Islamic banks at about $200bn, with a steady growth expected to range from 10 to 20 per cent per annum.

Al Meeza drew the attention of his audience to two major issues that Islamic banks and financial institutions must take note of.

The first being risk management, particularly with regard to Islamic banks, which are prone to risks, and the second being operations that obstruct the way of these banks to become the major engine of competition.

The golden era

“The golden age of Islamic banking and high patronage they enjoy encouraged us to launch the Salam Bank Group which continue to witness rapid growth and prosperity day by day.

“We started with Salam Bank of Sudan, then with Salam Bank of Bahrain and now with Salam Bank of Algeria. We will soon open more in other Arab countries,” said Al Meeza.

Salam Bank of Sudan, which was set up in 2005 with an initial capital of $100m, is one of the biggest banks in Sudan’s financial market and has been working hard to position itself as one of the most reputable banks on the Sudanese market, thanks to its innovative and high quality services.

The Salam Bank of Bahrain was established in 2006 with a capital of 120 million Bahraini dinars ($320m).

The bank was listed on the Bahrain Stock Market on April 27, 2006.

The general subscription of its shares attracted high patronage having been covered 63.4 times, while the outcome of the subscription of the bank’s shares, which closed in March 2006, reached BD2.7bn. The bank achieved a profit of $43.5m in 2006.

This was followed by the setting up of the Salam Bank of Algeria, which obtained a licence to operate in Algeria on October 17, 2006 and started its business with 7.2 billion Algerian dinars ($10.7m).

DIFC will be Islamic finance hub

DIFC will be Islamic finance hub

The Dubai International Financial Centre (DIFC) is creating new infrastructure as part of its efforts to become a global Islamic finance hub, a senior official said on Thursday.

Chief executive officer Nasser Al Shaali said Dubai wants to take advantage of both the “demography and geography” of the region to achieve this goal.

Islamic finance in the Gulf is gaining popularity and assets of banks in the sector are growing faster than their counterparts in conventional banking.

Globally, assets of Islamic financial institutions are estimated to be more than $500 billion.

“We want to build critical mass in this sector by creating an international point of reference for Islamic finance regulations, stand-ards and practices,” Al Shaali said at a bankers lunch organised by Emirates NBD.

He said the planned initiatives include setting up of the DIFC Sharia Centre, an Islamic hedge funds platform, an Islamic finance portal, a commodity murabah exchange, and creation of a judicial acad-emy and research centre.

“We already have developed the world’s only model law, which can be applied to regulate the Islamic finance sector by any jurisdiction and we would be happy to assist,” he said.

Malaysia and Bahrain are among the countries where Islamic banking and finance sectors have made considerable progress. Islamic banking, which follows Sharia’s ban on interest, has received a boost in the Gulf from high oil export revenues of Arab countries.

The DIFC, set up by the government in 2004 to make the emirate a financial services hub, has attracted more than 500 companies that include top foreign financial institutions.

The Dubai International Financial Exchange, which is part of the DIFC, is the world’s biggest bourse for Islamic bond listings in terms of value, which is about $16 billion.

According to Al Shaali the DIFC is also strengthening its standards in areas such as insolvency, accounting, compliance for auditing and corporate governance.

S&P launches Shariah indices

S&P launches Shariah indices

Standard & Poor’s announced the launch of three new benchmark indices designed to help investors track the performance of the largest global universe of more than $20 trillion of Shariah-compliant equities.

“The launch of these new global indices underlines Standard & Poor’s commitment to providing Islamic investors with the widest possible universe of investment options that have been screened for Shariah compliance, and equipping them with the tools they need to quantify their performance,” said Alka Banerjee, Vice President of Index Services at Standard & Poor’s. “Islamic investors are increasingly looking for exposure beyond their local markets in the Middle East and Asia, and Standard & Poor’s Shariah index series provides them with the ability to slice and dice an expanding array of countries and regions by size, style and sector.”

The three new indices S&P LargeCap World Shariah, S&P SmallCap World Shariah and S&P UK Shariah – cover 26 developed markets and join Standard & Poor’s growing line-up of investable sector, region and strategy Shariah indices developed for investors seeking to abide by Islamic law.

Lloyds TSB expands Shariah compliant services: Launches Islamic Nostro Account

Lloyds TSB expands Shariah compliant services: Launches Islamic Nostro Account

LloydsTSB has expanded its Shariah compliant services by launching an account that allows banks to move money around the world on behalf of their individual and business clients, in keeping with Islamic Shariah law.

The Islamic Nostro Account is the first of its kind, claims LloydsTSB, to be offered by a mainstream Western bank and is a Shariah compliant version of the account used by all banks to distribute payments to customers across the world. Whenever individuals or businesses send money to other countries, the payments are made from one bank to another and are passed through a Nostro account in the process.

The new Lloyds TSB account is designed to ensure that the UK’s two million Muslims and 100,000 Muslim firms can make and receive international payments without compromising their faith. Many of these customers regularly make, or receive, international payments through the estimated 250 Islamic banks worldwide. However, until now, the process of transferring this money between banks has not been in line with Islamic principles.

The Nostro account adheres to the principles of Islamic law, because it does not pay interest on money banks hold in the account; does not provide an overdraft facility; and does not allow any of the funds held to be invested in industries – such as alcohol and gambling – which are prohibited under the rules of the faith.

The global Islamic financial services market is now worth an estimated $480 billion and is growing at almost 15% a year. As the range of Shariah compliant products and services widens, with developments such as the Nostro account, the market is expected to grow even further.

Credit Rating and Islamic Bonds (Sukuk)

Credit Rating and Islamic Bonds (Sukuk)

According to a report published by the Saudi ‘Al-Eqtisadiah’ newspaper, credit rating agencies have unanimously agreed that when assessing sukuk (Islamic bonds), they do not take into account whether the bond is Shariah-compliant or not. This is because agencies believe that the decision regarding whether the Islamic bonds in question are Shariaa-compliant or not is a matter that fatwa committees should deal with.

The truth is; I believe that this is an unacceptable deficiency in the principle of rating in view of the fact that risks related to Shariaa should be taken into account when rating Islamic bonds. This is because declaring sukuk as non-Shariaa compliant, because they are based on fatwas that flout resolutions issued by the jurisprudential academies and the concerned ‘ijtihad jamaei’ (collective interpretation) institutions or because they are based on opinions that are contentious among scholars will affect bond underwriting and buying among investors. This, in turn, will result in a decline in the liquidity of these bonds (meaning its ability to circulate).

Raymond Hill of Fitch Ratings agrees with this last fact. Undoubtedly the liquidity aspect of Islamic bonds is an important factor in the decision made by investors to buy the bond or not. Additionally, it has proven that upon finding out that bonds were not Shariaa-compliant, after having bought them, investors then sell them at a lower price so as to get rid of them but end up losing a portion of their investment – and that is if they can find someone to buy them in the first place.

We may also add to this the legal risks entailed in the case of disputes over these bonds or which result as the outcome of sentences that declare them non-Shariaa compliant, which then makes them susceptible to invalidation or diminishes the rights of their holders by nullifying some of their conditions in accordance with the judiciary’s discretion.

Therefore, the regulation of these bonds using Islamic Shariaa law and the prevalent known jurisprudential opinions is required of credit rating agencies, and the impact of rating must be reflected on these bonds. This is so as to reassure investors with regards to the outcome of such rating.

All credit rating does not take into account the jurisprudential views on which the Islamic bonds are based since the strength of the jurisprudential view or its deviance is not considered a rating capable of expressing with utmost clarity and transparency the risks involved in this type of investment.

My assessment of the fact that credit rating agencies do not take Islamic jurisprudential opinions into consideration in the rating process could be summed as follows:

First: Credit rating institutions deal with Islamic bonds in the same way they deal with debt bonds without considering the particularity that sukuk have over the traditional debt bonds, which is that the former represent a share of ownership while the latter entail no ownership.

Second: The absence of competent jurisprudential expertise within these institutions [credit rating agencies], which could help clarify this dimension [Islamic bonds], which means that these institutions avoid delving into this field.

Third: The lack of a legitimate, clear and consensually agreed upon criterion with regards to Islamic bonds that credit rating agencies could implement and use as a reference and for arbitration.

This deficiency may be treated by uniting the efforts of the credit rating agencies and the supporting Islamic banking institutions, such as the committees for auditing and accountability within Islamic financial institutions and the Islamic financial services councils and international Islamic rating agencies, to set the criteria for rating Islamic bonds so that the controversial jurisprudential dispute inherent within sukuk can be taken into account.

These institutions should also employ the expertise of Shariaa law scholars so as to clarify this field, thus enabling the establishment of a legitimate and united Shariaa-compliant criterion for Islamic bonds.

Kuwait Finance House posts $1 billion profit

Kuwait Finance House posts $1 billion profit

Kuwait Finance House (KFH) group achieved a record net profit of $1 billion last year, it was announced yesterday. The results takes account of overseas operations including KFH – Bahrain. KFH’s chairman and chief executive Bader Abdul Mohsen Al Mukhaizeem announced that KFH has achieved total profits worth $1.917bn last year, with an increase of $667.7 million, equal to 53 per cent compared to the previous year.

This includes the profits for investment depositors that reached $881.92m, distributed to shareholders of stock listed in Kuwait Stock Market as follows: 8.632pc for investment deposits, 6.714pc for Al Sedra deposit and 5.755pc for investment saving accounts.

The net profits for shareholders reached $1bn, with an increase of $411.861m, equal to an increase of 70pc compared to 2006.

Profit per share increased to 166 fils compared to 102 fils in 2006 – a 63pc rise.

Assuming the capital increase since the beginning of the year, profit per share was 161 fils compared to 102 fils in 2006 with an increase of 58pc.

The board of directors recommended granting the shareholders cash distributions with a rate of 65pc compared to 57pc for 2006, and bonus shares with a rate of 20pc compared to 15pc in the previous year, after the approval of the general assembly and concerned authorities.

Volume of assets increased in the balance to reach $32bn with a rise of $9.03bn compared to 2006 and an increased rate of 39pc.

The volume of deposits increased to $19.414bn with an increase of $5.93bn equal to 44pc compared to the last year.

The total shareholders’ equity reached $4.4bn with an increase of $1.847bn, equal to 72pc compared to the previous year.

Mr Al Mukhaizeem said these results were the fruits of the extended success that KFH has achieved during the previous years.

“This success is based on KFH’s awareness of the market and economical sectors where it operates, in addition to the policy that KFH follows in varying the assets, which it uses for investment,” he said.

“This policy focuses on distinguished qualitative investments that have an increasing value and high return on investment.”

KFH-Bahrain general manager Abdulhakeem Alkhayyat said KFH-Bahrain witnessed several milestones last year terms of its products, services and banking activities.

“This success is mainly due to the bank’s well planned strategies which includes not only Bahrain, but the countries we operate within,” he added.

“We are looking forward to continue this success in 2008 and beyond and to achieve our optimum goal of customer satisfaction.

“At KFH-Bahrain we look at the Kingdom’s economy with positive consideration, and we are committed to invest in the country as part of our long term vision.”

A fine example is the recently announced industrial holding company established in Bahrain, said Mr Abdulhakeem.

“We expect that our projects in the next few years will amount to $12bn,” he added.

“KFH-Bahrain is very proud that more than 95pc of its human power are young Bahraini professionals working with very high efficiency.”

Mr Al Mukhaizeem said KFH’s achievements last year were the pillars that supported KFH as a pioneer in the Islamic banking industry .

“Last year, which marked KFH’s 30th anniversary, the group won several global awards,” he revealed.

“KFH took seven awards from high profile specialised authorities. The most prestigious awards are Best Bank in Kuwait 2007 award from The Banker Magazine and The Distinguished Establishment by the 14th International Conference for Islamic Banks.

“In addition to that, KFH is soaring towards global expansion, new markets and countries, while reinforcing its status in the current markets.”

KFH established a company in Morocco and it is considering establishing an Islamic bank in Algeria. In Saudi Arabia, KFH is considering establishing a bank to reap the benefits of the booming economical development.

As result of KFH’s success in Malaysia, studies are going on to establish banks in countries in south East Asia. An exchange rate of 0.275 was used to convert every Kuwaiti dinar to the dollar.