Wednesday, February 23, 2011

BNM sets end-June deadline for new Shariah framework

By Habhajan Singh & Farah Saad
Some Islamic banks and takaful operators may not meet the end-June deadline to comply with the requirements of the Shariah Governance Framework for the Islamic Financial Institutions, issued by Bank Negara Malaysia (BNM), which took effect on Jan 1.

It is understood that some Islamic financial institutions (IFIs) coming under the ambit of the framework issued in October 2010 are still behind the curve with the full implementation of the framework which includes establishing an "end-to-end Shariahcompliant control mechanism" for all aspects of their business operations to ensure that "all activities are Shariah-compliant".

"The central bank has paid a visit to some local IFIs to check on their preparedness for the framework," one industry source told The Malaysian Reserve.

BNM deputy director for Islamic banking and takaful department Rustam Mohd Idris told a forum discussing the framework in Kuala Lumpur on Monday that "our deadline is our deadline".

The document marks another key milestone in the development of Islamic finance in Malaysia and also another first for Malaysia in the global Islamic finance arena.

In the 50-page document, the central bank said it has developed the framework with "the primary objective of enhancing the role of the board, the Shariah Committee and the management in relation to Shariah matters, including enhancing the relevant key organs having the responsibility to execute the Shariah compliance and research functions aimed at the attainment of a Shariah-based operating environment".

The framework is applicable to all Islamic bank licensed under Islamic Banking Act 1983 (IBA), takaful and retakaful operators registered under the Takaful Act 1984 (TA), financial institutions licenced under the Banking and Financial Institutions Act 1989 (BAFIA) that participates in the Islamic banking scheme, and development financial institutions prescribed under the Development Financial Institutions Act 2002 (DFIA) that participates in the Islamic banking scheme.

"The new framework is more comprehensive and provide guidance on Shariah audit, Shariah review, Shariah risk management and Shariah research function," said Mohammad Faiz Azmi, who leads the PricewaterhouseCoopers Global Islamic Finance Team and is also the chairman of the Malaysian Accounting Standards Board.

Speaking at the forum on Monday, organised by ZI Shariah Advisory Sdn Bhd which is the Shariah arm of legal firm Zaid Ibrahim & Co, he said the framework also has "stricter requirements" in terms of qualification.

He said paper qualification was not mandatory in the old framework but the new framework requires that the majority of members in the Shariah Committee shall at least hold a bachelor's degree in Shariah from a recognised university.

The new framework replaces Guidelines on the Governance of Shariah Committee for IFIs issued in 2004.

At the same forum, International Shariah Research Academy for Islamic Finance (ISRA) senior researcher Prof Dr Ashraf Md Hashim pointed out that one of the special features of the new framework is the inclusion of a clause for succession planning for Shariah Committee members.

In section four of the framework, it states: "The IFI should develop a succession planning programme for the Shariah Committee members by identifying, hiring and nurturing new members with the view to entrusting them with greater responsibilities as and when appropriate."

The first objective of the new framework is to set out the expectations of BNM on IFIs' Shariah governance structures, processes and arrangements to ensure that all its operations and business activities are in accordance with Shariah.

It also intends to provide a "comprehensive guidance" to the board, Shariah Committee and management of IFIs in discharging its duties in matters relating to Shariah, and outlines the functions relating to Shariah review, Shariah audit, Shariah risk management and Shariah research istitutions are still behind the curve on full implementation of the framework which includes establishing an 'end-to-end Shariah-compliant control mechanism' for all aspects of their business operations.

(This story appeared in The Malaysian Reserve on 16 February 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)

New set-up ASAS to assist in Shariah matters soon

By Farah Saad
A NEWLY-ESTABLISHED Association of Shariah Advisors (ASAS) will begin operations within the next few months to assist Islamic financial institutions (IFIs) to ensure the effective implementation of Bank Negara Malaysia's (BNM) recently released Shariah Governance Framework (SGF).

"We have submitted the application to the Registrar of Societies to make it an official establishment and are now awaiting approval," said Prof Ashraf Md Hashim after a dialogue on the Shariah Governance Framework for Islamic Financial Institutions, in Kuala Lumpur on Monday.
Besides being a source of reference for IFIs on Shariah matters, ASAS will help maintain standards of competence and conduct of the Shariah advisory services in accordance with its code of conduct.

ASAS will also assist regulators and relevant authorities in the appointment of Shariah advisors. Currently, ASAS is operating as a pro-tem committee, chaired by Asst Prof Dr Aznan Hasan, assistant professor in Islamic Law and a member of the Shariah Advisory Council of Bank Negara Malaysia, and Ashraf himself as deputy chairman.
Pending the association's success in Malaysia, Dr Ashraf is optimistic the concept would catch on internationally, with Shariah advisors from around the world joining to form an international version of ASAS.
"We will start in Malaysia, while we are weighing out the pros and cons, before we go international. If it is done properly, other countries will follow," he said.

ASAS is considering a twotiered membership structure, where Shariah scholars can either be full members or associated members, Ashraf said.
He was speaking to The Malaysian Reserve after the dialogue hosted by ZI Shariah Advisory Services Sdn Bhd, the Shariah arm of law firm Zaid Ibrahim & Co's.
The event was held to discuss the on-going implementation of BNM's SGF. IFIs have till end-June months to ensure all their operations are in accordance with the framework.

[The Malaysian Reserve, 16 February 2011]

Launch of the Islamic Globe e-newspaper

DUBAI: The Islamic Globe, touted to be the world-first Islamic finance e-newspaper, was launched on Feb 16 by global publishing venture called Eaglemont Media.

It is a free weekly e-newspaper delivered to readers on a variety of digital platforms — from the iPad to the iPhone, Blackberry to Kindle, Android to Samsung Tablet as well as PDF.

The new e-newspaper is designed to look like an old fashioned newspaper from the 1950s — complete with yellowing paper and curled edges — to remind readers of a time when quality journalism was the most important part of the reading experience, according to a statement by its publisher.

"Much of the media that has addressed this market in the past has been filled with regurgitated press releases and advertiser-friendly PR (public relations). The Islamic Globe seeks to tell the truth with no bias and no slant," said its founder and editor Paul McNamara.

Anxiety over Qatar: It's 'wait and see' over in Malaysia

As Qatari markets are still reeling from its central bank's ban on Islamic banking windows, the Islamic finance industry in Malaysia watches the developments unfold with a measure of trepidation.

Earlier this month, Qatar Central Bank (QCB) issued a circular to convent ional banks with Islamic banking arms in the emirate to close their Islamic operations by end-2011.

Although, in general, Malaysian Islamic banks are not directly impacted by Qatar's announcement, the move took most market players by surprise. For now, though, the industry seems to have adopted a wait-and-see stance as the policy is implemented.

"There has not been clarification from QCB at this stage, so the industry will need to wait and see how QCB will implement this," Deloitte Corporate Advisory Services global Islamic finance leader Daud Vicary Abdullah told The Malaysian Reserve in a telephone interview.
He said QCB had earlier flagged a move in the direction, but had initially indicated that a maximum percentage of Islamic finance business was permissible at a conventional institution.
"The directive to shut it down came as a bit of a surprise," he said.

In a report posted on the website of law firm SNR Denton, it said the circular followed an earlier decision in August 2010 by the regulator requiring the assets of Islamic banking operations to be limited to 15% of a conventional bank’s total assets.
QCB's motives, according to the circular, is to ensure that conventional and Islamic banking operations become entirely segregated, in full compliance with Shariah principles.
To this end, a Malaysian-based lawyer believes that the Qatari regulators would have made the decision "upon due considerations".
"Islamic windows within a conventional banking set-up basically create a shadow-banking operation, ie the formation of a bank-within-a-bank, which makes it quite opaque for the regulators to supervise and monitor the bank's operations as well as the risks associated with it," said Madzlan Hussain, a partner and head of Islamic financial services practice at Zaid Ibrahim & Co.

Perhaps this was amongst the issues bothering the regulator's mind, he said.
In implementing the policy, Madzlan sees the year-end deadline given by the regulator for Islamic windows to wind down as 'challenging', as any such radical change requires the market to be adequately prepared with appropriate infrastructures.
"Here we are not only looking at the market readiness in terms of its human capital and financial capacity to adapt to such change, but quite importantly, whether the public themselves are ready to adapt to such change?" he said.

Reports have indicated Qatar's directive is a step towards emulating Malaysia's comprehensive Shariah framework for its Islamic banks.
Malaysia, which has adopted a dual financial system comprising conventional and Islamic systems under its new central bank laws, has in place an established regulatory and supervisory framework for standalone banks and subsidiaries offering Shariah-compliant products.
Most countries practicing Islamic finance do not yet have such legal framework in place. As such, major policy decisions such as the one made by Qatar should be approached cautiously, said one Islamic banker.
"Surely the regulator does not want to shock the market and cause it to destabilise. There is no one-size-fits-all answer to some of these issues; every policy decisions must take into consideration the specificities of each jurisdiction," the banker said.

(This story appeared in The Malaysian Reserve on 21 February 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)

Sunday, February 13, 2011

Qatar banks under pressure

Qatar's central bank has ordered commercial banks to close Islamic banking operations by the end of 2011. Image Credit: ReutersThe decision by the Qatar Central Bank to order conventional banks in the country to close their Islamic banking operations by the end of the year — without a detailed explanation — may be harmful to the financial services industry in the country and the region, reports Gulf News (February 13, 2011).

Many international and local conventional banks in Qatar have reportedly invested in setting up Islamic finance operations which they may now have to shut-down at some cost. But perhaps of greater concern is that by not immediately providing clear reasons for the step, the central bank has created uncertainty in the financial services industry in the country — which may deter further investment.

The shares of some Islamic-only banks listed in Qatar strengthened on the news of the ban, on the back of speculation that they would be able to pick up assets conventional institutions may be forced to sell cheaply. It is expected that shares in conventional banks in Qatar will remain under pressure until the issue is resolved.

And, although it might seem unfair, given the different national regulatory authorities, the uncertainty is likely to spread to the entire Islamic finance industry, which spans the region and the world. While the Gulf is an important centre for the global Islamic finance industry, those countries in Asia, among others, also trying to win market share, will be quick to take advantage of any regulatory uncertainty that will make investors look for new destinations.

The global financial crisis showed that Islamic banking is as vulnerable to sentiment and the state of the world economy as conventional banks. While it may be within their rights, governments must at all times institute regulations and policies with a restrained hand. Without a clear and stable operating environment, both Islamic and conventional banks will suffer.

Qatar Tells Conventional Lenders To Stop Islamic Ops

Qatar's central bank-Qatar's central bank has ordered conventional lenders operating in the gas-rich Gulf Arab state to shut down Islamic finance activities by the end of 2011, two bankers familiar with the situation said Sunday, in a move that could curb an important source of income for many banks, reports Zawya Dow Jones (Monday, Feb 07, 2011).The central bank earlier this month sent a memorandum to non-Islamic lenders operating in Qatar asking them to close their Islamic units without providing a reason for the decision, according to two senior banking officials, who reviewed the document. The move is seen to benefit the pure Islamic players such as Masraf Al RayanMasraf Al Rayan and Qatar Islamic Bank (QIB), whose shares rose 10% and 8.4% respectively, the report added.

"We expect banks to convert or restructure Islamic corporate loans into conventional loans, wind down or sell their Islamic loans," the report quoted Jaap Meijer, Dubai-based head of the banking team at AlembicHC research.
A Qatar central bankQatar central bank official, who declined to be named, confirmed that the memorandum was issued but declined to provide further details.

The report added:

Meijer said the biggest impact would be on Qatar National BankQatar National Bank, as 12% of its assets, 16% of its loans and 9% of its profits are derived from Islamic finance. QNBQNB's shares lost nearly 5%. Doha BankDoha Bank and Commercial Bank of Qatar would also be affected by the central bank move, he added.
"QIB could be key beneficiary as it currently has 50% market share in Islamic finance. If it captures just 50% of loans of the big three, this could boost loans by around 35%," Meijer said.
While analysts and bankers are assessing the impact of the central bank's decision, few can offer an explanation of the motive other than that the country's authorities want to separate the product offering of conventional banks and shariah-compliant lenders.
"We don't know the real reason, the picture is still unclear," one of the Qatar-based bankers said.