Thursday, 31 May 2012

Can Islamic banking help boost Czech Republic exports?

A good deal of the ongoing economic and financial turmoil on world markets has been blamed on the unscrupulous practices of the international banking and financial sector. Islamic banking, on the other hand, is seen as a fairer and more balanced alternative which has been much less affected by the crisis. Can the Czech Republic benefit from a financial system based on the Islamic law? And can Islamic banking help boost Czech exports into Muslim countries? These are some of the issues debated at an international conference on Islamic banking held in Prague.
Based on the principles of Islamic law, or shariah, Islamic banks are prohibited from charging interests, speculating as well as investing in businesses considered unethical by Islamic scholars. Instead, Islamic or participant banking offers a system of shared risks and profits, and its supports claim it is committed to promoting equity, moderation and social justice.
Islamic banking is today the fastest growing segment of the financial system, and is also considered a more honest and fairer alternative to conventional banking. Cihad Erginay is the Turkish ambassador to Prague, and head of the local group of the Organisation of Islamic Cooperation which organized the event.
“There was great interest on the subject from our Czech colleagues, Czech bankers and journalists who kept asking us about it and expressed their interest because they saw that Islamic banks were not as affected by the economic crisis that we see today. That led us to think that it could be interesting to organize such a conference. And as you can see from the participation, there is great interest in the subject.”
“Banking as it should be” is the slogan of the Abu Dhabi Islamic Bank, the fourth largest Islamic bank in the world, whose head of marketing, Petr Klimeš, was one of the speakers at the conference. I asked him what the attraction of the Islamic finance system for non-Muslims was.
“The slogan ‘Banking as it should be’ in fact came from non-Muslims. When we tested the proposition and the banking model that was based on hospitable, transparent banking that protected the best interests of the customer and banking that was simple, it was non-Muslims who said that.
“So yes, it is very attractive to non-Muslims. As recently as yesterday, when I had dinner with one of my friends, I was telling him about how we conduct our business. He’s Czech, and he said, ‘I wish my bank was like that’.”
Some 200 people from Czech and international financial institutions, the private sector and public administration took part in the conference. One of the panellists was Emad Yousuf Al Monayea is the CEO of Kuwait’s Liquidity Management House. I asked him why Islamic banking was largely sheltered from the global financial crisis.
“If we look at the basic principles of Islamic banking, they require the right structures and practices whereby the evaluation of each potential project would be conducted rather than just jumping into a project without a proper assessment, without finding the right assets to back that kind of project. Otherwise, we will end in difficulties.
“We have to admit that there were, as everywhere, some good examples and, Alhamdolillah, some bad examples, when it comes into practise.”
Through cooperation with Islamic banks, Mr Al Monayea said, Eastern European countries including the Czech Republic could benefit by attracting new investors from the Gulf Region and beyond.
“Liquidity is building up all over the market, there is good liquidity but a lack of good projects that would give you comfort to invest in. In comparison with other international markets, we have seen what’s happened in the US and Western Europe, and Eastern Europe should now open the door for new capital which is searching for new havens of good assets.”
The Czech Republic recently announced it would try to diversify its exports the majority of which now go to Germany and other EU member states. Czech officials and business leaders are now eyeing Turkey, Kazakhstan and other Muslim nations, and closer ties with Muslim financial institutions could help those efforts, according to Jaroslav Hanák, the head of the Confederation of Industry of the Czech Republic which represents around 1,500 industrial firms.
“Our efforts to diversify our exports and our export strategy which includes a number of countries from the area such as Iraq, Kazakhstan and Turkey, all that makes any links, including banking and financial ones, very interesting and valuable. But we have been working with many other countries as well, and we should not underestimate their interest in investing in Central Europe.”
Jaroslav Hanák says that cooperation with Islamic banks for example in Turkey would certainly provide a boost to mutual trade. When it comes to potential private customers of these banks, Mr Hanák is sceptical.
“We already have experience with dealing with those countries. On his recent visit to Turkey, President Klaus was accompanied by dozens of Czech businesspeople, and that’s a typical country where we could develop further ties. But I think it’s only interesting for businesses really. I don’t think it has some kind of immediate potential for regular Czech clients.”
Tuesday’s conference was held at the headquarters of the Czech National Bank in Prague. The bank’s officials refused to share their view on Islamic banking and how it could contribute to Czech export strategy. But Professor Michal Mejstřík, who is a member of the Czech government’s economic board, says the event could prove to be a good start.
“If you look at it from the perspective of Czech exports – and we are a country with one of the highest export quotas – it’s absolutely inevitable for our exporters. They have to understand the principles and get familiar with the banks. I understand that cultural differences are part of business and banking too, so from this perspective, it’s a good kick-off.”


According to the organizers of the conference, shariah-compliant assets represent about half a percent of the world’s total assets but the industry is growing at an annual rate of between 10 and 15 percent. Islamic banks now operate in the UK, Germany, Demark and other countries. So how would the Czech law need to change to allow them into the Czech Republic? Not that much, says Judge Ivana Hrdličková, a legal expert for the Council of Europe.

“There are several issues related to for example book keeping, or tax law generally speaking, and to the rules concerning the protection of creditors. But we could find inspiration in Germany for instance which changed its laws slightly to allow such institutions to operate in the country.
“But I don’t think there are any major obstacles in the Czech Republic either. As far as Islamic banks are concerned, some changes would also have to be made but we could look at other European countries for examples.”
Another issue has to do with the negative connotations of shariah in liberal democracies where people link the Islamic law to Islamism and Islamist extremism. But Petr Klimeš from the Abu Dhabi Islamic bank says their non-Muslim clients care about what they can get rather than the shariah principles.
“We mainly operate in Muslim countries where the word shariah has a very positive connotation. It’s actually the Arabic word for law. So we don’t see an issue with saying we operate in compliance with shariah which is an absolute requirement for our Muslim customers. And what’s important for our non-Muslim costumers is what they will get at the end of the day. They might not necessarily be interested in whether the transaction is compliant with shariah but they don’t mind. They are interested in the value they get and they are very happy with it.”
Petr Klimeš, who worked for the Czech branch of Citibank before he joined ADIB in 2008, says it will take some time before a bank observing the Islamic law opens up a branch in the Czech Republic. But Czech exporters hope that cooperation with Islamic banks will bring more immediate results.
(Radio Praha / 30 May 2012)
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The Islamic Development Bank (IDB) exploring microfinance options in UK

LONDON, 9 Rajab/30 May (IINA)-The Islamic Development Bank (IDB) is exploring social and financial inclusion opportunities in the UK including the provision of community-based microfinance, SMEs (small-and-medium-sized enterprises) financing and technical assistance programs.
An IDB delegation, led by its President Dr. Ahmed Mohammed Ali, participated in a roundtable here Monday with financial institutions, law firms, corporates and community organizations and leaders.
Dr. Ali said that in addition to the direct assistance to microfinance institutions, initial discussions have taken place with the UK’s Department for International Development (DFID), World Bank and CGAP to start some pilot projects in various common member countries and eventually develop a global Islamic microfinance facility.
In the UK, there are several initiatives aimed at helping small business start-ups and young entrepreneurs and to promote financial inclusion. These include Community Development Financing Institutions (CDFI), the Enterprise Capital Fund, and regional ones such as Bolton Business Ventures.
On Monday, Lord Young, the former Conservative cabinet minister, announced the launch of a GBP85 million initiative to help young people in the above respect. The reality is that the UK is facing a multi-billion pound funding gap for small businesses.
One microfinance initiative that is seeking to cooperate with the IDB is GLEOne London, whose CEO Nicholas Nicolaou, revealed that the entity is working on a program to assist Muslim immigrants starting up small businesses and becoming entrepreneurs.
In fact, City law firm Norton Rose; Gatehouse Bank, one of the five UK-authorized Islamic banks; and international auditing firm and consultancy KPMG have been cooperating with GLEOne London to develop an Islamic microfinance product based on the Mudaraba (trust funding) concept.
According to Farmida Bi, Partner at Norton Rose, the product is ready to roll out and addresses the various tax and legal issues especially under the Consumer Credit Act, which protects the rights of customers.
Dr. Ali reiterated IDB’s support for various microfinance initiatives. He stressed that the Islamic banking industry registered a year-on-year growth of 35 percent in 2010 to 2011. Within OIC countries for instance, Islamic financial institutions are becoming major economic players in an increasing number of these countries.
In Indonesia, for instance, a recent Central Bank of Indonesia report has indicated that the industry is growing very fast at a rate of 35 to 40 percent per annum and is expected to capture up to 20 percent market share of the total banking industry in the next few years.
“If this trend continues the Islamic financial industry will become a major industry with an important role to play in global finance. London being the gateway for Islamic banking in Europe, needs to be prepared for this tremendous growth of this industry,” he said.
Dr. Ali also held talks with the Lord Mayor of the City of London, Alderman Ian Luder; the Sheriff of the City of London, Alderman Alan Yarrow; the British Consul General in Jeddah, Mohamed Shokat, and Richard Thomas, CEO, Gatehouse Bank, at Mansion House, the official residence of the Lord Mayor.
The IDB president’s visit was at the invitation of the Lord Mayor who earlier this year visited the bank’s headquarters in Jeddah.
Dr. Ali also met Andrew Mitchell, UK Secretary of State for International Development, to review progress on the implementation of the Memorandum of Understanding (MoU) signed by the two parties in Jeddah in March whereby the UK and the IDB agreed to cooperate in co-financing projects in IDB member countries aimed at generating youth employment and reducing poverty.
Alderman Luder stressed the close and historical relations between the City of London and the IDB and the GCC countries, in particular, Saudi Arabia. The City of London, as a premier international financial center, has much to offer not only in innovation, but also in education and training and also in the growing phenomenon of Islamic finance.
Dr Ali emphasized that the visit was a testament to the IDB’s partnership with the UK and specially with the City of London. “We have worked together to further some areas of our common interest. This visit also provides IDB with the opportunity to support the development of Muslim communities in the UK,” he said.
IDB’s Medium Term Note Program amounting to $6.5 billion for sukuk issuance is registered with the Financial Services Authority in UK and is listed on the London Stock Exchange.Under this program, IDB has made several issuances in US dollars, as well as pound sterling denominated private sukuk issuances have been made.
As far as the money market placements are concerned, the IDB has over the years increased its exposure to the UK’s financial institutions and IDB stands ready to do more in this regard when appropriate opportunities are identified.
The IDB is working with such recognized institutions as the Prince of Wales’ Prince’s Charities and has contributed just under $1 million to help young people in the inner cities to start up projects or small businesses.
The IDB has also been providing assistance for economic and social empowerment to UK citizens as part of IDB’s special assistance program for cooperation with Muslim communities in non-member countries. To date IDB has approved a total of 19 projects for the UK and further projects are being planned. These projects are mainly in the field of education, social welfare and research.
In the wake of the global financial crisis, economic recession and the impact of the eurozone debt crisis, the issue of embedded inclusiveness especially of the financial services industry is increasingly important. Not surprisingly, the IDB President appealed to the financial institutions to help in this respect.
“Achieving sound and sustainable socio-economic development is not simply a financing issue. It is a much broader endeavor,” said Dr. Ali, adding: “It is not within the bandwidth capacity of a single institution or even a single country. It requires strong commitment to reform the socio-economic system and its institutions. All stakeholders, including the government, private sector, civil society and donor community, have to play an active role and align their priorities and activities to achieve this common goal. Due to the strong banking traditions in the UK, it can contribute significantly to this endeavor.”
This, he added, is a once-in-a-lifetime opportunity and called upon all the Institutions to pull together and work towards building “an equitable, just and stable financial system which is capable of providing sustainable growth with employment creation for our own future. IDB would be happy to cooperate with initiatives in this regard.”
A key delivery vehicle for inclusiveness which the IDB has been promoting is through SME financing and microfinance programs aimed at generating employment, especially youth employment, and economic growth.
Due to the recent changes in the MENA region as a result of the Arab Spring, there has been a demand for funding of SMEs. In this context, the Bank has launched the IDB Youth Employment Support (YES) Program for which the IDB’s Board of Executive Directors approved $250 million to help empower Financial Institutions, Employers, Education and Vocational training organizations in the Arab Region to reduce youth unemployment.
Dr. Ali revealed that the targeted countries include Tunisia, Egypt and Morocco and that the first disbursements have started with Tunisia. However, he pointed out that it is up to the receiving countries to come up with project proposals to access the funding.
Furthermore, the Islamic Solidarity Fund for Development has allocated $500 million for Islamic microfinance and a similar amount for vocational literacy programs (VOLIP). The IDB Islamic Microfinance Development Program was established to strengthen the Islamic microfinance institutions and develop the overall enabling environment for them.
According to the IDB, the French Development Agency (AFD) and the Consultative Group to Assist the Poor (CGAP) are also collaborating with the IDB in the development of Islamic microfinance.

(Internatonal Islamic News Agency  / 30 May 2012)


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Central Bank of Malaysia (Bank Negara) introduces new Islamic instrument

KUALA LUMPUR: Bank Negara Malaysia announced introduction of a new Islamic monetary instrument, Collateralised Murabahah.

It said Collateralised Murabahah was essentially a syariah-compliant financing secured by assets in which the financier had the right to sell the asset should the client fail to repay the financing.

“It combines the widely accepted Murabahah financing transaction with sukuk (Islamic bond) that forms the pledged asset to back the transaction,” it said in a statement.

The central bank said Collateralised Murabahah would be a new low credit-risk financial instrument that enables collateralised interbank transactions in the Islamic money market in Malaysia.
“It will add diversity to existing liquidity management tools and further promote greater liquidity in the Islamic financial market,” it said.


Collateralised Murabahah could be used by Islamic financial institutions to obtain liquidity from Bank Negara under the standing facility and it would also be expanded to facilitate daily Islamic money market operations in the interbank market, it added.


(Borneo Post Online / 31 May 2012)


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Tuesday, 29 May 2012

Malaysia: to sell RM2bil sukuk to fund Mass Rapid Transit (MRT) project

KUALA LUMPUR: Malaysia plans to sell at least RM2bil of Islamic bonds to help finance the first phase of construction of a mass railway here, two people familiar with the matter said.

Dana Infra Sdn, a company formed by the Finance Ministry to fund development projects, may increase the offering to RM3bil if there’s sufficient demand, said the people, who declined to be named as the information is private.
No date has been fixed for the sale because of Europe’s debt crisis and marketing may start as early as June, they said.
Proceeds would go to state-owned Mass Rapid Transit Corp, which is overseeing work on a 156-km railway.
The network is targeted at easing congestion in Kuala Lumpur, with the first line scheduled for completion in 2016, the Government said in a 2010 report.
The Government plans to guarantee a total of RM8bil of syariah-compliant bonds for the project, the people said.
Dana Infra may issue an additional RM30bil of the securities via a 50-year programme, which would be announced later, one of the people said.
Irwan Siregar, deputy secretary to the treasury, wasn’t immediately available for comment.
The planned offering follows a record RM30.6bil sale of Islamic bonds, which pay returns from assets to comply with the religion’s ban on interest, by the nation’s toll-road operator PLUS Bhd completed in January.
Malaysian companies issued RM75.6bil of sukuk last year, an all-time high, according to data compiled by Bloomberg. Sales totaled RM15bil in 2012.
(The Star Online / 29 May 2012)




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Sharia products see significant growth

MANAMA: Islamic financial products represent a class of investment which appeals to those looking for socially responsible or ethical investments and are a fast-growing asset class globally.
It is estimated that investors globally hold more than $1.5 trillion in Sharia-compliant assets and currently there are more than 500 funds globally that comply with Islamic principles, Central Bank of Bahrain executive director of financial institutions supervision Abdul Rahman Al Baker said at the opening session of the World Islamic Funds and Financial Markets Conference (WIFFMC2012) at the Gulf Hotel yesterday.
"One-third of these funds were launched during the past seven years, while sukuk is another Islamic financial instrument that shows a significant growth during the past five years.
"It was estimated that the global sukuk market exceed $200 billion by the end of the first quarter of this year. Actually, the year 2012 saw a revival in the global sukuk markets due mainly to gradual recovery of global economy and investors' sentiment which drives the demand for sukuk.
"It is clear that sukuk issuance in the first quarter of 2012 exceeded all expectations reaching a record $43bn globally. This is almost double the average amount of sukuk issued in any given quarter in the past year, and represents half the total amounts of sukuk issued throughout 2011.
"In spite of the recent credit crunch and widespread global economic slowdown, the prospects for growth in Islamic securities markets are likely to be positive," he said.
"This positive trend can be attributed to the rapid expansion and increasing sophistication of the GCC financial markets, as well as the geographical spread of Islamic securities products and services that record remarkable growth in Europe, Asia Pacific countries, North Africa and the energy rich Central Asian states.
"In Bahrain, the mutual funds industry is one of the fastest growing segments of the overall financial sector. With around $9bn in assets under management, through more than 2,700 funds, the industry has been growing at an annual average of about 15pc in recent years. Overall, there are 100 Islamic funds incorporated and registered in Bahrain with total assets of $1.7bn as of March.
"The CBB, through its enabling legislation, promotes the development of new products for investors in both Islamic and traditional finance, while at the same time providing credible regulation in both areas.
"The CBB, having pioneered the development of sukuk, remains active in the sovereign sukuk market, with a total of $1.2bn medium to long-term sukuk issued, complemented by a regular programme of short term issuance," he added.
"Furthermore, the CBB had successfully issued a five-year maturity Islamic Leasing Sukuk in the local market with a value of BD200m.
"It is the CBB's hope that such initiatives will go a long way in harmonising market practices and creating a deep and vibrant Islamic capital market.
"Generally, the potential size of Islamic finance market is vast, and the accelerated establishment of Islamic finance hinges on attracting the flow of these potential funds into Islamic investment.
"However, it is important to ensure that Islamic funds and investment industry have solid and strong foundations for future development and growth."
(Gulf Daily News / 21 May 2012)



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Friday, 25 May 2012

Key drivers for growth of Islamic banking in Oman


MUSCAT — Apart from the stable economy, the presence of a favourable demography in Oman provides ample potential for the growth of Islamic banking in Oman.

According to reports, about 20 per cent of adult Omanis prefer a Sharia compliant bank for their banking needs. This trend is similar to overall 22 per cent Sharia compliant assets in the GCC region. In Oman 60 per cent of the population is less than 30 years of age.

“Also with the government plans towards diversification of economy we anticipate the financing needs to increase in Oman thereby providing opportunities for the newer banks”, say analysts of Gulf Baader Capital Market in a report on Bank Nizwa initial public offering.

Since the launch of Islamic products in the GCC region, all individual countries have reported higher levels of growth in Islamic assets and liabilities. Islamic banking assets in the GCC region have reported compound annual growth rate (CAGR) of 20.4 per cent over the last three years.

“We expect Oman to follow a similar trend and grow at a faster pace in the initial years of operations led by substantial unfulfilled demand for the Sharia products”, says the report.

In the Sultanate there are a number of conservative customers, who want to deal only with Sharia compliant banks. Further there remains the possibility that Sharia compliant funds parked by Omani investors overseas will come back to the local banking system with the opening up of Islamic banks.

As per market reports, during 2010 the global Sharia compliant assets were estimated at $1 trillion with retail banking continuing to be the main driver of the industry’s growth.

The Islamic finance represented only 1 per cent of the total global financial assets, which provides a case for higher growth rates going forward.

“With the emergence of Islamic banking in Oman, not only a new market is being formed with wider variety of products and services, there is also expectation of shift from the conventional banking to the Islamic banking”, says the report. Referring to Bank Nizwa, the first dedicated Islamic bank in Oman, the report says:
“The bank will be better placed to attract high-margin retail and institutional clients who are inclined to opt for Sharia compliant products. However, overall the industry is likely to become more competitive, which would in turn put pressure on the margins of all banks”.
In the Mena region, the Islamic banking assets are worth $400 billion, forming about 14 per cent of the total asset base of $3 trillion. As per the prospectus, the global Sharia banking industry has been growing at higher rates between 2003 and 2010.

In the GCC Region, the Islamic Banking assets stood at about $285 billion (as at end 2008).
The total Sharia compliant banking assets forms about 22 per cent (end 2008) of the total banking assets in the region. This shows the potential demand of Islamic Finance in Omani market too.

Oman’s financial system is dominated by banks which account for more than 90 per cent of total assets and liabilities of the financial sector as a whole.

The combined balance sheet of commercial banks exhibited healthy growth in all major banking aggregates.

Total assets increased by 18 per cent to RO 18503.1 million in February 2012 compared to RO 15693.7 million in February 2011.

Credit constituted bulk of the banks’ assets which remained by and large stable.

While credit to government declined by 51 per cent in February 2012 reflecting revenue surplus arising out of higher realisation of international crude oil prices, credit to public enterprises and the private sector increased by 47.6 per cent and 15 per cent, respectively.

On a year-on-year basis, total credit expanded by 17.9 per cent to RO 12,782.2 million at the end of February 2012 and accounted for 69 per cent of total assets.

The banking industry around the world has been passing through a critical phase since 2008.
Most of the banks and financial institutions, particularly in the western countries, were busy in repairing their balance sheets, infusing capital, and recovering from the state of credit crunch.


( Oman Daily Observer / 25 May 2012)


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Malaysia: SC lists 825 Syariah-compliant securities

KUALA LUMPUR (May 24, 2012): The Securities Commission (SC) today released an updated list of syariah-compliant securities approved by its Syariah Advisory Council.
In a statement today, the SC said the updated list, which would take effect on May 25 2012, featured a total of 825 syariah-compliant securities.
"These counters constitute 89% of the total 930 listed securities on Bursa Malaysia," it said.
The regulator said the list included five newly-classified syariah-compliant securities and none was excluded from the previous list issued in November 2011.
"The securities are China Stationery Ltd, EITA Resources Bhd, Fraser & Neave Holdings Bhd, Lingui Development Bhd and SapuraKencana Petroleum Bhd," it said.
It said syariah-compliant securities were well-represented in all sectors of industry.
The SC said the full list, which was updated twice a year, was now available on its website atwww.sc.com.my.

(The Sun Daily / 24 May 2012)



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Investors pile into sukuk (Islamic bonds)

April and May looked to be banner months for sukuk. Two deals, one from the Saudi Electricity Company (SEC) and the other, from Banque Saudi Fransi, the Saudi lender part-owned by Credit Agricole, marked two rare but popular US dollar denominated issues which were highly prized by investors. The benchmark deals helped underscore growing investor appetite for Islamic bonds.
Saudi Fransi, Saudi Arabia’s fifth largest bank, launched $750m five-year Islamic bond mid-month at par amid strong investor demand for the issue in mid-May. The issue is the bank’s first sukuk sale under a recently-established $2bn debt programme. The sukuk came in at a spread of 185 basis points (bps) over midswaps, at the lower end of its ­indicated range. Initial price guidance was 200bps over midswaps. The deal was heavily oversubscribed, attracting investor orders worth $4bn, under­scoring growing investor appetite for sukuk issuance. The sukuk carries a profit rate of 2.947%. Citi, Deutsche Bank and Credit Agricole were arrangers on the deal.
The deal marks the second dollar denominated sukuk emanating from the Kingdom so far this year. Saudi Electricity’s $1.75bn sukuk, issued three weeks earlier, raised the bar with some $17.5bn in investor orders.  The Saudi Electricity Company (SEC), which is rated A1/AA-/AA- all Stable, is the largest utility in the GCC. The issue was made up of a five year $500m tranche and a $1.25bn ten year element. The ­transaction was led by Deutsche Bank and HSBC marked the inaugural ­international sukuk issuance by SEC and the largest international debt capital markets issuance out of Saudi Arabia for some years. The issuer also wanted to achieve a long tenor bond supported by a diversified investor base, which the arrangers helped secure after a comprehensive global road show. The dual-tranche Sukuk transaction was well received globally and generated a large order book with over 440 investors placing orders.


Shortly after the issue the SEC’s chief executive Ali Al Barrak explained, “The sukuk issue is important to us for strengthening our funding mix, accessing longer-tenor financing, broadening our investor base and helping us become more in line with our global peers while supporting SEC’s capital expenditure requirements.”
Saudi Arabian dollar-denominated bonds come to market relatively infrequently, and attract substantial demand when they do; illustrating that Gulf issuers are benefiting from their own economic micro-climate and are providing something of an oasis for investors starved of comprehensive corporate issuance opportunities. 
Investor appetite for the deals was marked and might just be a sign of a growing preference for Islamic instruments. The evidence is still thin: however Banque Saudi Fransi’s existing $650m conventional bond, which carries interest of 4.5% and matures in 2015, was bid at just over 103.97 in the second week of May, to yield about 2.8%, coming under some selling pressure ahead of the new issue.
Also in mid May Islamic Development Bank (IDB) enhanced the size of its medium term notes (NTN) ­programme from $1.5bn to $3.5bn, which will be issued in both London and Kuala Lumpur. The IDB’s forthcoming medium term sukuk (which is expected to range between five and seven years) will be issued under this programme sometime in June and is expected to raise between $750m and $1bn. Funds will be used to provide blended credits in support of capital goods projects in member countries. IDB, which is AAA-rated, priced a $750m five-year sukuk last May at a spread of 35bps over midswaps to yield 2.35%. According to local Saudi press reports, the sukuk will be 144a-compliant and, therefore, open to investors from the United States; though the IDB did not respond to questions about its forthcoming issue. 
Elsewhere, bond traders expect the first restructuring of an Islamic bond.  United Arab Emirates’ Dana Gas, the Sharjah-based energy company, is expected to restructure its $920m sukuk in coming weeks as investor concerns have heightened over the ability of the utility to meet its payment ­commitments. Up to now no Islamic bonds have been renegotiated though there have been examples of outright defaults (in both Saudi Arabia and Kuwait).
Dana has reportedly hired Blackstone, Latham Watkins and Deutsche Bank to advise on the various options for repaying the sukuk. The company is “committed to finding a consensual solution that is equitable to all stakeholders”, it said in a statement to the Dubai stock exchange.
Meantime, the Central Bank of Bahrain (CBB) says its monthly issue of the short-term Islamic leasing bonds, Sukuk Al-Ijaara, has been oversubscribed by 175%. Subscriptions worth BD35mwere received for the BD20m issue, which carries a maturity of 182 days. The expected return on the issue, which matures in mid-November 2012, is 1.34%.

(F.T.S.E Global Market / 23 May 2012)



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Thursday, 24 May 2012

Malaysian Airline maps out $798 mln sukuk route

May 22 (Reuters) - Malaysian Airline System said on Tuesday it planned a 10-year, 2.5 billion ringgit ($798 million) sukuk programme to shore up its capital base under a three-pronged funding pillar.

The funding plan is part of the ailing national carrier's strategy to return to profitability after posting a narrower first-quarter net loss.

"We anticipate drawing down the first tranche of 1 billion ringgit of the proposed sukuk some time in June 2012, once all regulatory approvals are cleared," MAS said.

MAS also said it had secured a bridging loan of 1 billion ringgit from a local commercial bank on March 30, to ensure its working capital cash balances remained adequate until the expected drawdown of the first tranche of sharia law-compliant sukuk.

The second funding pillar entailed the leasing of six new Airbus A380s and two new Airbus A330s, with a total capital value of 5.3 billion ringgit, according to the airline.

The third pillar involved the commercial funding of its aircraft capital expenditure, MAS added.

MAS shares closed 0.97 percent lower on Tuesday at a record-low 1.02 ringgit, underperforming Malaysia's benchmark stock index, which ended the day 0.52 percent higher.

(Reuters / 22 May 2012)



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Wednesday, 23 May 2012

Bumper year for sukuk issuance

MANAMA: Last year was a bumper year for the issuance of sukuk.
Luxembourg for Finance chief executive Fernand Grulms told delegates at the conference that $85 billion were issued in 2011 which was two-and-a-half times the pre-financial crisis record of $33bn issued in 2007. "This huge increase indicates that the Islamic capital markets are back in the game," he said.
"Nevertheless, we should set the figure in context. In the conventional debt markets, in 2011, $5.4 trillion were issued in the US alone and the sukuk market in 2011 was driven largely by Malaysia. In other words, the short answer to the question of are Islamic investments building international reach and scale is a yes and a no."
"Sharia-compliant capital markets activity currently still remains a niche market but certainly can and will build international reach and scale.
"Islamic finance is no longer limited to the countries in which it began, or to the early adopters and one of the key hurdles to achieving international reach and scale is a lack of transparency in the product development area.
"The absence of a consistent published set of legal rules can be perceived by the market as uncertainty, inefficiency, increased time to market and increased costs, which are elements that markets dislike," Mr Grulms said.
Conference managing director David McLean said with the sukuk markets already off to a strong start in 2012, recent reports are indicating that there will be a significant increase in issuances this year.
"The issuances in the first quarter of 2012 have already reached approximately $43bn worldwide, which is nearly half of the total issuance in 2011.
"This year may see new jurisdictions joining the Islamic financial markets particularly from the Asia Pacific and the Mena region. With significant infrastructure and social development expenditure in these key markets, along with challenging global conventional bond market conditions, market borrowers are seeking to diversify to other alternate funding sources.
"Given the continued level of liquidity within the overall Islamic investor base, Islamic instruments are emerging as an increasingly attractive and viable alternative," he said.

(Gulf Daily News / 21 May 2012)


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Risk management strategies and practices for Islamic banks

MUSCAT — Islamic Banking differs significantly from conventional banking approaches not solely by its nature, but also by way of the challenges it faces due to the complexity of its sophisticated nature, in the form of operational risks.
According to Basel II, “Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and system or from external events”.
However, according to the Islamic Financial Services Board (IFSB), in Islamic banks, operational risk is associated with the loss resulting from ‘inadequate, or failed internal processes, people, and system, or from external events, including losses resulting from Shariah noncompliance, and the failure in fiduciary responsibilities.
Thus the best way for Islamic banks to combat operational risks is to develop risk management strategies and practices said Arsalan Ahmed Qureshi, AVP — Senior Manager, Operational Risk — Risk Management Dept, Al Baraka Bank.
Keeping in line with this definition by the IFSB, simply put, the elements of operational risk exposures, related to Islamic banks are Shariah non compliance risk, fiduciary risk, people risk, technology risk, and legal risk.
According to IFSB guidelines, Shariah noncompliance risk arises from Islamic banks’ failure to comply with the Shariah rules and principles determined by its Shariah Board or the relevant body in the jurisdiction in which the Islamic bank operates resulting in the transaction being cancelled, and inability to recognise income or loss.
Fiduciary risk is the risk that arises from Islamic banks failure to perform in accordance with explicit and implicit standards applicable to their fiduciary responsibilities resulting in the deterioration of reputation. People risk is caused due to the lack of people who are adequately trained in modern financial transactions as well as Fiqh al Muamalat (Islamic law relating to financial transactions).
Technology risk occurs due to the Islamic banks’ inability to capitalise on the use of its technology in different ways.
Finally legal risk may arise from uncertainty in laws, the lack of a reliable legal system to enforce financial contracts, legal uncertainty in the interpretation of contracts, the legality of financial instruments, lack of availability of legal experts, and exposure to unanticipated changes in laws and regulations.
Operational risks are a recent addition to a list of risks faced by financial institutions which can lead to significant losses.
This sees various techniques being applied by these institutions, including Islamic banks, to measure and manage operational risks.
At Al Baraka Bank, Qureshi’s responsibilities are twofold, one as a strategic partner to the business units which involves advising them on risk/ regulatory issues and the best way to identify and manage operational issues.
The second is that of a risk controller setting parameters for risk activities. This makes him an expert on the subject of operational risks, risk strategies, measurement of operational risk capital, operational risk capital charge and tools and practices to combat operational risk — issues that will be highlighted in great detail at the Oman Islamic Banking and Finance Conference 2012.


(Oman Daily Observer / 23 May 2012)


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Tuesday, 22 May 2012

Financial shock would never have happened under Sharia

LEGAL OPINION by John King
In the West we have, over many years, created a range of financial instruments to meet the needs of business, of investors and of the man and woman in the street. In the recent past, institutions in the Islamic world have developed a parallel set of instruments which seek to fulfil those needs in a way which is consistent with sharia law.
Modern Islamic finance as we now know it today, having its origins in 1960's.
To the extent they think about such things at all, it is probable that many in the West regard Islamic finance as a harmless eccentricity. Some may see its arrival in Europe and North America as an unwelcome intrusion. Few would ever take the time to examine its underlying principles.
In the decades which followed the Reagan revolution, we came to think that markets, including financial markets, could, by and large, look after themselves. Since the onset of the global financial crisis, many in Europe and America have come to believe we need to apply a new ethic to the conduct of financial markets. However, in the West, where public morality is divorced from revealed religion, there is as yet no consensus as to what form this should take.
In the Islamic world, the problem is different. To pious Muslims, it is self-evident that financial markets should be organised in accordance with sharia law, which reflects the truths revealed in the Koran, and the example set by the prophet in the Sunnah.
Most of us are aware that Islam prohibits usury and few would be surprised to learn that a Muslim should not profit from the sale of alcohol or from the distribution of pornography.
What most of us do not know is that the sharia presents a positive vision, based on principles of equity, as to how business should be carried on. In a financial transaction, the person who brings the money should share risk with the person to whom it is brought.
An investment should normally be backed by a tangible underlying asset. One should make an investment only if it is reasonable to suppose it will bring a return.
How are these principles applied in practice? Some conventional instruments, including many of the more exotic creations of Wall Street, are so irremediably unIslamic that no amount of ingenuity could produce an equivalent which was sharia-compliant.
Into this category would fall the high-risk products of casino capitalism and instruments which derive their value not from assets but from algorithms.
Other, more familiar, financial products have their Islamic equivalents. A Western bank pays a saver interest by reference to the “time value of money”. A depositor in an Islamic bank shares in the profit and losses which the institution generates when it puts the deposit to use. An Islamic institution cannot grant a mortgage but it may lease a property to its customer.
In the Christian (or post-Christian) West, Islam can resonate negatively. We often focus on aspects of that civilisation which are foreign and threatening to us and ignore features of Muslim life and beliefs which we might consider more benign.
Our Government is anxious that Dublin should develop as a centre for Islamic finance and, with that in mind, we have amended our tax code so as to create a level playing field for conventional and Islamic financial instruments. So where a bank depositor receives a share in the profits (and losses) generated from, for example, the deposit, the Revenue Commissioners will treat such return as if it was interest.
Opinion in the West is often suspicious of, or antagonistic towards, sharia. Is it right then that our law should accommodate practices which are informed by that code?
In the US housing bubble of 2005-2006, unscrupulous institutions lent money to poor people on the security of their homes. By some form of financial alchemy, investment banks converted these mortgages into triple A securities which they then sold on to fund managers. Some shrewd investors could see this market was heading for a fall and placed their bets accordingly. In the resulting debacle, the global economic system received a shock from which it has not yet recovered.
Nothing remotely like this could have happened if the actors in this drama had been constrained by sharia principles, so we should not be surprised that many Muslims feel that, in the era following the collapse of Lehman Brothers, we might when we come to regulate financial markets consider taking a leaf out of their book.
By John King, a partner in Ivor Fitzpatrick Company Solicitors, where he specialises in media and commercial law.
(Irish Times.Com / 21 May 2012)



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NIB backs AAOIFI’s efforts to reform Islamic finance industry

NIB (Noor Islamic Bank) is backing what could be Islamic finance’s biggest shake up in years, lending its support to the announcement of seven new standards from the Middle East’s leading Islamic finance regulator, the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI).

The new standards govern key areas of Islamic finance, including financial rights and their management; liquidity management; bankruptcy; capital and investment protection; agency investment; calculation of profits transaction and options of trust.
AAOIFI will introduce the new standards to the region’s Islamic financial community at a ceremony, to be held at Dubai’s Grand Hyatt hotel, on 23 May, of which Noor Islamic Bank is a sponsor. Islamic finance industry leaders will have the opportunity to debate the proposed changes before a final draft of the reforms is prepared by the end of this year.
Hussain AlQemzi, GCEO of Noor Investment Group and CEO of Noor Islamic Bank said, “We welcome AAOIFI’s initiative to reform the guidelines that direct the work of the Shari’a boards which act as advisors to our industry. The announcement of these new standards will be an opportunity for the Islamic finance industry to engage in meaningful and insightful debate about the future direction of our industry.
“This review of standards is timely. Islamic finance is growing rapidly, hitting $1.3 trillion last year. This speed of growth will inevitably expose systemic flaws in how the industry is regulated, which could impact Islamic finance institutions and stall growth unless they are addressed. That is why we are supporting AAOIFI’s efforts to bring about much needed change.”
AAOIFI, a Bahrain-based organisation, had previously said it wished to develop standards that can benefit the industry and help drive future growth. Among the basic components of Islamic finance to be reviewed this year will be the Murabaha, Mudaraba and Ijara structures, which are designed to permit investment while obeying religious bans on paying interest and pure monetary speculation.
AlQemiz has been an outspoken critic of the lack of clear global consensus on what products and services are Shari’ah compliant. According to AlQemzi, this disconnect between different regions of the world, such as the GCC and S.E Asia, makes it harder for Islamic finance players to construct the type of cross border deals required to challenge the conventional banks dominance.
He has also criticised the Islamic finance industry for its failure to challenge the pre-eminent position of the regulators in driving the sector forward. Speaking at a recent Islamic finance conference in Dubai, Al Qemzi called on his counterparts in the industry to challenge the regulators with new and innovative products and to take responsibility for the sector’s future growth.
NIB is backing what could be Islamic finance’s biggest shake up in years, lending its support to the announcement of seven new standards from the Middle East’s leading Islamic finance regulator, the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI).

The new standards govern key areas of Islamic finance, including financial rights and their management; liquidity management; bankruptcy; capital and investment protection; agency investment; calculation of profits transaction and options of trust.
AAOIFI will introduce the new standards to the region’s Islamic financial community at a ceremony, to be held at Dubai’s Grand Hyatt hotel, on 23 May, of which Noor Islamic Bank is a sponsor. Islamic finance industry leaders will have the opportunity to debate the proposed changes before a final draft of the reforms is prepared by the end of this year.
Hussain AlQemzi, GCEO of Noor Investment Group and CEO of Noor Islamic Bank said, “We welcome AAOIFI’s initiative to reform the guidelines that direct the work of the Shari’a boards which act as advisors to our industry. The announcement of these new standards will be an opportunity for the Islamic finance industry to engage in meaningful and insightful debate about the future direction of our industry.
“This review of standards is timely. Islamic finance is growing rapidly, hitting $1.3 trillion last year. This speed of growth will inevitably expose systemic flaws in how the industry is regulated, which could impact Islamic finance institutions and stall growth unless they are addressed. That is why we are supporting AAOIFI’s efforts to bring about much needed change.”
AAOIFI, a Bahrain-based organisation, had previously said it wished to develop standards that can benefit the industry and help drive future growth. Among the basic components of Islamic finance to be reviewed this year will be the Murabaha, Mudaraba and Ijara structures, which are designed to permit investment while obeying religious bans on paying interest and pure monetary speculation.
AlQemiz has been an outspoken critic of the lack of clear global consensus on what products and services are Shari’ah compliant. According to AlQemzi, this disconnect between different regions of the world, such as the GCC and S.E Asia, makes it harder for Islamic finance players to construct the type of cross border deals required to challenge the conventional banks dominance.
He has also criticised the Islamic finance industry for its failure to challenge the pre-eminent position of the regulators in driving the sector forward. Speaking at a recent Islamic finance conference in Dubai, Al Qemzi called on his counterparts in the industry to challenge the regulators with new and innovative products and to take responsibility for the sector’s future growth.
(C.P.I  Financial / 21 May 2012)

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