ICIE09: World ‘desperately’ looking for sustainable financial system

By Habhajan Singh
The world is desperately looking for a viable solution towards a sustainable financial system now that is in the midst of the worst financial crisis, said Organisation of Islamic Conference (OIC) secretary general Prof Ekmeleddin Ihsanoglu.
In this connection, he told a two-day conference on Islamic finance that the Islamic banking and finance now has an opportunity to be an important stakeholder of what he calls the new world financial order in regaining trust and confidence.
He said that a number of experts and Islamic bank officials have confirmed that Islamic banking has not been affected by the global financial crisis and that "bad effects" would be limited due to the nature of Islamic banking.
"The on-going global financial crisis promted many to question the integrity and the sustainability of the existing international monetary and financial system," he said in his keynote address at the International Conference on Islamic Economics and Economies of the OIC Countries (ICIE) 2009 in Kuala Lumpur on April 28.
The two-day conference, which ended yesterday [April 29], was jointly organised by International Islamic University Malaysia's (IIUM) economics department and Islamic Research and Training Institute (IRTI) of the the Islamic Development Bank Group.
Dr Abbas Mirakhor, a professor of economics and a former executive director at the International Monetary Fund (IMF), was the keynote speaker on the second day.
In his speech, Ihsanoglu noted that Islamic banking and finance has some way to go before it can be a serious alternative to conventional finance and banking.
He said OIC has played a role in areas like dialogue among civilisations, defending the image of Islam and combating the phenomenon of Islamophobia.
"In the face of the mounting phenomenon of Islamophobia in the West, the OIC has placed this issues at the top of its priorities and pre-occupations by conducting a large-scale world-wide effort to confront it.
"We have been able to achieve convincing progress at all levels, mainly at the UN Human Rights Council in Geneva and the UN General Assembly in New York," he said.
OIC is the second largest intergovernmental organisation after the United Nations which has membership of 57 states spread over four continents. ICIE 2009 had four focus areas.
In Islamic economics, it is to evaluate the current state of art in the various sub-areas, from environmental economics to monetary economics, and theoretical and policy studies dealing with the development of Islamic economics.
On Islamic banking and finance, it is looking at the fundamentals of Islamic finance, regulatory structures, Shariah compliant investment, takaful, risk management, branding opportunities for Shariah compliant products, socially responsible investment strategy, wealth management, sukuk, zakat, hedge funds and derivatives, housing finance and Shariah compliant mortgage products.
On economies of the OIC countries, the conference is evaluating the performance and current status of economic development in the OIC member countries, and the role of the OIC and IDB in facilitating development in OIC countries.
The fourth area is in the economic cooperation among the OIC countries where it looks at the current status, challenges and problems, strategies to increase cooperation and trade, and the potential role of the OIC and IDB in enhancing economic integration.

(This story appeared in The Malaysian Reserve on Apr 30, 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)

ISRA I YEAR: Forges international tie-ups, translates 300 fatwas

By Habhajan Singh
International Shariah Research Academy for Islamic Finance (Isra), the central bank-backed research outfit set-up just over a year ago, has translated from Arabic to English some 300 fatwas that will be of use to Islamic financial institutions (IFIs).
This is one of the achievements of the research outfit that began operations in May 2008 to promote applied research in the area of Shariah and Islamic finance.
The outfit, now with 20 staff led by executive director Dr Mohamad Akram Laldin, has also forged a number of ties with international bodies like General Council for Islamic Banks and Financial Institutions (CIBAFI), the United Kingdom's Islamic Finance Council and Islamic Research and Training Institute (IRTI). In the last year, Isra has published two books and one monograph entitled "Dispute resolution in Islamic finance".
"We've also got the executive committee to endorse our policies. At this juncture, we already have all the approval for policies required for our core business," Isra executive director Dr Mohamad Akram Laldin told The Malaysian Reserve in an interview.
On the operations side, he said Isra has basically completed its administrative setup, with the management team having obtained its mandate on policies concerning its administratione, research and scholarship activities.
"We are still looking for a few more senior researchers," he said, adding that a few more research-based staff are joining the body next month. Research Fellwoship Moving forward, one initiative in the pipeline is the proposal to establish a research fellowship, modelled to the concept of chairs at universities.
"This will allow us to get some prominent figures in Islamic finance to attach with Isra for a period of time. They will be able to share their experience and perform research with us," he said. For this, Isra is on the lookout for collaborations with private institutions keen on sponsoring the initiative.
The 300-odd fatwas translated from Arabic to English are now avaialble on Isra’s website. These fatwas, compiled by the institution from various sources, have been classified to allow easier reference by end-users, who are predominantly Shariah advisors and researchers. Fatwa is a key component in Islamic finance. Islamic banks and takaful operators are required to operate in a manner that is compliant with Shariah.
Their products are also required to be fashioned such that they are in consonance with Islam. This badge of approval comes in the form of a fatwa from Shariah scholars who sit on the Shariah advisory boards of the individual IFIs, including Islamic banks and takaful operators.
At the national level, both Bank Negara Malaysia (BNM) and the Securities Commission (SC) have their own national Shariah boards that provide Shariah guidance for Islamic banking and the Islamic capital markets, respectively. Applied Research Isra has also started the ball rolling in conducting researches.
From May 2008 to April 2009, the institution has also completed 14 short-term researches. Among them are are on Malaysian experience in Shariah advisory, Shariah solutions for secondary sukuk trading, jurists' opinion on financial tawarruq and hibah issues in takaful.
During that time, Isra undertook eight medium-term research projects, having completed the study on Employees Provident Fund (EPF) Shariah-compliant investment guidelines.
Projects like research and fatwa translation goes to show Isra's commitment to act as the repository of knowledge for Shariah views or fatwas and undertake research on contemporary issues in Islamic financial industry.
Isra is a specialised research academy established by BNM on March 26, 2008, as part of initiatives to enhance the spectrum of Islamic finance knowledge, with concentration on applied research that is geared towards solving the pressing issues faced by the global Islamic finance industry, particularly Shariah matters.
Moving forward, Mohamad Akram said that one of challenge faced was to convey the message to the various stakegholders in Islamic finance abroad that it does not intend to become another standard setting body, but that it intends to play the role of an active researcher, as mentioned in its vision be the premier Shariah research centre in Islamic finance.
Its board of directors consist of BNM govenor Tan Sri Dr Zeti Akhtar Aziz and also its deputy governor Datuk Mohd Razif Abdul Kadir. Its governing council is led by International Centre for Education In Islamic Finance (INCEIF) governing council chairman Tan Sri Dr Rozali Mohamed Ali.
Some of the 14 members in the council are renowned educationist Royal Prof Ungku A Aziz, Datuk Dr Zulkefli A Hassan Secretary-General Ministry of Higher Education secretary general Datuk Dr Zulkefli A Hassan, Prof Dr Rifaat Ahmed Abdel Karim Secretary-General Islamic Financial Services Board (IFSB) secretary general Prof Dr Rifaat Ahmed Abdel Karim, BNM deputy governor Datuk Zamani Abdul Ghani, Shariah scholar Yusuf Talal DeLorenzo, Saudi Arabia's Dallahal-Baraka Group chairman Sheikh Saleh Abdullah Kamel and Germany's Phillips University Marburg president Prof Dr Volker Nienhaus.

(This story appeared in The Malaysian Reserve on Apr 27, 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)

ZUBAIR: Clearer definitions of Islamic banking contracts needed

By Zubair Hasan
The call that Ahmad Hidayat Buan, a leading Malaysian religious scholar, recently gave for having clearer definitions of Islamic finance contracts is laudable and timely.
It is laudable because there is urgency to guard against the recurrence of the sort of faux pas on the conflicting court judgments on commodity murabahah transactions in the country and the pronouncements of some top Shariah scholars reversing their earlier rulings on the permissibility on certain types of contracts generated.
It is timely because the haze raised by the controversies has blurred the perception of the common man and created in his mind doubts about the validity of Islamic banking instruments. The call for clearer definitions of contracts is rather symbolic; it draws attention to what at present ails Islamic finance on a wider spectrum. The phase of emphasis on expansion has taken the greater part of our attention and has paid off well.
Islamic finance has made its mark on the global level and attracting mainstream clientele to its folds in an elating fashion. Its share, coverage and potential are all on the rise. Thanks to the commitment and efforts of the country Malaysia has emerged as the largest Islamic bonds market in the world; it had a 37.5% share of the total issuance in 2008.
The financial sector, bonds included, is estimated to be worth US$1 trillion (RM3.59 trillion). To improve upon this achievement the time has come to shift the emphasis from expansion to consolidation; from quantity to quality and from vagueness to clarity. Illustrative is Ahmad's lament that there is no definition of Islamic banking on our statutes. He rightly says that we should not let go round the impression that our laws are mysterious. One such unknown element is the legal position on Islamic windows in the mainstream banks.
They are doubtless encouraged to establish and register exclusive subsidiaries but is there any legal provision barring the opening of new windows or policy to phase out the existing ones? One is not sure. So seems to be the ambiguity on the issue of created creation.
Can or should Islamic banks generate credit deposits the same way as mainstream banks do? If yes, what instruments the central bank would use for control and with what effect or limitations has to be spelled out. According to Ahmad, there is now a proposal for amending the law to compel judges to refer to the national Shariah advisors when handling Islamic finance disputes, which are presently heard in the civil courts of the country.
But Ahmad is opposed to the idea of forcing the judges for such referrals to maintain the independence of the judiciary. Shariah scholars must put there foot down, he says, within the industry boards. But what is the check on such scholars themselves? Their quality of knowledge and character will matter.
I feel that even as individual banks may have their own advisor(s), they must refer to the national body all their new or amended products for clearance.
The national boards must have also knowledgeable economists as members because I have found not a few Shariah experts claiming without substance that they are well versed on the economic side of the issues. The implications of individual contracts at the macro level are at times difficult to grasp even for trained economists.
(Zubair Hasan is the Professor of Islamic Economics and Finance at the Kuala Lumpur-based International Centre for Education in Islamic Finance, INCEIF)

(This comment appeared in The Malaysian Reserve on Apr 27, 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)

Malaysia's RHB plans Korean sukuk roadshow-paper

Malaysia's RHB Investment Bank will launch a RM500 million-RM1 billion (US$139.5 million-$279.1 million) Islamic bond issue in a roadshow next month, a newspaper reported on Monday, reports Reuters.
"We have seen quite a bit of interest for the sukuk already, from the Middle East, London and New York," the bank's managing director Chay Wai Leong was quoted as saying by the Edge Financial Daily, adding that the issuance would be a multi-currency sukuk.
The newspaper said the bank, which is part of Malaysia's fourth-largest lender RHB, is looking to arrange a sukuk for South Korean oil firm GS Caltex, the report added.

High Court to consult SAC on Islamic finance cases

By LEE CHERNG WEE
The High Court will be compelled to consult the Shariah Advisory Council (SAC) of Bank Negara Malaysia (BNM) when hearing Islamic finance disputes when a new central banking act is passed.
"In the new central banking act which is due to be presented in parliament, the court shall refer to the Shariah Advisory Council (SAC) on Shariah matters," BNM governor Tan Sri Dr Zeti Akhtar Aziz told an Islamic finance forum in London on Friday, reports Reuters.
"It would allow for the consistent application of the interpretation given by the Shariah advisory council," she said.
Under proposed changes to the law, Zeti said judges would be guided by either the central bank or the capital market regulator's Shariah advisory body in deciding Islamic banking matters, according to the news wire report.
When contacted yesterday, BNM spokesperson confirmed the statement, but declined to give further elaboration on the matter.
The proposal confirmed a report by The Malaysian Reserve on Oct 29, 2008, that plans were underway to compel the High Court to refer to the SAC when presiding over Islamic banking and finance-related cases, unlike presently, where High Court judges are neither required to consult the Shariah experts nor heed their advise.
It was then learnt that the central bank was reviewing the necessary laws to make that possible. The development came on the heels of an intense debate over the Islamic financing under concepts like Al-Bai' Bithaman Ajil (BBA) and Bai Inah following a High Court ruling in July 2008 that had found its application to be contrary to Malaysia's Islamic banking laws.
Industry players were also debating on the role of the SAC, a body formed under the wings of the central body, in determining the compliance status of Islamic finance products.
Presently, SAC has the final say on Shariah matters for financial institutions involved in Islamic financing, whether it be approving new products or Shariah concepts, making the advisory body a powerful outfit. It is currently chaired by Shariah scholar Dr Mohd Daud Bakar.
When contacted, Zaid Ibrahim & Co chairman Datuk Dr Nik Norzrul Thani Nik Hassan Thani said the move by BNM was not entirely unexpected.
"It will provide certainty to the players. It will also alow for the development of the Islamic jurisprudence on Islamic finance cases and concepts," said the head of the nation’s largest law firm.
In July 2008, High Court judge Datuk Abdul Wahab Patail had ruled that the application of the BBA contracts in Arab Malaysian Finance Berhad v Taman Ihsan Jaya & Others (2008) was contrary to the Islamic Banking Act 1983 (IBA), as the sale element in the BBA was deemed "not a bona fide sale".
The judgment brought into question the profit portion of the facilities, as it suggests that defaulters need not pay more than the original financing amount obtained, thereby depriving banks of the profit they would otherwise have booked.
This reopened the debate on the usability of BBA from the Shariah point of view. However, on March 31, the Court of Appeal unanimously overturned Abdul Wahab 's much-debated judgment in Bank Islam Malaysia Bhd v Ghazali Shamsuddin & Two Others, and nine other cases.

(This story appeared in The Malaysian Reserve on Apr 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)

Standardising Shariah legal documentation

By Habhajan Singh
There is no standard documentation process for structuring Islamic financial products made available by local Islamic banks to customers, a lawyer told a recent forum on Islamic finance.
However, the speaker told the forum that the legal documentat ion process has evolved along with the development of Islamic finance products made available to the market since its existence in Malaysia 20 years ago.
"In Islamic financing principle, we must ensure that Shariah-compliant aspects are adhered to in every product especially on the legal documentation process which distinguishes Islamic finance with the conventional process," said Mohamed Ridza & Co managing partner Mohamed Ridza Mohamed Abdullah.
He presented a paper entitled "Legal Documentations — New Products" at the recent National Symposium on Islamic Banking and Finance jointly organised by the Bar Council Islamic Finance Committee and Association of Islamic Banking Institutions Malaysia (AIBIM).
He said banks have come up with their own standard template of Islamic finance documents with changes made from time to time, taking into account the introduction of new laws, amendments made to existing laws, and the interpretation made by Shariah advisors.
When contacted, Mohamed Ridza told The Malaysian Reserve that banks have their own standard mechaism when handling the documentation process in relation to Islamic financing products like istisna, mudharabah, musharakah, ijarah, murabahah and musharakah mutanaqisah.
"Nothing is standard amongst themselves. There are variations in documentations, from one bank to another," he said.
Asked how it impacts customers, he said it provides them with options as the underlying principles are same.
"Take musharakah mutanaqisah. Some banks take ownership, some don't," he said, taking the example of the diminishing partnership contract now being introduced by some local banks for home financing compliant with Shariah.
Mohamed Ridza is the coauthor of the book Law and Practice of Islamic Banking and Finance, together with Datuk Dr Nik Norzrul Thani and Megat Hizaini Hassan.
In her presentation, Islamic University Malaysia (IIUM)'s Associate Professor Dr Engku Rabiah Adawiah noted that case law on Islamic banking in Malaysia is mainly on Al-Bai Bithaman Ajil (BBA) and a little on istisna, noting that BBA had been used right from the start of Islamic banking in Malaysia, citing the example of Bank Islam Malaysia Bhd's (BIMB) house financing since 1983.
"BBA is still the main contract for asset financing in Malaysia though some Islamic banks have started to use some other contracts.
"Istisna had been used by some Islamic banks to finance assets under construction," said Engku Rabiah who is attached to IIUM's Ahmad Ibrahim Kulliyyah of Laws.
The usability of BBA, from the Shariah point of view, was keenly debated in some quarters of the Malaysian Islamic finance fraternity following a judgment by the High Court finding its application to be contrary to Malaysia's Islamic banking regulations, a decision recently overturned on appeal.
In July 2008, High Court judge Datuk Abdul Wahab Patail had ruled that the application of the BBA contracts in Arab Malaysian Finance Berhad v Taman Ihsan Jaya & Others (2008) was contrary to the Islamic Banking Act 1983 (IBA).
On March 31, the Court of Appeal unanimously overturned Abdul Wahab 's much-debated judgment in the Bank Islam Malaysia Bhd v Ghazali Shamsuddin & Two Others, and nine other cases.
The two presentations were followed by a discussion led by panelists Andri Aidham from Kadir Andri & Partners, Mohd Shuhaimi Ismail from Hisham Sobri & Kadir and Muhamad Illiayas from Illiayas.
It was chaired by Yasmeen Muhammad Shariff from Yasmeen Hajar & Hairudin. Some 500 lawyers attended the one-day forum where Bank Negara Malaysia deputy govenor Datuk Mohd Razif Abdul Kadir had presented the keynote address. Also present were Malaysian Bar president Ragunath Kesavan and AIBIM president Datuk Zukri Samat.

(This story appeared in The Malaysian Reserve on Apr 20, 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)

Global takaful market could touch RM29b in 2012: E&Y

Ernst and Young's World Takaful Report 2009 notes that global Takaful contributions have risen to US$3.4 billion (RM12.77 billion) in 2007 as compared to US$2.5 billion in 2006.
Saudi Arabia, with contributions totalling to US$1.7 billion in 2007, and Malaysia, with US$797 million, are the top two Takaful markets worldwide.
The report was unveiled at the two-day Annual World Takaful Conference 2009 held in Dubai which ended on April 15.
Held in strategic partnership with the Dubai International Financial Centre (DIFC), some 300 takaful executives globally took part to discuss the opportunities and challenges that a changing economic landscape presents.
"The global downturn has affected everyone and takaful is not immune, said Ernst & Young (Middle East) managing partner for advisory services Omar Bitar.
He said takaful operators now need to better manage their costs in a more challenging market as the risk landscape has changed substantially.
"Investment portfolios, human resource expertise and competition will be their most pressing business risks over the coming 12 months. Operators will also need to reassess their core business, move away from a reliance on high-risk investment returns, and focus on achieving underwriting profit," he said.
The Gulf Cooperation Council (GCC), Malaysia and Sudan are the top three markets for takaful while the Indian subcontinent, Indonesia, Egypt and Turkey, remain the least penetrated Muslim markets, reported Ameinfo.Com.
Compared to the reported losses of almost US$350 billion of conventional insurers and government supported enterprises in the Americas, Europe and Asia, the takaful market has largely shown resilience in the current economic downturn.
However, the report noted that the last quarter of 2008 has seen a decline in the returns-on-equity of major takaful operators. As a consequence, takaful operators are increasingly concerned with the strategic, operational, compliance and financial risks they face today.
The E&Y report recommends that to counter highrisk investment portfolios, takaful operators need to enhance their portfolio management capabilities and improve risk-adjusted returns. This risk for the operators is an opportunity for asset managers, who need to address the unique risk-return profile of takaful operators, it added.
To deal with human resource expertise risk, it has advised operators to focus on developing local talent and partnering for quick market entry. (The Malaysian Reserve, Apr 20, 2009, p31)

Al Rajhi Bank awarded second Malaysian licence

By Habhajan Singh
AL RAJHI Bank KSA, the largest bank in Saudi Arabia, has recently been awarded its second banking licence in Malaysia to enable the group to tap into the non-ringgit financing markets, close to three years after launching a full-fledged local Islamic banking subsidiary in the country.
The International Islamic Banking licence issued under the Malaysia International Islamic Financial Centre (MIFC) was granted to Al Rajhi Bank KSA to operate as a branch office, the bank said in a statement issued on April 16.
The new Malaysian branch, referred to as ARIIB, will serve as the banking group's regional Islamic investment banking base to support the growing demand for Islamic investment banking services in the region, the statement added.
It will also complement the franchise built by Al Rajhi Banking & Investment Corporation (Malaysia) Bhd, says ARIIB's principal officer and director of investment banking Leong See Meng.
ARIIB is probably the third bank to receive the international Islamic banking licence under the MIFC initiative, with the two others being Unicorn International Islamic Bank Malaysia Bhd and Indonesia's PT Bank Shariah Muamalat Indonesia Tbk.
Al Rajhi Bank, which started its operations in Malaysia in October 2006 and has 19 branches spread throughout the country, is allowed to operate similar to other Islamic banking outfits Maybank Islamic Bank Bhd, Hong Leong Islamic Bank Bhd and OCBC Al-Amin Bank Bhd.
The major difference is that Al Rajhi Malaysia, led by Ahmed Rehman as its chief executive officer, is a subsidiary of the Saudi bank, while the latest entity is a branch of the Saudi bank.
As a branch of the main bank, which bills itself as the largest Islamic bank in the world with total assets of 165 billion Saudi Arabian riyals (RM158.4 billion), ARIIB will be able to leverage on the parent's balance sheet when cutting large financing.
Over the past two years, Al Rajhi Bank KSA has achieved a leading position in the areas of project and structured finance, advisory, Islamic debt arranging and corporate finance as well as asset management and brokerage, the statement said.
It is primarily involved in the fields of project and structured finance, in which Al Rajhi has excelled, bringing innovation and Shariah structuring skills to project sponsors in the Middle East, it added.
In the same statement, Al Rajhi Bank Malaysia's Ahmed said the MIFC provides an excellent platform to provide Islamic investment banking services to cater to the growing sophistication demanded by top tier players in the region.
"ARIIB is looking at introducing Islamic structures and advisory services based on global best practices that appeal to Malaysian, regional and Middle Eastern customers and investors in recognition of Malaysia as a true international Islamic banking hub," he said.
ARIIB's focus will be on leveraging on the parent's capabilities in leverage finance, mergers and acquisition advisory, Islamic sukuk, corporate finance advisory, private equity, sales and distribution, equity capital markets, and structured finance.
The time is ripe for the group to broaden its proliferation into the region amid the slower global economic growth as ARIIB intends to nurture and promote Islamic investment banking as a viable alternative to conventional finance as governments and corporate in the region embark on their initiatives to move ahead of the challenging times, the statement said.
"We have the technical capability and more importantly, the human capital and the Islamic finance intellect to make this a reality through the MIFC platform", said Leong.

(This story appeared in The Malaysian Reserve on Apr 7, 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)

‘Banks are well-positioned’: BNM

By Isabelle Francis
There is no need to increase the minimum capital requirement for local banks, which are well-positioned to absorb nonperforming loans (NPL) that is currently at historical low of 2%, said Bank Negara Malaysia governor Tan Sri Dr Zeti Akhtar Aziz.
"Banks' NPL levels are at a historical low of 2%, and even if it rises, the banks are well-positioned to absorb (it)," she told reporters in Kuala Lumpur on Apr 15 after launching the standardise master agreements for deposit and placement transactions for Islamic banks.
Banks, including the largest local lender Malayan Banking Bhd, Public Bank Bhd and RHB Bank Bhd, have recently taken steps to boost capital, which is seen as a pre-cautionary measure amidst the global financial crisis.
Based on current regulations, local banking institutions are required to maintain a minimum risk-weighted capital ratio of 8% at all times at the entity, global and consolidated level.
Zeti also said loans growth recorded by banks are at a "pace" that is supportive to the economy, reiterating that the central bank's focus now is on financing and not lowering interest rates.
To spur bank lending and ease credit flow, especially to smaller companies, the government on April 14, 2009, unveiled a RM10 billion guarantee scheme. Under the programme, the government would guarantee 80% of loans for companies with a shareholder equity of less than RM20 million. The scheme is part of the government's RM60 billion stimulus package.
Meanwhile, president of The Association of Islamic Banking Institutions Malaysia (AIBIM) Datuk Zukri Samat said 17 of its members will soon adopt two standardised Interbank master agreements, namely the Interbank Murabahah Master Agreement (IMAA) and Master Agency Agreement (MAA).
The structure and mechanism of IMMA and MAA have been reviewed by the Shariah Advisory Committees of the respective member banks and the final document reviewed by AIBIM's Shariah advisory Committee.
The adoption of IMAA and MAA will help increase the intensity of Islamic interbank activities as a result of tremendous cost and resources savings, said Zukri.

(This story appeared in The Malaysian Reserve on Apr 16, 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)

Shariah banks standardise murabahah terms

Islamic banks in the country have agreed to standardise terms for murabahah contracts to help facilitate interbank transactions, an industry body said on Apri 15, reports Reuters.
The Association of Islamic Banking Institutions Malaysia (AIBIM) said its 20 members will adopt two standardised documents for interbank transactions that involve deposit taking and placement.
"The success of commodity murabahah-based instruments will depend a lot on the existence of a standardised document as well as a universally acceptable structure and widely recognized by the market. The two standardised documents would foster greater transparency, robustness, operational efficiencies and consistency in Islamic financial transactions," AIBIM president Datuk Zukri Samat said in a speech.
The report added that commodity murabahah enables shariah lenders to create financing transactions which involve specific assets, fulfilling Islam's demand that all deals must involve real economic activity.
When an Islamic bank uses commodity murabaha to provide financing, it will first buy an asset which it then sells to the borrower. The borrower then sells the commodity to a third party using the bank as its agent, and it receives payment and secures the financing it had sought.
The International Islamic Financial Market, an industry body backed by the central banks of several Muslim countries, has estimated that the global commodity murabahah market is valued at more than US$100 billion (RM360.78 billion).
But some religious scholars have criticised the structure, saying it resembles conventionalbased lending instruments.
AIBIM's Zukri said the use of the standardised terms would create a critical mass of commodity murabahah deals ahead of a plan by the Malaysian stock exchange for a spot commodity trading platform.
Bursa Malaysia is expected to launch in July the Commodity Murabahah House, which uses crude palm oil as the underlying commodity to facilitate Islamic financing based on the murabaha concept.

ACR ReTakaful aims to grow its business in Malaysia: REUTERS

DUBAI: The Kuala Lumpur-based Islamic reinsurer ACR ReTakaful SEA Bhd expects to grow its business in Malaysia, Brunei and Indonesia, an executive.
Chief executive Zainal Abidin M. Noor estimated yearly growth for Islamic insurance, or takaful, at 20 per cent in Malaysia and up to 15% in Indonesia, Reuters reported on April 14.
"Malaysia is a mature market and we see tremendous growth there still. In terms of Indonesia, there is big space for growth given that it is the biggest Islamic country," he told the Reuters Islamic and Finance Summit here.
ACR ReTakaful SEA is interested in specialised risk, including special liabilities, offshore energy, aviation and satellite and space insurance, he said.
Zainal said the company was in talks to enter into a strategic alliance with an Islamic reinsurer in Malaysia, which would likely take place in September, but declined to give further details.
Under takaful, the risk and reward are shared between the customer and insurer; in conventional insurance, the insurer takes on all the risk for a premium. - Reuters

Bank Islam offers deferment scheme

Bank Islam Malaysia Bhd is offering a 12-month installment deferment scheme for home financing customers who have been retrenched from July 1, 2008. This deferment scheme, called Ehsan programme, is tailored specifically to offer relief to the bank’s financing-i customers who have been affected by the current economic slowdown by easing their financial burden.
Bank Islam managing director Datuk Zukri Samat said, "Buying a home is one of the biggest financial decisions that most individuals make in their lifetime.
The bank recognises the financial predicament faced by those who have lost their jobs and their need to ride through this rough patch and hoped this special scheme will give them respite." In terms of policy, this scheme is actually a rescheduling of financing accounts under the performing accounts portfolio.
It also complements the bank’s on-going Rescheduling and Restructuring (R&R) exercise for delinquent and non-performing accounts of financing products, Zukri said last Friday. However, customers must meet some requirements to qualify for the deferment scheme.
Firstly, the customer must present a retrenchment letter, effective July 1, 2008 onwards, from his former employer. Secondly, the customer’s current home financing account must bear ‘performing’ status and lastly, the deferment of the installment payment will take effect from the date of approval from the bank. (The Malaysian Reserve, April 13, 2009)

MERVYN LEWIS: If only they had followed Islamic principles ...

The calls for moral and values in financial markets by top world leaders are proof that Islamic finance could assume a role in the global financial system.
These demand were made by Britain's Gordon Brown and Autralia's Kevin Rudd, at the recent meeting of the world's top 20 countries in London.
"Islamic finance is all about moral spiritual values. It is all about equity in commercial transaction. The whole basis of Islam itself is one should not be concerned solely in one's own but also seek the advancement of ummah (Muslim community)," academician Mervyn K. Lewis told Business Times (April 13, 2009) in an interview in Kuala Lumpur recently.
Islamic finance is not just about being interest-free but it prohibits gharar or uncertainty, gambling and only allows halal investment activities.
"Very importantly is the religious supervision provided by the syariah board of the respective financial institutions," he told the newspaper.
THE REST OF THE STORY:
If the West does not want to adopt Islamic banking directly, it could "copy and replicate the Islamic principles," he said.
Lewis is in Malaysia under the Securities Commission and University Malaya Islamic Finance collaboration. He is first visiting scholar to be attached to UM for a month.
The SC will also host a public lecture by Lewis this Thursday entitled "An Islamic Economic Perspective on the Global Financial Crisis."
"I will look at the western financial institutions and ask, had they followed the Islamic principles where activities are governed by a board of religious scholars, how would things be different."
In the West, there are ethical investment funds which are based on certain aspects of a religion. There are also funds guided by the environment and sustainability principles.
"There is no ethical banking. There are not too many banks that do not invest in alcohol or gaming activities. There is no ethical insurance companies... etcetera," he said.
The potential for Islamic finance is tremendous but Lewis conceded this will take time as the area is still a mystery to most people in the West.
Even in Malaysia, which has the best regulated Islamic finance sector in the world, Islamic loans make up only 15 per cent of the total market.
"The target of 20 per cent by 2010, I believe is going to be undershot," he said, referring to the target set by the government.
But Kuala Lumpur has the chance to lead the industry due to the huge Muslim population in the region. Indonesia has 180 million Muslims, China has around 100 million, while Thailand has 7 million.
Lewis does not specifically teach Islamic finance at his university. His interest came about back in 1994 when he had to mentor a post-graduate student from the Middle East working on Islamic finance at the University of Nottingham.
In 2001, the paper was turned into a book that touched on governance in Islamic finance.

Maybank Islamic eyes RM4b financing business - THE STAR

MAYBANK Islamic Bhd expects to garner some RM4bil worth of financing deals from the corporate sector in the next six months, according to executive vice-president and acting chief executive officer Ibrahim Hassan. The financing is said to comprise Islamic revolving credit and term financing and will help boost the bank’s financing base which stood at RM22.4bil as at Dec 31, 2008, reports The Star.
Ibrahin told the newspaper: "Our position as the biggest Islamic banking operator in the country – in terms of capital available and biggest single customer financing limit – enables us to garner good business from the corporate sector as we can accommodate big chunky loans.
"There is a lot of interest from corporates to raise their financing requirement in a syariah-compliant manner. We expect strong demand in this area."
THE REPORT GOES ON:
With this, he expects financing growth to increase by at least 12% for the financial year ending June 30 (FY09), up from the RM21.1bil registered in FY08.
“We have yet to see a slowdown in business for Maybank Islamic. For the first six months of the year ended Dec 31, 2008, our financing grew by an annualised rate of 14% versus the year to June 30, 2008.
“This was driven by the consumer segment – auto and mortgage financing as well as the Amanah Saham Bumiputra (ASB) unit trust financing which was launched in August,” he said.
Asset quality also improved with the bank’s net non-performing loans (NPLs) improving to 2.3% as at Dec 30, 2008 from 2.6% as at June 30, 2008.
Nevertheless, Ibrahim anticipates a slight deterioration in asset quality going forward.
“The more challenging credit conditions in the next 12 to 18 months may result in a rise in financial delinquencies and careful monitoring is essential to preserve asset quality,” he said.
Ibrahim said the bank’s financing growth in the second half of the fiscal year would mainly be from the corporate sector as consumer financing, such as auto and mortgage financing, was expected to experience a slowdown in growth, which would be mitigated somewhat by stronger financing growth in ASB unit trust financing, personal financing and credit cards.
Maybank Islamic launched its first Islamic credit card in September. As at end-March, the bank had issued some 35,000 cards. The target is to hit 100,000 cards by year-end.
“Financing growth will also come from new products such as Islamic personal financing in collaboration with co-operatives in FY10 and personal financing to our credit card customers both conventional and Islamic,” Ibrahim said.
According to him, product innovation is one of the key areas to grow the business in the challenging economic conditions.
Another growth area is Islamic wealth management.
“We have offered structured investment products locally and also in Singapore. We are targeting to offer some of these structured products in US dollars and sell to potential clients in Asean and the Middle East,” Ibrahim said.

RULINGS: Islamic bankers breathe easier with ruling reversal

By Habhajan Singh
Bankers in the Islamic finance sector will certainly be breathing a lot easier now that the Court of Appeal, the second highest court in Malaysia, has provided certainty to the usage of two key Shariah principals.
In two separate judgments, the Court of Appeal had reversed the rulings by High Court judge Datuk Abdul Wahab Patail on Al-Bai Bithaman Ajil (BBA) and Bai Inah, two key concepts in structuring products for home, corporate and personal financing.
Some bankers, while acknowledging the significance of the judgments, pointed out that the earlier High Court judgment did not have far reaching implications in terms of business on the ground.
"We expected it to be reversed. Knowing Shariah to be what it is, the decision cannot be in any other form. "Hence, the industry had every confidence it would reverse the earlier decision," said CIMB Islamic Bank Bhd chief executive officer Badlisyah Abdul Ghani.
But an immediate statement from Bank Islam underscores the industry's relief, when it stated that its customers "can now take comfort from the certainty" that BBA contracts are valid and binding.
On March 31, the Court of Appeal reversed Abdul Wahab's judgment that BBA contracts were contrary to Malaysia's Islamic banking regulations in Bank Islam Malaysia Bhd vs Ghazali Shamsuddin & two others, and nine other cases. The next day, the same court ruled that Bai Inah, the concept of sale with an immediate repurchase widely used for personal and corporate financing, is a valid transaction, overturning Abdul Wahab's contention that the application of the Bai Inah contracts were against Islamic banking regulations, in the case of Bank Kerjasama Rakyat Malaysia Bhd vs Fadason Holdings Sdn Bhd and three others.
The Court of Appeal bench was made up of judges Datuk Md Raus Sharif, Datuk Abdull Hamid Embong and Datuk Ahmad Maarop.
Since Abdul Wahab's string of judgments, mostly dated July 18, the local Islamic finance fraternity had been rattled on the point of whether their contracts are Shariahcompliant, a key element that has to be observed diligently in any Islamic finance transaction or contract.
These have revolved around the concepts of BBA and Bai Inah, both heavily used by various Islamic financial outfits on the local front, but rejected by Shariah scholars in most jurisdictions in the Middle East and some other parts of the world.
Badlisyah, who heads the Islamic banking outfit most active in structuring sukuk, contended that the original Abdul Wahab's judgements did not impact the industry at all.
"As a result, the Court of Appeal decision is an important decision, but a non-event for the industry. It's business as usual," he told The Malaysian Reserve.
In Bank Islam Malaysia Bhd vs Ghazali Shamsuddin, the Court of Appeal had ruled that the BBA contracts in the cases before it were valid and binding contracts.
It had also said that the BBA contract must not be compared with the conventional loan agreement, as the BBA is a sale contract while a conventional loan is a money lending transaction.
"The Court of Appeal has decided that you cannot rewrite contracts," said Mohamed Ismail Shariff who appeared as the lead counsel for Bank Islam.
"Under the contract, you are entitled to pay the selling price. Now you go to the court and claim that this contract is not valid as the price you are paying is too high.
"You ask for a fair selling price? It's not for the courts to say," said Mohamed Ismail, a partner at the law firm Skrine.
But not everyone is in agreement with the latest decision.
Mustafa Omar Mohammed from International Islamic University Malaysia (IIUM) is one of the dissenting voices on this point, though he stresses that a proper comment can only come upon reading the written judgment, which has yet to be made available.
"But as it stands, I fully agree with the earlier judgement by the High Court Judge. His judgements were based on solid grounds.
"In fact his judgement has helped the industry to revisit its direction. We cannot continue to rely on legal tricks and superficial sales," he said.
Mustafa is a lecturer at IIUM's Kulliyyah of Economics and Management Sciences. He also lecturers at the IIUM Institute of Islamic Finance and Banking (IIiBF), with his areas of specialisation stated as Islamic economics, fiqh and usul al-fiqh.
While the matter has been settled, the debate on BBA and other such Shariah enablers will always be around.

GIH: Asset quality erosion to take its toll on SIB

The main challenge facing Sharjah Islamic Bank (SIB) is the arising from asset quality erosion, which is forecast to take its toll on its bottomline for the years 2009 and 2010, says a Middle Eest equity research outfit.
Provisions from non-performing loans (NPLs) and from impairments in equity and property investments will remain on the heavier side in 2009, according to a research note from Global Investment House (GIH).
"Attributable purely to the magnitude of provisions, we forecast a further drop in the profitability of the bank in 2009. Significant peaks in bottomline growth may be visible in 2010 and 2011 on account of a healthy trajectory of the top-line coupled with noteworthy reduction in the size of the impairments," it said.
Entitled Value despite the odds, the report noted that SIB is operating in the United Arab Emirates (UAE) where operating conditions have seen a major shake-up.
"Severe liquidity crunch, plummeting equity markets, eroding property valuations, rising non-performing loans (NPLs) and that too amidst low oil prices coupled with production cuts are problems that will brutally undermine the asset growth trajectory of the banks in the UAE," it said.
On its profitability, SIB posted a net profit of AED231.6 million (RM226.53 million) in 2008, exhibiting a drop of 23% y-o-y in the bank’s bottom-line, adding that the bank’s profitability growth dipped for the first time in the last six years after a stupendous 40% profitability CAGR for the 2002–2007 period.
"Despite a robust growth in the top-line, the net profit was bogged down due to severe provisioning against non-performing loans and impairments in investments. We believe that further decline in profitability may be witnessed in 2009 owing to persistence of high provisioning eroding and completely offsetting a robust increase in net commission income.
"However, earnings growth is expected to rebound strongly in the years following as a consequence of strong top-line improvement, supplemented by a modest rise in other sources of income and relatively lower provisioning requirements," it said.
SIB also faced impairments in investments to the tune of AED79 million during 2008, on account of its property and AFS (most probably equity) investments.
As an outcome of the fall in the stock markets in the last quarter of 2008, the bank’s AFS portfolio deteriorated significantly leading to the revaluation reserve falling AED36 million and an additional AED67 million being charged off the income accounts in impairments (prolonged and significant, as per our understanding).
The total value shrinkage amounted to approximately 17% of the value the investments as of December 2008. The bank, however, seems to have escaped the fall in the property prices in 2008, and charged only AED12 million in impairments during the year.
GIH believes that the bank is yet to face the full brunt of the decline in loans quality, and the plummeting property and equity markets.
It feels it is prudent to provide heavy provisioning throughout the forecast period with the most painful pinch coming in 2009 with both the NPLs ratio and the coverage ratio increasing dramatically.

(This story appeared in The Malaysian Reserve on Apr 13, 2009, in the ISLAMIC COUNTERS, a column that looks at the performance and activities of Islamic financial institutions abroad. 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)

Islamic finance must resolve inner tensions: FT

Proponents of the US$800 billion (RM2.87 trillion) industry argue that the prohibition on dealing in interest has saved Islamic institutions, preventing them from investing in all the dubious structures that have brought down high-flying international institutions, argues a recent article in the Financial Times.
A small idea is developing into a big hope in the Middle East. It is that the answer to the global financial crisis lies in Islamic finance, it said.
The article, entitled "Islamic finance must resolve inner tensions", goes on to say one cheerleader for Islamic finance is Humayon Dar, chief executive officer of BMB Islamic, a subsidiary of The BMB Group, the global alternative asset management company.
He told the UK-based newspaper that he was starting to worry about his job at the end of last year because of the changing economic climate, adding "But I’m pleasantly surprised. The inquiries we’ve been receiving are numerous."
However, the article noted that many of the Gulf’s Islamic banks have not been immune to the financial crisis — the liquidity squeeze in the region has put pressure on these banks just as much as their conventional counterparts, adding that the volume of sukuk, or Islamic bonds, has dramatically declined, though predictions abound that it will take off again later this year.
"But it is true that Islamic banks have been relatively protected because they had no exposure to securitised debt-based assets.
"This fortunate condition, however, may be due to the immaturity of the industry. The financial wizards who flocked to Islamic banks in recent years had not yet engineered the synthetic structures that would pass muster with sharia (Islamic law) scholars, whose job is to sign off on the probity of products," the article argues.

Bank Muamalat puts in measures to strengthen operations, says STAR

Bank Muamalat Malaysia Bhd has put in place a new management team and shored up its capital substantially. Its latest risk-weighted capital ratio was 18% compared with 12.12% at end-December last year. RAM Ratings has reaffirmed its current ratings of “negative” outlook despite the challenging environment, reports The Star (Apr 9 2009).
Datuk Mohd Redza Shah Abdul Wahid, the former chief operating officer of DRB-HICOM Bhd, became Bank Muamalat chief executive officer at end-2008 in a management revamp following the purchase of a 70% stake in the bank by DRB-HICOM. A five-year business plan has been drawn up to position Bank Muamalat as a pure Islamic bank.
“The new approach looks more towards syariah principles in decision-making and in being more selective in its target customer base,’’ Redza told StarBiz.
The report continues:
Bank Muamalat is also pursuing similar business areas in the DRB-HICOM group, such as property and motor vehicle. An IT infrastructure that is fully compliant with systems in the Gulf Cooperation Council is being put in place.
“Proactive measures have been put in place to immediately improve the asset quality issues. Stringent credit evaluation process and active recovery measures are being pursued,’’ Redza added.
Net non-performing financing ratio was at 4.1% at end-December 2008.
Last month, Bank Muamalat completed a capital-raising exercise involving the issuance of 500 million shares to its shareholders, DRB-HICOM (70%) and Khazanah Nasional Bhd (30%). This effectively raised the bank’s total capital to RM1bil.
In its report, RAM Ratings pointed to stable funding and liquidity positions at the bank. However, it was concerned about further deterioration in asset quality.
Acknowledging the new measures put in by the new management, RAM Ratings said it needed more time to evaluate them.
Other factors cited were limited franchise (Bank Muamalat is seeking a strategic partner), erratic profitability (pre-tax profit of RM41.3mil in the financial year ended December 2005 (FY05); RM104.8mil in FY06; RM65.5mil in FY07) and impairment losses.

BIMB issuing 175.4m new shares to Tabung Haji

BIMB Holdings Bhd has proposed a restricted issue of 175.4 million new ordinary shares of RM1 each to Lembaga Tabung Haji (LTH) to raise RM175.4 million.
The shares, representing 16.44% of the enlarged issued and paid-up share capital, will be issued at RM1 each and used to fund a capital raising exercise by its 51% subsidiary Bank Islam Malaysia Bhd (Bank Islam).
In an announcement to Bursa Malaysia on April 6, BIMB said the proceeds from the restricted share issue will be utilised to subscribe part of to Bank Islam's proposed issuance of 540 million Islamic convertible redeemable non-cumulative preference shares of RM1 each (CRNCPS).
By virtue of BIMB’s 51% shareholding in Bank Islam, BIMB’s is entitled to 275.4 million units of CRNCPS. It plans to subscribe 175.4 million units with cash and the remaining 100 million units via RM100 million cash proceeds arising from the redemption of an existing subordinated Mudharabah financing facility granted by the company to Bank Islam, subject to Bank Negara Malaysia's (BNM) approval.
BIMB said Bank Islam has developed a strategic capital management plan involving a capital injection of up to RM540 million to enhance Bank Islam Group’s capital base and improve its risk-weighted capital ratio (RWCR).
"Bank Islam and its subsidiaries’ RWCR as at 31 December 2008 stood at 13.08%. The capital raising will strengthen its balance sheet during and beyond the current economic downturn. Provided the proposed CRNCPS obtains, amongst others, BNM's approval for qualification as Tier 1 capital, the RM540 million to be raised from the proposed CRNCPS will improve Bank Islam Group’s core capital ratio from 11.32% as at 31 December 2008 to 15.84% and RWCR to 17.26% after the completion of the proposed Bank Islam capital raising" said BIMB.
Currently, LTH holds 373.67 million BIMB shares, representing a 41.92% equity interest. LTH has indicated its intention to subscribe to the proposed restricted issue, which will lift its shareholding to 51.47% and trigger a mandatory general offer.
"LTH has no intention of undertaking a mandatory offer and is seeking an exemption from the obligation to extend a mandatory offer," said BIMB. — By Lee Cherng Wee
(The Malaysian Reserve, Apr 7, 2009, p2)

Bai Inah not contrary to Islamic banking

By HABHAJAN SINGH
AFTER reversing High Court judge Datuk Abdul Wahab Patail's judgment on Al-Bai Bithaman Ajil (BBA), a widely used Shariah enabler in Islamic financing, the Court of Appeal last week also overturned a judgment on the concept of Bai Inah.
Last Wednesday [Apr 1, 2009], the Court of Appeal ruled that Bai Inah, the concept of sale with an imediate repurchase widely used for personal and corporate financing, is a valid transaction, overturning Abdul Wahab's contention that the application of the Bai Inah contracts were against Islamic banking regulations.
The Court of Appeal bench was made up of judges Datuk Md Raus Sharif, Datuk Abdull Hamid Embong and Datuk Ahmad Maarop — the same bench that had delivered what would be a much discussed judgment just the day earlier.
They had earlier delivered the ruling in the case of Bank Kerjasama Rakyat Malaysia Bhd v Fadason Holdings Sdn Bhd and three others.
It was also the same bench that delivered the BBA judgment on March 31. As in the earlier BBA judgment, this ruling will also see local Islamic financial institutions breathing a lot easier now that the matter has been clarified and the Shariah concept cleared for use.
"This judgment will see Bank Rakyat letting out a huge sigh of relief. They have a huge portfolio wrapped around the Bai Inah concept," a banker with a local Islamic bank told The Malaysian Reserve. "We are talking about financing, including personal financing, running into billions of ringgit," he added.
Since Abdul Wahab's string of judgments, mostly dated July 18, local Islamic banks have been rattled on the point of whether their contracts are Shariah-compliant, a key element that has to be observed diligently in any Islamic finance transaction or contract.
These have revolved around the concepts of BBA and Bai Inah, both heavily used by various Islamic financial outfits on the local front, but rejected by Shariah scholars in most jurisdictions in the Middle East and some other parts of the world.
In this most recent case, Khairuddin Abd Ghani from Amir Ruhana & Khairuddin appeared for Bank Rakyat while the respondents were represented by S L Tan of SL Tan Associates.
The court is expected to deliver a written judgment later. On March 31, the same bench had unanimously reversed Abdul Wahab's judgment that BBA contracts were contrary to Malaysia's Islamic banking regulations in Bank Islam Malaysia Bhd v Ghazali Shamsuddin & two others, and nine other cases.
The Malaysian Reserve first reported on Abdul Wahab's BBA judgement on Sept 8, 2008, sending shockwaves through the local Islamic banking fraternity as they began deciphering its impact. Until the news broke, many Islamic finance bankers and lawyers had not had the chance to read Abdul Wahab's 54-page written judgment dated July 18, but which was made available to lawyers involved in the case only sometime in August.
In Bank Rakyat's case, the cooperative bank is claiming from Fadason and three others the sum of RM2.47 million, as at 2004, being the balance from a RM10 million facility granted under the Bai Inah concept.
On the concept of Bai Inah, Abdul Wahah wrote that it is a combination of two separate agreements, the first being the Al-Bai, meaning a sale by the financier to the client, and the second being the buyback by the financier from the client. The purchase price paid by the financier under the second agreement and the deferred payments under the first agreement provides the client with the immediate funds that he desired, and the facility to pay back over a period of time, he added.
In this case, the facility was provided under the Bai Inah concept by the bank selling five blocks of shares quoted on the stock exchange for RM12.31 million (being the sale price) to be paid by the clients in 18 monthly instalments.
On the same day, the bank purchased from the clients the shares for RM10 million, thus making a profit of RM2.31 million while the client obtained funds amounting RM10 million.
In the earlier High Court written judgment, Abdul Wahab acknowledged that Bai Inah is an acceptable concept as it is approved by Bank Negara Malaysia's Shariah Advisory Council.
However, he had deemed the "profit element" as riba, or usury, an element expressly forbidden in Islam.
He wrote: "Such increase or profit may not have been expressed as a percentage but as a sum, but it is no less riba in a usurious loan. "Upon the facts of this case, the foregong reasoning leads to the conclusion that the Bai Al-Inah transaction as impleented contains the element of riba, an element not approved by the Religion of Islam."

(This story appeared in The Malaysian Reserve on Apr 7, 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)

Bank Islam consumer lending rising

BANK Islam Malaysia Bhd expects its consumer lending to grow by at least 10% in its current year ending June 30 (FY09) from 3.9% in FY08, driven by the innovative features it has incorporated in its products. Its projected growth is higher than the industry average for conventional consumer banking, which is expected to be between 2% and 3% this year, reports The Star.
Bank Islam is one of two full-fledged Islamic commercial banks in the country. The other is Bank Muamalat (M) Bhd.
"While we are concerned about the economic outlook and, hence, demand for financing, we believe that there is still enough to go around," consumer banking group head Khairul Kamarudin said in an interview published on April 6.
Bank Islam’s efforts in incorporating innovative features in its products, together with more aggressive marketing, would help it capture a wide customer base, he said. For example, its mortgage financing product, the Baiti Home Financing-i, allows customers to skip repayments every November and December, the report said.
Last year, Bank Islam also introduced a special mortgage financing scheme for individuals like fishermen and hawkers who would like to buy homes but do not have the relevant documents like payslips. The scheme is guaranteed by a RM50mil fund to be managed by government-owned Syarikat Jaminan Kredit Perumahan Bhd.

World’s biggest Islamic bank in the offing

The Bahrain-based AlBaraka Banking Group (ABG) is holding talks with other parties to set up the world's biggest Islamic bank before the end of this year, a senior Al Baraka official said.
In an interview with CNBC Arabiya, Adnan Youssef, CEO of Al Baraka Banking Group, said that its chairman Sheikh Saleh Kamel is heading an alliance to launch the world's biggest Islamic bank before the end of this year, with an initial public offering of US$3 billion (RM10.94 billion), according to a report by Emirates Business on Apr 1.
"We have already completed the necessary research for launching the Islamic bank and there are current discussions between Sheikh Saleh Kamel and investors to prepare for the public offering," said Adnan Youssef, who is also the chairman of the Union of Arab Banks.
Under the current economic climate, news reports said Sheikh Saleh Kamel did not withdraw or pull back but on the contrary, he is accelerating the finalisation process. "The Islamic banking industry needs this investment at such times," he added. The mega bank announced last year will have an initial capital of US$10 billion through a number of initial public offerings and private stock options.
In March, Moody's said Islamic financial institutions have been more resilient to the crisis than their conventional counterparts because direct investment in sub-prime assets is banned under Shariah law.
It was reported that a group of Gulf banks and investors planned to raise US$9 billion by selling shares in a planned Islamic investment bank, which will tap the rising liquidity in Muslim nations.
In June 2008, news reports quoted Sheikh Saleh as saying that the bank, tentatively named Ummar Bank, will have a paid-up capital of US$11 billion, of which US$2 billion will be raised via a private equity placement.
The new Bahrain-based Islamic investment bank was then reportedly seeking to raise as much as US$11 billion to start projects in all Muslim countries. With the emergence of better capitalised Islamic banks in the Middle East, bankers believe that consolidation is bound to take place, both locally and globally. - (The Malaysian Reserve, APril 2, 2009, p9)

Malaysia's Court of Appeal reverses High Court BBA ruling

By Habhajan Singh
The Court of Appeal had on Mar 31 reversed an earlier High Court decision that Al-Bai Bithaman Ajil (BBA) contracts were contrary to Malaysia's Islamic banking regulations.
The move will certainly be a relief to local Islamic banks that had earlier feared a potential spike in defaults of Islamic contracts, especially for home financing.
The unanimous decision in the appeal in the Bank Islam Malaysia Bhd v Ghazali Shamsuddin & 2 Others, and nine other cases, would mean that Islamic banks need not worry about the possibility of a string of defaults in BBA-based financing on the basis that the facilities are not Shariah-compliant.
In Tuesday's [Mar 31, 2009] appeal, Bank Islam Malaysia Bhd (Bank Islam) had 10 cases bundled together in the appeal before Court of Appeal judges Datuk Md Raus Sharif, Datuk Abdull Hamid Embong and Datuk Ahmad Maarop.
The Malaysian Reserve first reported on Sept 8, last year on the BBA judgment by High Court judge Datuk Abdul Wahab Patail, that sent shockwaves through the local Islamic banking fraternity as they began deciphering its impact.
Before that, many Islamic finance bankers and lawyers had not seen Abdul Wahab's 54-page written judgment dated July 18, but which was made available to lawyers involved in the case only sometime in August.
Upon winning the appeal, Bank Islam yesterday issued a two-paragraph statement saying: "Customers of Bank Islam and the public at large can now take comfort from the certainty that Bai Bithaman Ajil (BBA) contracts are valid and binding.
"This follows the unanimous decision by judges of the Court of Appeal on March 31, 2009, during a proceeding involving Bank Islam. The said decision reaffirmed that Bank Islam's practices in relation to BBA contracts are Shariah-compliant and valid.
"The Court of Appeal also reiterated that a BBA contract is a sale transaction and therefore must not be compared to a loan transaction."
Bankers at outfits like Maybank Islamic Bhd, CIMB Islamic Bhd and RHB Islamic Bank Bhd were jolted by Abdul Wahab's ruling that the application of the BBA contracts in Arab Malaysian Finance Bhd vs Taman Ihsan Jaya & 2 Others (2008), and 12 other cases, were contrary to the Islamic Banking Act 1983 (IBA).
Abdul Wahab had argued 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 feared that this could mean that current BBA financing clients would only need to pay the facility amount and would escape from paying the profit portion.
BBA is a hugely popular Islamic financing contract in Malaysia, though it is not accepted in many other jurisdictions, including most of the Middle East. In Malaysia, BBA has been the underlying concept for most Islamic financing in the last two decades.
Since Abdul Wahab's judgment, there has been some shift away from BBA. Towards the end of 2008, RHB Islamic, for example, completely phased out BBA in favour of the musharakah mutanaqisah concept for its home financing products.
At the full hearing on Tuesday, Mohamed Ismail Shariff from the law firm Skrine appeared as the lead counsel for Bank Islam, assisted by Oommen Koshy and Arief Emran, while Harpal Singh Grewal and Harminder Kaur appeared for one of the respondents. In this instance, the Arab Malaysian Finance Bhd v Taman Ihsan Jaya case proper was not one of the cases before the Court of Appeal.
When contacted, Ismail said the Court of Appeal ruled that the BBA agreement is valid as it is being done now, even without a novation agreement.
Post Abdul Wahab's BBA judgment, some banks were considering including a novation agreement in future BBA contracts as it was cleared by the judge.
"It also ruled that the amount that the bank is entitled to demand upon a default is the balance of the bank's selling price, subject to the bank giving an ibra [CORRECTED] or rebate, upon payment being received or realised," he said.
In the earlier judgment, Abdul Wahab had ruled that the sale element in the BBA is "not a bona fide sale" and had brought into question the profit portion of the facility.
Bank Negara Malaysia (BNM), which regulates the Islamic finance sector, was involved in the hearing as an intervener. It was represented by Karlos Israphil Bendlin from Zaid Ibrahim & Co. Association of Islamic Banking Institutions Malaysia [and not Institut Bank-Bank Malaysia (IBBM) as reported in original TMR 2/4//09 report] had also sent a counsel holding a watching brief.
Technically, the respondents can still appeal to the Federal Court, the highest court of the land. However, initial checks show that this is not likely to happen.
The BBA financing is a contract of deferred payment sale (the sale of goods on a deferred payment basis) at an agreed selling price, which includes a profit margin agreed on by the customer and the bank. Profits in this context is justified since they are derived from the buying and selling transaction as opposed to interest accruing from the principal lent out.

(This story appeared in The Malaysian Reserve on Apr 2, 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)

Salman leave KFH Malaysia

It's official. The ever-approachable and smiling Salman Younis will be leaving Kuwait Finance House Malaysia to head back for an assignment at mothership in Kuwait. Below is KFH's press statement.

Official Statement from Kuwait Finance House (Malaysia) Berhad

Kuala Lumpur, Malaysia, 1 April 2009. Dato’ K. Salman Younis on secondment from KFH-Kuwait has successfully spearheaded the establishment of KFHMB in 2005. Subsequently, he was appointed as the Bank’s Managing Director and Chief Executive Officer. With the growth and achievements of the Bank over the last three and a half years, Dato’ Salman will return to the Head Office in Kuwait to assume wider responsibilities. Dato’ Salman will relinquish his position as Chief Executive Officer of KFHMB officially on 1 June 2009, but will continue to serve on the Board of KFHMB.
With immediate effect, Mr Ab Jabar Ab Rahman, Deputy Chief Executive Officer will be Acting Chief Executive Officer of KFHMB. He has extensive experience in the banking sector, having been in the industry for 30 years. As one of the pioneers of KFHMB, Mr. Jabar joined the Bank as Director, Commercial banking, in July 2005. He was then promoted to Chief Officer in March 2007. His portfolio was widened to include Commercial, Retail and Consumer Banking, with his promotion to Country Head on 18 September 2007. Mr. Jabar was appointed Deputy Chief Executive Officer on 1 August 2008.

Bursa to launch platform for Islamic short-selling

Malaysia's stock exchange plans to launch a platform to facilitate regulated Islamic short-selling and hedge fund activities towards the end of the year, the bourse's head said on Mar 30, reports Reuters.
Short-selling — the sale of borrowed stock with a view to buying it back more cheaply later — is controversial among Islamic scholars, as some believe that sharia does not permit selling what one does not own.
Bursa Malaysia is still working out the platform's structure, but one way to enable Islamic short-selling is for investors to buy — instead of borrowing — a stock by paying a fraction of the stock price and executing a simultaneous agreement to sell it back to the seller at a later date, the report added.
It quoted Bursa Malaysia chief executive Yusli Mohamed Yusoff as saying: "This is being worked on, and we hope to offer an alternat ive way of stock borowing and lending which is sharia-compliant...This will help in bringing in Islamic hedge fund activities. Short-selling is an essential ingredient for capital markets to perform efficiently."
Short-sellers can boost market liquidity and lift returns for fund managers who lend out their shares for a fee.
Eighty-seven percent of securities listed on Bursa Malaysia meet Islamic law standards, which forbid activities such as interest-based lending, gambling, alcohol and tobacco. The practice of short-selling has come under criticism in the West recently, with some politicians saying it has helped to fuel sharp tumbles in the price of shares, particularly for banks reeling from the global credit crisis. The Malaysian stock exchange reintroduced regulated short selling in 2007 after a gap of nearly a decade in an attempt to boost turnover and foreign interest in the domestic market, the report added.