Monday, June 29, 2009

Absence of Shariah audit a ‘serious loophole’


By Habhajan Singh
Shariah audit, one of the key missing links in the current operations of Islamic financial institutions (IFIs), is expected to gain prominence in a few years time.
A local academic, who has been studying the matter from the Islamic perspective, has said that the absence of Shariah audit is a "serious loophole" in the Islamic finance system that is now fast expanding, with Malaysia alone having 17 stand-alone Islamic banks.
A cursory examination of the Islamic financial services industry, especially in Malaysia, shows an apparent gap in the Shariah supervisory practices, said International Islamic University Malaysia's (IIUM) Dr Abdul Rahim Abdul Rahman.
He noted that even though the Shariah Supervisory Committee (SSC) — an Islamic bank's inhouse Shariah body that ensures compliance on the Shariah front — express their opinions on Shariah compliance, the thorough audit or review processes of the Shariah legal contracts, documentations and operations were rarely conducted properly.
"Without such an audit and review process will result in a functional gap of Shariah compliance processes. This gap is a serious loophole in the Islamic financial system that is founded on Shariah precepts," said Abdul Rahim who is an associate professor at IIUM's Kulliyah of Economics and Management Sciences and also a former director of IIUM's Institute of Islamic Banking and Finance (IIiBF).
Menwhile, Daud Vicary Abdullah, who has held key positions in several Islamic banks in Malaysia and is now with Delloitte Consulting Malaysia, said that Shariah audit is still at the design stage.
"There is a growing awareness of it. I sense that in the future, at some point in time, the professional services firms will be expected to conduct a review from the outside, to validate what's happening (at Islamic banks)," he said.
In a paper presented at a local Islamic finance conference late last year, Abdul Rahim highlighted Section 5(b) of the Islamic Banking Act 1983 which specifies the need for the establishment of a Shariah Advisory Council (SAC).
"That there is, in the articles of association of the bank concerned, provision for the establishment of a Shariah advisory body to advise the bank on the operation of its banking business," he said.
Here, he noted, there are two types of Shariah compliance — ex-ante compliance and ex-post compliance. The ex-ante Shariah compliance is basically the Shariah Advisory Council's (SAC) supervision, monitoring and control tasks that take place upon and during implementation of the bank's dealings.
These activities include making sure that banks and financial institutions comply with the Shariah rules and guidelines during the designing of the contracts and agreements, during the process of transactions, during the conclusion of the contract, and the execution of the contract up to the implementation of the terms of contract until liquidation, he wrote.
"So far, very few institutions undertake ex-post Shariah compliance process. Ex-post Shariah compliance process requires a thorough and comprehensive Shariah audit to review and check the transactions that took place after the execution of the contracts.
"The ex-post Shariah compliance is basically to perform the random samples of completed transactions to ensure that these transactions conform to Shariah rules and guidelines.
"An internal audit or external audit may be required to perform this where the result of the audit needs to be reported to the management," he said.
On the processes, Vicary agreed that the Shariah audit is a lot wider than just accounting as it includes areas like procesess, people and governance. Abdul Rahim noted that Shariah advisors are rarely carrying out thorough internal Shariah review or audit on the operations of Islamic banks due to their restricted scope of work.

(This story appeared in The Malaysian Reserve on June 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)

MASB forum on Islamic accounting

The Malaysian Accounting Standards Board (MASB) last Thursday [25 June 2009] conducted a forum to gain feedback on the ‘Financial Reporting from an Islamic Perspective’ exposure draft. The panel session was chaired by Mohammad Faiz Azmi (3rd left) from PricewaterhouseCoopers, who has been recently appointed as the board's chairman. With him were (from left) MSB technical manager Mas Sukmawati Abu Bakar, Islamic banking veteran Mustapha Hamat and Amanie Business Solutions principal consultant Dr Syed Musa Al Habshi.

Rasameel's Issam: In town for Islamic finance

The point person at Kuwait-based Rasameel Structured Finance is scheduled to be in Kuala Lumpur today. The company' vice chairman and CEO Issam Al-Tawari (picture) will be discussing the topic of distressed assets at the two-day 5th International Islamic Finance Forum Asia 2009.
Issam will be one of the panel members in a session discussing investment potentials in the distressed asset market and exploring the possibility for such assets to be managed in a Shariah-compliant manner. He will also be looking at the challenges and risk appetites faced when structuring Islamic funds for distressed assets.
Moderated by The Malaysian Reserve's associate editor Habhajan Singh, other panel members in the session are Accounting and Auditing Organisation for Islamic Financial Institution's (AAOIFI) assistant secretary general Khairul Nizam, Citi's head of regional Islamic structuring for fixed income Ahmad Shahriman Mohd Shariff and Thomson Reuters global head of Islamic finance Rushdi Siddiqui.
Headquartered in Kuwait, Rasameel's primary focus is providing its clients with a Shariah-compliant portfolio of predictable cashflow generating assets and securities in the form of asset securitisation invested in structured Islamic investment products.
Issam started his career with the Bahrain-based Arab Banking Corporation (ABC), working in the area of loans and syndication covering the European market and the GCC market at a later stage. He then worked extensively on corporate finance issues with ABC’s then newly incorporated subsidiary in 1994, ABC Islamic Bank, to become an associate director whose main responsibility was syndication and marketing.
He joined The International Investor (TII), Kuwait, in 1998 in the structured finance division working on project finance, asset-backed leases and a broad range of Islamic investment products. His last position with TII was chief operating officer and a partner with the structured finance group.
Issam has served on the board of directors of a number of companies and funds. He is also the chairman of Ain Takaful Insurance company, Kuwait, cofounder of Ritaj Investment Company, Kuwait, and ex-chairman of Binaa & Namaa (Sorooh) Investment, a company which specialises in financing build-operate-tranfer projects.

(This story appeared in The Malaysian Reserve on June 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)

Tuesday, June 23, 2009

MASB faces uphill task in getting feedback on draft

By Habhajan Singh
THE Malaysian Accounting Standards Board (MASB) is facing an uphill task in its attempts to get feedback for a draft of its exposure on financial reporting for the growing Islamic finance fraternity. Earlier attempts to receive feedback for the 'Financial Reporting from an Islamic Perspective' exposure draft, whose lifespan for comments ended on April 3, proved futile.
It is understood that the regulatory body did not get much feedback from industry practitioners as well as from the academic circles on the 95-page document containing the draft statement with five key appendices.
With so little feedback, the regulatory body decided to take the exposure draft directly to the floor for a discussion, hoping that would generate enough relevant and pertinent feedback before the exposure draft is moved up a notch in becoming a policy statement.
On Thursday, MASB is organising a forum for this very purpose.
"The forum is part of the due process in engaging the public. If some people have violent objections, they need to be heard," said MASB executive director Dr Susela Devi.
The draft statement is designed to underscore financial reporting for Islamic financial institutions, which among others, affirms that MASB-approved accounting standards shall apply in relation to Shariah compliant financial transactions and events, unless there is a Shariah prohibition.
A key statement in the draft is the pronouncement that financial reporting from an Islamic perspective may not necessarily be issued in the form of an approved accounting standard but may be issued via other technical pronouncements.
As a banker told The Malaysian Reserve in an earlier report, the statement is "akin to AAOIFI's statement. Once converted into a policy statement, it would underlie future MASB pronouncements on financial reporting from an Islamic perspective."
AAOIFI, or the Accounting and Auditing Organisation for Islamic Financial Institutions, is a Bahrain based standard setting body which is active in developing and promoting Islamic accounting, auditing, and Shariah standards.
To date, MASB has only released one set of accounting standards for Islamic financial institutions (IFIs), with a number of other standards still being drafted.
As the name suggests, the maiden 'MASB Standard i-1: Presentation of financial statements of Islamic financial institutions', lays the foundation for the presentation and disclosure of financial stataments of IFIs.
In addition, it provides guidelines for the structure, and a basis of contents of the financial statements to ensure conformity with Shariah requirements. In its introduction, the exposure draft notes that the existing Financial Reporting Standards, which have been developed in harmony with the International Accounting Standards (IASs), have not been able to address accounting issues within Islamic banking operations adequately.
"Fundamental differences within the underlying principles, along with the distinctive nature of Islamic financial practices, have rendered many facets of conventional accounting standards irrelevant to Islamic banking.
"Hence, the existing Financial Reporting Standards and prevailing IASs are useful in providing a structural framework for reporting, but these standards are inadequate to accommodate Shariah precepts, which form the basis of all Islamic transactions," it said.

(This story appeared in The Malaysian Reserve on June 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)

BNM launches murabaha instrument to manage liquidity

BANK Negara Malaysia central bank launched last Friday [Jun 19, 2009]a murabaha instrument to manage liquidity in Islamic financial markets. The central bank said the murabaha notes, certificates of indebtedness arising from a deferred mark-up sale of assets, would increase efficiency and flexibility in managing liquidity in the financial system by diversifying the Shariah concept used in the bank's Islamic monetary instrument, reports Reuters. The report said, under a murabaha deal, an Islamic bank buys an asset from a third party and sells it to its customer at cost plus profit. This allows the bank to extend financing without charging interest, which is forbidden by Islamic law. The murabaha notes would be used in place of the asset. Banks, after successfully bidding for the paper, would park their funds at the central bank for the duration of the notes. The notes would be issued through competitive auctions, the central bank said on its website.

Fitch revises outlook on Indonesia’s Bank Shahriah Muamalat

Fitch Ratings recently revised the outlook on PT Bank Shariah Muamalat's (Muamalat) national long term rating to negative from stable and affirmed the rating at 'A (idn)'. At the same time, Fitch has affirmed the rating of the bank's subordinated mudaraba bond at 'A (idn)'.
The outlook revision reflects the increase within the bank's non-performing financing (NPF) in the first quarter of the 2009 financial year (1Q09) and Fitch expects the challenging economic climate may also continue to affect the bank's asset quality and modest capital base.
The bank's NPF stood at 6.4% in 1Q09, up considerably from 4.3% in 2008 and 3% in 2007; this is higher than the 5.1% industry average for Islamic banks. According to the bank, the increase of its NPF was driven mainly by the deterioration in one large account.
Following a restructuring of the financing of that account, the bank expects the loan to be upgraded soon, provided the account continues to perform based on the restructured terms. Given the bank's relatively concentrated financing — its top 20 debtors account for 29% of loans and three times of equity — NPFs could increase significantly should some of these accounts turn non-performing.
However, Fitch understands that the bank has taken preventive measures, such as stepping up debtor monitoring and initiating early restructuring efforts.
The agency is also concerned about the decline within the bank's provision cover to 24% of NPF in 1Q09 from 34% and 88% in 2008 and 2007 respectively; these levels are much lower than the industry average of 104%.
While there is mitigation from its focus on secured lending, a higher provision buffer is preferred given the weak legal climate in Indonesia. The bank intends to increase its provision reserves to 300 billion Rupiah (RM101,915.30) in 2009.
Muamalat's capital ratios are at the lower end of the banking system average with a Tier 1 CAR of an 8.8% in 1Q09, although the total CAR increased to 12.1% underpinned by the issuance of 314 billion Rupiah subordinated mudaraba bonds in 2008. It is likely that the total CAR — which is expected to be 10% at end-2009 — will come under further pressure should the current economic uncertainties affect the bank's asset quality severely. Fitch also understands the bank is considering an equity issuance by early 2010 to strengthen its CAR.
Muamalat was established in 1991 as Indonesia's first Islamic bank. The bank is currently the secondlargest provider of Islamic finance in Indonesia with about 28% market share. Muamalat's largest shareholder is Saudi Arabia based Islamic Development Bank with 28.01% ownership at end-2008. — Source: Fitch Ratings

(This story appeared in The Malaysian Reserve on June 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)

Monday, June 15, 2009

Role of Shariah in equity-based financing


By Habhajan Singh
The issue of how Shariah can support the development of equity-based financing is one that affects the growth of the industry, said a much sought-after Shariah scholar of Islamic finance.
"Since the inception of the industry, we have been very much biased towards debtbased financing, which is compliant by any standard.
"But moving forward, we should couple it with equitybased financing, because debt and equity are complementary to each other," said Dr Mohammed Daud Bakar in an interview in the latest bulletin pulished by International Shariah Research Academy for Islamic Finance (Isra).
Mohd Daud runs Amanie Business Solution Sdn Bhd and chairs the Shariah Advisory Council (SAC) of Bank Negara Malaysia (BNM). He is also chairman of Isra's council of scholars.
On some of the pressing Shariah issues that the industry is currently facing, Mohd Daud said when looking at a wider perspective, there are some issues that are related to the growth of the industry, protection of the industry and issues that could affect the industry negatively. He noted that there are many Shariah issues related to equity.
"For instance, the issue of how debt can be converted into equity, the issue of quasi-equity, how to make equitybased financing more attractive to the issuer and investor, issues of the valuation of equities and so on.
So, Shariah should come in and try to solve the equity-related issues, to push the growth of the industry," he said. Risk management is one of the issues pertaining to the protection of the industry, Mohd Daud said.
"Somehow, we tend to take for granted that the conventional risk management system tends to be compliant because it does not contain any interest. But perhaps the background of this system does not suit the Islamic financial system.
"Shariah must come in and see how the scholars and jurists in the past were able to provide risk management tools, which are very much pertinent to our industry, rather than just following the conventional system," he said.
According to Mohd Daud, also of importance are concerns related to issues that may negatively affect the industry.
"For example, there is the issue of differences of opinion that could negatively affect the whole industry. So, this issue needs to be resolved amicably.
"If possible, we must provide solutions that can jive well with the products and acceptability by the market. So, we have to resolve this issue, by providing solutions that are not only Shariahcompliant, but also commercially viable," he said.
Mohd Daud also shared his thoughts on the issue of tawarruq. It should be noted, however, that the interview took place before the International Council of Fiqh Academy, in a meeting in end-April, issued a ruling banning organised tawarruq.
On why commodity murabahah (tawarruq) is tolerated by the scholars, Mohd Daud said this was another contention that some segments of people were saying, i.e. commodity murabahah is tolerated, whereby scholars transforms it to be compliant.
"For me, this is wrong from the economic perspective. If you were to refer to the books of past scholars, in most schools of thought, they endorse Murabahah without any issue.
"Murabahah or tawarruq in our case, has been used in the past and accepted in the past. There were no contentions and objections to the practice.
"However, some modern scholars, practitioners and economists object to the principle of organised tawarruq, where we have three or four parties coming together to facilitate the murabahah transaction, to be able to get cash at the end of the day.
"So, murabahah has been seen to be as a cash financing methodology, rather than (used for) the acquisition of assets for the real use of the asset," he explained.
"As such, this has been seen by some as bad because you are using murabahah to raise money. If that is the basis of the argument, then you would also have to disallow or discourage sale and lease back.
"Sale and lease back is also another structure that allows the owner of the asset to get credit or cash financing by selling his asset and taking it back on lease.
"But these are Shariahcompliant instrument that can be used to raise financing, for the purpose of getting the cash for the owner or customer. So, this statement is a bit out of context because we have to put some conditions," Mohd Daud said.
"For example, murabahah cannot be used to finance conventional banks, i.e. for them to get cash, as the money will be used for riba-based activities. "There are some conditions under the AAOIFI (Accounting and Auditing Organisation for Islamic Financial Institutions) Shariah standard. We are bound by those conditions.
"It is not a jacket kind of a product that can be used by any party in the market. It should be used Islamically, to support Islamic products, which are Shariah-compliant," he said.

(This story appeared in The Malaysian Reserve on June 15, 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)

Special Focus:Islamic hedge funds viable?

Although there is strong interest, the process of developing syariah-compliant hedge funds has been constrained by Islamic law, which prevents the use of derivatives, where one transfers the risk of payments in a business dealing to another person. Islamic law forbids short selling because it involves selling an asset that one does not own. Forward and futures contracts are equally forbidden because they are construed as “selling promises”, reports The Edge.
“Options, meanwhile, include payment for a future ‘right’ to do something, but such a right, without obligation, makes it dependent upon future events and therefore creates uncertainty, an element also forbidden under Islamic law,” the report quoted Nik Azhar Abdullah, executive director and head of Alliance Investment Management Bhd.
THE REPORT GOES ON:
A Reuters article in mid-April quoted some Islamic finance proponents as saying hedge funds that based their investment strategy on syariah or Islamic legal principles would face significant disadvantages compared with non-syariah hedge funds. They said many strategies would be difficult to achieve because these would be too expensive to perform in a syariah-compliant way or because the tools themselves would be inappropriate under syariah law.
The Securities Commission has looked into a regulated short selling and securities borrowing and lending framework with a view to introducing appropriate flexibilities within the syariah context. This would enable the establishment of alternative strategy funds that are highly dependent on their ability to undertake hedging strategies. These regulatory developments seek to provide a basis for alternative strategy funds to be used as a launch pad for Islamic funds employing absolute return strategies.
Nik Azhar says with new developments in Islamic investment, there is a view that hedge fund managers can adopt some of the accepted Islamic finance practices to work with conventional hedge fund strategies. For example, a fund falls within the permitted domain of Islamic finance by creating “stipulating options” or options where a buyer makes an advance partial payment for goods at a later date. If the buyer later decides not to complete the deal, the seller keeps the advance and this is the closest product in Islamic finance to an option.
“A further development of the hedge fund principle is the Salam Sale, where one sells a commodity to a buyer against full upfront payment for delivery at a future date. An investor can hedge downside risk by selling stocks as a Salam Sale, with the same result as short selling, but without a borrowing element. The performance fee may be structured similarly to the mudharabah contract where the investor and entrepreneur agree on the profit-sharing ratio upfront,” says Nik Azhar.
He believes that a syariah-compliant hedge funds market will grow in the future but it may be restricted to certain types of hedge fund investment as there are more prohibited than permissible areas in hedge funds.
Humayon Dar, CEO of BMB Islamic UK Ltd says there is nothing in syariah law that is against the basic philosophy of hedge funds, which earn market-neutral returns for their investors.
Says Badlisyah Abdul Ghani, CEO of CIMB Islamic Bank: “Islamic financial markets fall under the ambit of muamalat or human societal relationship where everything is allowed unless it is expressly disallowed under syariah. Few things are expressly prohibited in muamalat and these can be broadly categorised as not conducting riba or charging interest and/or trading ribawi goods and to avoid uncertainty in contract, the buyer and seller must be clear on the goods sold, and the timing and price must be outlined in the agreement.”
Other restrictions are not to gamble or trade in an exhaustive list of non-halal goods or trade in goods with no value.
Innovation and development can only arise when research is done, says Badlisyah. “If syariah law is not followed under the principle of muamalat, unless there are clear prohibitions, we will never do the research to know whether hedge funds can be done. To my mind, if we adhere to syariah, there are many areas that can be explored.”

This article appeared in the Islamic Banking & Finance page, the Special Focus pullout of The Edge Malaysia, Issue 755, May 18-24, 2009.

Kuwait Finance House unveils investment arm


By Sumathi Wong
Kuwait Finance House (Malaysia) Bhd yesterday unveiled its sister company, Liquidity Management House for Investment KSCC (Liquidity House) which aims to penetrate further into the Malaysian market.
Chairman and managing director of Liquidity Management House, Emad Al Monayea said that it currently has very strong communication relations with its sister companies, among which is Kuwait Finance House (Malaysia).
"I don't think there is a need to have a separate set up currently, but definitely within the medium term strategy. We cannot avoid having a physical business jointly with KFH Malaysia to have our own presence within the Malaysian market," said Emad.
Liquidity Management House is the investment company wholly-owned by Kuwait Finance House KSC and currently serves as its international investment arm. Currently based in Kuwait, it started operations in Sept 2008 with a capital of Kuwaiti Dinar of 100 million (RM1.22 billion) and is regulated by the Central Bank of Kuwait.
Its main objective is to be a principal player in the international sukuk market and the Shariah-compliant structured finance arena.
Together with Kuwait Finance House (M), it is also keen to capitalise on the opportunities that can be derived from the advanced and sophisticated local sukuk market, whereby investors from the Middle East and Gulf Cooperative Council countries could take advantage.
Emad also added that there would be more sukuk issuance this year compared to last year but not equaling the total sukuk issuance in 2007, where last year's total sukuk issuance was US$14 billion (RM49.4 billion).
He noted that it would issue sukuks of US$300 million to US$400 million in total and not limited to any country.
"There is a healthy appetite for it with a focus on solid corporates with proven track record, strong cash flow derived from operations and maintaining realistic assets to back up the structure that we develop," said Emad at the launch of the Liquidity House in Kuala Lumpur yesterday [June 9, 2009].
Meanwhile, Kuwait Finance House (M) deputy CEO Ab Jabar Ab Rahman views Liquidity House as an extension of the bank's corporate and investment banking division.
"With the complemetary efforts of Liquidity House, the KFH group is in an even stronger position to play a key role in the development of Islamic banking in Malaysia and the region."
Kuwait Finance House (M) has participated with Liquidity House recently in the syndicated Ijarah facility for Burgan Company for well drilling trading and maintenance for the purchase of four new oil rigs.

(This story appeared in The Malaysian Reserve on June 10, 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, June 14, 2009

Takaful Malaysia sees light at the end of tunnel

By Alfean Hardy
Syarikat Takaful Malaysia Bhd is seeing the light at the end of the global economic crisis tunnel and is planning to leverage on the improving e conomy and increasing customer appetite for investment products, its group managing director Datuk Mohamed Hassan Md Kamil said in a recent email interview with The Malaysian Reserve.
"We are of the view that the global economy will slowly stabilise towards the end of this year considering the massive stimulus packages and accommodative monetary policies introduced worldwide to support the downturn," he said. "Since equity markets normally recover a few months ahead of the economy, we expect the local market to steadily recover in the second half of this year.
"Hence, it is timely to offer an investment-linked product with equity exposure to take advantage of the upside when market recovers.
"We believe that investors are constantly looking for the best investible asset to invest in and Takaful myInvest provides them more alternatives to diversify their portfolios while at the same time obtain takaful protection," he added.
Takaful Malaysia recently launched an open-ended investment-linked product, Takaful myInvest, to cater to investors who want takaful protection while looking for alternatives to diversify their portfolios.
The product offers takaful protection in the event of death or total permanent disability during the investment period. It has four different investment funds — Dividend Fund (Irad), Blue Chips Fund (Istifad), Index Tracker Fund (Ihfaz) and Growth Fund (Ittihad) — that can be mixed to suit different investment appetites.
The funds will be invested in Bursa Malaysia-listed Shariah-compliant stocks approved by the Securities Commission's Shariah Advisory Council. The product is also designed to be invested in Islamic deposits and the money market.
Mohamed Hassan said Takaful myInvest is for all types of investors who hold an optimistic view on the equity market's recovery locally and would like to position their investment portfolios to take advantage of that recovery as well as the unlimited upside of potential returns that equity investments offer.
"While we are aware of the opportunities offered in the overseas markets as a result of the financial meltdown, we opine that the risks are also higher, which we need to avoid.
"The local market is more defensive in nature but it also offers tremendous growth," he said. "With the current economic condition, domestic investments would be the most prudent and best way to contain risk exposure.
"The domestic equity market still offers decent earnings in terms of dividend as compared to other regional markets, and money market investment ensures that liquidity is intact while at the same time offering the opportunity of stable returns," he added.
Asked whether Takaful Malaysia had an overseas variant of Takaful myInvest in the pipeline, Mohamed Hassan said the company was constantly working to offer innovative products to its valued customers.
"As such, there are plans on launching more investmentlinked products that will be associated with the performance of foreign investments, for example, structured products, provided that the global sentiment improves and that economic recovery is forthcoming," he said.

SEE SISTER BLOG: UNDERWRITERASIA

(This story appeared in The Malaysian Reserve on June 10, 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)

EonCap Islamic to focus on car financing sector


By Sumathi Wong
EonCap Islamic Bank Bhd (EonCap Islamic) is not perturbed that its car financing sector remains the biggest contributor to its financing portfolio despite falling car sales due to the contracting economy.
The wholly-owned subsidiary of EON Bank Bhd is confident of its car financing segment in view of low non-performing rates (NPR) and a good mix of cars under financing.
"We do see a slowdown, but it is fine. Our non-performing loans ratio is fantastic. In fact, we are below average on the industry's non-performing loans. We are at about 2%," EonCap Islamic CEO Fozia Amanulla told The Malaysian Reserve in a recent interview.
She was responding to a question on whether management was concerned that the economic contraction would cause a potential slowdown in its financing front as car financing is a major component in its portfolio.
For the year ended Dec 31, 2007, EonCap Islamic's financing and advances totalled RM4.69 billion, with RM1.60 billion, or 34%, coming from its car financing portfolio.
EonCap Islamic provides Shariah-compliant motor vehicle financing called Hire Purchase-i (Auto Aitab). The underlying contract is based on the Shariah principle of Al-Ijarah Thumma Al-Bai (Aitab).
Fozia said that 75% of its total financing portfolio is derived from retail financing while the remaining 25% comes from corporate or commercial financing.
On the impact of fewer new cars hitting the roads due to the slowdown, she said that while business has generally slowed down, it has not impacted EonCap Islamic as it is not only involved in the local car industry, but also covers foreign makes such as Mercedes and BMW.
For the first four months of 2009, total passenger and commercial vehicles sold were 159,816, or close to 12% lower than the corresponding period last year, according to the Malaysian Automotive Association (MAA) figures. Sales volume in April 2009 was 3,070 units, or 7% lower than the previous month.
For the whole of 2008, Malaysian car dealers sold 548,115 passenger and commercial vehicles, or 12.5% more than the year before. Fozia said that there is no cause for alarm in having too much of Auto-Aitab in its portfolio as it is a form of personal financing spread out over a large pool.
"It is unlike a (large) corporate loan... when they default, you are in deep trouble. Retail financing is more of a safer bet and our average NPL is very low. So there is no concern.
"Perhaps the idea is to grow other segments rather than to slow down on Auto-Aitab. Aitab is something which we are still growing. We are coming up with different packages, different financing schemes and going into highend motorbike financing," she said.
Fozia said EonCap Islamic does not do second-hand car financing as the bank is focusing on new cars. "There are a lot more issues when you go into secondhand car financing. We have just not gone into that simply because our new car financing portfolio is big," she said.

(This story appeared in The Malaysian Reserve on June 8, 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)

BOOK REVIEWS: Useful guide into the world of Shariah banking

Book: Understanding Islamic Finance
Author: Muhammad Ayub
Publisher: John Wiley & Sons Ltd, 2007 Pages: 516
By Mohammed Obaidullah

This is a new and extremely useful addition to the rapidly expanding literature in the area of Islamic finance. It purports to provide a clear exposition of all the basic building blocks of Islamic finance and of all the major components of the Islamic financial system, such as, Islamic commercial and investment banking, insurance, capital markets and what-haveyou.
The book is encyclopedic in its coverage and is divided into three parts.
Part One, spanning over four chapters, deals with fundamentals. In the very first chapter, the book raises the interest of the reader by questioning conventional wisdom on many issues. It begins with a strong criticism of capitalism and the neoclassical framework, which, as the author puts, is based on greed. The author asserts that this unbridled pursuit of wealth led to an ever-increasing gap between the haves and havenots, with the system exhibiting no discipline in money creation, no, or dubious, care for the weak and oppressed classes, no concern for justice, fair play and equity characterised by unhindered unethical practices (page 4, paral).
The chapter is more journalistic in its content as it makes some sweeping statements without relevant references to theoretical proofs or empirical evidence, and thus, could be a source of discomfort to readers seeking objectivity in the contents. The remaining two chapters in Part One present the framework under which the Islamic financial system is supposed to work.
Chapter 2 aims to highlight the key features that distinguish an Islamic economic system from a conventional one. It begins with a very brief section of the sources of "shancah" norms where the author rightly highlights the principle of "general permissibility" (ibahatul asliyah) in matters of muamalat or that pertain to socio-economic rights and obligations, which means that all acts and things that have not been expressly prohibited by the original sources of sharicah are permissible (page 22, para 3).
The author then moves on to an interesting discussion on the fundamental idea of objectives (maqdsid) of Shariah that according to many should be the basis of all rules, regulations and laws governing Islamic economic and financial system. The balanced approach in highlighting both the rules of fiqh and objectives of Shariah assumes significance in the context of recent debates over whether the former or the latter has been/should be accorded greater emphasis in design of the Islamic financial system.
The author does a commendable balancing act in dealing with fiqhi matters that are often characterised by divergence of views. For most issues, he prefers to present the consensus position as captured in the AAOIFI resolutions. At the same time he does not show any reluctance to exercise his "own" judgment.
Using a critic's lens, however, one finds a rather inadequate discussion on managerial aspects of IFIs. For instance, while the author devotes five chapters exclusively to contractual aspects of Islamic modes of finance, he covers all the institutional and operational aspects of IFIs as well as Islamic financial markets in just one following chapter.
A more detailed discussion on various risk factors confronting IFIs and ways to manage them should have been included. Similarly, the exposition of various concepts and structures could have been made more reader-friendly. A good example: Explain how an IFI operates or is different from a conventional FI with the help of a hypothetical financial statement. The author has no doubt produced an extremely useful work.
The readability and usefulness of each chapter can be enhanced further with the addition of learning objectives at the beginning, summaries at the end, insertion of more diagrams and flow charts, inclusion of more illustrative examples/cases, and perhaps chapter-end exercises. In this form the book can serve as the basic text book for serious students (at Bachelors' or Masters' level) of taught programmes. At the same time, researchers and practitioners of Islamic finance would find it useful.

- Abridged version of the review that appeared in Islamic Economic Studies, Vol.15, January 2008
(This story appeared in The Malaysian Reserve on June 8, 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)

Exploring opportunities in wake of credit crunch


CAPTION: Get the inside scoop from (clockwise from top left) Dheerasak, Badlisyah, Issam and Mohamad Nedal at the 5th International Islamic Finance Forum 2009 Asia

by Habhajan Singh
Opportunities for Islamic finance in the wake of the credit crunch and managing distressed assets will be among the topics discussed at an Islamic finance forum later this month that will see the presence of the Accounting and Auditing Organisation for Islamic Financial Institutions's (AAOIFI) key man.
AAOIFI secretary general Dr Mohamad Nedal Alchaar is scheduled to present a keynote address on the opportunities for Islamic finance in the wake of the credit crunch at the 5th International Islamic Finance Forum 2009 Asia that begins on June 29.
Among others, he will be discussing the impact of the financial crisis on Islamic finance and synergies between Islamic finance and conventional finance. He will also address the need to strengthen the Islamic finance infrastructure and systems.
AAOIFI is the Bahrain-based standard setting body active in developing and promoting Islamic accounting, auditing, and Shariah standards. It plays a crucial role in coming out with standards for Islamic financial institutions globally, though not all regulators around the world implement its pronoucements.
The two-day forum will also present an international case study on distressed assets or sellers for Islamic investments.
Rasameel Structured Finance vice chairman and chief executive officer Issam Zaid Al-Tawari will guide participants through the distressed asset market to search for potential for investors and to see if the assets can be managed in a Shariah-compliant manner. He will also be looking at the challenges and risk appetites faced when structuring Islamic funds for distressed assets. Headquartered in Kuwait, Rasameel's primary focus is providing a Shariah-compliant portfolio of predictable cashflow generating assets and securities in the form of asset securitisation to its clients invested in structured Islamic investment products.
On Feb 19, The Malaysian Reserve had reported that Malaysian Shariah advisory body Amanie Business Solutions Sdn Bhd, led by Dr Mohd Daud Bakar, was advising a number of fund managers from the United States and the Middle East who are keen on managing distressed assets in a manner compliant with Shariah. This is another new innovation being injected into the fast growing field of Islamic finance.
According to the report, these fund managers, believed to have an estimated average fund size of US$500 million (RM1.83 billion), were keen on picking up distressed assets following the economic downturn to form funds that will be used to tap Islamic investors.
"We've been approached to structure products to enable the fund managers to launch their funds. They want to structure Islamic funds for distressed assets," Dr Mohd Daud was reported as saying.
Dr Mohd Daud, a Shariah scholar and chairman of Bank Negara Malaysia's Shariah Advisory Council, is also scheduled to speak on the risk return potential of derivatives and hedge funds in the Islamic finance market.
Other panelists for the event are CIMB Islamic Bank Bhd executive director & CEO Badlisyah Abdul Ghani, Deutsche Bank global head of Islamic distribution Salman Ashraf and Islamic Bank of Thailand (IBT) president Dheerasak Suwannayos, who will speak on the Thai experience of operating in a market with minimal Islamic finance infrastructure.
Neighbouring Thailand has made a number of moves to open the doors to Islamic finance, including setting up the IBT in 2003 with the Thai Finance Ministry as the largest shareholder with a 48.54% stake in the bank.
In February, it was also reported that Thailand was planning to ease taxation rules to support the development of an Islamic bond market that enables local companies and banks to tap new investors.
In the same month, the Stock Exchange of Thailand (SET) had announced plans to launch a Shariah 50 index early in the next quarter before going on a roadshow to the Middle East in the second half.
The index would combine 50 listed stocks, making up 47% of the SET's market capitalisation, that are compatible with Islamic law, according to media reports.

(This story appeared in The Malaysian Reserve on June 8, 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)

Bahrain’s Ithmaar Bank sees 1Q net profit plunge 88%

Established in 1984, Ithmaar Bank (Ithmaar) is a regional banking and financial services group, whose services include investments, private, retail and commercial banking, private equity, Islamic insurance and assurance, equipment leasing and real estate development. It has an operational presence and investments across Mena and Asia.
Moreover, in a view to broaden its GCC presence, Ithmaar is also cross listed on the Kuwait Stock Exchange in 2008. During 1Q09, Ithmaar’s net profit plunged 88% to US$3.83 million (RM13.34 million) from US$32.01 million in 1Q08 on falling operating income, rising impairment provisions and a foreign currency translation loss. The bank’s total operating income declined 51.1% to US$49.26 million in 1Q09 from US$100.76 million in 1Q08 on falling interest rate and noninterest incomes. Its annualised net interest margin and net spread decreased 260 bps and 120 bps to 1.1% and 2.4% in 1Q09, respectively. As a result, net interest income plummeted 58.2% to US$9.39 million in 1Q09. Moreover, fees and commission income and income from fund management and services fell 20.2% and 54.5% to US$7.55 million and US$2.19 million in 1Q09, respectively. Income from investment properties was lower by 60.4% q-o-q at US$24.46 million from US$61.74 million q-o-q. However, the bank reported a trading income of US$1.82 million as against a trading loss of US$0.25 million in 1Q08. On the expenses side, its operating expenses decreased 21.8% to US$31.85 million on account of a 20.5% decline in staff costs and a 39.6% fall in general and administrative expenses, countered by a 14.4% increase in depreciation and amortisation expenses. However, share of profit of associated companies rose to US$9 million from US$0.67 million during the same quarter of the last year on the increase in its total associates. Outlook and Valuation Driven by the ongoing financial crisis and subsequent global economic slowdown, consolidated balance sheet of wholesale banks witnessed a negative growth of 3.8% to reach US$188.9 billion in 2008. This negative growth has continued and assets have further declined to US$179.9 billion in 1Q09. However, the industry is well supported by the regulator, which encourages innovation while providing sound regulatory framework. Moreover, Fitch expects writedowns will continue to impact across the Bahraini retail and wholesale banking sectors along with an "adequate" profitability for 2009.
(Extracted from a equity research note issued by Taib Research in May 2009)

(This story appeared in The Malaysian Reserve on June 1, 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)