Most significant event in Islamic finance

It has been an eventful year for Islamic finance. You can expect more challenges and changes in 2009 as the financial sector weather the storm ahead, engineered by a credit crunch and global economic anxiety. Before we march ahead into 2009, let us take stock. WHAT IS THE MOST SIGNIFICANT EVENT IN ISLAMIC FINANCE IN 2008? That's the question that THE MALAYSIAN RESERVE, a business/finance daily published out of Kuala Lumpur, is asking its readers. What event/deal/launch/programme created the most impact on the sector? Drop us a note at habhajan.singh@gmail.com.


PS: You can browse thru this blog site (and others) to catch some events of significance.

ISRA: Seminar to highlight secondary sukuk trading

By Habhajan Singh
Giving a boost to secondary sukuk trading is one of key issues to be discussed at the two-day International Shariah Scholars Dialogue (ISSD) 2008 beginning tomorrow.
The session, organised by the International Shariah Research Academy for Islamic Finance (Isra), will see the presence of four globally renowned Shariah scholars, including Sheikh Prof Dr Mohamed Ali Elgari who is currently Professor of Islamic Economics at King Abdul Aziz University, Saudi Arabia.
Associate Prof Dr Shamsiah Mohamad (pix) from University Malaysia's Academy of Islamic Studies will present a paper on Shariah issues and solutions when it comes to secondary sukuk trading.
The paper, focusing on Shariah issues pertaining to secondary sukuk trading such as bay al-dayn, which represent mix-asset and selling the sukuk at discount, will propose possible solutions.
Shariah scholars Sheikh Nizam M S Yaquby from Bahrain and International Islamic University Malaysia (IIUM) deputy rector Prof Datuk Dr Sano Koutoub Moustapha will act as discussants for the session.
The spectacular growth of sukuk issuance has not seen a corresponding rise in secondary trading, partly due to the fact that most investors have had a buy-and-hold mentality. On top of that, comment by industry players in past media reports also indicated that another reason is the differing structures of the various sukuk that come to the market, with some being assetbased, others based on profitsharing agreement.
The Malaysian sukuk market has expanded significantly with an average annual growth rate of 22% since 2001, according to data from the central bank. In 2007, the sukuk market saw an exceptional growth of more than 70% with new issues during the year reaching a record high to about US$47 billion (RM162.52 billion) and the outstanding global sukuk market surpassing the US$100 billion mark.
Up until August 2008, BNM governor Tan Sri Dr Zeti Akhtar Aziz said the sukuk market has held its ground with a total global issuance now exceeding US$14 billion, and is expected to exceed US$200 billion in 2010.
Isra associate researcher Zaharudin Muhammad will present a paper on "Adaptation of the concept of insurable interest in takaful practices".
Assistant Prof Dr Said Bouheraoua from IIUM's Ahmad Ibrahim Kulliyah of Laws will present another paper entitled "Dhawabit (parameters) for the application of the principles of maslahah and dharurah in Islamic finance".
Among discussants for the two sessions are Associate Prof Dr Younes Soualhi from IIUM's Kulliyah of Islamic Revealed Knowledge and Human Sciences, Sheikh Dr Abdul Sattar Abu Ghuddah from Syria and International Institute of Islamic Finance's (IIIF) Dr Mohd Daud Bakar.
BNM deputy govenor Datuk Mohd Razif Abd Kadir will present the keynote address while Isra executive director Dr Mohamed Akram Laldin will chair the sessions.

Dr Younes & I on talkshow

On Dec 16, Dr Younes Soualhi from International Islamic University Malaysia (IIUM) and I were panelists on a live talkshow on Bernama TV on Islamic finance. Dr Younes is the deputy dean at the IIUM Institute of Islamic Banking and Finance. We had a good number of callers. The one-hour show was anchored by the programme executive producer Anne Edwards.

Maybank Islamic launches financing facility

Maybank Islamic has launched its new Islamic term financing facility specifically designed for corporate and business customers.
The Musharakah Mutanaqisah Term Financing-i (MMTF-i) is a Shariah-compliant financing facility for asset acquisitions and refinancing landed properties, plant and machinery, vessels as well as commercial vehicles.
The contract for MMTF-i is based on the Islamic principle of musharakah mutanaqisah or the diminishing partnership concept. Customers using this facility will enter into a musharakah mutanaqisah co-ownership agreement with Maybank Islamic to jointly acquire and co-own the asset.
The bank will lease its share of the asset to the customer and the customer, as an owner-tenant, will make payments which consist of a monthly rental payment and the acquisition payment intended to gradually acquire the bank's share of the jointly-owned asset.
The ownership of the property will progressively move towards the customer and the financing ends when the customer owns 100% of the property. Maybank Islamic acting CEO Ibrahim Hassain (in pix above, receiving a KLIFF award from Minister of Finance II Tan Sri Nor Mohamed Yakcop) said the new facility complements the bank's existing Term Financing-i, and it functions as an alternative for customers to manage their asset acquisitions and refinancing.
"The musharakah mutanaqisah concept is internationally accepted and is available to both local and foreign customers.
"The introduction of this latest facility given today's challenging business environment is our commitment to offer value services to customers and to assist in sustaining the growth momentum for business," he said in a statement yesterday.
MMTF-i is offered at a very competitive financing rate and is available under fixed and floating rates. Customers are also eligible for a 20% remission from stamp duty.
"Given these benefits, MMTF-i therefore offers significant advantages to our business customers. We are targeting for MMTF-I to contribute to our 10% to 15% growth target within Maybank Islamic's overall financing portfolio for the next financial year.
"To date, Maybank Islamic has more than RM8.2 billion in outstanding financing to the business sector," added Ibrahim. MMTF-i is Maybank Islamic's seventh latest mainstream banking product introduced since it commenced operations on Jan 1, 2008.
Ibrahim said Maybank Islamic will continue to bring a comprehensive range of ringgit and foreign denominated banking products to meet the ever growing needs of Malaysia's individual and business customers. (The Malaysian Reserve, Dec 17, 2008, p9. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays edited by Habhajan Singh)

ACCA: ‘Need to ensure level playing field for Shariah banking’

By Habhajan Singh
While it is not possible for United Kingdom (UK) regulation to distinguish Islamic finance from other forms of banking on a non-secular basis, there is a need to ensure a level playing field as far as possible. This was one of the pointers highlighted by Association of Chartered Certified Accountants (ACCA) president Richard Aitken-Davies during a recent breakfast meeting he hosted in London with some players from the Islamic finance sector.
He also noted that Islamic banks are not a panacea as they are increasingly beginning to feel the effects of the slowdown, due to the interconnection with the global financial system.
The discussion also touched on the role Islamic finance could play in helping in the current credit crisis. It revolved round a recent ACCA paper — "Islamic Finance: An Ethical Alternative to Conventional Finance?" — which explores the basic tenets of Islamic finance, the role of the UK in leading its development and whether it is a serious alternative to conventional finance.
"Once seen as a marginal industry by some, Islamic finance is now recognised as a vital and thriving market. "It has been widely acclaimed as the fastest growing sector within the world of finance and positions itself as an alternative model," Aitken-Davies wrote on his blog.
"Some suggest much of the current problems might have been avoided in an Islamic system (for example, because short selling and derivatives are generally prohibited).
"Advocates of this view point to the fact that funds adhering to Islamic (Shariah) investment principles have so far avoided the worst effects of the credit crisis," he added.
In November 2007, UK's Financial Services Authority (FSA), UK's single financial regulator, produced a paper entitled "Islamic Finance in the UK: Regulation and Challenges", setting out FSA's role in the development of the UK as the major European financial centre for Islamic financial products and services.
In the paper, it noted that UK's tax and legislative framework is becoming favourably inclined to Islamic financing, establishing a level playing field for a variety of Islamic products such as mortgages, bonds and insurance.
It also said it believes that these could lead to the availability of new retail products, the expansion of wealth and asset management services and the development of sukuk and other wholesale markets.
"Although we cannot promote Islamic finance (or any other particular kind of finance), we can give a clear regulatory framework which is flexible enough to adapt to changes in the market.
"We are keen to see the industry expand, although we recognise this will bring new regulatory challenges," the paper noted.
Since ACCA student, and members live in countries with a thriving Islamic finance market in the Middle East, Malaysia and Pakistan, he said it was keen to play its part in increasing the understanding and development of this sector. During the discussion, he also noted the the need to raise awareness of the principles of Islamic finance, with particular emphasis on the embedded principles of ethics and social responsibility.
"Further development of Islamic finance will require a wider range of products to stimulate competition and provide the best service to the public," he said.
(The Malaysian Reserve, Dec 15, 2008, p32, by Habhajan Singh. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays)

Al Rajhi to join MEPS service network

Al Rajhi Bank Malaysia will be the first foreign Islamic Bank to join the Malaysian Electronic Payment System Sdn Bhd or MEPS service network.
"As a trade-off, Al Rajhi Bank will give MEPS, a link to Saudi Arabia," said its director of retail banking, Sabry Ghouse, to reporters at a official signing ceremony between the bank and Lembaga Zakat Selangor (LZS) in Kuala Lumpur last Friday. The ceremony marked the appointment of Al Rajhi Bank as the LZS zakah payment agent for zakah Al Mal.
Ghouse noted that Al Rajhi is bringing value to the table whereby it will make available Saudi Switch, another system payment network,for Malaysia. "We will make a proper announcement on this next week," he said. It was reported last month that MEPS, an interbank payment network service provider, was talking to three foreign Islamic banks in Malaysia to join it.
Besides Al-Rajhi Bank, MEPS was hoping to clinch a deal with Kuwait Finance House and the Asian Finance Bank by the second quarter of next year. "Within the next two days we will have the final word from MEPS on our participation. Everthing is more or less all right. We have formally agreed," said Ghouse.
According to Ghouse, the MEPS service network will make it easier for Lembaga Tabung Haji as well as Malaysians in Mekah and Madinah for the Haj and Umrah activities, as they do not have to take along a lot of money. There are currently 1,800 Automated Teller Machines (ATMs) in Saudi Arabia. — Bernama

Takaful Malaysia looking for Indonesian partners

By ALFEAN HARDY
SYARIKAT Takaful Malaysia Bhd (Takaful Malaysia) is injecting up to RM21 million into its Indonesian operations, both to meet Indonesian regulatory needs as well as to make its operations there attractive enough for possible partnerships with Indonesian banks, its group managing director Datuk Mohamed Hassan Md Kamil said.
Speaking at a press conference in Kuala Lumpur yesterday, Hassan (picture) said Takaful Malaysia could see the injection of capital into its PT Asuransi Takaful Keluarga (Takaful Keluarga) sub-subsidiary once it gets the green light from the relevant authorities.
Takaful Keluarga, as of June 2008, is the 56%-owned Islamic family insurance arm of Takaful Malaysia's 56%-owned PT Syarikat Takaful Indonesia (Takaful Indonesia) operations. Takaful Indonesia is also the parent company for the company's Indonesian Islamic general insurance business, PT Asuransi Takaful Umum. "The Indonesian regulators have a risk-based capital requirement in place.
The injection is to partly meet this riskbased framework and partly to expand on the infrastructure capabilities of the company there in IT and distribution capabilities,' he added.
Hassan said Takaful Malaysia felt the injection of capital would also make its Indonesian operations an attractive prospect for a local partner, which he sees is essential to make in-roads in a very large country that was almost equal in size to the US lengthwise.
"We currently have between 33 and 34 branches in Indonesia, which isn't enough to have a meaningful presence. We feel that having a strategic partner with a ready distribution network is the ideal option to expand our business in Indonesia.
"We would prefer a bank, a Shariah bank, which has branches all over the country. In today's environment, the bancassurance model is probably the most effective and costefficient method to expand your business," he added. Hassan said potential partners had already been identified but no talks had yet begun.
"We've decided to inject the capital first to strengthen the infrastructure of the company and then continue to source for the strategic partner, perhaps towards the middle of next year," he added.
Takaful Malaysia had late last year been given the green light by Bank Negara to negotiate a proposed strategic alliance and possible stake sale to Dubai-based Islamic Arab Insurance Co PJSC (Salama) and Abu Dhabi-Kuwait-Malaysia Strategic Investment Corp. The talks with Salama officially ended on Tuesday (Dec 9), which Hassan acknowledged was a decision made by Takaful Malaysia's 65.22% parent, BIMB Holdings Bhd, but that negotiations with Abu Dhabi-Kuwait were still on-going.
Asked if a potential Indonesian strategic partner could be offered stakes in Takaful Malaysia, he said it was possible. "The partner has to have value-added to the company. The potential thing we're looking for is the distribution capabilities, cross-selling opportunities and the like. Market speculation and other earlier reports had said Takaful Malaysia had sought out Middle Eastern partners in order to penetrate the West Asian market.
Asked if this was the case, Hassan said the Middle East had become quite saturated. "Especially now with the price of oil falling below US$50 per barrel, I believe purchasing power had been quite affected. There are also many other takaful operators operating out of the Middle East," he said.
"Our strength, I believe, is to focus in Asia. At the near future, we want to strengthen our company in Indonesia. Depending on how long this financial crisis will stretch, we may differ plans to expand overseas until late next year or early 2010," he added.
(The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays edited by its associate editor, Habhajan Singh)

RHB Islamic phases out ‘disputed’ BBA financing

By HABHAJAN SINGH
RHB Islamic Bank Bhd has completely phased out Al-Bai Bithaman Ajil (BBA) in favour of the musharakah mutanaqisah concept for its home financing products. This probably makes it one of the first local Islamic subsidiaries of local banks to move away completely from BBA which has been under increasing scrutiny over the years.
The move by RHB Islamic, one of the 17 Islamic banks including Al Rajhi Banking & Investment Corporation (Malaysia) Bhd and Maybank Islamic Bhd licensed by Bank Negara Malaysia (BNM), signals a shift in the local Islamic home financing front away from BBA.
"RHB Islamic has taken a stance of phasing out products and services based on BBA or bai al-inah with effect Oct 1. This is based on (its) Shariah committee's advice to adopt globally accepted Shariah principles," RHB Islamic Head of Shariah Division Ahmad Suhaimi Yahya told The Malaysian Reserve.
He added that the move is in tandem with the bank’s strategy to position itself as the banker of choice for local and international customers looking for Shariah-compliant financial products and services. This is in reference to the fact that BBA, with underlying concepts of bai dayn (debt trading) and bai inah (sale with imediate repurchase), are shunned in jurisdictions like the Middle East and Pakistan. BBA, which may involve the two concepts, is a deferred sale contract for a sale price that includes the profit, with a repayment period agreed beforehand.
For so many years, local Islamic banks have made BBA the linchpin when carving out Islamic financing, which now stands around RM143.4 billion.
The Islamic banking assets, according to latest statistics from the central bank, have expanded by 23% to RM234.9 billion compared to a year ago. The Islamic banking industry now accounts for 16.7% of total assets in the industry. It is understood that other banks are also in the midst of preparing to put on the shelf more home financing offerings that are not based on BBA contracts.
The recent major trigger for the move away from BBA was the July 18 written judgment by High Court judge Justice Datuk Abdul Wahab Patail in Arab-Malaysian Finance Bhd vs Taman Ihsan Jaya, first reported by The Malaysian Reserve on Sept 8.
The judgment, a collective ruling on 12 cases now pending an appeal, sent shockwaves in the local Islamic banking fraternity as they began deciphering its impact.
For starters, the judge had ruled that the application of the BBA contracts in those cases were contrary to the Islamic Banking Act 1983 (IBA). The judge ruled that since some BBA contracts were structurally faulty, defaulters need not pay more than the original financing amount that they received, depriving banks of the profit they would have otherwise booked from the transaction.
Bankers fear that this judgement could mean that current BBA financing clients would only need to pay the facility amount and would escape from paying the profit portion.
Following the High Court ruling, BNM sent a circular dated Sept 8 to heads of Islamic financial institutions to "strongly advise" them to review their heavy reliance on the BBA concept in their transactions.
The circular noted the industry's seeming over dependence on BBA, adding that BBA is a Shariah concept introduced more than 20 years ago to facililtate growth and development of Islamic finance.
At its end, RHB Islamic is offering Equity Home Financing-i to its customers based on diminishing musharakah or musharakah mutanaqisah as an alternative to the earlier BBA home financing.
(The Malaysian Reserve, Dec 09, 2008, p1, By Habhajan Singh. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays)