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’.

[THE MALAYSIAN RESERVE, 31 March 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.

[THE MALAYSIAN RESERVE, 24 March 2014]

TMR: New rulings on Islamic banking raise concern

 

By Habhajan Singh

Islamic banks and takaful operators in Malaysia are now in the middle of its largest product migration to comply with a new set of legislation passed last year, with some quarters fearing there may be a flight of capital to the conventional banking side.

There is concern on the ground that some customers may return to conventional banking products if they are not comfortable with the new products to be released by the Islamic banks to comply with the requirements of the Islamic Financial Services Act (IFSA) 2013 [pdf version here].

A key focus for Islamic bankers at the moment is Bank Negara Malaysia’s (BNM) “restrictive” proposed guidelines for Shariah contracts used to structure savings, the mainstay of banks as they pool savings from customers and mobilise them for other productive purposes.

The specific concern, according to Islamic bankers who spoke to The Malaysian Reserve, is the ability for the banks to pay hibah, or gift, to holders of savings accounts structured under the Shariah principle of wadiah (custodian).

“The industry is still exploring the various options. Some changes to the proposed guidelines are required.

We will have to wait and see how this pans out. Until then, there is no real solution for the savings products,” said HSBC Amanah Malaysia Bhd CEO Rafe Haneef (picture).

Without the ability to pay hibah, the savings accounts may no longer be attractive to customers, unlike the savings accounts on the conventional side which promises them a certain amount of return.

CIMB Islamic Bank Bhd CEO Badlisyah Abdul Ghani said Shariah allows for the giving of gifts at the full discretion of the bank including under wadiah.

“Gifts are made by all Islamic banks in charity works, for staff welfares, for customer loyalty and for many other things. Wadiah with deposit customers is just one of many areas that we provide gifts or hibah.

“We are working with the regulator on the new exposure draft on wadiah and hibah to ensure that, for wadiah deposit products, they still function as they do now,” he said.

“Wadiah has been there for many years and has proven to be the best structure for an Islamic savings product. There will be enhancements to it, but I don’t think the hibah framework will be disallowed.”

Wadiah contract is a mechanism that enables a person to entrust his asset to another person for the purpose of safe keeping, according to the BNM ShariahResolution in Islamic Finance (2nd edition, 2010).

As a reward and token of appreciation for the utilisation of the deposit, the Islamic banking institution, at its discretion, may give hibah to the customer, it added. However, that may see some changes under a new draft exposure and its related guidelines now under review.

The central bank may provide some clarity on the issue when it releases the BNM Annual Report for 2013, scheduled for Wednesday.

On the fears of capital flight to the conventional side, industry sources acknowledge that there was a possibility, but do not expect it to be an issue of major concern. “If replacement of products is in place, then there should be no concern (for capital flight),” said Badlisyah.

It is understood that the central bank is also keeping an eye on the possibility of the capital flight, either among Islamic banks itself, or between the Islamic banking and the conventional banking systems, as Islamic banks start introducing their new products.

“At the moment, there is nothing significant,” said an industry source.

Under the leadership of BNM governor Tan Sri Dr Zeti Akhtar Aziz, the central bank has pushed forward for some major changes in the regulatory landscape of the nation’s financial system.

Aside from IFSA, the other major legislation is the introduction of the Financial Services Act 2013. Earlier, Parliament had also passed the Central Bank of Malaysia Act 2009, which had instituted some significant regulatory changes to the Islamic finance landscape in the country.

Shariah experts in the field of Islamic finance attest to the major changes that are happening, especially with the advent of the IFSA.

“It’s a big shift from what it was to what it’s going to be,” said Dr Mohamad Akram Laldin, the ED of International Shariah Research Academy for Islamic Finance, which was set up by BNM six years ago. He said investment products, for example, are going to behave differently from how it was in the past.

“Take mudarabah products. In the past, such investment products come with a guarantee on the capital. In future, under IFSA, that will no longer be the case. Capital will no longer be guaranteed. Investors must be willing to take the risk that they may lose their capital,” he said.

[THE MALAYSIAN RESERVE, 17 March 2014]

TMR: Widening scope for Shariah-compliant financial tools

By Kazi Mahmood

The Islamic banking sector has enlarged its scope of business, covering a wider range of commercial needs for working capital and trade financing among others, said a report published by the Malaysian International Islamic Financial Centre (MIFC).

“Shariah-compliant financial solutions now range from working capital, trade financing, re-financing and capital expenditure needs as well as the household and the retail sector,” the report entitled "Shariah compliance in all matters, the priority of a robust Islamic finance ecosystem" said.

The report indicated the retail sector is well covered with Islamic financing products that meet their asset financing needs, such as home financing or car financing, personal financial and other retail liquidity needs.

In addition, the government and government-related entities have been actively tapping into the Islamic finance sector to raise funds to support their fiscal, revenue and infrastructure expenditures, it said.

The report offered an insight on the progress of the Islamic banking and financial sector in Malaysia in 2013.

As at the end of 2013, Malaysia’s Islamic banking sector held over US$130 billion (RM98.34 billion) in assets and the country has the largest and most liquid sukuk market with amounts outstanding over US$158 billion.

The sukuk market in Malaysia represents over 58% of the global sukuk outstanding.

Furthermore, Malaysia also has the largest Islamic funds sector (in terms of number of funds domiciled) with over US$16.3 billion of assets under management while it has the second-largest takaful market with total gross contributions estimated at over US$2.2 billion.

The Malaysian Islamic finance sector also provides lucrative investment opportunities to investors globally seeking healthy and ethical returns and over the years, the sector has attracted substantial inflows of funds from global investors, particularly from the Middle East.

Since the inception of the Islamic finance industry in Malaysia three decades ago, the country has successfully embarked on a number of strategies and initiatives to develop the industry.
Among these include the robust and sound development of a comprehensive Islamic finance ecosystem that guide the country’s
Islamic financial institutions in effectively managing the Shariah compliance of the operations.

“These have been critical in substantially attracting Islamic finance business in the country from both domestic and global stakeholders,” the report indicated.

To date, Malaysia has the world’s most progressive Islamic finance marketplace, leveraging on the country’s long track record of over 30 years of experience in building a successful domestic Islamic financial industry, the MIFC said in the report published in late February 2014.

“Rapid liberalisation in the Islamic finance industry, coupled with facultative business environment have encouraged foreign financial institutions to make Malaysia their destination of choice to conduct Islamic banking business,” the report added.

[THE MALAYSIAN RESERVE, 17 March 2014]

TMR: Takaful Ikhlas targets 10% rise in policy holders

By P Vijian

Takaful Ikhlas Sdn Bhd expects its certificate holders’ base to expand by nearly 10% this financial year, from 1.8 million to two million.

Its president/CEO Abdul Latiff Abu Bakar (left in photo above) said the company’s products, both general and family takaful schemes, are well received by Malaysians, prompting the company to target good growth this year in terms of revenue and policy holders.

“We will be able to touch the two million mark this financial year and we are also expecting a very good financial result. We will surpass last year’s numbers in terms of gross revenue,” Abdul Latiff told the media in Kuala Lumpur last Friday.

The company recorded RM747 million in revenue in 2013.

Currently, Takaful Ikhlas which is the Islamic insurance unit of MRRB Holdings Bhd, has seen its market share touched 12% based on gross contribution and ranked third among the 12 companies in Malaysia. It is behind market leaders Etiqa Takaful Bhd and Prudential BSN Takaful Bhd.

Last year Takaful Ikhlas launched three new products — Ikhlas Capital Investment- Linked Takaful Plus, Ikhlas Premier Investment-Linked Takaful Plus and Ikhlas “ChoicePlus” Individual Medical Rider. The company offers 83 products in Malaysia.

For the fourth consecutive year, Takaful Ikhlas was awarded “The Best Takaful House” by Euromoney, a monthly business and finance magazine. The award ceremony was held in London in February.

Regional head for Asia Marcus H Langston said Malaysia’s Takaful Ikhlas is setting growth pace in Islamic finance industry.

“They are pushing new innovations and cross-border tie ups. There is a large growth potential….There is no close competition against Malaysia in the Asia region, particularly in terms of innovation,” Langston said after he presented the award to Latiff at the company’s headquarters.

[THE MALAYSIAN RESERVE, 11 March 2014]

TMR: Sumitomo Mitsui starts Islamic finance in Malaysia

By Sathish Govind

Sumitomo Mitsui Banking Corp (SMBC) said its wholly owned subsidiary Sumitomo Mitsui Corp Malaysia Bhd will dispense Islamic financial services as part of the initiative to strengthen SMBC’s operations in the Asia-Pacific region.

The ability of SMBC Malaysia to offer Islamic finance services in Malaysia, the key market in Asian Islamic finance, will translate into better services to meet client needs, contributing to the development of the financial markets in Malaysia, the bank said in a statement issued on Tuesday.

With the approval from Malaysian authorities on Feb 10, 2014, secured, SMBC Malaysia became the second entity in the SMBC group to offer Islamic finance services. The first was Sumitomo Mitsui Banking Corp Europe Ltd, the bank said.

SMBC Malaysia’s total assets as at Dec 31, 2013, stood at RM3.33 billion. The bank recorded pretax profit of RM23.5 million for the nine months ended Dec 31, 2013.

The bank said it foresees the growth of the Malaysian banking industry to remain stable for the coming years. For the financial year ending March 31, 2014, the bank will continue to offer basic commercial banking services such as loan, deposit, foreign-exchange, derivatives and cash management services to both Japanese and non-Japanese clients.

Total assets at Dec 31, 2013, stood at RM3.33 million, RM743.4 million higher compared to March 31, 2013.

Loans, advances and financing recorded an increase of RM275.8 million, followed by increases in deposits and placements with banks and other financial institutions of RM261.1 million, and cash and short term funds at RM206.4 million.

The Islamic finance market is continuing to expand mainly driven by the high economic growth of Muslim states, particularly in Malaysia which launched International Islamic Finance Centre Initiative in August 2006 and is playing a leading role in the development of Asian Islamic finance market as a major business hub.

[THE MALAYSIAN RESERVE, 13 March 2014]

Indian court: Fatwa cannot be forced upon people

By Habhajan Singh

The Indian judiciary had declared that fatwa issues by Muslim clerics cannot be forced upon people and the state has to protect persons who are harassed for not following such dictates, a move that throws another spanner into attempts to introduce Islamic finance in the country.



On Feb 25, India’s Supreme Court made the stand, which is similar in spirit in other Muslim nations, including Malaysia, while expressing reservation in interfering with Shariah courts.



Holding that it is a matter of choice for the people to accept fatwa or not, the Apex Court said running of institutions like Darul Qaza and Darul-Iftaa is a religious issue and the courts should interfere only when someone’s rights are violated by their decision, according to a report by the Press Trust ofIndia.

 [See also Times of India report here]

“We can protect people who are subjected to suffering due to this. When a pujari gives a date of Dushera, he cannot force someone to celebrate the festival on that day. If somebody forces them on you, then we can protect you,” a bench, headed by Justice CK Prasad, said after the petitioner pleaded that fatwa issued by clerics is unconstitutional, the report added.



Fatwa is a key component in Islamic finance. Islamic banks and takaful operators are required to operate in a manner that is compliant with Shariah.



Their products are required to be fashioned in consonance with Islamic laws. This badge of approval comes in the form of a fatwa from Shariah scholars who sit on the Shariah advisory boards of the individual islamic financial institutions (IFIs), including Islamic banks and takaful operators. However, IFIs are non-exsitent in India, a nation with a large Islamic minority, put at 138 million, or 13.4%, of its 1.03 billion population as per its 2011 census.



When asked to comment on the fatwa ruling, International Shari’ah Research Academyfor Islamic Finance (ISRA) ED Dr Mohamad Akram Laldin said the same applied in many Muslim countries.



“A fatwa is not binding until it becomes part of the law of the state or country. It is the opinion of the scholars and it cannot be enforced until it becomes law. So it is up to the individual to practice the fatwas,” he said in an email response to The Malaysian Reserve.



In Islamic finance, he said usually there are enabling provisions such as guidelines which say that the institutions are bound to implement the Shariah views of the Shariah board. “In case the institutions refuse there will be huge reputational risk to the institutions. The credibility of the institutions will be at stake,” he said.



ISRA was established in 2008 by Bank Negara Malaysia, the nation’s central bank which regulates the Islamic banking and takaful activities. The academy is charged to promote applied research in the area of Shariah and Islamic finance and also act as a repository of knowledge for Shariah views or fatwas.

 [THE MALAYSIAN RESERVE, 10 March 2014] 

TMR: AmIslamic Bank issues Malaysia’s 1st Basel III-compliant sukuk

By Farah Adilla

AMMB Holdings Bhd’s Islamic banking arm, AmIslamic Bank Bhd, had on Feb 28 issued a RM200 million Basel III-compliant Tier 2 Subordinated Sukuk Murabahah.

The bank claims it is Malaysia’s first Basel III-compliant Tier 2 Subordinated Sukuk issuance and the world’s first Basel III- compliant Tier 2 Subordinated Sukuk to be issued under the Shariah principle of Murabahah based on commodity trading.

In a statement last Friday, the company said the RM200 million Tier 2 Sukuk Murabahah, with a maturity of 10 years and callable at the end of year five, carries a semiannual profit payment of 5.07% per annum.

“This is a 30-year programme which will provide AmIslamic Bank greater flexibility to issue sukuk of varying tenures on a “need to” basis from time to time to fund its general working capital requirements that conform to Shariah principles at competitive pricing given its strong credit rating, underscored by its strengthening credit fundamentals and improving asset quality,” it said in the statement.

AmIslamic Bank was upgraded to AA2 by RAM Rating Services Bhd in November 2013 along with AmBank (M) Bhd and AmInvestment Bank Bhd.

The Tier 2 Sukuk Murabahah has been assigned AA3 rating by RAM Ratings, one notch below AmIslamic Bank’s long-term financial institution rating, which reflects their lower ranking in the priority of claims upon bankruptcy or liquidation, relative to senior unsecured creditors.

AmInvestment Bank acted as the sole principal advisor, lead arranger and lead manager for this Tier 2 Sukuk Murabahah (2014/2044) issuance which was made under the RM3 billion subordinated Sukuk Murabahah programme.

AMMB said the Tier 2 Sukuk Murabahah has been structured to qualify as an Islamic Tier 2 capital instrument for AmIslamic Bank under Bank Negara Malaysia’s (BNM) capital adequacy framework for Islamic banks issued in November 2012, which, among others, requires the Tier 2 Sukuk to have loss absorption features at the point of non-viability of AmIslamic Bank.

AmBank Group MD Ashok Ramamurthy said while a number of conventional banks have issued Basel III-compliant capital instruments in Malaysia and the region, incorporating the required characteristics of Basel-III capital instruments into an Islamic context presented a number of additional challenges requiring close cooperation with the regulators.

“The successful closing of this landmark transaction represents a significant milestone for the Malaysian sukuk market.

“At the same time, this issuance saw the engineering of a Shariah mechanism that is acceptable to both the regulators and the Shariah scholars.

“This is the first Basel III-compliant Tier 2 Sukuk issuance by a Malaysian issuer which demonstrates our capability in sukuk structuring and profound track record in product innovation,” Ashok said.

[THE MALAYSIAN RESERVE, 3 March 2014]

RHB Investment completes first global sukuk

STATEMENT FROM THE BANK:

Kuala Lumpur, 7 March 2014 – RHB Investment Bank successfully completed its first global sukuk offering as Joint Lead Manager for a landmark global sukuk bond issuance by IDB Trust Services Limited (IDBTS), a special purpose vehicle established to raise fund for the Islamic Development Bank (IDB).

RHB Investment Bank’s role also included underwriting IDBTS’s 5-year USD1.5billion sukuk issuance under its USD10billion sukuk programme. The issuance was initially over-subscribed by two times prior to a USD500million upsize to cater to the overwhelming response.

Mike Chan, Managing Director of RHB Investment Banksaid, “RHB Investment Bank is pleased to be part of this notable exercise. Our involvement in IDB’s programme is part of our strategy to internationalise the Islamic capital market. This global sukuk issuance is a first for RHB Investment Bank and is a stepping stone towards achieving our aspiration to be a significant player in the global sukuk market.

This issuance also represents the RHB Banking Group’s continuous drive for Malaysia to be the market leader in global sukuk issuance.

“Islamic finance continues to gain momentum and is pacing up to traditional banking around the world. We see this as an exciting time for the Group to be a part of this Islamic financial scene as we want to continue to grow and provide comprehensive financial instruments in our aim to attain global Islamic leadership status” said Ibrahim Hassan, Managing Director of RHB Islamic Bank.

The sukuk issuance is rated AAA, the highest credit rating, by Standard & Poor’s, Fitch and Moody’s and is listed on the London Stock Exchange, Bursa Malaysia and Nasdaq Dubai Exchange.

RHB's Sukuk Trading & Distribution offering under its Islamic banking

REUTERS: Malaysia's EPF mulls standalone Islamic pension fund -sources

Malaysia's $160 billion state pension fund has hired consultants to study the possibility of establishing one of the world's first state-backed pension funds focusing entirely on sharia-compliant investments, sources familiar with the matter said. If it goes ahead, the plan could pour billions of dollars into sharia-compliant assets in Malaysia, stimulate its Islamic finance sector, and provide a model for other predominantly Muslim countries such as those in the Gulf, reports Reuters (6 March 2014).

The Employees Provident Fund (EPF), the world's sixth-largest pension pool, is looking at the viability of such a fund from accounting, legal and sharia-compliance standpoints, the sources said, declining to be named because the matter is not yet public. Global advisory firm Ernst & Young, Kuala Lumpur-based law firm ZICOlaw and ZICO's sharia advisory team were hired in late 2013 and are to present a final study to the EPF this year, the sources told the news agency.

"Depositors are asking for the option to put their savings into sharia investments alone, so the EPF is looking to set up the end-to-end infrastructure, from collecting contributions to returning dividends," the report quoted unnamed sources.

The report suggests that having a standalone, state-backed Islamic pension fund would put Malaysia ahead of most countries in developing its pension industry. The fund might be the world's first such institution outside Iran, where the entire financial system is designated as Islamic.

The EPF has set up an internal committee to steer the project, which it hopes to implement within two or three years. But the timeline will depend on the final study from the consultants, one of the sources said. "They want to make sure that a separate fund will be an attractive proposition, by matching the returns people are used to seeing from the EPF."

BADLISYAH: Standalone Islamic bank versus Islamic window

Standalone Islamic bank versus Islamic window operations is the most prolific debates found in the Islamic finance industry today. It is, however, not a new subject for discourse. It has been around for about as long as the successful reintroduction of Islamic finance industry started in the early 1960s.



I personally and professionally believe that this is one of the most debilitating and time wasting debates that those within and outside the industry are having. I put it down in the same wasteful category as the debates on having a singular interpretation or application of Shariah, on having a separate benchmark rate from the conventional market, on having a separate Islamic currency from existing currencies circulating in the market and on the need for Islamic finance to be different from conventional finance in regards to product offerings.



Often time, we debate about these matters to the extent that no Islamic financial institution or activities actually exist in a particular jurisdiction in any manner, to the detriment of the Ummah especially the Muslims.



We should do away with these incessant and unproductive debates as they really do a total disservice in meeting the objectives of the industry’s stakeholders within the ambit of the maqasid al shariah (ie the objective of Shariah) of providing benefits to all mankind (ie Ummah) and preventing harm from befalling them.



We all know that the objectives of doing Islamic finance have always been to meet various stakeholders’ expectations such as maximising profit and fulfilling social responsibility for shareholders; a good place to work for employees; getting valued and trusted Shariah compliant products and services for customers; and nation building, optimum financial inclusion, effective customer protection, defending systemic integrity and promoting equitable wealth distribution for government as well as regulators.



All these objectives must be met without compromise when we undertake Islamic finance activities which is the intermediation between the haves and have nots across the different consumer segments, in particular, jurisdiction in a manner consistent with Shariah as applied in that jurisdiction for the banking sector, for the capital market (debt and equity alike) and for the non- banking financial sector such as asset management, takaful and private equity.



Considering all these stakeholders’ expectations, when we intermediate in the banking sector, we would need to establish an operating platform that would best suit the provision of Islamic finance in this sector. This is where the debate between standalone Islamic bank versus Islamic window operations happens.



The debate is healthy and worthwhile having, if it is done merely for the purpose of determining how best to meet the various stakeholders’ expectations in a particular jurisdiction. For example, if there is no separate enabling Islamic banking act, then the debate will conclude that the best way to meet the stakeholders’ expectations is to establish an Islamic window operation under the existing banking laws.



However, the debate becomes totally unhealthy and time wasting if it is done on the basis of determining which one is more credible or “more Shariah-compliant”. The reason why this is the case is because whether you operate as an Islamic window or a standalone Islamic bank, the requirement to comply with Shariah and having your activities to be operated and based wholly on Shariah on an enterprise wide basis is still the same. Such requirement exists irrespective of whether or not you are subjected to a regulated Shariah governance framework.



Malaysia is pretty much the only country in the world that has comprehensively legislated and regulated how financial institution may provide Islamic banking products and services. We have the Islamic Financial Services Act (IFSA) 2013 that enables the licensing of a standalone Islamic bank and the Financial Services Act (FSA) 2014 that enables the licensing of an Islamic window operations under a conventional bank.



Those interested in participating in the industry to provide Islamic banking offerings, have a choice of doing it under the IFSA or under the FSA and this depends on how best they can meet their own peculiar stakeholders’ expectations.



Both are equally credible in terms of Shariah compliancy as both are fully governed by Bank Negara Malaysia on Shariah governance. Both are also equally credible in terms of compliance to relevant prudential requirement, capital adequacy, etc for the same reasons. Any debate to determine which one is better in Malaysia is just superflous. Both fulfill all stakeholders’ expectations for Islamic finance in Malaysia in their own ways.



If we go to a jurisdiction that does not have what Malaysia has in terms of a structured and established enabling framework, then we must operate within the existing banking framework. There is no point debating until the cows come home, to demand a standalone bank operation when legislation does not facilitate the establishment of one.



Focus on doing what can be done, which is normally the Islamic window operations under conventional bank so that we can immediately meet the stakeholders’ expectations especially the expectation by customers of having the choice to do Islamic finance.

When the enabling legislation exists, then we can consider other forms of operations.

All in all, the debate between standalone Islamic banks and Islamic window to determine which one is better may never end because there will always be new people who do not understand Islamic finance wanting to debate it.



I can only hope that such a debate does not prevent Islamic finance from being effectively done in any particular jurisdiction or worse, dismantle what is already good in meeting all stakeholders’s expectations in a particular jurisdiction. We should focus on the substance instead of the mere form.



Substance wise, standalone Islamic bank or Islamic window, both are equally good and credible.



  

[THE MALAYSIAN RESERVE, 3 March 2014. Badlisyah Abdul Ghani is ED and CEO of CIMB Islamic Bank Bhd.]