Monday, June 2, 2014

BADLISYAH: Sound leadership needed in Islamic finance

First of all, I would like to express my sadness at the passing of the late Ruler of Perak, Almarhum Sultan Azlan Muhibbudin Shah last week.

He was the exemplar of leadership in Malaysia for decades not just as a Ruler but also as a consummate professional in the Malaysian Judiciary and the Malaysian sports fraternity. He was one of the most respected and well-loved Sultans that Perak has ever had.

As a Perakian, I mourn the loss of a great man but at the same time I rejoice as we welcome the anointment of a new Ruler of Perak, Sultan Nazrin Muizzuddin Shah. I have had the opportunity to work alongside His Highness in the realm of Islamic finance in his capacity as the ambassador of the Malaysia International Islamic Finance Centre. He has been an inspirational and exemplary leader to many of us in the Islamic finance industry.

I am looking forward to His Highness able and wise leadership to help steer Perak Darul Takzim to greater heights. And I pray and hope that His Highness will continue to lend the Islamic finance industry his support and most importantly his voice to the cause. We still need His Highness leadership in this space. Daulat Tuanku!

Talking about leadership, Islamic finance as a growing component of the Malaysian and global financial markets need to have strong and sound leadership. For us to be able to build leadership strength in our ranks, we first must identify what elements or aspects of leadership that are critically needed and valued in the industry and for what roles.

There are many key leadership roles in Islamic finance such as CEOs, CFOs, chief shariah officers (CSOs), COOs, chief people officers, chief technology officers, chief information officers, chief compliance officers, chief auditors as well as the various other general and line managers.

This whole thing may look obvious but it is not as easy as it seems considering the lack of talent with the right skill sets for Islamic finance in the financial market. It has caused many organisations within the Islamic finance industry to spend enormous sums of money and time trying to define needed competencies for the various leadership positions found. It makes leadership management within Islamic finance more difficult when organisations involved in the industry do not have effective organisational structure and the right focus.

To put it simply, the industry leadership in Islamic finance today is weak because of the following:

1. We lack the talent with the right competencies. Many in positions do not have the right skills sets or competencies to provide effective leadership.

2. And when we are successful in identifying the right talent, we put them in positions that are not fully empowered to provide effective leadership.

It is not enough to just find the right talent with the right competencies. Leadership in Islamic finance can only become effective if these talents are put in leadership positions that are appropriately empowered within their organisations.

Let’s analyse some of the different organisations that we have in the markets to identify the issues that prevent effective leadership in Islamic finance today.

Standalone Islamic bank:

A standalone Islamic bank rightfully has all the key positions in place. However, we still have leadership failure because of the following:

1. Practically all the “C” level executives are talents who are educated, trained and experienced in conventional “riba” based financial market.

2. The people who know Islamic finance do not have the needed leadership skills or experience to take up “C” level positions.

3. In some organisations in the Middle East, the Shariah Committee comprising pure Shariah scholars sit above the Board of Directors and they dictate the course of business when they are not fully equipped with the right competencies to determine policies and directions of the organisations.

4. In some organisations, CSOs are not even members of the management committee.

5. In some organisations in the Middle East, the competent CEOs have to report to both the Board of Directors and Shariah Committee/Board on equal basis thus getting confused as to what he or she can do and needs to do. Focus goes out the window due to misaligned direction.

Islamic bank subsidiary of a conventional financial group:

1. Practically all the “C” level executives are talents who are educated, trained and experienced in conventional “riba” based financial market.

2. The people who know Islamic finance do not have the needed leadership skills or experience to take up “C” level positions.

3. In some organisations in the Middle East, the Shariah Committee comprising pure Shariah scholars sits above the Board of Directors and they dictate the course of business when they are not fully equipped with the right competencies to determine policies and directions of the organisations.

4. In some organisations, the “C“ level executives of the parent company actually dictate the policy and business direction of the Islamic bank subsidiary even when the “C” level executives of the subsidiary are competent talents.

5. In some organisations, them competent talents in the Islamic bank subsidiary are actually only responsible for Shariah governance and nothing more.

They are not involved in business direction and development. And even in this situation the CSOs are not part of the key management committee member.

6. In some organisations, the competent CEO is not even a member of the key management of the bigger financial group and does not report to the group CEO or group MD but to some second or third line management below the group CEO/MD.

For Islamic finance to go beyond what it is today, there is a need to correct the leadership structure in many of the organisations within the industry and fit them with the right talents. The industry cannot afford to rely on the leaderships of only the few organisations that have got their structure right.

[Badlisyah Abdul Ghani’s column, STRAIGHT TALKING, in The Malaysian Reserve on 2 June 2014. Badlisyah is Executive Director and CEO of CIMB Islamic Bank Bhd]

REUTERS: Sukuk the missing link in Bangladesh Islamic finance sector

Bangladesh has developed a sizeable Islamic finance industry but a lack of sharia-compliant instruments such as sukuk is limiting further growth of the sector, a report by a standard-setting body found, reports Reuters (2 June 2014).

With a predominantly Muslim population of 160 million, Bangladesh has developed Islamic finance with only marginal regulatory adjustments; the industry has doubled in size in the past four years.

The central bank has a small short-term sukuk (Islamic bond) programme which issues six-month tenors to help Islamic banks manage their liquidity, but a wide range of tenors is not available and there are no corporate sukuk, according to the report.


Sukuk would help to diversify funding sources and make up for the limited scope of the Islamic money market, but issuance of sukuk would require more specific rules, said the report by the Malaysia-based Islamic Financial Services Board (IFSB).

"The larger policy issue in Bangladesh is the adequacy and scope of the legal and regulatory framework in providing an appropriate enabling environment," it said.

Islamic banks, which follow religious principles such as a ban on interest payments, now represent 18.9 percent of total bank deposits in Bangladesh, the report said. Bank deposits, excluding interbank deposits, totaled 6.33 trillion taka ($82 billion) in March this year, according to the central bank.

The banks include Islami Bank Bangladesh Limited (IBBL) , set up in 1983 as the country's first Islamic bank and its largest privately owned commercial bank.But Islamic banks ran into liquidity constraints in 2010 when their combined advances-to-deposit ratio exceeded a ceiling set by the central bank, prompting the regulator to monitor their liquidity profiles to detect maturity mismatches.

This problem was addressed in 2011 when the central bank launched an Islamic interbank money market, but the dominant share of IBBL limits the market's efficiency, the report said.

"Its relative size may impact on the effectiveness of the interbank market, and the central bank should take a further look at this issue."

The central bank has set statutory liquidity requirements for Islamic banks at half of what is required for conventional banks, boosting their profitability but leaving the core issue of the money market's depth unaddressed.

"This privilege has the critical flipside that the instruments of Islamic banks for their liquidity risk management are very limited. In cases of sizeable and unexpected deposit withdrawals, Islamic banks may face a liquidity crunch."

The report also said a sharia-compliant lender-of-last- resort facility and Islamic deposit insurance should be developed by regulators. The central bank, which did not respond to Reuters queries about its Islamic finance strategy, has said it plans to expand its short-term sukuk programme.

"Introduction of another similar instrument of three-month tenor for further facilitation is at the final stage," central bank governor Atiur Rahman said in a speech in April.

OTHMAN: Can an IT system be certified as halal?

I enjoy pre-sales presentations. I have presented to banks in Malaysia, Indonesia, Brunei, Thailand, Singapore, the Philippines, Sri Lanka, Kazakhstan, the United Arab Emirates, Bahrain, Jordan, Egypt, Iran, Sudan, Qatar, Oman and Saudi Arabia. While presenting the information technology (IT) system flexibilities, features, and functions to my audiences, I would explain which part of the system that is sensitive to Shar iah requi rement s. I would also emphasise as to how the system supports a variety of Islamic products and services.

One common query: Is the IT System Shariah-compliant? To my amusement, some people even ask whether the system had been certified halal? Some even request proof ofShariah certification papers. Can an IT system (software) be certified halal or Shariahcompliant?

Here are my two sen worth as an IT specialist who is passionate and academically qualified in Islamic banking and finance. In my opinion, there is no such thing as a Shariah-compliant IT system.

The IT system is only an enabler to support financial institutions to deliver products and services. The system does not dictate the features and functionalities of banks’ products and services. Rather, it is the other way around. The requirements of products and service of Islamic banks dictate system functionalities.

Before Islamic banks can offer products and services to the public, they have to obtain the approval of their Shariah boards. Shariah board members will scrutinise the products and services to ascertain whether they comply with their Shariah guidelines. Once endorsed by the board, the products or services are ready to be configured into the system.

Of course, the system would have to be built with features and functions to support the requirements of the products and services. Once configured into the system, system users will have to perform user acceptance test to verify that the system is behaving according to their requirements.

Based on my experience in implementing IT systems in many banks over the years, Shariah-compliant requirements is quite subjective as it depends on interpretations. It also depends, to a certain extent, on the strictness of the Shariah board members of the banks. This results in certain requirements being considered as Shariah-compliant in one bank but not in another. I have encountered various scenarios.

Take the case of the restructuring of Islamic financing. A local industry practice is that the bank and customer will sign a new set of legal documents when a financing account is restructured. This is to renew the contract (aqad).

While the signing of new legal documents is the common practice, I have encountered differing requirements on the system handling of restructured financing. One bank requires for the old financing account number to be retained while another bank requires a new account number to be generated. Both have valid arguments to support their requests.

Since the interpretations of Shariah requirements may differ from one bank to another, it is not practical to expect an Islamic banking IT system (a piece of software) by itself to be certified as Shariah-compliant. At best, the Islamic banking IT system can be made flexible with configurable parameters and workflows to cater for different “practices” of Shariah requirements.

In conclusion, while the IT system by itself cannot be certified as Shariah-compliant, the behaviour of an instance of IT system, duly configured with Shariah compliant products and services requirements, can be certified as Shariah-compliant through a comprehensive user acceptance test process.

[Othman Abdullah’s SHARIAH TECH column in THE MALAYSIAN RESERVE (26 May 2014). Othman is the Silverlake Group of Companies MD for Islamic banking, responsible for Silverlake Axis Integrated Islamic Banking Solution product development, marketing support and implementation services]

Indonesia prepares Islamic finance 
road map

Indonesia’s capital market regulator is preparing a five-year road map for Islamic finance to expand the industry in Southeast Asia’s largest economy, reports the Jakarta Post (30 May 2014).

The plan will help boost the number of Islamic capital market products and expand the industry’s investor base, the Financial Services Authority (OJK) said in a statement.

The OJK added that it was seeking market input for the road map and would set up discussion groups with stakeholders, including the central bank, the Finance Ministry, the Indonesian Stock Exchange (IDX) and the country’s national sharia board.

It also said it was refining rules for the issuance of Islamic securities, which it expected to be completed this year. These would include details on the settlement of Islamic financial transactions, disclosure requirements for sukuk (Islamic bonds) and guidelines for sukuk trustees, Bloomberg reported.

Indonesia has 11 Islamic banks and 23 Islamic windows operated by conventional banks. Their combined Islamic banking assets grew 24 percent to Rp 242 trillion (US$20.8 billion) last year, giving the sector a 4.9 percent share of total banking assets, OJK data shows.

Last month, the OJK said it would implement risk management guidelines for Islamic insurance companies and that it was now a full member of the Malaysia-based Islamic Financial Services Board, a major standard-setting body of the industry.

The OJK took over the supervision of banks, brokerages and insurance firms from the central bank and Capital Market and Financial Institution Supervisory Agency (Bapepam-LK) in January this year.