ZULKIFLI: Window dressing, scholar wannabes

By Dr Zulkifli Hasan

SHARIAH scholars in Islamic finance are frequently put in a dilemma position. They have been accused upside down with numerous allegations even without any basis. During early implementation of Islamic finance, Shariah scholars were alleged to have formed an alliance with Islamic capitalists to create a new market for Islamic finance sector.

In this instance, the Islamic banks were guided by those well-paid clerics and always issued rulings according to their needs. In fact, since 1980s, many of the scholars have been accused of being bankers’ window dressing and of overstretching the rules of Shariah to provide easy fatwas to Islamic financial institutions.

Lately, it is quite surprising that the scholars have been criticised even by Islamic bankers. The myth of alliance between Islamic bankers and Shariah scholars seems to be no longer relevant. One of the critics refers to an allegation where the Islamic financial market globally has been invaded by Shariah scholar wannabes, a new term introduced to refer to the so-called unqualified Shariah scholars.

Infiltration of Islamic Banks 

These Shariah scholar wannabes have infiltrated Islamic banks, regulatory authorities and Shariah governing bodies without due consideration to stakeholders value. Much more serious is where the criticism includes allegations of changing the meaning of Quranic verses and  Hadith by those Shariah scholar wannabes.

Caution and criticism are mostly welcomed and in fact warranted but not baseless allegations and wrongful accusations. Constructive criticisms particularly on the governance issue in Islamic financial institutions will surely contribute to the development of Islamic finance industry. The unqualified criticisms will lead the industry nowhere and in fact hinder its development and negate the public confidence.

Considering the significance of this issue, this article attempts to address several misconceptions about Islamic finance even by the so-called truly Islamic finance practitioners with the aim of providing a basic understanding and removing any inaccurate or unfounded prejudice.

1. Islamic finance is purely a commercial transaction: Islamic finance concept is grounded in ethics, values and norms. As Islamic finance is not pure commercial transaction and not only confined to nominate contracts, Islamic financial institutions therefore should be commercially and morally oriented entities. Islamic finance assumes a moral based value proposition which offers solutions for the economic and financial problems. These moral and ethical value systems require that the decisionmaking process in Islamic finance must not be solely based on efficiency and equity but must have social and ethical dimensions.

2. Stakeholders value confines to shareholders interest: The stakeholder value orientation is not only concern for shareholders but also to protect all the stakeholders’ interests and rights. The stakeholders value, conceptually, requires Islamic financial institutions to balance the corporate goal of maximising the profit with the duty to uphold the principle of social justice and maqasid Shariah and this entails the notion of protecting the interests and rights of all stakeholders within the Shariah rules. Even the Basel Committee for Banking Supervision on “Enhancing Corporate Governance for Banking Organisations”, expands the term “stakeholders” to include employees, customers, depositors, suppliers, supervisors, government and the community.

Not only that, the Organisation for Economic Cooperation and Development further classifies the stakeholders into shareholders, internal stakeholders (employees and labour unions), operational partners (customers, suppliers, creditors and contractors), and the social community (state authorities, trade union, non-governmental organisations and civil society).

3. The true meaning of Bay is sale and it has no element of risk: Islamic finance is gharar-free, maysir-free and riba-free, but not risk-free. Since Islamic financial products and services are designed based on different nominate contracts, it is erroneous and would be a sheer misconception to say that Islamic finance is risk-free or less risky. Moral and Ethical Dimensions Furthermore, Islamic financial products and services should have moral and ethical dimensions and therefore any transaction should be embedded in real economy which offers an alternative financing paradigm. At this point, the conceptual framework of Islamic finance suggests that it should be more than financialisation of the nominate contracts. Islamic financial institutions should take necessary risks equitably and not simply shifting the liability unfairly to the customer. In other words, Islamic finance should represent a holistic approach to financing not only bankable customers but also to allocate certain funds for non-bankable and underprivileged people as part of its social responsibility to the society and ummah.

4. Islamic financial institutions are purely profit oriented entities: Based on its epistemological dimension, Islamic finance is actually a society oriented financing proposition as it aims to serve the community, ummah and not solely to the markets. Islamic finance must not be confined within profit-driven orientation but it should also address issues on economic and sustainable development, social justice and social investing oriented principles. With reference to several empirical studies, the current Islamic finance practices on the other hand do not indicate positive correlation with human development index scores. Surprisingly, the corporate social responsibility performance of Islamic financial institutions also has been rather weak and poor as compared to its conventional counterpart. This position demands Islamic financial institutions to seriously reevaluate and review their current practices and future direction.

5. Shariah scholar wannabes infiltrated the industry’s wellbeing: The critics on the roles of Shariah scholars are always blown out of proportion and over-exaggerated. Undeniably, Shariah scholars, either senior or young scholars or conservative or pragmatic scholars have their own unique contribution to the industry’s wellbeing but their approaches may be different. This should not be the reason of denying their significant contribution. The “conservative” scholars may view the legitimacy of Islamic financial products and services to be based on the legal and mechanistic aspects of Shariah. The products and services are classified as lawful and Shariah-compliant or Shariah-based if they meet the conditions of a valid muamalat transaction after going through the ordinary process of usul al fiqh.

On the other hand, the “pragmatic” scholars admit that Islamic finance should not confine their function by solely emphasising the fiqh aspect. The “pragmatic” scholars acknowledged that Islamic financial products and services should not only be valid and lawful, must fulfill the spirit of maqasid Shariah but must also be ethical and uphold the Islamic values.

Allegations Misleading

The critics upon Shariah scholars of either being banker’s window dressing or invasion of the scholar wannabes are actually misleading. These allegations to a certain extent will negatively influence the Islamic finance industry as they are not supported with any empirical evidence. Rather than discussing these unnecessary issues, the Islamic finance discourse should actually be focusing on its fundamental principles and how to ensure its sustainability. It is important to critically evaluate the performance of Islamic financial institutions against their foundational base and at the same time to maintain its positive development.

The existing practices of Islamic finance so far have failed to establish a distinct identity or to draw a clear demarcation line with conventional banks. In fact, with several corporate failures of Islamic financial institutions, such as the closures of Ihlas Finance House in Turkey, the Islamic Bank of South Africa and the Islamic Investment Co of Egypt, and corporate difficulties, as in the case of the Dubai Islamic Bank, and Bank Islam Malaysia Bhd, Islamic finance is clearly not immune from the crisis. Islamic finance must learn from the history and take lesson from previous financial crisis. We do not want to hear that the only lesson that Islamic financial institutions have learned is that they never learn.

Dr Zulkifli Hasan is a senior lecturer at Shariah and Law faculty of Islamic Science University of Malaysia. He is a Shariah committee member of Affin Islamic Bank Bhd and also sits in the committee member for the Association of Shariah Advisors. Opinions expressed in this article are his personal views. This article appeared in the Feb 25, 2013 issue of The Malaysian Reserve


[The Malaysian Reserve, Feb 25, 2013]

Malaysia’s sukuk issuances market expected to see new boost in 2013

by TANU PANDEY

Sukuk, the Islamic equivalent for bonds, has become an option for many when they need stable long-term financing. The instrument that performed extremely well in the last fiscal (2012) is expected to continue the trend this year.

In fact, this year the issuance of sukuk may even pick up after a little slackening trend in the last quarter of 2012, according to CIMB Islamic Bank Bhd executive director and chief executive officer  Badlisyah Abdul Ghani (picture). CIMB, it may be mentioned here, was one of the top sukuk issuers globally in 2012. In an email interview with The Malaysian Reserve (TMR), Badlisyah points out that the financing needs for the growing infrastructure sector in Malaysia is expected to give a further boost to the sukuk issuance market which may see infrastructure, blue chip companies and financial institutions dominating the sukuk issues this year.

TMR: 2012 was a record year for sukuk issuance. Do you hope to see the same trend in 2013 and which banks or financial institutions do you see leading the way?

Badlisyah: We anticipate another strong year for sukuk in the traditional markets where sukuk is actively pursued, ie, Malaysia and the Middle East (in particular Qatar, Saudi Arabia and the United Arab Emirates). There was a slowdown of sukuk issuance in the last quarter of 2012 in the Middle East but this should pick up in 2013. We expect plenty of infrastructure and development projects to come on stream in the near- to medium-term and those projects would require long-term and stable funding source. We see a healthy deal pipeline at CIMB and expect to end this year on a high again. I would assume other significant players in the league table would also have a healthy deal pipeline and this bodes well for the market.

TMR: How would you rate the Malaysian market’s appetite for sukuk and Islamic financing and is there a possibility that it could outperform other financial instruments?

Badlisyah: Malaysia will see a lot of infrastructure projects in the coming years and sukuk has become a popular choice for a number of reasons, including a wider investor base (Islamic and conventional investors) which typically translates to better price tension in favour of the issuers; tax incentives that make borrowing cost cheaper and price transparency that makes it attractive to investors.

On a yearly basis since we entered the new millennium, sukuk has outpaced conventional bonds in terms of growth. The same can be said about Islamic financing in the banking sector in Malaysia. I do not see this trend changing especially with the new Securities Commission’s (SC) framework on Shariah-compliant stocks on Bursa Malaysia coming into force this year. To be eligible as a Shariah-compliant stock, the framework requires companies to ensure that the majority of their financing is Shariah-compliant. Being a Shariah-compliant stock allows a company to tap into a wider investor base, thus giving better liquidity to their stocks and better profiling.

TMR: What is the target for Islamic finance in Malaysia for 2013 and is it well on the trend?

Badlisyah: There are no specific targets for the Islamic finance industry on a yearly basis. There is a 2020 industry target, set under the Financial Market Blueprint, of 40% overall share of market. We foresee that sukuk will continue to dominate the debt capital market space and we expect it to account between 70% and 75% of the total ringgit issuance this year, as seen in the last five years. We will continue to see steady growth in Islamic banking assets and deposits at north of 20% boosted by tax incentives as well as the revised Shariah screening framework by the SC.

TMR: Do you plan to increase sukuk issuance market share this year? any big issues that you are looking at?

Badlisyah: In 2013, just like in other years before it, we are committed to deliver the best results for our clients in the sukuk market. We always strive to be a significant player in the market and hopefully, we will land ourselves among the top sukuk arrangers/managers (if not the top) on the league table. One of our key aims is to meet our clients’ needs through practical solutions and innovative ideas. We believe that our strong and long track record in sukuk as well as our enhanced distribution capabilities will allow us to perform well again this year. We expect to see infrastructure projects, bluechip companies and financial institutions dominating the sukuk issuers profile list this year. However, it is hard to say which deal will be a big issuance in the market.

TMR: What more can be done by the government and financial institutions to promote the growth of the sector?

Badlisyah: The Malaysian government has done more for Islamic finance than any other government in the world. Of course, there will always be room for improvement. The government just needs to continue supporting this growth through effective policies as needed from time to time. If there is anything more that the government can do now is to undertake more of their own financial transactions through Islamic banking and finance industry. This will naturally boost the growth exponentially. As far as financial institutions are concerned, they just need to do the business more effectively and efficiently, providing the same if not superior level of delivery and services compared to the conventional offerings.

[The Malaysian Reserve, Feb 25, 2013]

BADLISYAH: Shariah development, innovation can be easy

Today, I want to talk about business and product developments as well as innovations in Islamic finance and the issues plaguing it all these years. Don’t get me wrong, we have seen a lot of developments and innovations in Islamic finance but it had been a struggle every single time we came up with something new.

It is better now but there is still a lot of ignorance in the market place across all levels of stakeholders, especially among those whom I have labelled Shariah scholar wannabes in my last column. It seems what I said then had a fairly hot reception. As the Malay saying goes, “Siapa makan cili, dia rasa pedas!”

I can’t help it if people felt I was talking about them if they see themselves as those who claim to be Shariah scholars, when in reality they do not have the authority nor the qualification to be one. If they are doctors we would be calling them quacks! However, I don’t want to belabour anymore about these people but they have unfortunately been a bane to development and innovation in Islamic finance.

A lot of our efforts to bring further progress to the industry under the guidance of real and genuinely qualified Shariah scholars have been criticised unjustifiably and irrationally by these people. Also, in many instances, these people have also been responsible for certain developments and innovations in the industry that were just wrong under Shariah. To the extent that some of them have even argued that there was no point developing or innovating for Islamic finance as an alternative to conventional finance because riba-based banking is already Shariah compliant in the first place. It is halal because there is no excessive charging of interest. So why bother developing Islamic finance at all?

Some people, including the Shariah scholar wannabes, argued that what we do in Islamic finance is not really Islamic. All the products that we have today are merely replicating and copying conventional finance. To them, Islamic finance must be different in its entirety. It cannot carry the same value proposition as conventional finance. As a result, Islamic finance fails to be competitive and a real alternative to conventional finance in many jurisdictions. Malaysia is the one exception but these weird perceptions still exist.

In order to fully appreciate development and innovation in the industry we must shed our ignorance of Islamic finance and its history. We must understand that Islamic finance is nothing new. It’s at least 1,400 years old. It has been in existence since the advent of Islam and was seen throughout the various economically rich and powerful Islamic civilisations in history. It is impossible for Islamic finance to not have been transacted in one form or another during that period. It may not have been called Islamic banking or Islamic finance but it existed, otherwise, how could Islamic civilisations become the nexus of global trade and finance for close to a thousand years?

Islamic finance was practised in several forms back then. There was the Mudharabah, murabahah, ijarah, wakaf, istisna and many more financial products that became the mainstay of commerce during that period. It is interesting to note that Islamic civilisation had developed most of the modern economic and financial theory that we know today.

A lot of financial products that we know today as conventional products such as debt/ fixed income papers or bonds, travellers cheques, registered shares, remittance, trade finance, and so on, were all developed and innovated by Islamic civilisations and later adopted by the conventional market.

If we study this history further, we will realise that a lot of these financial products that have been reintroduced into our industry today had in reality pre-existed Islam. Mudharabah is in fact 3,000 years older than Islam, developed under the Babylonian and Assyrian Empires during the Mesopotamian era. It was a product that was used and practised for everything and anything in the market then but when it was adopted by the Muslims, after the advent of Islam, it was changed, innovated upon and made to be Shariah compliant by, among others, having its use limited to productive activities that were consistent with Shariah. Wakaf was taken practically lock, stock and barrel from the Greeks.

We had a lot of development and innovation back then, which included the “Islamisation” of conventional or jahiliyah products. And it was done and exemplified by none other than Prophet Muhammad (SAW) himself. We must ask ourselves whether there really is any difference to what we are doing today. I must say the answer is a resounding no! A lot of the conventional products that we have in the market have been “Islamised” in a way where what was not Shariah compliant was made Shariah compliant.

If we really study history in the way we have developed and innovated Islamic financial products since the advent of Islam, we would note that the products that we have in the market arguably cannot be said to be “holy”. Thus, it is able to be further innovated upon and be changed. We can be creative on how we look at all these products in order to best serve the Muslim community or Ummah.

For example, if we take Mudharabah and tweak it, it does not mean that we are changing the nature of Mudharabah nor are we defeating its spirit.

Mudharabah is a product that has been adopted and adapted by the Prophet (SAW) and it will remain as a distinct Shariah compliant product.

But when we look at mudharabah and change 2% or 5% of the structure or the concept, it becomes another product altogether. It is no longer a product called mudharabah.

One can call it whatever name one desires, it will be another product that is structured in a manner that is Shariah compliant. It will still be something that we can transact and undertake in our industry today without going astray from Shariah. That is what we call innovation.

Unfortunately in many parts of the world, even in our own country, Malaysia, there are people who feel that we cannot change Islamic financial products that have been adopted or developed by the Prophet (SAW).

It is supposedly blasphemous. This mentality needs to change for the good of the Ummah. In the example given, we are not changing mudharabah. We are simply innovating mudharabah, creating another product that is still Shariah compliant. So over time, we have mudharabah, ijarah, and other things including this new product, which we have not named for example.

In fact, mudharabah exists in the conventional market even until today. It may not be a regulated activity in the financial market but mudharabah is widely practised across the globe including in Europe even for activities such as wine refinery and vineyards. We have a Shariah compliant mudharabah and a non-Shariah compliant mudharabah in the world.

So when we innovate and develop in Islamic finance, we are purely coming up with commercial products that cater to the needs of society in a Shariah compliant manner. It is the same thing when we innovate and develop products in the food and beverage sector. When we came up with the halal version of the mooncake, we were simply changing some of the original ingredients of the mooncake that were not halal and replacing it with something compliant with Shariah. If it is not blasphemous to innovate on food, then it should not be so when we innovate on financial products.

At the end of the day, the only real comparison between Islamic and conventional finance, if we really need to articulate a difference between the two, is that one is Shariah compliant while the other is not. Everything else is the same. Innovation and development is easy under Shariah but some of us are just hell bent on making life difficult for all of us.

Badlisyah Abdul Ghani is executive director and chief executive officer of CIMB Islamic Bank Bhd. This article appeared in The Malaysian Reserve, a business/finance daily published out of  Kuala Lumpur.

[The Malaysian Reserve, Feb 4, 2013]

Takaful Ikhlas group health policy said to be on track to boost earnings

By Kamalavacini Ramanathan

Shariah-based financial protection provider, Takaful Ikhlas Sdn Bhd, has recorded RM12.16 million in contribution as of January 2013 from its very first kind of customised group hospitalisation and surgical product, “ChoicePlus” introduced in September last year.

Takaful Ikhlas chairman Sharkawi Alis said to date, ChoicePlus has more than 21,000 policy holders from about 57 corporations.

“We anticipate to achieve RM66.5 million annual contribution from ChoicePlus with the participation of more than 70,000 members and 200 companies,” he said at the launch of the product in Kuala Lumpur yesterday.

ChoicePlus is a medical aid card targeting all employers, not individuals, in Malaysia up to 75 years old for the purpose of looking after their employees’ health and welfare.

“We believe that ChoicePlus is capable of increasing our company’s contribution to earnings. At present we are on track and we believe we can achieve the target as the demand is already there,” he added.

Meanwhile, president and chief executive officer Ab Latiff Abu Bakar said apart from providing medical solutions, ChoicePlus takes a step higher to educate the participants on wellness management by conducting healthcare or wellness programmes.

Supported by the medical advisory board (MAB), he said it has a team of specialists both in-house and from the medical industry to conduct the wellness programme including day-care facilities.

“Any company with more than 10 employees may take up ChoicePlus and it is an extended healthcare policy to their (policy holder’s) spouse and children.

“We also view the importance of this product to be in line with current needs, as through ChoicePlus we also help companies to control their medical costs,” he said.

He said through its hospital health product segment, the company recorded contributions of more than RM50 million last year involving 154 companies. He also said that Takaful Ikhlas has plans in the pipeline to introduce a few more new health products for individuals this year.

“It is similar to ChoicePlus but it’ll be more focused on medical coverage for the individuals,” he said, adding that the company also plans to launch a new investment-linked product in the first-quarter of 2013.

Established in 2003, Takaful Ikhlas is a wholly-owned subsidiary of MNRB Holdings Bhd and has attracted 1.8 million participants comprising individuals and companies.

[The Malaysian Reserve, Feb 22, 2013]

Islamic banking via Pos Malaysia soon

THE plan by Bank Muamalat Malaysia Bhd to offer Islamic banking services through post office counters by the third quarter of the year is still pending approvals.

Chief executive officer Datuk Mohd Redza Shah Abdul Wahid said the collaboration with Pos Malaysia Bhd would provide the bank substantially wider reach through more than 1,000 post office service counters nationwide. “By year end, all post office counters should be able to off er our services.”

These include Pos Minis, self service terminals, Post-On-Wheels mobile outlets, postal agents and stamp agents — making it one of the most extensive retail network in Malaysia.

Under the same alliance, Bank Muamalat will also offer Pos Malaysia services through its counters, Redza said. The bank currently has 58 branches throughout Malaysia, including seven kiosks and has plans to open two more branches this year.

Both companies are subsidiaries of DRB-Hicom Group Bhd, which currently holds 70% of Bank Muamalat and 32% in Pos Malaysia. DRB will reduce its Bank Muamalat stake to 30% in accordance with Bank Negara requirements.

Redza said the bank wanted to have either a post office in a banking environment or a bank in a post office.

“However, a bank in a post office is more challenging in terms of regulatory requirements.

[The Malaysian Reserve, Jan 17, 2013]

IFSA to enforce Shariah terms in Islamic finance

By Sathish Govind

The soon to be introduced Islamic Financial Service Act 2012 (IFSA 2012) will make Malaysia one of the few countries in the world where the Islamic regulator is given a mandate to promote Shariah compliance among Islamic financial institutions, said a former senior official of Bank Negara Malaysia (BNM).

“The act will ensure there would be greater certainty and will ensure that the Shariah terms can be enforced as per the terms of the Shariah contract,” said former BNM assistant governor Gopal Sundaram at a forum discussing the advent of the new legislation.

The act, which has been approved by Parliament and now awaiting Royal Assent, will replace the Islamic Banking Act 1983 and the Takaful Act 1984, and incorporates elements from the Payment Systems Act 2003 and Exchange Control Act 1953.

On the conventional side, Parliament has passed the Financial Services Act 2012, which will consolidate the Banking and Financial Institutions Act 1989 (BAFIA) and the Insurance Act 1996.

Speaking at the public lecture organised by the International Centre For Education In Islamic Finance (INCEIF) and law firm Abdullah Chan, he said the new legalisation would provide the legal framework based on Shariah and be able to regulate Shariah-compliant institutions in a manner befitting Shariah requirements.

Gopal, who is also director of Kuwait Finance House Malaysia Bhd, said: “A greater clarity on the legal and prudential requirements underpinned by Shariah principles will enable participants of the Islamic financial system to align their practices and expectations accordingly when undertaking Islamic financial businesses and transactions.” International Islamic Banking Liquidity Management Corp (IILM) chief executive officer Dr Rifaat Ahmed Abdel Karim, who also presented a paper at the same forum, said one of the distinctive features of the IFSA 2012 is that it statutorily enforces management of the Shariah non-compliance risk.

He said it also requires Islamic financial institutions to ensure at all times that their aims, operations, business, affairs and activities are in compliance with Shariah. The act requires that any failure to abide by the statutory requirements has to be immediately notified to BNM as the regulator and the Shariah committee of the financial institutions.

“Any person, including a financial institution or its directors, controllers or officers that contravenes these requirements is considered to have committed a criminal offence,” he said.

[The Malaysian Reserve, Feb 6, 2013]

PHOTO: Courtesy of INCEIF

Bank Islam lodges 2nd police report

Bank Islam lodges 2nd police report

By Sathish Govind

Bank Islam Malaysia Bhd (BIMB) said that it has filed two police reports against Azrul Azwar Ahmad Tajudin who was suspended as chief economist last week.

Azrul Azwar was suspended after allegedly breaching the bank’s internal policies. BIMB had said earlier said that it was conducting an internal investigation.Azrul Azwar predicted in a Singapore forum this month that Prime Minister Datuk Seri Mohd Najib Razak who must dissolve Parliament by April 28, for polls, could narrowly loose Malaysia’s general elections as one of the three possible scenarios, the Singapore Straits Times reported on Jan 11.

The bank had reiterated that the suspension is due to Azrul Azwar’s violation of the bank’s internal policies, the details of which have been conveyed to Azrul Azwar in a show cause letter, handed to him on Jan 17, 2013. The bank said that in the course of its investigation into these breaches, the bank discovered evidence of other violations which warranted them to make a police report on Jan 18, 2013, and upon further investigations, the bank lodged a second police report yesterday.

Meanwhile, Azrul Azwar in a statement said that the allegation contained in the police report made by BIMB does not constitute any criminal offences.

(The Malaysian Reserve,  Jan 23, 2013)

Islamic banks ‘should focus more on quality growth’

Islamic banks ‘should focus more on quality growth’

By  Azli Jamil

Mergers and acquisitions, quality of talents and embracing technology are key areas for Islamic banks to move forward, in addition to focusing more on quality rather than percentage of growth.

“There are 13 banks that are big with more than US$1 billion [RM3.09 billion] each in equity whereas the rest of the industry is small, lacking scale,” Ernst & Young (E&Y) partner, Islamic banking excellence centre, Ashar Nazim told The Malaysian Reserve last week.

“There are too many banks out there. Therefore, consolidations and mergers is the way to go in moving forward,” said Ashar. “The industry is still young and it has learnt from its mistakes. It is emerging from a state of self-denial after the international crisis. There is a long way to go.”Ashar added that Malaysian banks are ahead of the pack in terms of the scale some of them have achieved.Commenting on talents, Ashar said: “Most Islamic banks are led by bankers that were previously conventional bankers and some have reached their retirement age. This industry is a young industry that needs entrepreneurial fresh blood to drive it forward.”

He added that the use of technology is sub-optimal because no information technology vendors out there are truly syariah-compliant and have been vetted or certified by the global standard setting board.

“They are mostly conventional core banking solutions which have been adapted for Islamic banks. That is a major limiting factor for Islamic banks and that drives their operating costs much higher than conventional,” Ashar said.

Regarding quality of growth, Ashar said: “Initially, it used to be important because it was a young industry. It was trying to establish itself and to prove a point that it is not a fad and is here to stay.“Now, whether the growth rate of 19% or 20% or 22% is less relevant. What is more relevant now is the quality of growth.”According to E&Y’s World Islamic Banking Competitiveness Report 2013, global Islamic banking assets had an average annual growth of 19% over the last four years and are set to cross US$1.8 trillion (RM5.56 trillion) in 2013, up from the US$1.3 trillion of assets held in 2011.

Synthetic instrumentsThe report added that the top four market accounted for 84% of industry assets and Islamic banking grew 50% faster than the overall banking sector.Nonetheless, the report said that the average return on equity at 12% was lower than the 15% registered for conventional banking.“Islamic banks are 20% to 25% less profitable than conventional banks, but the more worrying factor is that this is because of all factors that are controllable,” said Ashar.

“Being syariah-compliant should mean that you are more profitable because you are better linked to the real economy and you are into socially responsible businesses,” he added.Ashar said that for Islamic banks in Malaysia to grow from its current US$120 billion-US$130 billion industry to a 40% market share of the industry by 2020, banks have to “optimise the balance sheet to be more capital friendly”.

He added that Islamic banks have to understand the customers better because as the conventional banks “are bigger, well entrenched, understand their customers better and as everyone agrees, they have a better service culture.

That is where Islamic banks slacked. “Islamic banks have so far failed to penetrate the mainstream segments to its fullest potential.”

Ashar said Islamic banks should look at their retail banking business and how they acquire and serve their customers.He added that many customers of Islamic banks are deposit bank customers and have not taken the financing part either because of lack of awareness or a number of other reasons.

“Clearly there is an opportunity to increase penetration with existing customers,” Ashar said.Commenting on the new Islamic Financial Services Act 2012 which will statutorily enforce management of syariah-non-compliance risk and requires Islamic financial institutions to ensure at all times that their aim, operation, business, affairs and activities are in compliance with syariah, Ashar said: “It will help the international industry move towards harmonisation because the gist of the act is that Islamic banking business should be more syariah driven, syariah-based instead of just having synthetic instruments.

”According to Bank Negara Malaysia’s website, there are 16 Islamic banks operating in Malaysia, 10 locally-owned with the remaining six that are foreign-owned.

(The. Malaysian Reserve,  Feb 18, 2013)

HUMAYON: Cultivate a culture of save first, spend later

Cultivate a culture of save first, spend later

It is certainly true that emphasis on innovation in development of Islamic financial products has receded in the wake of current financial crisis in the developed economies of the world, especially the US and the European countries. It is primarily because of the criticism of irresponsible innovation in conventional banking and finance, which has been blamed for malaise one may observe in the well-developed financial markets around the world.Financial derivatives and structured products in particular draw a major share of this criticism. Consequently, financial regulators have gone back to drawing boards to redraw regulatory maps to restrict what is being termed as irresponsible innovation.

Given this focus on innovation and the born again urge for regulation, one may ponder over the optimum levels of regulation and innovation to ensure that the growth in Islamic financial sector is not unnecessarily hampered by over-regulation.

One message that one may draw from experience of the last 20 years of financial innovation is that moving the financial sector away from the real economy is not a good idea at all. Islamic economists have for last 30 years been arguing against dichotomy between financial sector and the real economic activity.

Any innovation that involves trading in debt (eg creating debt from debt and buying and selling debt instruments), over-reliance of insurance (ie shifting risk from one party to another in the financial markets, without actually reducing the volume of risk), and creation of money through interest rate mechanism is bound to result in financial bubbles that destabilise an economic system.Islamic banking has shown impressive growth in Malaysia and the Bank Negara Malaysia has played an instrumental role in ensuring the smooth running of Islamic banks and financial institutions in the country. It will only be a natural expansion of the growth story of Islamic banking, if Islamic banks and financial institutions start promoting a culture of saving first and spending later. This is not only in line with the Islamic emphasis on prudence and living in one’s own means, but also is required for sustainable macroeconomic growth.

On a systemic level, any kind of budget deficit (especially large government budget deficits) is not self-sustainable and, hence, caution must be exercised to over-spend. Any innovation in financial services, which encourages spending first to save later is dangerous, and has adverse implications for future generations. It is, therefore, important to encourage savings with the help of innovative financial products so that the future generations benefits from the savings of their predecessors.One such model could be based on the idea of micro savings and micro investments.

While microfinance has been used as a tool for promoting financial inclusion in a number of countries, it has rather limited relevance to the Malaysian economy wherein in abject poverty does not pose as big a threat as in many other Islamic countries.

Micro savings and micro investments are on the other hand relevant to the needs of a growing economy. It is, therefore, the time now to develop micro investment programmes that must encourage individuals and households to save small amounts over significantly long time periods. These small savings and micro investments can be encouraged with the help of strong incentivisation programmes.

Prizes and rewards are one way of encouraging people to save more and for longer time periods. Prize-based saving schemes and loyalty programmes as devised by businesses (eg air miles, reward points etc) may be used to structure innovative financial products.

For long-term micro savings and investments, it is important that strong regulatory frameworks are developed to ensure safety of such savings by way of investing them prudently in long term infrastructure projects.

In most developing countries, including many emerging markets, legal structures and property rights regimes are either non-existent or underdeveloped.

Hence, governments must focus on bringing legal reforms to accommodate such a change. This will indeed give rise to a new range of financial products that will not only deepen financial markets but also create and maintain the desired link between finance and economy.

(Dr Humayon Dar, chairman of EdBiz Corp Ltd, is also an adjunct professor at International Centre for Education in Islamic Finance. This article appeared in he Feb 18, 2013 issue of The Malaysian Reserve)

HUMAYON: New liquidity tool needed for Malaysian Islamic banks

New liquidity tool needed for Malaysian Islamic banks

Malaysia has emerged as a front-runner in the global Islamic financial services industry, with the state of the art infrastructure and unparalleled government support. With the development of Commodity Murabaha (CM) transactions on Bursa Malaysia under its Bursa Suq Al Sila’, it attempted to snatch away the business of liquidity management by Islamic banks from the London Metal Exchange (LME).

While a one-step forward from the LME CM practice, Bursa Malaysia’s Suq Al Sila’ necessarily represents the case of trading in commodities with complete irrelevance of commodities to the intended outcome, which is no more than exchange of cash between two participating banks.The practice of Islamic banking cannot be criticised because of obvious advancements one may notice in Islamic banking in the recent past. The most recent development in Malaysia is the issuance of new guidelines by Bank Negara Malaysia (BNM) on the use of Bai Ina in Islamic banking transactions. The observance of new restrictions will certainly enhance the Shariah authenticity of Islamic financial products in Malaysia.

It is also needed to bring the practice of Islamic banks closer to the real economic transactions. Bringing the liquidity management and treasury operations of Islamic banks closer to the real economic activity can serve this purpose.

Malaysia, being an unchallenged global leader in Islamic banking and finance, is well positioned to develop a new model of Islamic banking, which must be emulated by other countries that aspire to develop Islamic banking.Crude palm oil, rubber and tin (which is a dying industry) sectors can be reinvigorated with the help of Islamic banks.

While the front side of Islamic banking can continue to serve the households and small businesses, the strategic sectors like above should be provided a back-door access to cheaper credit through capital markets and treasury operations of Islamic banks.One way of doing so is by developing a sukuk platform for strategic sectors. The proposed sukuk platform should allow corporates and commodity growers in the strategic sectors to issue small tranches of sukuk for meeting their working capital requirements. These sukuk must be issued on tangible assets like inventories and other goods and services, so that they are fully tradable from a Shariah viewpoint.

BNM can play an important role in promoting this instrument by binding Islamic banks and financial institutions to buy certain amount of the sukuk by using a proportion of their proprietary funds. While listed and traded on Bursa Malaysia, these sukuk will allow the participating banks to buy and sell them in the market, as part of their liquidity management operations.

Such an instrument will allow Malaysia to attract funds from other parts of the world for meeting working capital financing of their strategic sectors. These sukuk, being a liquidity management instrument, will allow the businesses in the strategic sectors to have cheaper access to financing, as compared to the current rates they have to pay to the banks offering them overdraft facilities.The proposed sukuk can be based on a variety of Shariah principles, but it is preferred that they are issued on the real assets like commodities and other manufactured goods.

Such instruments will be fully tradable from a Shariah viewpoint and hence are expected to draw interest from the Middle Eastern investors. Other alternative structures could be based on a Salam (an Islamic contract the allows a seller to sell something before it may come into existence, but should ordinarily be available in the market).Istisna’, or commissioned manufacturing, is another contract that may be used as a basis for such instruments. However, the Salam and Istisna’ based instruments are not deemed tradable in the secondary markets in the Middle East, and hence will be limited in their usage by Islamic banks and financial institutions in Malaysia.

As long as these instruments give the funding benefit to the businesses in the strategic sectors, the debate on whether they are tradable in the secondary market can be extended without limiting their use. This will be similar to the approach taken by BNM, which promoted the use of Bai Ina with some relaxed conditions and tightened the screw only when it deemed that the market would not be adversely affected by such a decision. 

(This is the first enty for Dr Humayon Dar's column in The Malaysian Reserve,  Jan 21, 2013. He is chairman of EdBiz Corp Ltd and an adjunct professor at International Centre for Education in Islamic Finance, INCEIF.)