‘No necessity for Islamic accounting standards’

By Bhupinder Singh
The Malaysian Accounting Standard Board (MASB) is expected to issue a statement of principle later this year stating that it does not think there is a need to have Islamic accounting standards.
"We feel that we can use the International Financial Reporting Standards (IFRS) unless someone can show us that there is a clear prohibition in the Shariah, then we will amend it accordingly. Until such a time, we'll use the IFRS," the new chairman of MASB Mohammad Faiz Azmi told The Malaysian Reserve.
The MASB is adopting this stance as there have not been many significant issues between Islamic and conventional accounting, which required a different set of accounting standards for the former. Even countries like Saudi Arabia have adopted the IFRS, Mohammad Faiz added. The main accounting issues in Islamic finance centre around disclosure and transparency in terms of how money is utilised. There has, however, been some confusion on the behaviour of products and how they are accounted for.
MASB will seek to use Malaysia's role as a pioneer in Islamic finance to share its experience in this field with other countries, as well as to raise concerns and issues about implementing the I FRS with the International Accounting Standards Board (IASB). According to Mohammad Faiz, the country's staggered approach to a convergence with the IFRS by January 2012 is progressing smoothly.
"We are 95% there in terms of convergence with the IFRS. We have left the two major standards because of their impact — the FRS 139 that is due for implementation in January 2010 along with the agricultural standard FRS 1431," he said.
The FRS 139 (financial instruments — recognition and measurement), an omnibus standard that covers a whole range of things, is set to impact corporate earnings reporting as this standard requires companies to record/recognise their derivative contract exposures and not just disclose them as potential claims.
The standard will also act as an anti-abuse mechanism requiring the management to state clearly their investment decisions. MASB's main challenge now is to educate the market on the need to converge and the benefits of converging, as well as to explain what and how these changes will impact the market.
"The reality is accounting does not just reflect on what you do, it may actually change the way you do business," Mohammad Faiz said. The new standards may require companies to rethink their human resource, remuneration or bonus policies, he added.
Meanwhile, the new chairman of MASB, whose tenure will run for three years, has a busy schedule ahead of him. In November, MASB will host the Asian-Oceanian Standards Setters Group's (AOSSG) first meeting in Kuala Lumpur. Set up last April, the AOSSG will be a forum for Asian countries to formulate viewpoints that will be forwarded to the IASB. The AOSSG comprises representatives from China, Japan, South Korea, Singapore, New Zealand, Australia, Hong Kong, Macau, Brunei and Indonesia.

(This story appeared in The Malaysian Reserve on Aug 17, 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)

Islamic finance at crossroads

by Alfean Hardy
The Islamic finance sector, both locally and abroad, is now at a crossroad and is facing the possibility of not being able to present itself as an alternative to the conventional financial system, said KPMG executive director John Lee. In a presentation at the Malaysian Corporate Conference 2009 in Kuala Lumpur last week, Lee said that the global sector was in good shape, with excess liquidity and good growth rates.
"It's still recording good growth rates in spite of the global financial turmoil that we've been seeing. In Malaysia, we've seen tremendous growth rates as well, registering an over 20% growth rate.
"However, a lot of this (locally) has been because of the displacement of conventional banking rather than creating a new market. It's about market share, taking from the conventional rather than growing new market share. So we have to see this growth rate with some scepticism. "There's (also) been a number of people who have been saying that, if we'd had more Islamic finance, we would not be seeing what we've been seeing in the markets to some extent," Lee said.
"Also, we didn't see a lot of collapse of, or issues with, Islamic banks resulting from the global financial turmoil. "We have to be careful about saying that, (in the case of banks collapsing/being affected), it's not because they were insulated, better managed or smarter. It was simply that a lot of them were not exposed to toxic assets, that's all," he added.
Lee, who was involved in KPMG's report entitled "Growth and diversification in Islamic finance" released in 2007, added that the industry was now at point where the market was no longer in its infancy but was maturing.
"The risk of maturing is, where do we go (from here)? The risk, in my opinion, is that it's converging with conventional finance and not diverging from conventional finance.
"Initially, it was important for (the industry) to have some similarity with conventional financing. Because of familiarity, a conventional mirror was an asset but if we continue down that path, the fear is that we'll be converging with conventional. And my argument will be, why bother then?" he said. Lee said he would like to see the industry undergo a divergence from conventional finance, noting that the whole idea was one of alternative finance — to create a market that provides an alternative space to conventional banking.
"But, if it moves along the path I've seen, it's going to be a lot more convergence, to have more Shariah-compliant as opposed to Shariah-based products. A lot of the instruments out there (now) are Shariah-compliant products rather than Shariah-based products," he added.
At a question and answer session later, International Shariah Research Academy (Isra) associate researcher Shabnam Mohamad Mokhtar said economists have argued that Shariah-compliant products were conventional products that have been Islamised while Shariah-based products were those that truly originated from the Shariah perspective.
"If you go by that argument, if you go into murabahah, which is a sales transaction, and if you go into ijarah, which is a lease transaction, aren't these in the conventional space (as well)? "If you look at the Prophet's approach, he never differentiated between Shariah-compliant and Shariah-based. It's still the same contract. "If the contracts had any Shariah contradiction, he would take out the contradiction and it would be Islamised," she added.
Shabnam said the issue here was one of innovation and frustration in the market about the Islamising of conventional products.
"Consumers, however, understand the conventional and their demand is for (Islamic products) that are on par with conventional products, thus the supply from the banks is going that way.
"But, when you take the venture capitalist approach, then that is truly the Shariah way. Isra is looking at this but it's a matter of educating the industry," she said.

Balance between innovation and compliance in Islamic finance

CAPTION: (From left) Ibrahim, Norashikin, ASTRO head of treasury Latifah Mohamed Yusof and Jasani at the Malaysian Corporate Conference 2009 in Kuala Lumpur

By Alfean Hardy
The global Islamic finance sector already has a comprehensive range of products to offer to its clients and consumers but there still remains a need to find a balance between innovation and having to comply with the Shariah regulations if the industry is to continue to grow, several Islamic finance experts said.
In a session at the Malaysian Corporate Conference 2009 in Kuala Lumpur yesterday, Bank Islam Malaysia Bhd's treasury department general manager Norashikin Mohd Kassim said the Islamic finance sector was now at an interesting period.
"It's going to be a US$1 trillion (RM3.54 trillion) industry and it's important for all Islamic banks that any product that we introduce is going to be Shariah-compliant. But, at the same time, we must allow the market to innovate and not to stagnate, to meet market demand," she added.
Norashikin said it was the very nature of Islamic finance and its Shariah-compliance that has highlighted it as a viable alternative to the conventional system.
"It's all about ethical values and postulates the principles of equity and balance, the prohibition of speculation, and the requirement that transactions must create real economic value have helped evert the problems we have today due to the subprime crisis. So, even as we innovate, we must still abide by Shariah-compliance," she added.
Asked why Islamic finance practicioners did not come out with a killer product that did not have a counterpart in the conventional system, Maybank Islamic Bank Bhd acting chief executive officer Ibrahim Hassan said there were already financial institutions that were offering innovate products like musharakah financing.
"These are either pure or hybrid musharakah in the form of consumer and corporate banking or business banking markets. "It's already available but not actively offered by the Islamic banking institutions because it's a new type of risk, you're going beyond the normal lending or financing risk that banking institutions assume.
"It requires different capital requirements and not many institutions are ready to take up this kind of risk. It's already offered and some of the foreign and local institutions have already offered such products," he added. Hong Leong Islamic Bank Bhd shariah and product development head Jasani Abdullah said the question was a popular one.
"It's basically about whether Islamic banks are ready to become direct entrepreneurs. Some (banks) already do that," he said. However, he said that such a move required a massive change in perceptions and profiles.
"The training skillsets for bankers will also (have to) differ. The training is new, the framework is pretty new and is being looked at from time to time to see the success of banks embarking on such (new) portfolios.
"In short, it takes time. Corporates need time to look at such risky-based investments. Bankers also need time to get the skillsets required to do such undertakings because it's not just the bank's shareholders money that's impacted but it will also impact their depositors' money in undertaking such transactions," he added.

Corporate Murabahah Master Agreement to boost money mart

The Corporate Murabahah Master Agreement (CMMA), a standard document for deposit-taking between financial institutions and corporate customers, was launched yesterday, in a move to boost the Islamic money market.
Association of Islamic Banking Institutions Malaysia (AIBIM) President, Datuk Zukri Samat described the launch as timely as it would unlock the vast potential of the domestic Islamic money market. He said the average daily transactions is estimated to top RM6 billion, as such, CMMA could assume a significant role in raising the innovation level of deposit products.
"The adoption of the CMMA for corporate deposits is expected to result in cost and resource savings for both Islamic banks and corporations," Zukri said during the launch of the master agreement in conjunction with the Malaysian Corporate Conference 2009 in Kuala Lumpur yesterday.
AIBIM also signed a memorandum of understanding with Takaful Malaysia, ACR Retakaful, Astro, Maesat and the Employees Provident Fund to part icipate i n CMMA. Zukri said the standard agreement would specify a common modus operandi for Islamic financial institutions in accepting deposits via commodity Murabahah.
"It will help eliminate the need for corporate customers to vet through each and every agreement proposed by different Islamic financial institutions on the same product.
The agreement will also provide certainty and a standard methodology in ensuring principal and profit due to corporate depositors," Zukri explained. Being fundamentally a deposit-taking product, the Murabahah arrangement naturally involves two main parties, namely the Deposit Placing Entity (DPE) and the Deposit Taking Ent it y (DTE).
The DPE or the principal is a company or corporation which intends to place its surplus funds with the bank. Conversely, the DTE is the bank itself. The purchase by the bank, in its capacity as the agent of the principal, will be effected upon spot payment and immediate delivery by suppliers. Zukri said the sale price consisted of two elements, the purchase price initially paid by the principal, and an amount that represents the profit for the principal on the sale of the commodities to the bank.
Earlier, Second Finance Minister, Datuk Seri Ahmad Husni Hanadzlah, who attended the launch, said the Islamic banking association would definitely promote its usage and application with local and foreign Islamic financial institutions globally.
He said for Islamic finance to be accepted as a viable mainstream system on a global scale, there must be elements of cost competitiveness, accessibility and adaptability.
"Shariah compliant products need to have the ability to be replicated across as many markets, he said, adding that it would encourage Islamic finance to be adopted in relatively under-developed financial markets and also in the more sophisticated financial capitals of the world. — Bernama (The article appeared in The Malaysian Reserve, Aug 21, 2009, p8)

RHB Islamic tawarruq deal

RHB Islamic Bank Bhd (RHB Islamic) last week signed an agreement with Sedania Media Group and E-Pay for the introduction of telecommunication air time in its tawarruq offerings.
Signing the agreement were (seated from left) Sedania group CEO Azrin Mohd Noor, RHB Islamic MD Jamelah Jamaluddin and E-Pay CFO Yap Chih Ming. Witnessing the event were RHB Islamic chairman Datuk Faisal Siraj (2nd from left), Sedania chairman Tan Sri Halim Ali (3rd from left) and Deputy Minister of International Trade and Industry Datuk Mukhiz Mahathir (2nd from right). Tawarruq is an Islamic-based product which allows for users to raise funds. (The Malaysian Reserve, Aug 17, 2009, p32)

Tawarruq structure valid if conditions met, says scholar

Tawaruq must meet the standards of industry body AAOIFI and cannot be a standalone funding tool, a top scholar said, outlining conditions for the use of a structure that has split the Shariah banking sector, a Reuters report said.
Tawarruq is a bedrock of the US$1 trillion (RM3.51 trillion) Islamic finance industry and is widely used as a financing and liquidity management instrument. But growing disputes about the permissibility of some forms of tawarruq under the Shariah have thrown markets into disarray, with practitioners warning of catastrophic consequences if the structure were to be revoked, the report added.
Seeking to calm investor worries, it said influential Shariah scholar Sheikh Yusuf Talal DeLorenzo said tawarruq is allowed when it is applied properly, adding that arguments against it are removed from commercial realities.
"Tawarruq from my perspective has been carefully researched and explained by AAOIFI," the 60-year old American scholar told Reuters in an interview, referring to the Accounting and Auditing Organisation for Islamic Financial Institutions, which sets guidelines used by much of the industry. "AAOIFI has developed a standard through its own methodology which is very thorough and that standard, as far as I'm concerned, still stands.
"There's a great deal of misunderstanding in the marketplace that's a disconnect between scholars who are actively involved in the field of finance and scholars who are not."

THE REPORT GOES ON:
Other prominent Shariah scholars such as Sheikh Nizam Yaquby, Mohd Daud Bakar and Mohammad Akram Laldin have also recently defended the use of tawarruq. The International Council of Fiqh Academy, a leading industry body driven by the Organisation of Islamic Conferences, had earlier ruled organised and reverse tawarruq to be "a deception" that seeks to disguise the use of usury. Confusion over the structure's status has been compounded by by the fact that compliance with standards of Islamic finance industry bodies such as AAOIFI and IFSB is voluntary, and there is no ultimate arbiter in case of disputes. In its basic form, tawarruq is an asset sale to a purchaser with deferred payment terms. The purchaser then sells the asset to a third party to get funds. Organised tawarruq is similar although the transactions are executed through banks. Reverse tawarruq is akin to organised tawarruq, although the buyer would be a financial institution seeking liquidity. "If tawarruq were suddenly withdrawn, this would have a dramatic effect because many Islamic financiers routinely use this instrument as a means of liquidity management and to provide their customers with working capital facilities," law firm Denton Wilde Sapte had said in a note in May. DeLorenzo, however, said tawarruq should not be used as a financing instrument on its own. "Modern tawarruq is not intended as a transaction in and of itself. Rather it is intended as a means to an end," said DeLorenzo, a scholar of Islamic transactional law, who sits on about 15 Shariah boards including AAOIFI. "What people don't understand unfortunately is that they think tawarruq is just a way of disguising a loan. It's really a link in a transactional chain." — Reuters

AFB n RM50m chemical tanker financing

TANKER FINANCING: Onsys Energy Sdn Bhd is to invest US$92m (RM326.12m) on four chemical tankers, which cost US$23m each, its MD Jaafar Mohamad (2nd right) said at the signing ceremony between Onsys and Asian Finance Bank (AFB) Bhd for a RM50m Islamic financing facility in Kuala Lumpur yesterday. Also present at the event were (from left) AFB's CEO Datuk Mohamed Azahari Kamil and SVP & head of domestic banking Ismail Hj Aminuddin with Onsys director Alan Tan.
By T Vignesh Onsys Energy Sdn Bhd, a Malaysian-owned company with core activities in bunkering supply, oil trading, ship chartering, brokering and ownership, is to invest US$92 million (RM326.12 million) on four chemical tankers.
Managing director Jaafar Mohamad said the tankers cost US$23 million each with the first chemical tanker to arrive in November.
He said that Onsys will receive two tankers by early next year and the fourth chemical tanker is expected to reach Malaysian waters from China by March. Jaafar said that Onsys is still negotiating with a few foreign banks for the financing of the chemical tankers but for now, "the company can't say much".
"We are in talks with foreign banks as we have not received good feedback from local banks for the funding of the tankers. "The funding will be on a 50:50 basis as the other half of the funding will come from the company's internal funds," he told reporters at the signing ceremony between Onsys and Asian Finance Bank (AFB) Bhd for a RM50 million Islamic financing facility in Kuala Lumpur yesterday.
Meanwhile, the RM50 million term financing is to part finance the acquisition cost of two units of oil product tankers, Onsys Leo and Onsys Aries which sums up to US$26 million for both the tankers.
AFB's chief executive officer Datuk Mohamed Azahari Kamil said that yesterday's (Aug 17) signing ceremony marks yet another milestone for the bank as this is its first opportunity as a foreign Islamic financial institution, to part finance the acquisition of two oil product tankers. He said it is the governments vision to make Malaysia, the region's premier transhipment hub.
However, since the global economic downturn, Mohamed Azahari said the marine industry has been plagued by poor fundamentals and a lack of accessibility to funding which is necessary to develop and expand AFB's services in order to stay competitive. (The Malaysian Reserve, Aug 18, 2009, p1/7)

Maybank Islamic launches CMA-i

Maybank Islamic Bhd (MIB) yesterday launched a special Shariah compliant trade finance solution named collateral management arrangement-i (CMA-i) which is a tailor-made financing solution for middle market and corporate customers who are involved with commodity-based products.
CMA-i is a commodity-based financing arrangement that entails a tri-partite agreement between the bank, customer and a collateral manager who controls and manages the commodities to be financed by the bank.
The arrangement is customised to finance the various stages of a commodity trade transaction cycle and is secured against the control and rights over the commodity by the bank. The risk evaluation by the bank would be more focused on the collateral valuation of the commodity instead of just the customer's financials and track record, it said in a statement.
Maybank Islamic executive vice president Ibrahim Hassan said that the introduction of CMA-i marks a milestone in the bank's product offering. "As a leader in Islamic trade financing, with a market share of 38.8% as at June 2009, Maybank Islamic is committed to introduce a diverse range of financing solutions for our trade customers.
"We currently offer approximately 30 trade financing products and with this new product, we are targeting to see our Islamic trade finance volume grow by around 10% this year," he said in a statement.
Ibrahim said the commodities that can be securitised and financed under this arrangement include steel, copper, aluminum, nickel, zinc, tin, crude oil, gasoline and others acceptable to the bank. Financing available under CMA-i includes Islamic Trade Finance products such as Accepted Bills-i and Trust Receipts-i.
CMA-i not only covers commodities that are produced in Malaysia for export or distribution in local markets, but also those that are imported into the country. The commodities can either be in the form of raw materials, semi-finished products or finished products.
Maybank Islamic has also introduced commercial industrial hire purchase (CIHP) based on the Shariah contract al-ijarah thumma al-bai (AITAB) for soleproprietorships, partnership, private limited and public limited companies.
It refers to a hire-and-sell concept whereby the financier will purchase the vehicle, equipment or machinery which are classified as non act goods and subsequently hire it to the potential customer on agreed terms and conditions and for tenures ranging from three to five years.
Ibrahim said that the introduction of these two new Islamic financing solutions will assist customers to improve their cash flow and liquidity position, particularly during the current challenging economic environment. He added that customers would also benefit from the various incentives offered under the Islamic banking scheme.
"In addition to the 20% stamp duty discount given for all our existing Islamic financing products, CMA-i is also being offered at competitive rates with affordable fee structures. "Given these benefits, CMA-i offers a viable financing solution to our business customers.
With the recent launch of Commodity Murabahah Term Financing (CMTF-i) and Murabahah Term Financing (MTF-i), we are targeting to provide our customers a comprehensive financing solution that can significantly contribute to our 15% growth target in Maybank Islamic's overall financing portfolio for the financial year ending June 2010. To date, Maybank Islamic has more than RM9.8 billion in total financing to the business sector," he said. (The Malaysian Reserve, Aug 14, 2009, p9)

‘Islamic banking has role in global finance’

By Alfean Hardy
Islamic finance has a role in shaping the future of the global financial and capital market landscapes, and could very well be the vehicle that brings back the element of trust into the world’s financial system, Malaysia International Islamic Finance Centre's (MIFC) financial ambassador Raja Nazrin Shah said.
In a royal address at the World Capital Market Symposium in Kuala Lumpur yesterday, Raja Nazrin, who is the crown prince of Perak, said that while everyone wanted to believe in the system of finance, "it has apparently let us down".
"It has tried to place mathematics at the centre of a financial system to manage risks and provide reassurances (but) no matter how sophisticated the calculations are, they can never be a substitute for trust.
"Formulas cannot replace the human conscience, and markets will not flourish if people no longer believe in the products being sold or in how the markets work," he added. Raja Nazrin said the five pillars of Islam were ideal in rebuilding the confidence in the financial system by creating belief without reservation and that the challenge ahead was about putting faith into finance.
"Finance requires trust (and) trust is comprised of a set of universal elements like honesty, fairness, justice and clarity, which can be found in all religions," he said.
"The guidance provided by these values is supposed to help in ensuring that responsibility is exercised when making decisions to do with the deployment of capital," he added.
Raja Nazrin said such guidelines were essential given that fact that unlike before, everything was connected and that there was a need for a financial system that had high moral standards built into its structure.
"Today finance is not delineated by the boundaries of a city or even a country.
It’s global and interconnected,and even if one component is weak, the integrity of the system could be at risk," he added. Raja Nazrin said Islamic finance has grown substantially in the past few decades and as seen in the UK, Australia and South Korea, Islamic finance was no longer limited to the Islamic world.
"The world is interested and I believe Islamic finance will be up to the challenge," he said. He warned, however, there was a need for further openness if the industry were to flourish.
"While we have seen rapid growth in the industry so far, I foresee that industry participants will have to be unambiguous in defining their corporate strategies," he said.
"They must share their risk management best practices and document plans and processes so that they may be used for studies evaluating the industry. "Such self-critical evaluation can only help … establish accountability and help the Islamic finance industry and Islamic financial institutions stand apart from those of their conventional peers," he added. (The Malaysian Reserve, Aug 12, 2009, p4)

SC streamlines registration of Shariah advisers

The Securities Commission Malaysia (SC) has issued the Registration of Shariah Advisers Guidelines (Guidelines) which will make it easier for individuals and corporations providing advise on Islamic capital market products and services.
The guidelines will take effect on Aug 10, 2009.
Under the Guidelines, Shariah advisers can now, through a single registration, provide advice on all Shariah-based products and services regulated by the SC.
Prior to this, Shariah advisers have to register separately for each products and services based on the respective guidelines. The guidelines will supersede the various provisions on the eligibility and registration criteria outlined in other SC guidelines covering various Islamic products and services. They include guidelines of Unit Trust Funds and guidelines on the Offering of Islamic Securities.
The guidelines, among others, stipulate the criteria and procedures for registration and renewal, matters pertaining to registration and de-registration and continual professional development. (The Malaysian Reserve, Aug 11, 2009, p9)

Al-Rajhi Bank on track to meet year-end break-even target

AL-RAJHI Bank (M) Bhd, which started its operations in Malaysia almost two years ago, is on track to meet its target to break even by year-end. Its senior vice president for business intelligence, Mohd Najid Yahya, said the bank has started to make profit from May this year.
"We saw positive profit. Normally, a retail bank will take three to five years to break even but we only need two.
"Up to May, the numbers were looking good and we are working hard to achieve the target," he told Bernama in an interview. He, however, did not disclose the investment made by Al Rajhi to set up its operations in the country. The bank, which has over 60,000 clients todate, has expanded its reach throughout the country.
Started with only a branch in Jalan Ampang, Kuala Lumpur, it currently has 19 branches, with 14 in the Klang Valley and one each in Kota Bahru, Johor Bahru, Melaka, Penang and Kuching. Mohd Najid said the bank, under its five-year plan, planned to have at least 50 branches throughout the country. "We have been given licences to open 50 branches by Bank Negara Malaysia. By 2012, we will have all of them," he said. — Bernama (Appeared in The Malaysian Reserve, Aug 6, 2009, p6)

AmIslamic sees RM1.5b in assets by year-end

By Jason Ng
AmIslamic Funds Management Sdn Bhd expects to increase its assets under management up to RM1.5 billion by year-end by tapping investors from the Asia Pacific region. AmIslamic's assets under management stood at RM940 million as of June 30, 2009 comprising various Shariah-compliant equities, sukuk and other non-ringgit assets, according to CEO of fund management division Maznah Mahbob.
"The short-term plan would see that most of our funds would be raised from domestic retail investors but we are targeting global investors as part of our global expansion plans," she told a press conference after the official launch of AmIslamic in Kuala Lumpur yesterday.
AmIslamic is the Islamic funds management arm of Malaysia's fifth largest banking group Am-Bank Group. After obtaining licence from the Securities Commission in January, AmBank Group transferred Shariah-compliant assets to AmIslamic for it to begin operation.
AmIslamic offers customised Shariah-compliant investment solutions, specialising in global sukuks and Asia Pacific equities investments, for both retail and institutional investors.
"We have at least another four more Islamic unit trust products in the pipeline for the domestic retail investors," Maznah said. There are 11 Shariah-compliant unit trust funds ranging from money market, Islamic bonds, mixed assets, local and global equity, as well as separately managed accounts under AmIslamic presently.
AmIslamic has partnered South Africa-based Oasis Group Holdings Pty Ltd as well as Saudi Arabia's Al Rajhi Bank for fund management as well as distribution of the products globally, Maznah said. (The Malaysian Reserve, Aug 5, 2009, p9)

Bank Islam pursues local, overseas M&A deals

by Ashwin Raman
Bank Islam (M) Bhd is actively pursuing merger and acquisition (M&A) opportunities locally and abroad in a move to expand its business. Its managing director Datuk Zukri Samat said Bank Islam was looking at inorganic growth opportunities for expansion purposes as competition in the Islamic banking sector has been intensifying.
"We are looking at M&A opportunities both locally and overseas. If we can find something locally we'll do it but as far as regional opportunities are concerned, our focus and priority is in South-East Asia.
"We are always looking at opportunities but at this juncture there is nothing concrete I can mention except that expansion and inorganic growth are always on our agenda," he told reporters at the sidelines of a conference in Kuala Lumpur yesterday.
Earlier this year, speculation was rife of a merger between Malayan Banking Bhd's Islamic arm and Bank Islam. However, Bank Islam's controlling shareholder, BIMB Holdings Bhd, denied it was in talks with Maybank Islamic. When asked to name specific candidates, Zukri declined to comment, adding that Bank Islam would only go ahead with an M&A as long as the partnership would be a good fit.
Asked if Bank Muamalat Malaysia Bhd would be considered a good fit for Bank Islam, he said: "If I comment on one bank, then everyone will think we are talking to them."
As for expansion in South-East Asia, Zukri said Bank Islam is keen on expanding into Indonesia. In February this year, Bank Islam entered into a strategic collaboration with the Bank Muamalat Indonesia Group to promote Islamic trust products in Indonesia. On Bank Islam's exercise to raise RM540 million from the sale of preference shares, he said the bank's 40% foreign shareholder, Dubai Investment Group (DIG), has indicated it will subscribe to its portion.
So far, Bank Islam's other major shareholders, BIMB and Tabung Haji, have subscribed to the sale. BIMB and Tabung Haji own 51% and 9% respectively.
"This matter was brought up, discussed and deliberated at the board level and DIG has three members on the board who have agreed to this scheme. I presume DIG is agreeable.
"But to be fair, all parties are given until Sept 30 to put in their portion. It is just that Tabung Haji and BIMB have put in the funds already," Zukri said.
He said the bulk of the RM540 million from the exercise would be used for internal expansion while a portion of the cash raised could be used for M&A purposes. The cash raised from the exercise is expected to increase Bank Islam's riskweighted capital ratio to 17.26% from 13.08% as at end December 2008. (The Malaysian Reserve, Aug 4, 2009, p6)

Industry players are upbeat: The Star

THE Islamic financial industry in Malaysia has bloomed over the years and with 17 stand-alone Islamic banks, the country is poised to become one of the biggest Islamic financial hubs in the world. The sector is also expected to see further stimulus following the liberalisation of the financial sector, which allows for an increase in foreign equity ownership of up to 70% in Islamic banks, investment banks and insurance companies, reports The Star (Aug 8, 2009).
According to the Association of Islamic Banking Institutions Malaysia, the country’s Islamic financial system started from the establishment of the Malaysian Pilgrims Fund Board (Tabung Haji) to the setting up of the country’s first Islamic bank, Bank Islam Malaysia Bhd, which commenced business in 1983.
The report quoted Maybank Islamic Bhd executive vice-president and acting chief executive officer Ibrahim Hassan as saying Islamic financing assets grew at a compounded annual growth rate (CAGR) of 15% between 2004 to 2008 compared to conventional banking loans and advances, which grew at a CAGR of 10% during the same period.
“Going forward, most banking analysts are optimistic over the positive outlook and growth prospects of the Islamic banking industry in the medium-term.
“Bank Negara anticipates syariah-compliant assets will continue their double-digit growth momentum in line with continuing efforts and promotions to make Malaysia the world’s leading international Islamic financial centre,” he said.
Maybank Islamic’s total financing stood at RM23.4bil last year compared with RM21.7bil in 2007, while total Islamic deposits stood at RM18.8bil in 2008 compared with RM16.8bil in 2007.
Another comment came from HSBC Amanah Malaysia Bhd executive director and CEO Musa Abdul Malek. He said Islamic finance growth remained on an uptrend as Bank Negara continued to focus on providing conducive regulatory framework to accommodate the growth and development of the industry.
“This includes human capital development to position Malaysia as an international Islamic financial hub coupled with the industry players’ active participation by introducing innovative products and upgrading their service platform. Currently, Islamic finance represents about 17% of the whole banking industry compared to 6% in 2000,” he said.
The ringgit sukuk market for corporate bonds, according to Musa, accounted for over 68% of all corporate bonds issued in the Malaysian market last year.
OCBC Al-Amin Bank Bhd is in the process of enhancing further its Shariah-compliant assets building capacity and investment banking in Malaysia, its director and chief executive officer Syed Abdull Aziz Syed Kechik told the newspaper, adding that the bank was poised for further growth based on the potential of the Islamic capital market going forward.
“We hope to close several sukuk issues by year-end. We’re also exploring initiatives to expand the sukuk issuer base to the regional market,” Syed Abdull Aziz said.
OCBC Al-Amin, which started operations on Dec 1, 2008, has a total asset size of RM3.7bil.Its customer deposits and outstanding financing stood at RM2.7bil and RM2.2bil respectively as at Dec 31, 2008.

‘Shariah banks may face severe liquidity crunch’

by Habhajan Singh
Islamic banks are perceived to have less exposure to assets of lower credit rating compared to their conventional counterparts but they are still expected to face a severe liquidity crunch across sectors, says a Kuwaitibased research outfit.
The research house also noted that the rising demand and increasing popularity of Shariah-compliant products have contributed to the growth of Islamic finance, citing the rise in demand for Shariahbased products from various infrastructure projects including petrochemical complexes, housing and construction.
"Despite this, however, the ongoing economic recession, which has led to a severe liquidity crunch across sectors, especially in construction and real estate, is likely to significantly impact the performance of the sector," Taib Research said in a recent note on Boubyan Bank, one of the three Islamic banks in Kuwait. The other two are the Kuwait Finance House (KFH), which has a presence in Malaysia, and the International Bank of Kuwait (IBK).
According to the research note, competition is likely to intensify with commercial banks, attracted by Islamic finance, venturing into the same sector. In addition, the global sukuk market suffered a double blow recently with controversy surrounding the sector's compliance to the Shariah principles and a decline in the sector due to the liquidity crisis.
Taib Research noted that there has been a decline in the number of sukuk issued in 4Q08 to US$584 million (RM2.05 billion), the lowest since 4Q02. The research house expects the Kuwaiti banking sector to witness slower growth in 2009 as economic activity remains low.
"The real estate sector is already under pressure with recessionary forces leading to slackened demand and a price correction, thereby implying lower credit growth for banks. "However, at the same time initiatives by the government in the form of stimulus package of 1.5 billion Kuwaiti dinars (RM18.39 billion) do provide hope for the future," it said.
Commenting on Boubyan, the research house said the bank seems to be heavily burdened with assets of low credit rating as evident by huge provisions set aside by the bank in 2008 and 1Q09.
Kuwait has been looking for Islamic financial services as an alternative to conventional financial institutions, which have been struggling with high debt levels and falling profits in a period of global recession, the report noted. Shariah-compliant financial services have depicted a healthy growth in Kuwait over the past few years, emerging as a competitive force for conventional banks and investment houses.
The Kuwaiti Islamic finance sector was dominated by KFH until 2004 as it was the only Islamic bank, a position which necessary amendments paved the way for other Islamic institutions to commence operations.
In 2008, a legal framework to govern the sector was designed. The Islamic finance sector has been enjoying a healthy growth rate since its inception. The net profit of the Islamic banks bounced somewhat in 1Q09 mainly led by improved performance by KFH, while KIB and Boubyan continued to report losses during the quarter, the report said.

(This story appeared in The Malaysian Reserve on Aug 3, 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)

SC discussion on Islamic structured products

The Securities Commission (SC) held the third International Islamic Capital Market Forum last week as part of its efforts to promote the understanding of Islamic structured products as well as to address related regulatory and market issues.
Islamic finance experts and scholars discussed various aspects relating to Islamic structured products, including how hedging tools can be incorporated into the Shariah-compliant portfolio, it said in a statement.
In some markets, it said basic instruments have been packaged into structured products with specific investment goals and risk profiles. Investment opportunities traditionally available to institutions and high net worth individuals are being made available to the general investing public. In her keynote address, SC chairman Tan Sri Zarinah Anwar cautioned that these products raise important investor protection concerns. As structured products become more sophisticated, so is the inherent risk attached to these instruments. Investors have thus been subjected to losses for being ill-informed.
More than 270 senior industry officials, issuers, investors and regulators from Malaysia and other countries attended the forum. Panelists included UAE's EIS Asset Management head of business development Haroon Ahmad, Singapore-based Amsar Partners LLP managing director Bernardo Vizcaino, Etiqa Takaful Bhd CEO Mohd Tarmidzi Ahmad Nordin, Maybank Islamic Bank Bhd acting CEO Ibrahim Hassan and SC managing director Datuk Ranjit Ajit Singh. (The Malaysian Reserve, Aug 3, 2009, p32)

New members on Takaful Ikhlas committee

Takaful Ikhlas Sdn Bhd has has appointed Prof Madya Dr Shamsiah Mohamad (picture right) and Dr Muhammad Naim Omar (picture left) to its Shariah comittee effective April 1, the company announced in a statement released recently. They join Datuk Mohd Mokhtar Shafii, Datuk Nik Moustpha Nik Hassan and Prof Dr Ahmad Hidayat Buang.
Dr Shamsiah, an associate professor at the Islamic Academic Studies Department of University Malaya and an expert in fiqh muamalat, is also the Shariah advisor for the Standard Chartered Saadiq Bhd and the Security Commission. With a degree and Masters from University Malaya, she then received her PhD from University of Jordan.
Dr Muhammad Naim, an assistant professor of law studies at the International Islamic University of Malaysia (IIUM), obtained the Shariah Law degree from Al-Azhar University in 1992. In 1996, he received a Master degree from Cairo University in Shariah Law and later read a PhD at University of Wales, Lempeter. (The Malaysian Reserve, Aug 3, 2009, p32)

Organised tawarruq valid under Shariah: Nizam

The use of the organised tawarruq financing structure does not contradict Islamic law, prominent scholar Sheikh Nizam Yaquby said, disagreeing with a Saudi-based ruling to the contrary, reports Reuters.
Tawarruq is a key financing structure of the $1 trillion Islamic finance industry. But whether or not the way it is organised in modern banks contradicts sharia, or Islamic law, has triggered fiery debates between scholars as the industry is struggling with a decline in business during the global financial crisis, the report said.
The International Council of Fiqh Academy, a leading industry body based in Saudi Arabia, in April declared organised tawarruq "a deception" that carries elements of interest-based lending, prohibited under Islamic law.
"If proper procedures are implemented and checks and balances are put, then tawarruq is a useful tool and can be used," Yaquby told Reuters in an interview.
THE REPORT GOES ON:
Widely used as a financing and liquidity management tool, tawarruq is an asset sale to a purchaser with deferred payment terms. The purchaser then sells the asset, such as a commodity, to a third party to get cash.
Under organised tawarruq, the transactions are organised through banks which are appointed as agents to sell off the asset, in what has been criticised as a mere paper trail circumventing Islamic law and blurring lines between the purchaser and the third party.
Yaquby said centuries-old Islamic finance tools needed to be reconciled with the procedures of the modern banking system.
"All these Islamic finance tools have certain amounts of organization and we must know that (given) modern contracts within the existing frameworks, legal structures, it is very difficult to do something which is not organized," he said.
LOWER TRANSACTION COSTS
Yaquby is globally recognized as one of the top Islamic scholars, and in particular wields influence in the Gulf Arab region, one of the industry's most important regional centres.
He is listed by consultants Funds@Work as sitting on 46 sharia scholar boards, including at Islamic operations of BNP Paribas, HSBC and Standard Chartered.
Yaquby also said there were hardly any alternatives to tawarruq as a tool to satisfy legitimate financing needs, to which he gave more weight than how it is implemented.
He said the use of a bank in selling assets would help minimise the losses occurring from the additional transaction, which would be higher if the purchaser sold assets himself.
"How can sharia allow something which is burdensome on a person ... and not allow something which is organised and well done, and this man who is in dire need for cash will not suffer a lot," he said.
He voiced support for the standards of Bahrain-based AAOIFI -- the Accounting and Auditing Organization for Islamic Financial Institutions -- which he said provided the necessary checks to prevent the abuse of tawarruq.

(This story appeared in The Malaysian Reserve on July 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)

DIFC updates guide for Islamic finance

PHOTO: DIFC's Abdullah (left) and Praesidium senior partner Hri Bhambra
The Dubai International Financial Centre Authority had recently announced the release of the updated version of its 'Guide to Islamic Finance in or from the DIFC'.
Apart from incorporating the new landmarks in the evolution of its model Islamic insurance regulatory framework and operating practises, the latest publication also takes into account the changing overall scenario as a result of the ongoing financial crisis that is gripping the world, it said in statement.
At the same time, it said the publication retains and expands on its original aim of assisting those parties from within the region and outside, who are interested in learning about the rapidly expanding world of Islamic finance.
The publication provides a summary of the underlying concepts in Islamic finance and examines the issues facing the Islamic financial services industry.
The Islamic financial services industry is growing at a phenomenal rate, it noted.
"What emerged as a niche industry has now pervaded almost every major financial market in the world. Markets are seeking to introduce Islamic products under various labels like Islamic Finance, Shariah-compliant Finance, or even Alternative Finance, but whatever title is used, it is without doubt one of the fastest growing financial sectors in the world. Most global banks either have a subsidiary or a division dedicated to Islamic Finance," the statement said.
DIFC Authority chief executive office Abdulla Al Awar said the authority had identified Islamic Finance as one of its major pillars even before it became globally popular.
In recent years, the statement noted there has been a dramatic growth in Islamic or Shariah-compliant financial products, reflecting a number of trends including changes in Islamic law such as the approval in 1985 by the Grand Counsel of Islamic scholars of the Takaful system as the alternative form of insurance written in compliance with Islamic Shariah and the emergence of an international market in sukuk (Shariah-compliant) bonds.
The publication points out that the total size of the Islamic banking industry is currently estimated to be between US$800 billion to $1 trillion, and is estimated to have a global potential of $4 trillion. It is growing at 15-20% per annum and within the next 8-10 years Islamic banking industry is projected to capture half of the savings of the world's 1.6 billion Muslims.
Currently, it said market penetration amounts to an estimated 20% of the Arab population. This figure is expected to rise dramatically and it is expected that within the next decade, 50-60% of the total savings of the world's 1.2 billion Muslims will be in the form of Shariah compliant products.
It also noted that assets under management in Islamic funds are estimated to be between $50-70 billion and the total value of sukuks issued is valued at more than $88 billion, of which $13 billion is listed on NASDAQ Dubai.
DIFC Authority had commissioned Praesidium to develop the publication.

(This story appeared in The Malaysian Reserve on July 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)

Australia's Fahour moves to Islamic banking

Former National Australia Bank executive Ahmed Fahour will join Middle Eastern Islamic investment bank Gulf Finance House as its chief executive, after his chance to run Rudd Bank was squashed in the Senate, reports The Australian.
Fahour, who ran NAB's Australian operations until he was overlooked for the chief executive's post last year, will move with his family to GFH's headquarters in Bahrain, starting in the new job on August 1. He has been searching for a new role since the Coalition and the Greens used their numbers in the Senate to vote down the Australian Business Investment Partnership, the report said.
The partnership, which was instantly dubbed Rudd Bank, was designed to fund commercial property projects jeopardised by the withdrawal of foreign lenders from the Australian market. Fahour resigned from NAB in February when he was appointed by Wayne Swan to run the partnership, which would have drawn A$4 billion from the big four banks and billions more from government. NAB chief executive Cameron Clyne effectively pushed Fahour out of the bank by taking his job himself, the report added.
The report described the Lebanese-born Fahour as one of Australia's most prominent Muslim business leaders. It said his appointment to GFH comes amid growing interest in Australia in capturing part of the US$700 billion Islamic finance market, adding that assistant treasurer Nick Sherry had launched a new masters course in Islamic banking and finance last week at La Trobe University, in Melbourne.
GFH was founded 10 years ago specialising in a spectrum of financial products, including private equity, venture capital and asset management. Listed on the London, Kuwait, Bahrain and Dubai stock exchanges, it has a market capitalisation of US$710 billion and is known in some circles as the Macquarie Bank of the Middle East, it added.
In a statement in February, NAB announced that Fahour, then its executive director, had announced that he will step down from its principal board and group executive committee.
It noted that Fahour joined the NAB in September 2004 as Chief Executive Officer Australia and soon after become an executive member of the board.
He was responsible for managing the NAB’s Australian and Asian region which included retail, business and corporate banking.

(This story appeared in The Malaysian Reserve on July 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)

Profit Margin From Islamic Finance Too High - Hadi

Datuk Seri Abdul Hadi Awang (PAS-Marang) had recently called for a review on the implementation of the Islamic financial system in the country, saying the profit margin from loans provided under the system was too high.
He said the margin did not differ much with the conventional financial system, thus defeating the purpose of having a separate system.
Although the system was free of "riba" or interest, it was too profit-oriented, he added.
"This is not how the Islamic financial system should be operated because the basis for its implementation is to help those in need.
"In this context, the borrowers are the ones in need of help as they had to resort to borrowing. They should be assisted and not be taken advantage of," he said when debating the Bank Negara Malaysia Bill 2009 in the Dewan Rakyat, according to a Bernama report on July 1.
Abdul Hadi said the government should do something to make the country's Islamic financial system a truly people-oriented arrangement and to counter the negative perception that it was similar to the conventional system.
Datuk Ismail Abd Mutalib (BN-Maran) echoed Abdul Hadi's sentiment and invited the PAS president to sit down with the government to put the Islamic financial system on its right track.
Datuk Mohamad Aziz (BN-Sri Gading), who interjected, said he agreed with Ismail and asked Abdul Hadi to discuss with Umno for the benefit of the ummah.
"I agree with the Marang MP, whose views are sensible. So let's sit together and discuss," he said. - Bernama

(This story appeared in The Malaysian Reserve on July 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)