Hong Leong Islamic Bank to provide full set of services

By Habhajan Singh

Hong Leong Islamic Bank Bhd (HLIB), which is undergoing structural changes and has recently roped in a number of new senior staff, is all set to deliver results in the coming months.
The wholly owned subsidiary of Hong Leong Bank Bhd (HLB), which will turn three years old next month, is in the midst of turning what was a consumer bank into a full service bank.

"By next quarter, we would be able to provide a better range of services as compared to last year. We are in the transformation stage and we're building teams. Those teams will start delivering in the next quarter," HLIB managing director Khalid Mahmood Bhaimia told The Malaysian Reserve.
Asked to explain the key initiative being undertaken at HLIB at the moment, Khalid pointed towards the transformation process. "In Hong Leong Islamic, we've been a consumer bank, or a personal financial services bank, for the last three years of our formation as an Islamic bank. We are now in the process of transforming it into a full service bank.
"Here, it means you also do investment banking, wealth management, corporate banking, and takaful. We're undertaking a transformation towards that — having all those pieces available under one roof," he said.
In the process, he said the bank had brought in many new teams to work in wholesale, investment, product development and Shariah as well as Islamic credit. A number of the new team heads come from RHB Islamic Bank Bhd, where Khalid had earlier served as the chief executive officer before joining HLIB as chief operating officer in May 2007. He was then made managing director the following month.
Among the team heads are Ida Aizun Husin who heads HLIB's wholesale bank, Jasani Abdullah who heads product development and Shariah, Khadijah Iskandar who heads Islamic credit and Saw Ann Ping.
"These are the transformations that I'm talking about. The teams are in place. Some have been aggressive in the past, others are starting to be aggressive," he said.
With its beginnings as the Islamic banking arm of HLB, the division was incorporated as a separate entity on March 28, 2005 and is today a fullfledged Islamic bank with an authorised and paid up capital of RM1 billion and RM500 million, respectively.
HLIB is a dedicated brand offering a comprehensive range of innovative solutions covering areas like Structured Finance, Capital Markets, Corporate & Commercial, Personal Financial Services, Bancatakaful and Wealth Management. For the first half to Dec 31, 2007, HLIB posted a pre-tax profit of RM42 million, up 16% year-on-year and and 24% quarter-on-quarter compared to the same period last year, according to information posted on its website. The balance sheet net financing grew to RM4 billion versus RM3.7 billion as of June 2007.

Bank Muamalat to have new CEO, chairman

(The lead story of today's (Feb 18, 2008) of The Malaysian Reserve)



Bank Muamalat Malaysia Bhd, which saw DRB-Hicom Bhd acquiring a 70% stake in the bank in October last year, will see changes at the top management level soon.

It is learnt that following the acquisition of the stake from Bukhary Capital Sdn Bhd in a RM1.07 billion share deal, the bank has been searching for a new CEO to further push its transformation plan. The management revamp will also see a change in the chairmanship of one of the smallest Islamic banks in the country. Bank Muamalat’s assets total about RM13 billion currently.
The bank has been in the limelight since DRB-Hicom got an offer from Bukhary Capital, owned by tycoon Tan Sri Syed Mokhtar Al-Bukhary, to sell its entire stake in the bank. The balance 30% stake in Bank Muamalat is currently held by Khazanah Nasional Bhd.
The Malaysian Reserve understands the bank’s current chairman Datuk Ismail Shahuddin will not be renewing his contract when his term expires at the end of next month, while CEO Datuk Abdul Manap Abdul Wahab is already on leave pending his last day at the bank at the end of this month. The two, formerly from Malayan Banking Bhd, came on board at Bank Muamalat in 2005.
Sources said prior to their appointments, the bank was experiencing a downtrend in its performance, as shown by the deterioration in its net profit of RM18 million in financial year (FY) 2001 to its first-ever net loss in 2004.
However, under their leadership, the bank had managed to return to the black in FY05 and registered a huge improvement in its net profit to RM32 million. The strong showing continued in FY06, with its net profit increasing 130% to RM73.9 million. This was mainly attributed to strong earnings from its retail and wholesale businesses as well as enhanced asset quality management. Revenue in FY06 rose to RM627.2 million f rom RM471.9 million previously.
The purchase of Bank Muamalat by DRB-Hicom will see Syed Mokhtar cementing his control of the DRB-Hicom group, of which he already owns about 15%.
The deal, expected to be completed by the first quarter of this year, values the bank at RM1.6 billion or more than double the value it was when Bukhary Capital bought a 30% stake in early 2004 from Commerce Asset Holdings Bhd.
Established in 1999 following the merger between Bank Bumiputra Malaysia Bhd and Bank of Commerce, the bank absorbed the Islamic banking assets of the two banks. It was then, one of only two Islamic banks operating in the country, with the other being Bank Islam Malaysia Bhd.

Jordan opens door to Malaysian takaful players

By Habhajan Singh
Malaysian takaful players hoping to penetrate the Middle East and North Africa (Mena) market should consider Jordan as a starting point, says a regulator from the country.
Dr Bassel Hindawi, director general of the Insurance Commission of Jordan, says Jordan, through its geographical advantage and well-established regulatory system, should prove attractive for Malaysian takaful players who are considering expansion into the Middle East region.
"They can consider using Jordan as a regional hub to either start a foreign operation or to oversee existing operations in the region. The regulatory system we have in place is a dual system covering both conventional and takaful.
"From an investment point of view, we have no restrictions on foreign ownership. So it is left to investors to decide how they wish to operate," he told The Malaysian Reserve in a interview in Kuala Lumpur recently.
Hindawi, who is also president of the International Association of Insurance Fraud Agencies (IAIFA), noted that takaful is growing at a rate of 20% to 25% annually within Mena.
"Looking at the big picture of growth, it is prudent, from a business point of view, for Malaysian takaful players to seriously consider establishing their presence in Mena, either through joint ventures or stand-alones," he said.
According to a Standard & Poor's Ratings Services report, if the world average insurance premium of US$550 (RM1,776) per capita is achieved, the Gulf Cooperation Council (GCC) insurance market could be worth up to US$20 billion.Globally, takaful is expected to be worth between US$7.4 billion and US$14 billion mark by 2015, with the Middle East expected to be a major driver of growth. Dr Hindawi said that the commission intends to promote both conventional insurance and takaful."
Obviously, the potential for growth and development of takaful across the region is huge," he said. Dr Hindawi said one of the challenges faced in the development of takaful is the lack of a uniform standard.
"For takaful to continue to develop and reach its potential, there has to be a level playing field for takaful in all markets," he said.
He outlined two necessary precursors for this to happen. He said the first is the creation of a uniform standard, noting that the on-going work of global standard-setting Islamic Financial Services Board (IFSB) will lead to that.
The second "major challenge" is the consistency of Shariah interpretation from one jurisdiction to another, he said.
"Right now, even at the national level, you have different interpretations from one company to another. I would propose each jurisdiction has a central council to provide oversight and guidance for Shariah scholars at the national level," he said.
He also described Bank Negara Malaysia's Shariah Advisory Council as a "major plus for Malaysia." It is understood that Jordon does not have such a committee yet.

Scholars debate Taqi's paper on sukuk in London

(The Malaysian Reserve, 11 Feb 2008)

SUKUK DEBATE RAGES, SHARIAH COMPLIANCE QUESTIONED

Regulators are at loggerheads on what to do next after a study revealed that the majority of Islamic bonds do not comply with Islamic laws

By HABHAJAN SINGH

Sukuk, or Islamic bonds that notched global sales of up to US$30.8 billion (RM 99.47 billion) last year, almost doubling sales the year before, is currently under intense scrutiny of Shariah scholars. It became an industry hot potato when it was reported that a whooping 85% of Gulf sukuks did not fully comply with Islamic laws.

The figure, coming from prominent contemporary Islamic jurist Muhammad Taqi Usmani (PIX), expectably caused a stir. Sheikh Taqi, the chairman of the Shariah Council of Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), is a retired Pakistani Shariah judge, a permanent member of the OIC Fiqh Academy and an influential scholar.
Last week, his paper on sukuk was the focus of deliberation at a workshop in London conducted by a select group of Islamic legal scholars, economists and bankers. It was organised by the Islamic Finance Project (IFP), a venture by the Islamic legal studies program at Harvard Law School and the London School of Economics (LSE).

The discussion is timely as sukuk fast gain currency. Japan is reportedly planning to sell its first sovereign sukuk this month. Thailand has expressed interest while Hong Kong is actively wooing Islamic finance players. The workshop organisers estimated that the sukuk industry is currently valued at over US$150 billion.
It is precisely this explosion that prompted Sheikh Taqi to raise caution in the air on sukuks, which are generally structured as debt instruments.

The organisers noted sukuk criticism has come from two fronts: Economists who object to such instruments being debt based and certain scholars who voiced criticism of some interpretations of specific jurisprudential concepts employed in structuring sukuks. Shedding some background on the issue, Jeddah-based King Abdulaziz University Shariah supervisor and Professor Mohamed Elgari, in his response to Taqi's paper, wrote that AAOIFI Shariah Council had discussed the matter.

On its sitting in Makkah late last year, the sukuk discussion ended without conclusion. "Then came the storm, when a number was quoted by Justice Taqi Usmani during a speech in Bahrain. Reporters love numbers," he said.

Taqi's Arguments

Sheikh Taqi, who served a term as Pakistan's Federal Shariah Court judge, outlined three issues in his paper entitled 'Sukuk and their contemporary applications', signing off as AAOIFI Shariah Council president.

The Bahrain-based organisation is an Islamic international autonomous non-forprofit corporate body that prepares accounting, auditing, governance, ethics and Shariah standards for Islamic financial institutions. His concerns were on bondholders' ownership of enterprise assets, regular distributions to sukuk holders, and guaranteeing the return of principal.

On the first issue, Taqi said that sukuk represent ownership shares in assets that bring profits or revenue, one characteristic that distinguishes sukuk from conventional bonds. Recently, cracks have appeared in that respect. He cited the example where the assets in the sukuk may be shares of companies that do not confer true ownership but which merely offer sukuk holders right to returns. "Such sukuk are no more than the purchase of returns from shares; and this is not lawful from a Shariah perspective," he said.

On distribution, he noted that most sukuk issued today are identical to conventional bonds with regard to the distribution of profits from their enterprises at fixed percentages based on interest rates. As to the third point, he argued that virtually all sukuks issued today guarantee the return of principal to holders at maturity, just as in conventional bonds. This is accomplished by a binding promise from either the issuer or the manager to repurchase the assets at the stated price, regardless of their true or market value at maturity.

In Shariah-compliant dealings, he pointed out that reward always follows after risk. The legal presumption with regard to sukuk is that there can be no guarantee that capital will be returned to investors. Instead, he added they have a right to the true value of the assets, regardless of whether or not it exceeds the face value.

"All of today's sukuk, however, guarantee by indirect means sukuk holders' principal," he wrote in what must a hard pill to swallow for many practitioners. On purported "incentives" to sukuk managers, one of the issues under query, he said: "If Shariah supervisory boards have tolerated such irregularities (mafasid) when sukuk began to be issued, and at a time when Islamic financial institutions were few in number, the time has now come to revisit the matter and to rid sukuk from now on from such blemishes."

In the 14-page discussion paper on sukuk, Sheikh Taqi also discussed about the 'higher purposes' of Islamic economics. He argued that Islamic banks were not established so that they could offer the same products, and engage in the same operations, as conventional banks in the prevalent interest-based banking system. "What is happening at the present time, however, is the opposite. Islamic financial institutions have now begun competing to present themselves with all of the same characteristics of the conventional, interestbased marketplace, and to offer new products that march backwards towards interestbased enterprises rather than away from these.

"Often times these products are rushed to market using ploys that sound minds reject and bring laughter to enemies," he wrote. Academic, Industry Feedback A number of scholars and practitioners have presented their views on Taqi's arguments. Among them are India's Aligarh University former professor Mohammd Nejatualla Siddiqi, Seif I Tag el-Din from Leicestershire's Markfield Institute of Higher Education, Durham University's Prof Rodney Wilson and Mansoor Shakil, the director and head of HSBC Amanah Central Shariah Group, Dubai, UAE.

In his arguments, King Abdulaziz University's Mohamed Elgari wrote that sukuk cannot be objectionable because they deliver the same conventional outcome or behave in the market in similar way to bonds. "On the contrary, they are desirable because they do so," he said.

In his notes of discussion, local Shariah scholar from International Islamic University Malaysia (IIUM), Dr Mohamad Akram Laldin (PIX) touched on concern that today's sukuk behave like debt and suggestion by some quarters that it should be structured to behave more as an equity product. "While Islam allows debt, it does not encourage debt if there is no necessity to take debt.

"However, in modern day transactions, where liquidity is needed to facilitate mega projects and to fulfil the need of the market, such arrangement fall under the category of permissible things in Islam, provided that the requirements and restrictions of taking debt are observed. The same shall apply in the sukuk market," said Akram, who also sits on the HSBC Amanah's regional Shariah committee for Malaysia.

Rafe Haneef, former head of Islamic Finance for Asia at Citigroup, responded with a lengthy paper of his own, arguing that the industry has not yet reached the stage of maturity that could invoke the full force of the higher objectives of Shariah.

"The author submits that unfortunately, the time has not yet arrived to raise the standards in the Islamic finance industry," he said, responding to Taqi's assertion that the number of Islamic banks and financial institutions today is not to be overlooked. The debate is far from over and will continue as Islamic finance pushed ahead in the name of faith, business and innovation.

end