ISRA, a step forward to developing Islamic finance

IN yet another forward looking step to fortify Malaysia's lead position in Islamic finance, Bank Negara Malaysia (BNM) announced the establishment of International Shariah Research Academy for Islamic Finance (ISRA) to spearhead research in Shariah issues.

The establishment marks yet another proactive measure from the central bank in the co fastgrowing Islamic finance, which saw the size of global sukuk market, including sukuk denominanted in local currencies, growing rapidly to an estimated size of US$82 billion (RM262.72 billion) at end-2007. The setting up of ISRA comes after the central bank played a pivotal role in establishing the Malaysia International Islamic Financial Centre (MIFC) in 2006.

During the year, BNM said it granted 16 approvals to conduct international currency business operations, including an international Islamic banking licence to an investor from Bahrain as well as other domestic financial institutions to establish dedicated international currency business units.

In its March 26 announcement on the establishment of ISRA, the central bank also announced the appointment of local Shariah scholar Dr Mohamad Akram as executive director of the newly-established research academy.

The appointment of Dr Akram, a scholar at the International Islamic University Malaysia (IIUM) and also a Shariah scholar with HSBC Amanah, may also benefit International Centre for Education in Islamic Finance (INCEIF), the international Islamic finance university set up with a RM500 million endowment from the central bank.

It its statement, BNM said ISRA will be part of INCEIF which would enable the academy to leverage on the university's existing infrastructure and facilities as well as knowledge, expertise and resources of the academic faculty and post graduate students.

"INCEIF has been trying hard to rope in scholars. Dr Akram would be a great addition to the team," said an Islamic finance teaching staff from a local university.

BNM said the establishment of ISRA is to promote applied research in the area of Shariah and Islamic finance. It will also act as a repository of knowledge for Shariah views or fatwas and undertake studies on contemporary issues in Islamic financial industry. It noted that ISRA will contribute towards strengthening human capital development in the areas of Shariah and provide platform for greater engagement amongst practitioners, scholars, regulators, academicians via research and dialogues, both in the domestic and international environment.

It added that through pioneering research and rigorous intellectual dialogue, ISRA aims to promote innovation and dynamism into new boundaries of Islamic finance. It is envisioned that with greater research and dialogues, mutual respect and recognition would emerge within the Islamic financial industry globally. It said a council of scholars, comprising eminent local and international Shariah scholars, will be set up to provide input and assistance in the strategic direction of ISRA's research works. (The Malaysian Reserve, March 31, 2008, pg 32)

Nik Norzrul Thani helms Zaid Ibrahim & Co

Zaid Ibrahim & Co, Malaysia's largest law firm, saw its founder getting a seat in the Cabinet. Datuk Zaid Ibrahim, who did not contest in the recent general election, has been appointed as Minister in the Prime Minister's Department. With the Kelantan-hailing lawyer relinquishing all his interest in the firm, partner Dato' Dr Nik Norzrul Thani now assumes the firm's chairmanship. The Malaysian Reserve had interviewed Nik Norzul in November. Here's the piece.

ZAID IBRAHIM & CO EXPANDS INTO SHARIAH RELATED FIELDS

Zaid Ibrahim & Co, the country's largest legal firm that is actively engaged in regional work in the field of Islamic finance, has won a number of big ticket items and expects to export their legal services overseas. The firm — with presence in Indonesia, Singapore and Thailand — is looking at a slew of new cases and investment transactions in this region and as well as the Middle East.

"We have branches all over. We are able to export our Islamic finance expertise to these countries," Datuk Dr Nik Norzrul Thani Nik Hassan Thani, a partner at the legal firm told The Malaysian Reserve.

Nik Norzrul Thani, who heads the firm's Islamic finance practice, said legal firms and other advisors now require broader understanding of Syariah and related fields as demand for more competitive products intensifies amongst the Islamic finance providers. For some time now, bankers have voiced their frustrations at the lack of legal experts in Islamic financing, an area that is still undergoing growth. "We strive to have people who do cutting edge work," said Nik Norzrul Thani, formerly a dean at International Islamic University Malaysia (IIUM) and a lawyer with Baker & Mc Kenzie.

Over the last few years, Zaid Ibrahim & Co have managed to secure a number of Islamic finance related assignments. The law firm says its lawyers have structured some of the most innovative financing transactions in the region. In Brunei, it was appointed advisors for the first issuance of Islamic bonds based on the Syariah principles of Sukuk Al-Ijarah while in Indonesia, it advised on an Islamic financing structure based on the Syariah principle of Al-Murabaha.

Among others, it worked on a US$100 (RM332) million Sukuk Al-Ijarah Islamic financing facility in Bruinei, Islamic financing product bond on the principle of Al-Murabahah in the UK, a US$35 million Murabahah Islamic trade finance facility in South Africa and a US$10 million Bai Ad-Dayn Islamic facility in Canada. Locally, among the big ticket items included a RM5.57 billion MTN issued under the Istina principle to finance all costs associated with the initial operations of a power plant and a RM5.1 billion Al-Bai' Bithaman Ajil Islamic debt securities for a highwayrelated client.

It is also advising a number of financial institutions on standardising their Islamic banking documentation. Zaid Ibrahim & Co's Islamic banking and finance practice comprises five lawyers who cover an extensive range of domestic and regional transactions, with an emphasis on projects in emerging markets in Asia.

"One of the defining features of the firm's lawyers is their ability to add value -whether by creating innovative structures, finding solutions that meet the differing objectives of multiple parties or by contributing cutting edge substantive advice on a range of matters.

"Our lawyers are familiar with the products and structures available in the market and have advised on matters in Brunei, Canada, Indonesia, the Philippines, Singapore, South Africa, Turkey and Saudi Arabia, hence are able to assist clients on innovative forms of structured Islamic financing to meet the specific and unique needs of clients' commercial strategies and drivers," according to the firm's description of its Islamic banking and finance practice.

Nik Norzrul Thani said the firm has also team up with regulators to organise Islamic finance related seminars in the region; the most recent held in Jakarta. (THE MALAYSIAN RESERVE, Nov 12, 2007)

A Bridge Between Malaysia & the Gulf

Part Two of The Malaysian Reserve interview with Yakub Bobat of HSBC Amanah

HSBC Amanah Malaysia Bhd, the full-fledged Islamic subsdidiary of HSBC Bank Malaysia Bhd, plans to be a bridge between Malaysia and the Gulf Cooperation Countries (GCC) countries when it comes to financing.
The newly-approved Islamic subsidiary argues that there is no Islamic bank in this market that has the kind of presence that HSBC has across the GCC. In this second part of the interview, Yakub Bobat, the managing director of HSBC Amanah, talks to Habhajan Singh about the Islamic bank's plans on moving forward and the challenges in getting the right expertise.

Q: HSBC Amanah says that Malaysia will become the group's regional hub for Islamic banking businesses. What are the building blocks towards achieving that stated goal?

A: Actually, it already is. This is already the scenario within HSBC. We are already, within the HSBC world, the regional centre of excellence across Asia Pacific. We already are. And this is very much in line with the MIFC (Malaysian International Islamic Finance Centre) initiative. The idea is to consolidate existing businesses within the Asia Pacific market and to identify possible new markets, using Malaysia as a base to transfer and export best practices from Malaysia. Even from other markets within the globe. As I'm part of the global Amanah top team, we are able to transfer best practices across the globe into any market. We are able to take advantage of that given our presence.

Fundamentally, we will also build the block to act as a bridge between Malaysia and the GCC. It's not just a one-way traffic. Basically, with presence across both markets, we are able to connect Malaysian entities, and there are many of those that are moving into the other direction, to support the significant amount of growth in various industry sectors, including the real estate sector, for example in the UAE. We also have a need to support that market once they are there. So, we are able to connect those companies at that end in the same way as we are able to connect our customers in GCC into Malaysia.

Q: Is this similar to the roles played by some of the GCC Islamic banks present in Malaysia?

A: There is no Islamic bank in this market that has the kind of presence that HSBC has across the GCC. We have a presence in every single market over there. The depth and breath of our business, and our customer franchise across the entire GCC and indeed throughout the OIC (Organisation of Islamic Conference) market, gives us an ability to connect investment opportunities at both ends.

Q: What is the role of HSBC Amanah outfit that you have here?

A: Simply put, I would say HSBC Amanah is well positioned to supporting existing businesses, for example Indonesia, to grow significantly from where it is today, using the expertise, experience and the credentials that we have built in this market over the last 13-14 years, both in the areas of domestic banking as well as in cross-border investment banking business. And, the other part of that, our role is to support HSBC businesses across parts of Asia Pacific where there is no HSBC Amanah business to identify opportunities and to support them, help them establish an Amanah presence.

Q: Which markets?

A: If you look at the top six markets in the Asia Pacific markets, affinitiy populations, i.e. the Muslim population, across the markets is around 750 million large. That shows you there are significant opportunities to build an Islamic business across these markets. This is something that we will continue to focus on. It will depend on how fast regulation is established in some of these markets. Where regulations are already established, how fast they can be conducive to global Islamic finance. Where there are those needs, we will be there to support those needs, from Malaysia.

Q: What about getting the right people with the right skill-sets?

A: This is the biggest issue that the industry is facing right now. It's not just Malaysia, but across the Islamic finance industry in the world. It's not just the people in the business, it's also the resources that support the industry. For example, our scholars, training institutes and how we gear up our talent pipeline. In that respect, Malaysia has taken some steps, very positive steps, to develop talent. First, you have INCEIF (International Centre for Education in Islamic Finance), the Islamic university is doing a splendid job. You have the Bank Negara Malaysia (BNM) talent commission programme, and many other initiatives that will help build talent.

HSBC itself has taken a number of steps of our own. HSBC Amanah graduate recruitment programme, so that we have our own talent. We very much believe in the organic approach to build up grassroots. There has been a tendency, as the market develops rapidly, for players to come to market and acquire talent at a price. It increases the cost of doing Islamic business overall, without necessarily increasing incremental value for the organisation. Talent development is a crucial issue and the industry must focus on it. As the business continues to grow, the industry will need bigger resource pool. Now, is that resource pool coming through? That question needs to be asked. I believe it has been asked. There is a need to meet the supply-demand trend. It will be met through the various strategic initiatives that regulators have taken, but market players have to take it to heart, as well.

Q: What about conversion of conventional to Islamic bankers?

A: As this business grows, there will have to be a mix of people from within the bank who will work in the Islamic subsidiary. Let's just take Shariah, as an example. Not only do we have Shariah scholars, but also you have internal coordination functions. That's an obvious area where there may be deemed to be a shortage right now. But there are demands on resources across all aspects of our business. It's not limited just to one particular function. There is no doubt that there has been a lot of progress.

The industry, whether in Malaysia, Pakistan or other markets, very much recognises the need to develop talent across the board. Malaysia has so many examples: INCEIF, IBFIM (Islamic Banking and Finance Institute Malaysia), BNM's talent enrichment programme, IIUM (International Islamic University Malaysia) and many other institutions. Perhaps what we need is a coordinated approach. You have many institutions roving, perhaps, in the same direction. But you can have some element of better coordination, maybe some alignment, some consolidation the way the calendar is developed. More hand-in-hand partnership approach between the practitioners, as in the industry, academia and regulators towards talent development. That certainly might help accelerate the pace of talent development and the kind of talent the industry needs.

Q: You don't get the sense that it is happening at the moment?

A: Well, a lot of good things are happening. It is just that if you look at it from a different perspective to see how can it can be even better. Q: Is the industry fragmented? A: Supply-demand, there is a gap. No doubt. It's also fair to say that the initiatives in this area that Malaysia is taking far exceeds the initiatives that any other market is taking at the moment. Very proactive, indeed.

(The Malaysian Reserve, March 10, 2008)

Faisal Private Bank to use KL office as regional hub

By Ishun P Ahmad

GENEVA-based Faisal Private Bank (Switzerland) SA, currently the only Swiss Islamic private bank, is on track to set up its first overseas representative office in Malaysia.

The bank has obtained the approval from the Swiss Federal Banking Commission, paving the way for the formation of the office as early as next month.

"We obtained the approval from the Swiss Federal Banking Commission last week for the establishment of a representative office in Kuala Lumpur and are now in the process of submitting our application to Bank Negara Malaysia. The approval is expected by next month," said Fadhil Mansor who is slated to head the Malaysian office.

"We have passed the first hurdle for the representative office that is obtaining the Swiss Federal Banking Commission approval. The authorities there have been studying our business plan for the office for the past two months and have given us a letter of support for the representative office.

"Now we will wait to clear the second and final hurdle, i.e. the approval from Bank Negara Malaysia" added Fadhil. According to him, the bank has identified the place for the representative office to be located in the KL Golden Triangle.

He said the representative office would be used as a hub for the Asia Pacific region, namely markets in Malaysia, Indonesia, Thailand, Singapore, Brunei and India. The bank will use Malaysia as a centre to get clients in the region and is looking at a target of achieving assets under management of about US$100 million (RM312.4 million) for the region by the end of 2008.

On what will be the investment stance of the bank in the wake of the current global volatile financial markets, Fadhil said the bank will continue to practice its conservative approach to investments in accordance with Islamic Syariah principles. "Of course we will be prudent in managing our clients' wealth in accordance with syariah principles. It will also depend on their risk appetite," said Fadhil.

He said the bank will continue to seriously look into real estate investments, where it has a good 20-year track record, irregardless of the current US sub-prime mortgage problems. "We have been managing the risk quite effectively and have been showing good returns for our clients. We are also investing in other alternative investments, like renewal energy as a shift from the usual other investments asset classes," he said.

Faisal Private Bank CEO, Marco Rochat was in town over the weekend, to lend support to GP2 race driver, Romain Grosjean, who continues to lead the championship with 11 points, ahead of Petrov and behind Kamui Kobayashi.

Grosjean came be second after Kobayashi in the Sepang GP2 race yesterday morning. Faisal Private Bank is the principal sponsor for Grosjean of the Art Grand Prix team. (The Malaysian Reserve, March 24, 2008)

The making of HSBC’s Islamic banking subsidiary

AFTER a long wait, HSBC Amanah Malaysia Bhd has finally come on stream as a legal entity.

Last Friday, its parent, HSBC Bank Malaysia Bhd, announced the incorporation of the the new entity, a full-fledged Islamic bank, in its efforts to continue to capture a slice of the Islamic financial services market in the Asia Pacific region, with a keen eye on Malaysia. This follows HSBC Bank Malaysia becoming the first locally incorporated foreign bank to be awarded a licence in November 2007 by Bank Negara Malaysia to set up an Islamic Banking subsidiary. In its statement, HSBC said HSBC Amanah Malaysia will have universal banking scope, allowing it to substantially expand its access to Malaysia's Islamic finance industry, which currently accounts for 13% of the country's total banking assets. The local Islamic finance industry has witnessed significant growth in recent years, with assets now totaling close to US$34 billion (RM108.65 billion). The task to spearhead the new chapter falls on Yakub Bobat, currently the managing director of HSBC Amanah, HSBC Bank Malaysia. The Malaysian Reserve's Habhajan Singh interviewed him recently on the making of the subsidiary. The following is the first part of interview.

TMR: HSBC Amanah is the first locally-incorporated foreign bank to be awarded a licence by Bank Negara Malaysia (BNM) to establish an Islamic banking subsidiary. What made this possible?

Yakub: We really got to go back to the basic of the make-up of HSBC Amanah and the Islamic business within a window. We were the first foreign bank to be awarded the window license back in 1994. We have since grown to become the largest foreign player in the Islamic banking scene in this market and have evolved with some critical mass and scale in the last three or four years. If you look at the financials, you will see significant growth. If you look at the first half of FY07, as compared to the first half of FY06, we had 40% growth of total operating income. Business has gained significant critical mass and scale across all of our business segments. Also the fact that we have a proven track record and credentials, not only within the domestic business, but also within the cross border business because we have a business or functions within Malaysia that support regional cross border business in Asia Pacific. Long before MIFC (Malaysian International Islamic Finance Centre, the initiative launched officially in August 2006 to fortify Malaysia's position as a vibrant, innovative and competitive Islamic financial hub), we have been concluding regional deals using Malaysia as the base. With the critical mass and with the ability to support Malaysia and the MIFC agenda, given our global presence and the strength of our global customer franchise, collectively, all of those things put together, meant that we are able to get to this stage. At the end of the day, it will take global players in this market place to make MIFC a success. Players that are able to build the bridge across markets, the bridge that never existed, players that have connectivity in those markets, players with Islamic banking franchise across many global markets, which HSBC does. And the willingness to actually make it happen, the willingness to execute, a willingness of the market players to play their part. Given that those ingredients are in place, we feel that this is the reason why we have gone pass that, if you like, the finishing line first.

TMR: Can give us some examples of cross-border deals pre-MIFC?

Yakub: Two transactions are publicly available. One, the US$50 million syndicated facility for Krakatau Steel, a state owned Indonesia steel producer. The other was Indian company SREI Infrastructure Finance Ltd, also US$50 million. It was the first ever Islamic syndication to originate out of India, led by HSBC, advised and led out of Malaysia. We have the track record, prudent proven credentials, not just our time on the clock in the domestic business but it's the time on the clock for crossborder business. And, of course, we will talk about the capital market piece later on, but it is also our credentials there in terms of league table ranking and so forth. These are some of the critical steps.

TMR: It seemed that it took some time for HSBC Amanah to reach that milestone (of getting BNM approval). What were some of the key issues involved?

Yakub: If you consider, this is the first foreign bank application for an Islamic subsidiary license. Therefore, not only is it a major milestone for HSBC in terms of a shift in our overall structure, it is also a major milestone for BNM. If you consider, an application of this dimension for the business of our size and scale, it needs to have certain benchmarks and parameters established. It's only natural that the process takes a little bit of time. It has taken a little bit of time, we accept that. But time is needed to understand, time is needed to access the business case, time is needed to assess the contribution that an entity would make towards the MIFC which, I suppose, is a critical consideration for BNM, for there has to be a quid-pro-quo, and not just a one-way traffic. It's what HSBC is going to do to develop the industry domestically and also using its franchise globally to build the bridges and how we can put MIFC on the map. Clearly, there is a lot of work to actualise the MIFC agenda.

TMR: At some point, you may have thought that the process is taking too long. Were in you in constant touch with BNM?

Yakub: It was just a matter of discussion, a matter of understanding and helping each other to arrive at a point which is mutually acceptable. It is also beneficial to the country's agenda. It's only natural that this process takes a little bit of time. It's not something that is to be rushed into. We are delighted to be where we are today.

TMR: How did the idea come about to establish a locallyincorporated foreign Islamic bank? Why not just move on with the Islamic-window banking concept?

Yakub: We actually moved on with the window since 1994. There comes a point in time when you have to move on to the next stage of your evolution. A licence offers a much wider scope, in a number of different areas. The window itself has limitations in respect of the additional scope, as a distinct entity with dedicated channel, yet having an ability to leverage off the mother bank's conventional channels and to take advantage of the wider scope being offered. Consequently, being able to contribute to the wider MIFC agenda. This is basically the thought process that led us to where we are today. It's all part of our natural evolution to the next stage, the stage to take the business to different heights.

TMR: How does the HSBC Amanah set-up in Malaysia differ from the HSBC Amanah in operation in, say, the Middle East?

Yakub: This will be the first separate Islamic subsidiary, separate legal entity, anywhere within the HSBC Amanah world. All other businesses, across the HSBC Amanah world, are window operations, including the UAE, Indonesia and other markets. This will be the first, and only, legal entity for the HSBC Group.

TMR: So, will this be replicated anywhere else?

Yakub: The market in Malaysia is extremely proactive and the regulatory framework is extremely conducive. There are definitive benefits provided by the regulators for market players to move towards subsidiary status. We will continue to explore our options in other markets. Should the markets be as favourable and conducive as it is in Malaysia, and should the opportunity arise, we shall also move in that direction in those markets. TMR: What is your team's role here? Yakub: We are totally responsible for HSBC Amanah operations in the Asia Pacific region. That's entirely within my remit. Of course, as a member of the overall HSBC Amanah executive committee, and from a group wide perspective, clearly we have an ability to influence the business model and infrastructure. As a member of the Amanah senior team, across the globe, we have the ability to transfer best practice and discuss how the business model should be structured in different markets.

TMR: How does the team involved in Islamic banking here differ from that in the Gulf Cooperation Countries (GCC)?

Yakub: Actually, we are very fortunate in that we have several hundred professionals across the globe. It's the largest Islamic team any whwere in the world, across any organisation, dedicated towards this business. It's dedicated to service our needs of our business across all business segments, all the way from the retail segment through the commercial, corporate and institutional segments. We have a strong presence across many different markets. (The second part of this interview will appear next Monday)