BNM mulls 5 Shariah advisors for Islamic banks

By Habhajan Singh
Bank Negara Malaysia (BNM) is mulling at pushing up the number of Shariah comittee members to five from the present three and getting directors more involved in Islamic governance under its wide-ranging proposals on Shariah governance for Islamic banks.

At present, Islamic banks operating on the local turf like Maybank Islamic Bank Bhd, CIMB Islamic Bank Bhd and Kuwait Finance House Malaysia Bhd, are required to have at least three members in their in-house Shariah committee. Each member is not allowed to sit on the Shariah committee board of another Islamic bank, but may sit on the Shariah committee of a takaful operator.

A member of the Shariah Advisory Council (SAC), the Shariah mother-board at the central bank level currently headed by Dr Mohd Daud Bakar, is also not allowed to sit on Shariah committee at the bank level. The measures are partly built in as a firewall to ensure proper governance on the Shariah front.

The central bank is also recommending Islamic financial institutions (IFIs) operating in Malaysia to appoint their respective chairman of Shariah committees onto the board as independent directors. It is understood the Shariah governance recomnmendations drafted by the central bank have been circulated to IFIs for their feedback.

"So far, feedback has been mixed. Some banks may be a little behind the curve on some of the proposals," said one Islamic finance expert with knowledge of the proposals.

In its latest recommendation, it is understood that BNM is also compelling Islamic banks to ensure that at least three of the five Shariah committee members have Shariah background. It is understood that the requirement is to ensure members are able to fulfil the board's role, as spelt out in the Islamic Banking Act 1983 and Takaful Act 1984, which is to ensure that all aspects of their bank's business operations are in accordance with the Shariah principles.

"At the moment, there is no specific requirement. However, in practice, BNM approval is required for the appointment of each and every Shariah committee member. So, invariably, they will ensure that the board is appropriately manned," said one industry executive.

These proposed changes will mark yet another milestone in the regulation regime in place to govern IFIs which come under the jurisdictions of BNM, especially after the introduction of the Central Bank of Malaysia Act 2009.

In a report on Nov 23, 2009, The Malaysian Reserve noted that an analysis of the new ground rules for the central bank showed a strong Islamic finance flavour running through the 68-page document, especially in empowering of the SAC, designated to be the "authority for the ascertainment of Islamic law for the purpose of Islamic financial business". On the proposal for Shariah committee chairman to sit on the bank's board, an industry expert told The Malaysian Reserve that it may raise some issues.

"Some banks have state muftis chairing their Shariah committees. Now, do you want muftis to sit on the boards of Islamic banks?" he asked. Perak mufti Tan Sri Harussani Zakaria, for example, is chairman of Maybank Islamic's Shariah committee.

At CIMB Islamic, on the other hand, its Shariah committee is headed by Prof Dr Mohammad Hashim Kamali, who is already sitting as an independent director on the bank's board. Mohammad Hashim is the chairman/chief executive office of Hadhari Institute For Advance Islamic Studies. On the takaful side, MAA Takaful Bhd's Shariah committee chairman, Dr Mohd Khalil Ruslan from Universiti Malaya's law faculty, also sits on the company's board.

(This story appeared in The Malaysian Reserve on 25 October 2010. 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 fund management sector to see global players

The largely-fragmented Islamic fund management industry will welcome more global players as demand for sharia-compliant asset management products rise, a fund manager at Algebra Capital said, accordng to a Reuters (Oct 20, 2010) report.

The asset management portion of Islamic finance has been at a virtual standstill in the $1 trillion industry, in part, due to its perception of yielding poorer returns than conventional funds. "We think the type of players in Islamic funds is going to change and more established global managers will play a direct role," Mohieddine Kronfol, managing director at Algebra Capital told the Reuters Middle East Investment Summit. "The environment is better and people have begun to appreciate the need for such products."

THE REPORT ADDS:The Dubai-based asset management firm was in the process of developing additional funds along with its partners, including a global sukuk fund to tap into rising demand, Kronfol said.

"These don't necessarily have to be in our names. It will be someone else launching it and advising the work to us. It most probably will not be an Algebra Capital fund," he said.

The executive also said he expected the wave of debt issues in the region to continue as the need for additional sources of funding and demand for emerging market debt instruments among global investors increase.

"People generally are not really aware of how quickly the MENA bond market is developing," Kronfol said.

"You have several companies in the region that are well managed, that can access capital markets and that can think about diversifying their means of funding."

Global asset manager Franklin Templeton holds a 40 percent stake in Algebra and the Dubai-based firm runs the Middle East North Africa equity fund for the global asset manager.

M’sian Islamic finance education gets int’l demand

[PHOTO: Banker Norleza Abu Bakar (fourth from left) with four lawyers, (from left) Roziana Yusof, Wan Helmi Wan Hasan, Mohd Farid Azahari and Rafidah Ash'ari, are part of the batch that recently graduated from IIiBF]

By Habhajan Singh
Two local institutions specialising in Islamic finance saw their students graduating this month.

IIUM Institute of Islamic Banking and Finance (IIiBF), the wing under the International Islamic University of Malaysia, presented the latest batch of graduates their scrolls on Oct 4. On Saturday, International Centre for Education in Islamic Finance (INCEIF) celebrated a milestone with its second convocation ceremony.

IIiBF, officially established in January 2005, now offers a Postgraduate Diploma in Islamic Banking and Finance, Master of Science in Islamic Banking and Finance and PhD in Islamic Banking and Finance. Additionally, it also provides certificate programmes in Singapore and Sri Lanka.

"There are plans under way to offer similar certificate programmes in Bahrain, China, India, Maldives and Kazakhstan," said IIUM rector Prof Datuk Seri Dr Syed Arabi Idid. He said the institute has signed more than 15 MoUs and collaborations in areas of training, product development and consultancy with various private and governmental institutions nationally and internationally such as Brunei, Iran, Sri Lanka, Bahrain, Nigeria, Indonesia and Singapore.

"As part of IIiBF internationalization programme, our staff is involved in providing technical expertise to the Krygzstan and Afghanistan governments to develop Islamic financial system as a second pillar to support economic development there," he said.

INCEIF is also working on global collabaration in its quest to become a truly global university in Islamic finance going forward. Its resident and chief executive officer, Agil Natt, said the university would be collaborating with the University of Luxembourg, the Chinese University of Hong Kong and the Reims Management School in France next year in Islamic finance education.

"These are countries that have Muslim minorities. The fact that they are associating with us for Islamic finance education is indeed a good sign," he said in his speech at the recent convocation, reports Bernama.

The report added that INCEIF has already started its Chartered Islamic Finance Performance Professional (CIFP) programme in Bahrain in collaboration with the University of Bahrain, adding that the university is also currently working on accreditation in Iran and Yemen.

INCEIF was set up in March 2006 by Bank Negara Malaysia which provided an endowment fund to develop and enhance human capital in Islamic finance, to meet the needs of Islamic industry.

(This story appeared in The Malaysian Reserve on 25 October 2010. 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)

IBFIM inks pact to co-develop Islamic finance in Maldives

By Siti Radziah Hamzah
The first Islamic bank in Maldives, Maldives Islamic Bank, is expected to be fully operational in January next year, said its chairman Khaled Al-Aboodi.

He said the management team of the bank has been appointed and is currently in discussion with the advisor of the bank to provide advisory services in terms of providing training for the bank.

"Prospects are tremendous in terms of serving the market. We plan to take between 20% to 25% of the total market of Islamic banking (in the country) within the next three to five years," he told reporters after the signing of a memorandum of agreement (MoA) between the bank and the Islamic Banking and Finance Institute Malaysia (IBFIM) yesterday.

Khaled said the bank will be focusing on three main sectors namely small and medium enterprise (SME), fisheries and trade. He added that the bank also aims to diversify to other areas such as saving, takaful and mortgage businesses.

Khaled said the bank is in discussion with a Malaysian partner to develop an Islamic saving scheme. Witnessing the signing were Bank Negara Malaysia deputy governor, Datuk Mohd Razif Abd Kadir, and chairman of IBFIM, Datuk Seri Zukri Samat.

The MoA will bind both parties to co-develop Islamic finance in Maldives through extensive study of the country legal and banking framework to create an environment for the growth of Islamic finance. Maldives Islamic Bank has been granted a licence by the Maldives Monetary Authority to establish the country's first Islamic bank.

Jeddah-based Islamic Corp for the Development of the Private Sector, a subsidiary of Islamic Development Bank, holds a 70% stake in the bank and the remaining 30% is held by the government of Maldives.

Regional mandatory sharia finance body "years away"

The formation of a Gulf-wide sharia council with the mandate to set industry rules, rather than just issue guidelines in its present form, is still "years away", a senior executive at regulatory body AAOIFI, reports Reuters (Oct 11, 2010).

Speaking on the sidelines of an industry conference in Abu Dhabi, Assistant Secretary General Khairul Nizam said few expect such a centralised sharia council to be in place before 2013.

"It's an idea at the moment. It can help the Islamic finance industry because, if the committee has some regulatory bite to it, it can make AAOIFI standards mandatory," said Nizam.

THE REPORT GOES ON:

Currently, standards set by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) board are considered guidelines, rather than rules. Some countries such as Bahrain, however, require Islamic institutions to follow the standards.

Nizam said the Bahrain-based body is currently working to issue regulatory guidance for sharia scholars serving on the boards of Islamic institutions, which the regulatory body hopes to finalize by the end of 2011.

"It's going to be a long process because we have to make sure to get it right the first time," he said.

He said the industry body has had five meetings already to discuss key issues facing scholars that could be regarded as a conflict of interest in the growing $1 trillion Islamic finance industry.

Nizam said there is discussion over whether scholars should have a limit on the number of boards they sit on. Currently just 20 of the top scholars appear on 54 percent of sharia board positions, according to a report by consultancy Funds@Work.

AAOIFI will also address whether scholars should have shareholdings in the institutions they advise on, issues regarding compensation and whether scholars serving on sharia boards can also participate in separate sharia advisory firms that may have relationships with the institutions they serve. Nizam said an "exposure draft" will be circulated to all Islamic banks by the end of the first quarter for review.

Distressed Deals Lure Shariah Funds Managing $10 Billion

Islamic private equity funds in the Persian Gulf plan to take advantage of lower asset prices after the property market in Dubai tumbled as much as 50 percent from its peak in 2008, reports Bloomberg (Oct 27, 2010).

“We want to take advantage of massive dislocations that have taken place in this market over the past three years,” Yahya Jalil, director of private equity at Abu Dhabi-based investment and advisory company The National Investor, said in an interview Oct. 18. “We have gotten over that hump in the cycle when there were a lot of liquidity constraints.”

THE REPORT GOES ON:

Middle East and North Africa investment groups have about $10 billion available after raising a record $5.4 billion in 2008 that they haven’t been able to spend, Gulf Venture Capital Association said in a July 20 statement. Mid-sized businesses in the Gulf may need as much as $1 billion from investors, Jalil said. The Bloomberg GCC 200 Index of regional stocks has declined 26 percent since the end of September 2008 after credit markets collapsed.

The National and Kipco Asset Management Co., a Kuwaiti investment bank, started a $200 million Shariah-compliant fund this month, Jalil said in Abu Dhabi. Bahrain’s Capital Management House plans to complete a transaction and buy stakes in companies specializing in aviation and energy, Chairman Khalid Al Bassam said in an Oct. 25 telephone interview.

Islamic funds received $8.9 billion of commitments from investors from 2003 through July this year, of which about $4.5 billion has been invested, Kuwait Finance House KSC, the country’s biggest Islamic bank, said in an Oct. 8 report. About $75 billion of deals have been completed since 2003, the bank said.

“The private equity market is coming back,” said Al Bassam, whose firm has stakes in energy, banking and real-estate companies.

Shariah-compliant equity companies raised and completed deals worth about $3 billion worldwide last year, mostly in the Middle East and North Africa, Dubai-based Yasaar Media, a media and research company that specializes in Islamic finance, said in an August 2009 report.

Islamic finance industry under regulated, says Deloitte survey

by Habhajan Singh

At least two out of three Islamic finance industry leaders in the Middle East reg ion be l ieve t hat t he fast-growing financial sector is under regulated, a survey revealed. Some 31% of the Islamic Finance leaders from Saudi Arabia, Bahrain, UAE, Qatar and Lebanon surveyed by Deloitte believed that the Islamic Finance industry is appropriately regulated, majority (66%) indicat ing that it i s under regulated. Only 3% said it is over regulated.

"This result is consistent with the previous findings relating to the level of supervision and financial regulation in the GCC (Gulf Cooperation Council)," said the first of Deloitte's Islamic Finance leaders survey in the Middle East benchmarking practices.

The report noted that its findings also confirm the compelling need for an enhancement to the regulatory environment promoted by organisations like Islamic Financial Services Board, Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions and International Islamic Financial Market.

A copy of the survey, which excluded industry players from this part of the world, was made available to The Malaysian Reserve. Deloitte said it was the the first Islamic Finance leaders survey in a biannual series targeted at industry practitioners and leaders of Islamic financial institutions (IFIs) in the Middle East. It was based on interviews conducted with indust ry leaders between April and June 2010.

Islamic accounting standards and risk management were identified as the top two areas requiring new regulatory measures, and the leaders surveyed, view corporate governance and Shariah governance as prerequisites for best practices. It also noted that current and anticipated regulatory changes are the chief drivers of the business performance of IFIs.

It said the majority of industry leaders surveyed (84%) noted that within the next year,Islamic finance regulation will increase significantly.

"This is consistent with regulatory reforms that have recently taken place around the world. Includes are the US Securities and Exchange Commission's new rules requiring a large amount of disclosure about the information used to securitise notes," it added.

It noted that the European Commission has made similar moves. Reforms cited included new measures in Basel III to tighten core tier one capital, Ireland's new laws limiting bank credit exposures and exposures and the UK's bank tax levy. Bank Negara Malaysia (BNM) will also be introducing a new Shariah Governance Framework soon.

IILM to boost IFI capacity to facilitate cross-border flows

KUALA LUMPUR, Oct 25 (Bernama) -- The establishment of the International Islamic Liquidity Management Corp (IILM) will further enhance the capacity of Islamic finance in facilitating efficient cross-border flows, Bank Negara Malaysia (BNM) Governor, Tan Sri Dr Zeti Akhtar Aziz, said today.

She said the corporation would enable effective liquidity management not only for the Islamic financial institutions but also for the management of Islamic financial portfolios.

"This development is also significant as it demonstrates an international collaboration among the central banks. The greater collaboration among regulators seen in this decade cumulatively serves to contribute towards the continued resilience of the global Islamic financial system," she said in her welcoming address at the Global Islamic Finance Forum 2010 here today.

Zeti, who will chair the first IILM board meeting, said the meeting, which would be convened on the sidelines of the forum today, would pave the way for its operationalisation. Prime Minister Datuk Seri Najib Tun Razak, who is also present at the forum, witnessed the signing of the Articles of Agreement between central bank governors and bank representatives to set up the corporation She said recently, there has been an increased global engagement in syariah matters among scholars, practitioners and regulators through international platforms. This was a remarkable achievement, given that much of these developments had taken place amid the tumultuous global financial environment, she said.

"The rapid internationalisation in Islamic finance has also been underpinned by the massive flow of knowledge, ideas, technology and people across borders, a process which fosters a greater international understanding on the practices in Islamic finance," she said.

Zeti said Islamic finance has, during this period, been expanding steadily at a double-digit pace with the total Islamic financial assets estimated at more than US$1 trillion (US$1=RM3.06). She said this dynamic growth was driven by two key factors -- the pace of innovation in Islamic finance provided extensive range of financial solutions and the resilience derived from its inherent features provided foundations for financial stability in the Islamic financial system. On sukuk, for example, she said the advancement that has been achieved testified to the ability of Islamic finance in meeting the requirements of today’s differentiated demands of the modern economy.

"The sukuk market has demonstrated its ability to effectively intermediate funds across borders and thus contribute towards the efficient allocation of funds in the international financial system," say Zeti. Today, the sukuk market has become an important avenue for international fund raising and investment activities with the sukuk becoming a truly global product, generating significant cross-border financial flows, she said.

The central bank governor said the internationalisation of Islamic finance was also evidenced by the growing presence of Islamic financial institutions that now operated beyond their own jurisdictions and the increased number of international foreign financial institutions that offered Islamic financial products and services.

Indeed, increasingly, Islamic finance has become part of the growth strategies of a growing number of the global financial players, she said. Besides that, new horizons were also fast emerging, as seen by the concrete efforts for legislative and regulatory changes in several non-traditional markets to facilitate the introduction of Islamic finance in these markets, said Zeti. The Global Islamic Financial Forum, which gathers Islamic financial players as well as Islamic scholars around the world, will be held for four days beginning today. -- BERNAMA

BNM ruling on Islamic financial products

KUALA LUMPUR, Oct 26 (Bernama) -- All new Islamic financial products to be offered by Islamic financial institutions or any existing products to be offered to new customers must comply with the rulings of the new Syariah Resolutions in Islamic Finance (Second Edition), said Bank Negara Malaysia (BNM).

However, for Islamic financial products which had been contracted between the customers and Islamic financial institutions based on syariah rulings published in the first edition and the Summary of National Syariah Advisory Council (NSAC) decisions, the contract would remain in force until maturity, BNM said in a statement here today. The second edition is a compilation of all syariah resolutions made between 1997 and 2009, it said.

BNM said the move was also a continuation of all its earlier efforts to deepen the understanding on the syariah interpretations and the juristic reasoning for the rulings.

"It is also aimed to increase the level of transparency on juristic reasoning in Islamic finance and thus, an increased appreciation and acceptance of syariah decisions," it said. The central bank said it would also allow for more efficient syariah governance at institutional level, while catalysing greater cross-border harmonisation in the interpretation and application of syariah. -- BERNAMA

New licences to boost takaful take-up to 18%

by Jason NgThe penetration rate of takaful in Malaysia may increase up to 18% by 2013 following the issuance of four new licences by Bank Negara Malaysia (BNM) last week.

Presently, the penetration rate of takaful, or Shariah-compliant insurance, is just around 10% and the entry of four new operators will help to increase the reach to nonurban centres, said Malaysian Takaful Association chairman, Datuk Syed Moheeb Syed Kamarulzaman. "The market is very big and the penetration rate will accelerate with the new players," he told The Malaysian Reserve in a phone interview recently.

Under liberalisation measures of the financial services sector, BNM has granted four foreign-local joint ventures the licences to operate family takaful business in Malaysia, a market where about 60% of its 28 million population are Muslim, to help develop the industry and boost take-up rate.

The four are: American International Assurance Bhd (70%) and Alliance Bank Malaysia Bhd (30%); AMMB Holdings Bhd (70%) and Friends Provident Group plc (30%); ING Management Holdings (Malaysia) Sdn Bhd (60%), Public Bank Bhd (20%) and Public Islamic Bank Bhd (20%); The Great Eastern Life Assurance Company Ltd (70%) and Koperasi Angkatan Tentera Malaysia Bhd (30%).

Instead of selling risk at a price to the insurer, takaful is based on "mutual cooperation" where either part or all of the contribution paid is donated to the takaful fund, which also helps other participants by providing protection against potential risks.

"Certain sector of the market is difficult to reach especially the rural areas and where microtakaful can be beneficial. Since there are four new operators instead of two, we believe the penetration rate will accelerate," said Syed Moheeb, who is also the president of local takaful operator, Takaful Ikhlas Sdn Bhd. Two new family takaful licences were up for grabs as announced back in April 27, however, given the "vast potential" to enhance insurance penetration rate in Malaysia and in the region, BNM has decided to allow two more licences after considering the "strength of the applicants".

There are eight existing takaful operators in Malaysia, according to BNM website, namely CIMB Aviva Takaful Bhd, Etiqa Takaful Bhd, Hong Leong Tokio Marine Takaful Bhd, HSBC Amanah Takaful (M) Sdn Bhd, MAA Takaful Bhd, Prudential BSN Takaful Bhd, Syarikat Takaful Malaysia Bhd and Takaful Ikhlas Sdn Bhd. The new operators are expected to start business as early as 2011 as it "will take roughly six months for the new players to set up their business," said Syed Moheeb.

(This story appeared in The Malaysian Reserve on 4 October 2010. 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)

DEVELOP OTHER PREMIUM ISLAMIC FINANCIAL PRODUCTS & SERVICES, SAYS AHMAD HUSNI

Although Malaysia has done very well in the sukuk market, it has to seriously develop its capacity in other products and services that would command greater premiums not only within the domestic market but also in the foreign Islamic financial markets.

In making the call, Second Finance Minister Datuk Seri Ahmad Husni Mohamad Hanadzlah said it was therefore a national duty for domestic institutions to champion this cause to their highest possible capability and take the industry to the highest level. Malaysia's brand name in the field of Islamic finance is well-established and the domestic institutions must capitalise on this strong platform, but it has to do more, he said in his speech at the Khazanah's Megatrend Forum 2010 here today.

For instance, he highlighted how asset management was a critical component to further secure the country's position as a premier international Islamic financial centre. The expansion of a syariah-compliant asset management industry will give impact and add value across the financial services sector, he said.

"The asset management industry can directly support as well as complement a number of sectors including the takaful industry, private equity, mutual funds, private wealth management, trust and wakaf," he said. He also cited Tabung Haji -- one of the world's first Islamic fund management institution, which should expand its capability to partner with foreign brand names, if it must. -- BERNAMA (Oct 4, 2010)

M’sia is the largest 2010 sukuk issuer in the world

by Siti Radziah Hamzah
Malaysia remains the largest issuer of sukuk accounting for 64.6% of the total global issued outstanding as at end-June 2010. In line with the International Islamic Finance Centre (MIFC) initiative to develop Malaysia into a multi-currency global fund raising platform for Islamic finance, a number of foreign currency sukuk were issued, including those by the government, Nomura Holdings Inc and Khazanah Nasional Bhd, during the first eight months of 2010.

During the first seven months of 2010, 15 new sukuk were listed on Bursa Malaysia amount ing to RM70.5 billion, said the Ministry of Finance in the Economic Report for 2010/2011 released last week. In June 2010, the government issued the world's largest US dollar benchmark sovereign sukuk amounting to US$1.25 billion (RM3.86 billion) with a yield of 3.928% and was oversubscribed six times.

In July 2010, Nomura Holdings Inc's issue of US$100 million was the first sukuk listing by a Japanese international entity. Khazanah had in August 2010 raised a 5-year and a 10-year sukuk of S$1.5 billion (RM3.57 billion) which was oversubscribed by 4.3 times.

The sukuk was also the first Singapore dollardenominated issuance. In efforts to enhance diversity and depth of the MIFC initiative, the Deutsche Bank AG was licensed as an International Islamic Bank (IIB) in March 2010. In addition, the report said there was good response to the liberalisat ion measure, which all ows 100% foreign ownership in Islamic fund management companies. During the first-half of the year, three new key players were licensed as Islamic fund management companie s ( IFMCs) — Franklin Templeton GSC Asset Management Sdn Bhd, Saturna Sdn Bhd and OSK-UOB Islamic Fund Management Bhd — bringing the total IFMCs to 14 as at end-June 2010.

Assets of the takaful industry expanded 19.6% to RM13.9 billion, accounting for 9.1% of total insurance industry assets as at end-July 2010, from RM12.4 billion recorded at the end of 2009. The increase was attributed to the increase in family funds, which comprised 84.6% of total takaful assets.

Net contributions for family and general takaful recorded growth of 23.8% to RM2.2 billion compared to RM1.7 billion between January and July 2009. The Islamic banking system, including the development finance institutions, continued to expand in terms of market share of assets, deposits and financing in the first seven month of 2010, the report added.

(This story appeared in The Malaysian Reserve on 18 September 2010. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays, edited by Habhajan Singh)

Malaysia to cut taxes on Islamic transactions

Malaysia will cut taxes on Murabahah, and Bai Bithaman Ajil Islamic transactions based on Tawarruq to promote "innovation in Islamic securities," Prime Minister Datuk Seri Mohd Najib Razak said in his budget speech to parliament last on Oct 15, 2010.

Bloomberg reports that the policy will take effect next year and will last until 2015, he said. Bursa Malaysia Bhd, plans to start selling sukuk, or debt that pays asset returns to comply with the Islam's ban on interest, to individual investors, Mohd Najib said in Kuala Lumpur.

A Murabahah agreement refers to a transaction involving the sale and purchase of goods, whereby the seller provides a price to the buyer along with a profit margin. Bai Bithaman is a type of investment product with a pre-agreed profit rate. Islamic banking in Malaysia, the world's biggest market for sukuk, rose 21% in the first seven months of 2010 from a year earlier, and accounted for 20% of the total, the Ministry of Finance said in its 2010-2011 Economic Report issued last week before the budget announcement. Assets that comply with the religion's ban on interest climbed to RM337.6 billion ringgit, the report said.

Australia Seeks Tax Changes to Promote Sukuk

Australia plans to change laws to ensure Islamic finance products are taxed fairly as the government seeks to attract investors from the Middle East and Asia, paving the way for sukuk sales, reports Bloomberg (Oct 20, 2010).

The report reads:

The national taxation board will hold talks next month in Sydney, Canberra and Melbourne on how to best ensure that Islamic finance transactions are treated the same as equivalent non-Islamic deals. The board noted this month that mortgages that comply with religious principles may lead to stamp duty being paid twice, as the financier buys the property and then sells it to his client. Under a conventional mortgage there is only one sale that attracts the duty.

While Australia’s 365,000-strong Muslim population is 2 percent the size of Malaysia’s, the largest sukuk market, making the industry more accessible would generate demand, the government has said. Australia is looking to join countries from Egypt to South Korea in seeking to ease barriers to Shariah- compliant products and tap the industry’s $1 trillion in assets, which the Kuala Lumpur-based Islamic Financial Services Board predicts will reach $1.6 trillion by 2012.

“Islamic finance is a rapidly growing part of the global financial system and Australia is in an excellent position to capitalize on that growth,” Assistant Treasurer Bill Shorten said in an e-mail response to questions from Canberra on Oct. 18. Islamic finance will provide Australia with access to more offshore capital, he said.

Australia’s natural resources will provide companies seeking to sell sukuk with the underlying assets to back the debt and conform to the religion’s ban on interest, according to Zaid Ibrahim & Co., Malaysia’s biggest law firm.

Middle East money managers are interested in Australia investments that offer higher yields than most developed markets as well as potential returns from gains in the currency. Australia’s dollar advanced 7.1 percent this year against its counterparts among the Group of 10 currencies, second only to the yen.

“Australia wants investment from Gulf countries and that’s the reason they are taking it very seriously,” Abu Umar Faruq Ahmad, chairman of the Shariah Supervisory Board at the Sydney- based Islamic Co-Operative Finance Australia Ltd., said in an interview. “I see a lot of interest from the Gulf,” said Ahmad, who is also an assistant professor of Islamic finance at Hamdan Bin Mohammed e-University in Dubai.

There are a small number of companies offering Islamic financing in Australia, the tax office said this month, including the Muslim Community Cooperative Australia, a Melbourne-based mortgage provider, and Islamic Co-Operative Finance Australia.

Indonesia trails Malaysia in sukuk on taxes

Indonesia is under pressure from banks to match tax breaks and product offerings announced by Malaysia last week to catch up in developing Islamic finance, reports Bloomberg (Oct 19, 2010).

The report quoted Andi Buchari, a director at PT Bank Muamalat Indonesia, the nation’s oldest Islamic bank, in a telephone interview from Jakarta as saying: "The government needs to play a more active role. We need more incentives, things such as a tax holiday, or perhaps, an incentive for people to put their money in Syariah banks."

The report added:

Malaysia has the largest market for sukuk and is a global hub for the Islamic finance industry that manages US$1 trillion of assets. The government will cut taxes on Syariah-compliant transactions next year to promote “innovation in Islamic securities,” Prime Minister Datuk Seri Najib Razak said in his Oct. 15 budget speech.

Indonesia, which has the world’s biggest Muslim population at 192 million, had 75 trillion rupiah (US$8.4 billion) of Syariah-compliant banking assets in 2009, or about 3 per cent of the total, according to the central bank. The amount compares with RM337.6 billion (US$109 billion) in Malaysia, or 20 per cent of banking assets, the Finance Ministry said in the 2010-2011 economic report released in Kuala Lumpur last week. In Malaysia, 60 per cent of the 28 million people are Muslim.

Indonesia failed to sell all of the government sukuk it offered in an auction on Oct. 5, even after suspending sales for two months because investors demanded higher yields than the government was willing to offer. The government raised 382 billion rupiah less than the targeted 1 trillion rupiah, the 12th consecutive sale that fell short of plans this year.

Investors sought yields as high as 9.37 per cent for the five-year sukuk and 8.5 per cent for the 10-year notes, according to the Indonesian central bank’s website. The government raised 3 trillion rupiah from an auction of conventional bonds on Sept. 28 with yields of 7.3 per cent for the six-year notes and 7.72 per cent for the 11-year securities.

“Indonesia presents exciting prospects for the Islamic banking business,” Mudassir Amray, head of Asia Pacific Islamic banking at Citigroup Inc in Hong Kong, said in an e-mail on Oct. 15. “With the largest Muslim population in the region and gross domestic product of over US$670 billion, the growth potential is enormous.”

Global sales of sukuk fell 23 per cent to US$12 billion in 2010 from the same period a year earlier, according to data compiled by Bloomberg. Issuance totaled US$20.2 billion last year, up from US$14.1 billion in 2008 and was a record US$31 billion in 2007, the data show.