Thursday, January 29, 2009

Malaysian regulator approves 3 new foreign Islamic fund managers

The Securities Commission (SC) has given its approval for three new foreign Islamic fund management companies (IFMCs) to start operations in Malaysia. The three are Aberdeen Islamic Asset Management Sdn Bhd, BNP Paribas Islamic Asset Management Sdn Bhd and Nomura Islamic Asset Management Sdn Bhd, the regulator said in a statement on Jan 29, 2009.
It said the three companies already have a presence in the conventional asset management industry in Malaysia, as part of the five licences issued under a special scheme announced in 2005 to broaden the international participation in the Malaysian capital market.
Their interest to further expand their fund management business indicates their confidence in the Malaysian fund management industry, and reaffirms the growing interest among international players to make Malaysia the global hub for Islamic fund and wealth management activities, it added.
"Despite the global slowdown, the coming on board of these three international players reflects the strong growth potential in niche areas like Islamic fund management," said SC chairman Datuk Sri Zarinah Anwar. "This will help add depth and breadth to the Islamic finance industry, of which Malaysia commands a leadership role."
In granting the approval, the statement said the SC had considered, among other things, the scope of operations that will be established by the three Islamic fund management companies (IFMCs) in Malaysia, their fund management experience, brand value, expertise in various markets, geographical presence, and compliance and risk management capabilities.
The statement also provided comments from representatives of the newly approved players.
Atsushi Yoshikawa, president & CEO of Tokyo-based Nomura Asset Management Co Ltd commented: "Nomura Asset plans to position Islamic fund management as one of our most important strategies. With the establishment of Nomura Islamic Asset Management, we plan to provide a wide range of products and services to Asia and the Middle East regions".
BNP Paribas Investment Partners is firmly committed to further developing its existing Islamic investment capabilities, said Vincent Camerlynck, global head of business development and member of the executive committee, BNP Paribas Investment Partners in Paris.
"The domestic Islamic finance sector has been growing rapidly," said Aberdeen Asset Management Sdn Bhd managind director Gerald Ambrose.
The others who have been approved to establish operations are Kuwait Finance House (Malaysia), DBS Asset Management, CIMB-Principal Asset Management, Global Investment House and Reliance Asset Management, the SC said.

SEE ALSO: SC gives nod to 2 foreign fund managers

Wednesday, January 28, 2009

Bank Islam may end IT deal with Swiss firm

By Habhajan Singh & Halim Wahab
Bank Islam Malaysia Bhd is believed to be on the verge of terminating its core banking system contract entered into just over a year ago, potentially causing the bank to incur losses to the tune of millions of ringgit.
Sources say Bank Islam, the nation's first Islamic bank, has run into issues over the agreement signed with Swiss banking software maker Temenos Group AG in October 2007.
"The bank is facing some interpretation issues. If not resolved soon, it could derail its IT platform revamp," a source told The Malaysian Reserve.
A decision to change course now for its core banking system would have substantial financial implications for Bank Islam, with some industry executives familiar with such work estimating that the bank may end up forking out up to RM30 million.
However, a bank official who spoke on the condition of anonymity, said any losses would be "much less" than RM30 million and would not breach the amount previously allocated for the bank's total IT revamp.
In March 2008, Bank Islam managing director Datuk Zukri Samat said the bank had allocated some RM100 million to revamp its IT system, including the bank's core banking system, which was due to be completed by 2010.
Bank Islam is 51%-owned by public-listed BIMB Holdings Bhd, which also controls Islamic insurer Syarikat Takaful Malaysia Bhd.
When contacted, Bank Islam declined to provide figures on how much it had paid for the Temenos T24 system, or how much it is likely to fork out should it decide to rope in another vendor.
"Our IT infrastructure revamp programme is on track," Zukri said in an emailed statement.
In mid-2006, after two consecutive disastrous financial years — the bank reported a net loss of RM507.8 million for the financial year ended June 30, 2005, and a net loss of RM1.31 billion the following year — a new management team led by Zukri unveiled a five-pronged turnaround plan.
Once the revamp programme was set in motion, Bank Islam began looking at upgrading its IT infrastructure, a vital ingredient for a bank that is big in the retail segment.
In October 2007, Temenos announced that its system had been selected to replace Bank Islam's two in-house systems — a Silverlake core banking platform and an i-Flex Internet banking system — which the bank has operated over the last 10 years.
Meanwhile, the issue of replacing the core banking system was also raised by shareholders at the annual general meeting of the bank's parent BIMB on Dec 17. Among the key stakeholders are the Dubai Investment Group (DIG), a member of United Arab Emirates' (UAE) Dubai Holding, whic h emerged as one of Bank Islam's major shareholders following a recapitalisation exercise after the massive losses in 2005 and 2006.
"It had created a bit of an issue at the bank," said one banker familiar with the matter.
Among the questions raised were whether the bank had made the right call when it brought in the new platform and if it was financially prudent to switch to another platform at this juncture.
According to a media release by Temenos, the T24 is a functionally rich, scalable, integrated, modular banking system. It is understood that Bank Islam was Temenos' first major break for core banking system sales in Malaysia.
Silverlake, the industry rival that it replaced at Bank Islam, is said to have better knowledge of customisation to local needs as it counts a number of local Islamic financial banks as its customers, including Affin Islamic Bank Bhd and OCBC Al-Amin Bank Bhd.
(This story appeared in The Malaysian Reserve on Jan 29, 2009. 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)

KFH branch in East Malaysia

Kuwait Finance House (Malaysia) Bhd (KFHMB) made its entry into East Malaysia with the Islamic bank's branch in Kuching. It is the seventh nationwide branch for the bank. The ceremony was officiated by its managing director Datuk K Salman Younis (middle) flanked by the bank's deputy chief executive Ab Jabar Ab Rahman (right) and its head of retail and consumer banking Baldev Singh.

Wednesday, January 21, 2009

‘AFB not affected by Global debt default’

By Habhajan Singh
Asian Finance Bank Bhd (AFB), the Islamic bank backed by shareholders from the Middle East, has not been jeopardised by news that one of its sharehodlers, Global Investment House (Global) from Kuwait, had defaulted on most of its debt.
AFB chief executive officer Datuk Mohamed Azahari Kamil said the bank's position and operations has not been affected in any way. Global, which is one of AFB's pioneer shareholders, has a 10% stake in the bank.
"It is a temporary setback (for Global)," Azahari told The Malaysian Reserve, adding that Global's shareholding in the bank had been shifted to an investment fund since November 2008.
On Jan 8, Reuters reported that the Kuwait's biggest investment bank had defaulted on most of its debt, in the first of several expected casualties for the wealthy oil-producing nation due, to the global credit crunch.
The news dealt a blow to Kuwait's efforts to restore confidence among investors after it recently rescued its fourth-largest lender, Gulf Bank — which was hit by huge derivative losses — and guaranteed deposits at all banks, the newswire added.
Global, with a 10% stake, was the smallest of AFB's three shareholders when the bank was established in 2006, with Qatar Islamic Bank taking a 70% stake and RUSD Investment Bank Inc of Saudi Arabia holding 20%.
Meanwhile, the Securities Commission (SC) announced in mid-November last year that Global, together with India's Reliance Asset Management, was the latest foreign investment players to receive approval to operate in Malaysia.
However, it has yet to set up office here. According to AFB's website, Global's 10% stake is held by Financial Assets Bahrain WLL, a limited liability company incorporated in Bahrain. The shareholders are listed as Financial Assets MENA WLL (99.9% holding) and Global Investment House KSCC (0.1% nominee holding).
"They (Global) are not even shareholders in our books. The shareholder is a fund managed by Global," said Azahari, adding that AFB is in communications with Global.
"If you look at what went wrong, it's just the whole economic environment. With values marked-to-market, the valuations have come down almost 50%.
"As a fund manager, be it equities or structured products, valuations have come down. No one is insulated, all are affected," he said.
"We believe in the able leadership of Maha ( Global's chairperson and managing director Maha K Al-Ghunaim) and Omar (Global's executive vice president for products and business Omar M El-Quqa) to effect the turnaround," Azahari added.
AFB, which began operations on Jan 17, 2007, became the third foreign Islamic bank to be established in Malaysia after Kuwait Finance House and Al Rajhi Bank of Saudi Arabia. Global and other shareholders play a role in helping the Islamic bank to reach out to potential clients in the Middle East to market funds and to tap new sources for funds.
This would benefit AFB, for example, in marketing the worlds first Asean Shariah Corporate Governance Fund. AFB signed an agreement with Corston-Smith Asset Management in December 2008 to be the distribution agent of the RM1 billion fund targeted at GCC countries.
(This story appeared in The Malaysian Reserve on Jan 22, 2009. 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)

Hong Kong tax laws come under review

By Habhajan Singh
A review of tax laws is currently underway in Hong Kong to facilitate the launch of more Shariah-compliant products and put in place a level playing field for sukuk vis-a-vis conventional bonds, said a top executive.
"Islamic finance is a natural extension of our role as a global financial centre. We possess the necessary credentials, such as a transparent regulatory regime, a sound financial infrastructure and a large pool of professionals to make it work," said Hong Kong chief executive Donald Tsang at the opening of the Asian Financial Forum on Monday.
In a copy of his speech received in Kuala Lumpur, the Hong Kong leader noted that Islamic finance is an "exciting area for us" and it is making good progress in establishing a platform for Islamic finance. The financial jurisdiction has made known its intention to become an international hub for the fast-growing sector, joining the likes of Kuala Lumpur, Dubai and Singapore.
Apart from tax related issues, an international Islamic finance conference in Kuala Lumpur last November highlighted the fact that there is concern in Hong Kong in relation to the cost of retaining a Shariah scholar and also the cost of a regular compliance.
Amirali Nasir, a Hong Kong based lawyer who took part in the Second Global Islamic Finance Conference (GIFC) 2008, had said that another jurisprudence challenge facing the sector in Hong Kong is the perception that Shariah is a single code, which is interpreted and accepted consistently by all Muslims.
Delegates are confused when they hear about the various schools of law and the varying interpretations applied, the lawyer added.
In his latest speech, Tsang said his trip to the Middle East last year "to help promote Hong Kong's potential for Shariahcompliant products" has brought about a number of results, including the signing of an agreement with the Dubai International Financial Centre (DIFC) Authority and the Dubai Financial Services Authority (DFSA).
He added that Hong Kong has also seen the launch of a variety of Islamic financial products, such as the Islamic banking window and indexes, with an exchangeable sukuk now already listed on the local stock market.
(This story appeared in The Malaysian Reserve on Jan 19, 2009. 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)

Monday, January 19, 2009

Ceruli: Size of Shariah-compliant companies often overstated

By Habhajan Singh
The size of the Shariah-compliant industry is often overstated, claims a United Statesbased research outfit in a report on Islamic asset management. Cerulli Associate estimated the total mutual fund figure in Islamic finance to be US$35 billion (RM124.72 billion), and if mandates were included, the total figure would be US$65 billion.
"Equities are the dominant product in Shariah-compliant mutual funds — more than conventional products — these tend to be locally invested. "Retail and mass affluent individuals are the majority interest in Shariah-compliant funds," the research outfit said in a recent report entitled "Shariah Investing: Market Sizing and Analysis".
As at September 2008, data from the Securities Commission (SC) indicates that the total net asset value (NAV) of Islamic-based funds in Malaysia stood at RM17.17 billion, or 11.6% of the overall total of RM148.44 billion, for both conventional and Islamic-based funds.
Most unit trust companies in Malaysia offer some variant of Shariah-compliant funds, including companies ING Funds Bhd, AmInvestment Services Bhd, CIMB Wealth Advisors Bhd, HLG Unit Trust Bhd and MAAKL Mutual Bhd.
As at mid-August 2008, Shariah-compliant unit trust funds chalked up sales totalling RM2.96 billion, a growth of 84% compared to the year before, according to a speech by SC chairman Datuk Zarinah Anwar.
Providing one example, the Cerulli report dated December 2008 said there is US$786 million invested in balanced funds, with US$189 million invested in the Middle East, a region that is particularly receptive to such fund types. In Asia, it said Shariahcompliant balanced funds account for US$528 million of assets, adding that in most cases, these funds have a regional or local, rather than a global, mandate.
"While there are a large number of Shariah balanced funds, in asset terms they tend to be small, with not one boasting more than US$100 million under management. "The largest, from Public Mutual, has just US$96 million under management, and the largest from the Middle East, the Amanah Balanced Portfolio from HSBC/SABB, just US$46 million," it said.
As at Dec 31, 2007, data from Securities Commission (SC) shows that total asset under management by licensed fund management companies in Malaysia increased by 44.13% to RM236.98 billion as compared to 2006, adding that unit trust funds continued to be the main source of assets under management, reaching RM169.41 billion as at end-2007 as compared to RM121.77 billion as at end-2006.
As at Nov 30, 2008, SC data shows that there are 148 Islamic-based approved funds and another 432 conventional funds. As part of efforts to spur the Islamic fund management, Malaysia has been making available a range of tax and other incentives for companies to set up shop here.
The first batch of Islamic fund management licences were given out in April 2008 to Kuwait Finance House, Singapore's DBS Asset Management and CIMB Principal Islamic Asset Management.
In November, two Islamic fund managers, India's Reliance Asset Management and Kuwait's Global Investment House, became the latest global players to receive approval to operate in Malaysia.
(This story appeared in The Malaysian Reserve on Jan 12, 2009. 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)

Sunday, January 11, 2009

Sukuk pronouncement, BBA judgement grab headlines in ’08

By Habhajan Singh
Two pronouncements — one a judgement by the Malaysian High Court and another a view expressed by a renowed international Shariah scholar — grabbed the headlines in the world of Islamic finance in 2008. These two milestones were selected by The Malaysian Reserve as the most significant events for the Islamic finance sector last year following feedback from industry players and the Islamic finance teaching fraternity.
In February, Sheikh Muhammad Taqi Usmani created a storm in the industry when he remarked that a good number of Islamic bonds, or sukuk, were not Shariah-compliant; while High Court judge Justice Datuk Abdul Wahab Patail, in a written judgment dated July 16, ruled that the application of the Al-Bai Bithaman Ajil (BBA) contracts in the Arab-Malaysian Finance Bhd vs Taman Ihsan Jaya cases were contrary to the Islamic Banking Act 1983 (IBA).
The ruling, which took local Islamic bankers by surprise, was first reported by The Malaysian Reserve on Sept 8. Taqi's sukuk pronouncement and the BBA judgment caught the attention of local Islamic finance players , with the latter resulting in a number of semina r s t o clarify the impact of the ruling.
Taqi, chairman of the Shariah Council of Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and a retired Pakistani Shariah judge, was reported to have said that some 85% of Gulf sukuks did not fully comply with Islamic laws.
The figure, coming from prominent contemporary Islamic jurist like Taqi, expectably caused a stir. It sent sukuk investors and originators into a tailspin, raising questions as to the value of the papers, which by end-2007 were worth up to US$30.8 billion (RM 99.47 billion), almost double the sales of the year before.
The size of the global sukuk market, including sukuk denominanted in local currencies, stood at approximately US$ 82 billion (RM262.72 billion) as at end-2007
Other significant events last year were:
• The establisment of the International Shariah Research Academy for Islamic Finance (ISRA) in March. Isra, headed by Shariah scholar and academician Dr Mohamad Akram Laldin as its executive director, was engineered by Bank Negara Malaysia to spearhead research in Shariah issues.
• Foreign banks fortifying their Islamic banking operations. Coming on stream were the Islamic units of global and regional banks including HSBC Amanah Malaysia Bhd, Standard Chartered Saadiq Bhd and Singaporeowned OCBC Bank floating OCBC Al-Amin Bank Bhd.

Zubair: Commodity murabahah remains in the lurch

It is not the permissibility of murabahah contracts per se but their indiscreet use and faulty structuring — guaranteeing in many cases not only a fixed profit rate bench marked on interest but also the return of the principal through buy-back provisions — which is fueling the perception that from Islamic banks interest is out but interest is in; it only walks in an Islamic cloak, writers Prof Dr Zubair Hasan.
Of late, he noted that even Bank Negara Malaysia govenor Tan Sri Dr Zeti Akhtar Aziz has advised Islamic banks to curb the temptation of using fixed return transactions.
"Presumably, it is time to apply the principle of saad-aldharai that closes the potential avenues for circumventing the Shariah: more so its objectives and spirit," he wrote in a commentary published by The Malaysian Reserve yesterday (Jan 12, 2009).
Prof Zubair, the Professor of Islamic Economics and Finance at the International Centre for Edation in Islamic Finance (INCEIF), writes that some elating developments have taken place in the area of Islamic finance during the preceding year, noting a fast expansion in its market share, diversification of products picked up pace and the rapid globalisation of the services ensures their future expansion.
"But of no less consequence may prove, I feel, the lurch one finds commodity murabahah in at the close of the year," he said.
Commodity murabahah is one of the most commonly used financing contracts in Islamic banking. It falls in the same generic category of "uqud al-mu'awadhat" or exchange contracts that covers all types of transactions including most sukuk as well.
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Tuesday, January 6, 2009

Australia looks to UK for Shariah banking guidelines

By Habhajan Singh
The success of Islamic banking and finance practice under the existing legal and regulatory environment in the United Kingdom and its growth globally is enough reason for Australia to follow-suit, argued a Sydneybased academician.
It is most important that consideration be given to the adoption of the UK model of regulatory framework for Islamic banking and finance into Australia, said Abu Umar Faruq Ahmad, a senior lecturer from Sule College in a recent paper at an international Islamic finance conference.
"In this regard, regulations are needed to be developed by the Australian regulatory regime so as to make Islamic finance a viable alternative system of financing for Muslims in Australia," he said in a paper co-authored with Muhammad Fazlul Karim from Multimedia University (MMU).
The paper, entitled "Legal and regulatory issues in Islamic finance industry: The evidence from UK and Australia" was presented at the Sixth International Islamic Finance Conference 2008 organised by Monash University in October.
In the paper, the authors said that Islamic finance in Australia has been growing rapidly since it was first introduced in 1989 with the Muslim Community Co-operative (Australia) Ltd, better known as MCCA. Since then, a number of Islamic financial services providers have come into existence in the Australian financial services market during the past decade and some international financial institutions are also considering the introduction of Islamic banking branches and subsidiaries.
"No formal legal and regulatory framework or infrastructure in existence in Australia for guiding and supervising the functions of Islamic financial institutions operate in line with the precepts of Shariah.
"The legal and regulatory framework of the financial sector in Australia unlike in the UK consists of a multiplicity of bodies," they said.
These include the Reserve Bank of Australia (RBA), Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC). The coordinating body for these agencies is the Council of Financial Regulators. The paper noted that under Australia's subsection 9(3) of the Banking Act 1959, an authority to carry on all kinds of banking business in Australia was granted by APRA to the then Muslim Community Credit Union Ltd (MCCU) in December 1999.
It also noted that Australia’s new community banks (which have emerged largely due to the closure of traditional branches in smaller towns and funded and operated by local townspeople), and community-based Islamic co-operative financial institutions were registered and given licences to carry on cooperative businesses under the Cooperatives Act 1992.
"Although Islamic finance is different from conventional one in terms of its missions, objectives and practice the operation of Islamic financial institutions in Australia is still subject to basically the same laws and regulations as their conventional peers, and apply the same conventional interestbased framework for regulatory and supervisory activities," they said.
Like the Financial Services Authority (FSA) in the UK, they argued that a uniform regulatory and legal framework supportive of an Islamic financial system has not yet been developed in Australia.

Sunday, January 4, 2009

Juhaidi: Good corporate governance needed in Shariah banking

By Juhaidi Yean Abdulah
Over the past two or three decades, Islamic banking and finance has emerged as another important discipline and served as a viable alternative of financial intermediation. It has gained credibility and respect worldwide. As a matter of fact, Islamic bankers today are looking to marry that potential with China's rapid growth.
But while Muslims can be justifiably proud of the success of Islamic banking, issues on accountability and good corporate governance should not be taken for granted. Islamic banks are no less prone to suffer breaches of fiduciary responsibilities or consequences of weak governance structure. As a custodian of public funds, maintaining integrity and confidence in banking sector is vital towards ensuring the stability and soundness of the Islamic financial system.
Islamic financial institutions therefore need to be complemented and reinforced with good corporate governance. As such, transparency in the conduct of banking institutions facilitated by proper accounting standards that reflect the true and fair value of banking operations would certainly lead to greater accountability and responsibility on the part of the bank's management.
On the other hand, the consequences of weak corporate governance and accountability are not only financial but could include social, environmental and political as well.
The collapse of the Bank of Credit and Commerce International (BCCI) in 1992 is still fresh in our minds. A weak due diligence and governance process on the part of several Islamic banks especially in the verification of Shariah compliance cost them significant amount of losses. It was reported then that one of the Islamic financial institutions involved had 25% of its assets placed with the BCCI.
Perhaps, as a response to numerous calls worldwide, a study on ethical, developmental and environmental considerations in finance was endorsed by a number of financial institutions a few years ago. Those institutions were initially invited by the then UN secretary general Kofi Annan in January 2004 to participate in his initiative on implementing universal principles in business (originally launched in 2000).
The brilliant study was labeled "Who Cares Wins: Connecting Financial Market to a Changing World". The gist is of the report is to provide "recommendations by the financial industry to better integrate environmental, social and governance (ESG) issues in analysis, asset management and security brokerage".
The participating institutions provide a general framework for a new "Islamic Finance" identity, strongly suggesting that "the way that ESG issues are managed is part of companies' overall management quality needed to compete successfully. Companies that perform better with regard to these issues can increase shareholder value by, for example, properly managing risk, anticipating regulatory action or accessing new markets, while at the same time contributing to the sustainable development of the societies in which they operate. Moreover these issues can have strong impact on reputation and brands, an increasingly important part of company value."
In all three areas of ESG, Islamic finance has golden opportunities to redefine the brand name in a manner than enhances its' providers' profitability and market value, increase access to the fast-growing potential market segment of middle-class Muslims, and enhances its ability to recruit top-drawer talent from that same market segment of its products.
Indeed, Islam strongly advocates all forms of positive governance. These values and ethical conduct have already been inbuilt and inherent in the Muslim community. Islamic corporate governance and accounting serves through its underlying principles of economic well-being of the ummah, universal brotherhood, justice and equitable distribution of income.
For Islamic banking institutions, good corporate governance and accountability of the highest order should have already been embedded in all aspects of their operations. While the virtues of Islam have always advocated good corporate governance and accountability, the challenge lies in its application.
(The writer was a consultant to the National Economic Action Council, NEAC, from 2002-2004. He also served as a press secretary to a Cabinet minister from 1995-2008. This article was published in THE MALAYSIAN RESERVE issue of Jan 5, 2009)