Monday, March 31, 2014

TMR: BNM SAC given 90-day deadline to revert

By Habhajan Singh

Bank Negara Malaysia (BNM) has given itself a 90-day deadline to revert to the courts or arbitrators when asked to provide Shariah advice on Islamic financial matters.

This is mentioned in the recently published manual for courts and arbitrators on how to refer to the Shariah Advisory Council in Islamic Finance (SAC) of the central bank which is available on the BNM website.

In the document dated Feb 10, the SAC takes note its task was only to ascertain the Islamic law relating to issues raised by the courts or the arbitrators.

“The SAC does not have the jurisdiction to make findings of fact or to apply a law on the facts and make a decision, whether on a certain issue or for the case at hand because those matters are within the jurisdiction of the court or arbitrator,” it says.

This is in line with the Central Bank ofMalaysia Act 2009. Section 51 (1) of the act states the central bank ‘may establish a Shariah Advisory Council on Islamic Finance which shall be the authority for the ascertainment of Islamic law for the purposes of Islamic financial business’.

One of the functions of the SAC is, as per Section 52 (1), to ’ascertain the Islamic law on any financial matter and issue a ruling upon reference made to it’.

The recent manual lays out the processes for referral from the courts of law or abitration as provided under Section 56 of the same act.

Section 56 (1) states: ‘Wherein any proceedings relating to Islamic financial business before any court or arbitrator any question arises concerning a Shariah matter, the court or the arbitrator, as the case may be, shall — (a) take into consideration any published rulings of the Shariah Advisory Council; or (b) refer such question to the Shariah Advisory Council for its ruling’.

The manual says when referring a Shariah matter to the SAC, the court or the arbitrator is first required to refer to its published decisions.

They can also contact the SAC secretariat on their initial enquries or to get further information on the earlier decisions.

The manual also provides guidance as to the kind of matters that can be referred to the SAC.

It states, in point No 5, that only Shariah-related matters arising in a court proceeding related to Islamic finance business should be referred to the SAC.

In the next point, the document deals with what constitutes Shariah, falling back to a definition decided at the SAC meeting on Oct 19, 2011. It states: “Questions on Islamic law for matters related to Islamic finance that involves subjects that have or have yet to be ruled on by the SAC. Those questions include, but are not limited to, Islamic finance business aspects like business structure, products or services, implementation or operations, terms and conditions or documentation.”

The above is a translation of the original document which is in Malay, with the English version yet to be published.

On the effects of the Shariah rulings, Section 57 of the same act above states that SAC rulings made in reference of the courts or the arbitrators ‘shall be binding on the Islamic financial institutions’.

Pakistan tightens rules on Islamic banking windows

Pakistan's central bank has issued new rules for the operation of Islamic banking windows, aiming to strengthen their role in the world's second-most populous Muslim nation, reports Reuters (28 March 2014).

The new requirements come at a time when Pakistan is stepping up efforts to develop Islamic finance, prompting several banks to expand their operations in the sector.

 Bank will have to obtain written approval from the State Bank of Pakistan before opening each Islamic window, as well as providing the regulator with additional details on staffing, training and marketing arrangements, the report adds.


Islamic windows allow conventional lenders to offer Islamic financial services, provided client money is segregated from the rest of the bank.

As of December, Pakistan's full-fledged Islamic banks had a combined network of 767 branches while conventional banks had 441 Islamic branches and 96 sub-branches, the central bank said.

Different approaches to the Islamic window format have emerged over the years: In Oman windows are allowed only through standalone branches, while in 2011 Qatar banned Islamic windows outright.
The rules could help consumers better distinguish Islamic financial products from conventional ones, improving the industry's perception and overall uptake.

Regulators in Pakistan hope to expand the industry's branch network and bring Islamic banking' s market share to 15 percent of the system by 2018.

As of December, Islamic banks held assets worth 1 trillion rupees ($10 billion), a 21.1 percent increase from a year earlier and representing 11.2 percent of total banking assets.

Some conventional lenders are also opting to convert their operations into full-fledged Islamic banks.
Last week, the majority shareholder of Karachi-based Faysal Bank said it would convert the bank into a full-fledged Islamic unit in the next two to three years.

Last year, Summit Bank said it would convert itself into a full-fledged Islamic bank over a three- to five-year period. It opened its first Islamic banking branch earlier this month. 

PAKISTAN: Faysal Bank to turn to the Islamic banking system

Faysal Bank is going to turn itself into a full-fledged Shariah-compliant institution in the next two to three years, reports The Express Tribune (28 March 2014).

Quoting the CEO of Bahrain’s Ithmaar Bank – which owns a 66.7% stake in Faysal Bank along with associated companies, undertakings and related parties – news agency Reuters has reported the Gulf-based Islamic retail bank wants to consolidate its business line.

According to Ithmaar Bank CEO Ahmed Abdul Rahim, the Islamic bank wants to extract up to $35 million in savings from a turnaround plan after posting a net loss of $79.3 million last year.


Faysal Bank operates 216 branches for conventional banking and 58 branches for Islamic banking. It is in discussion with the State Bank of Pakistan (SBP) on the conversion of the entire operations to Shariah-compliant banking, Rahim told Reuters. In case Faysal Bank gets regulatory approvals, its conventional banking arm will merge into its Islamic banking operations.

According to Standard Capital Securities Research Analyst Rajesh Kumar Maheshwari, earnings per share of the bank are expected to increase from Rs1.77 in 2013 to Rs3.54 in 2014. Faysal Bank’s profit after tax for 2013 remained Rs1.85 billion, which was 30.28% higher than the net profit recorded in the preceding year.

The majority shareholder intends to add two more members to Faysal Bank’s board while its shareholding in the bank is expected to remain unchanged.

After increasing at an annualised rate of 9.95% for the last three years, total assets of Faysal Bank stood at Rs355.2 billion at the end of 2013. The annual increase in deposits has been 11.55% during 2010 and 2013.
Maheshwari believes Faysal Bank is focusing on increasing its margins by acquiring low-cost deposits and strengthening its current and savings accounts (CASA) mix. “As per the 2013 report, the bank was able to improve its CASA mix to 64.9% against 60.9% reported in 2013,” he said.

He added that Faysal Bank has the highest advances-to-deposits (ADR) ratio of 68% among middle-tier banks given that their ADR ratios hover around 45%-50%. “This is a double-edged sword for Faysal Bank, as it needs to jack up its deposit base,” he said.

He noted that Faysal Bank has benefited by its growing Islamic banking segment, which posted 36% year-on-year increase in deposits. Referring to the absence of the minimum rate of return condition on Islamic deposits, he said the substantial growth in this segment will help attain Faysal Bank low-cost deposits.

The market share of Islamic banking assets in the overall banking industry increased from 9.5% in September 2013 to 11.2% at the end of 2013. Similarly, the market share of Islamic banking deposits in the total banking industry increased from 10.1% by the end of September to 12.1% on December 31.

Bank of Korea joins Islamic finance body IFSB

South Korea's central bank has joined the Islamic Financial Services Board (IFSB), one of the main standard-setting bodies for Islamic finance, as regulators across Asia build closer ties to the growing industry, reports Reuters (28 March 2014).

Guidelines issued by the Kuala Lumpur-based IFSB are gaining prominence as the industry takes a greater share of the banking sector in several majority-Muslim countries and expands into new markets.

The Bank of Korea is the 59th regulatory body to join the IFSB, bringing total membership to 184, joining the likes of the central banks of Luxembourg and Japan and the monetary authorities of Hong Kong and Singapore.

The move could augur stronger links between South Korea and Islamic finance hubs in southeast Asia, the report added.



South Korea's Export-Import Bank of Korea already has a bond programme in Malaysia that can issue Islamic bonds, or sukuk, although it has yet to tap the market.

This week, Hong Kong lawmakers passed a bill that will allow the AAA-rated government to raise around $500 million via sukuk, or Islamic bonds.

In a separate statement, the IFSB also adopted a revised guideline on the supervision of Islamic finance institutions, helping tighten regulatory oversight of industry practices.

The latest update complements stricter Basel rules, agreed globally to make banks safer after the 2007-09 credit crisis.

In the past two years, the IFSB has issued separate guidelines on liquidity risk management, stress testing and capital adequacy.

Sunday, March 30, 2014

BNM: Setting the right framework for Malaysia’s future economy

The state of the economy affects both the conventional and the Islamic financial institutions. Here's are views of a senior Malaysian central banker on the state of the economy. It's taken from THE MALAYSIAN RESERVE, a daily business/finance newspaper. 

By Tanu Pandey

At a time when the advanced economies are back on the path of recovery after the financial crisis, the period ahead will be one of transition for the economy, and consequently for macroeconomic policy.

This changing environment carries with it some risks. Bank Negara Malaysia (BNM) has been monitoring developments in the domestic economy and financial system to ensure that risks are dealt with preemptively.

“The advantage of addressing them (risks) early is that they never evolve to become vulnerabilities, especially when circumstances turn adverse,” said BNM deputy governor Dr Sukhdave Singh in a recent discussion on the country’s economy organised by Persatuan Ekonomi Malaysia on the day after the central bank released its annual report.

Here are excerpts from Sukhdave’s comments on the issues.

Dealing with a Financial Crisis

We do not know if there is going to be a crisis in the future, and if there is one, where it would happen. But as an open economy, any crisis that affects the major economies will eventually reach our shores. There isn’t much we can do about that. But we can make our economy as resilient as possible in facing such an external shock.

That includes addressing any vulnerabilities that may be present in our economy. That is why we have acted preemptively to address the issue of household indebtedness. That is why we ensure that our financial system is sound and able to withstand shocks. It is why the government is undertaking the fiscal reforms.

High Household Debt Levels

We expect that the ratio of household debt to gross domestic product will continue increasing because of demographic factors, urbanisation and other factors. We have undertaken measures to ensure that the banks are being prudent in the extension of loans to the household sector.

For example, following the issuance of our responsible lending guidelines, the overall quality of bank lending has increased. Therefore, while the level of household indebtedness may continue to grow, the overall quality of the borrowers is improving due to the more rigorous vetting process for the new borrowers. Our supervision teams are also ensuring that the financial institutions have the appropriate standards of credit assessment and that they have adequate buffers.

Subsidy Rationalisation and its Impact on Prices

We have incorporated some assumptions on price adjustments in our inflation forecast, but frankly, we do not have any advance information of when and by how much the government will reduce subsidies.

These subsidies have grown very large and removing them too rapidly will have a significant negative effect on the economy and economic welfare. Therefore, these subsidies will have to be removed gradually.

From a macroeconomic perspective, the objective is to minimise the potential negative impact on economic growth and inflation. Unfortunately, there will be spillovers to the economy from the reduction in subsidies i n the form of higher prices for goods and services.

For example, higher fuel prices will have to work themselves through the economy. However, this should not be taken by some quarters as an opportunity to indulge in profiteering by increasing prices unreasonably using the pretext of the subsidy reductions. Such behaviour can best be countered through enforcement under legislations such as the Price Control and Anti-Profiteering Act 2011 and the Competition Act 2010.

The government is also undertaking mitigating measures to protect the welfare of the lower income groups, as for example through the fiscal transfers and the exclusion of many essential goods from the Goods and Services Tax that would be introduced in 2015.

The Need to Maintain Foreign Reserves

The ringgit is not a reserve currency and we do not conduct our international transactions in the ringgit. Our international payments and receipts are done using the major foreign currencies. As an open economy that has significant financial and trade flows with the rest of the world, we therefore need to hold adequate foreign exchange reserves to ensure that we are able to meet our international obligations and also to safeguard our economy against shocks such as those created by volatile financial flows.

A component of our reserves is solid in the sense that it is built from past current account surpluses. But there is also a volatile component which relates mainly to short-term capital flows. For long-term resilience, we need to ensure that we have adequate solid reserves to meet our real and financial obligations to the rest of the world over a period of time.

With the growing presence of non-resident funds in our financial markets, having adequate reserves is important to ensure that if there is a sudden outflow of these funds, it would not lead to sharp and disruptive changes in the exchange rate.

Therefore, the foreign exchange reserves meet the needs of the economy and also act as an insurance policy for the country. We are comfortable with the current level of these reserves.

Monetary Policy Action to Arrest Inflation

At this stage, it is cost related factors that are driving the increase in the inflation rate. There are no signs that secondary price increases are occurring and we do not yet see signs that the inflation is becoming more persistent. Therefore, at this stage we do not see a role for monetary policy.

However, we are being vigilant with our surveillance. We do not want inflation to become high before acting. Given that monetary policy has a 12 to 18 months lag before changes in it have the desired impact on macroeconomic variables, we would need to act preemptively if we see that the inflationary pressures are becoming more persistent.