Aussie overhauling taxation laws for Islamic investments

by Habhajan Singh

Australia will overhaul sections of its taxation laws to ensure they do not hamper the growth of Islamic finance products, with one of the nation's senators emphasising that the changes could come as early as the end of this year.

In a recent report, Australia Assistant Treasurer senator Nick Sherry told Radio Australia that a number of nations like UK and Malaysia have had changed tax and legal regimes and that "we do have to deal with these legal issues to hopefully draw levels and go past some of these other countries." Sherry was on recent four-day tour of Gulf countries to sell the credentials of Australian financial services companies.

The report noted that the 'reality is Australia is lagging far behind other Asian countries which have for some time facilitated financial products based on Shariah law'.
It noted that Sherry had been consulting experts in Abu Dhabi, Qatar and Bahrain, on changes needed to Australia's taxation and financial regulation laws to accommodate greater Islamic investment.
"I'd be hopeful we can identify where the law needs to be changed by the end of this year and hopefully have some and well we need to have legislative change by next year," he told the radio station, according to transcripts available on its website.
The report noted that it was 'hardly surprising' that Australia, which enjoys a good reputation throughout Asia for funds management, wants to tap into the potential market.

On March 29, The Malaysian Reserve reported that the lack of regulations supportive was one of the challenges when one tries to structure Islamic finance products in Australia, but the situation is slowly changing, according to Crescent Investments Australasia Pty Limited, an investment firm providing Shariah-compliant investment products.
"We face many challenges in Australia, in trying to structure Shariah-compliant products. The laws and regulations were not designed for Shariah compliant products and we have spent significant time, effort (not to mention expense) negotiating our way in the legal system to ensure compliance with the Australia statute and common law as well as Shariah rulings," said its executive chairman Talal Yassine.
However, he noted that the Australian authorities are now paying serious attention to the Shariah compliant market.

In an earlier report on March 19, this newspaper reported Amanie Business Solutions, a Malaysian-inspired Islamic finance consulting firm led and anchored by Shariah scholar Dr Mohd Daud Bakar, was looking to expand its presence in Australia, as well as Europe, to tap the growing business opportunities in those regions.

In the Radio Australia report, it said that senator Sherry was confident as Australian banks and investment funds develop their expertise and understanding of Islamic finance, Indonesia, for one, will welcome their services. "For Australia it's not just about the attraction of investment flowing into Australia it's to assist using Australia as a base to provide products and investments into Indonesiam," he said.

(This story appeared in The Malaysian Reserve on 3 March 2010. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays, edited by Habhajan Singh)

Computer glitch hits Proton delivery system

By Habhajan Singh & Ishun P Ahmad

Proton cars faced what is probably its worst delivery hick-up when a new central logistics hub meant to improve delivery from the manufacturer to dealers nationwide broke down due to a computer glitch.

With car delivery grinding to a near halt for a good part of April, the national car maker could see a massive drop in the registration of Proton models for the month as most dealers were unable to secure units to deliver to customers. It is understood that Proton Edar Sdn Bhd, the marketing arm of Proton Holdings Bhd, has outsourced the task of managing the logistics hub to public listed Konsortium Logistik Bhd and that the hub was supposed to have commenced on April 1.

Proton Edar general manager for sales Sidik Abd Hamid told The Malaysian Reserve that Proton has reverted to the conventional mode of delivering cars to dealers for the moment as it works to resolve the computer glitch at the new centralised logistics hub at Sijangkang, near Klang.

"There was some system error and it could not capture the barcodes of the cars parked at the hub. The cars started piling up," he said.

Beginning April 1, Proton Edar started utilising the centralised logistics hub in an effort to improve its supply chain. Under the plan, all cars from the Shah Alam manufacturing plant were sent to the Sijangkang yard for a pre-delivery inspection (PDI) and storage before being sent via trucks to dealers nationwide. Cars from Proton's Tanjung Malim plant were sent to a yard within the plant itself.

In a memo dated April 1, Proton Edar told its dealers that the effort was to 'improve its supply chain to meet fast changing business requirements and achieve cus tome r s at i s f ac t ion through speed and quality'. The idea — internally known as 'Class', which is short for centre for logistics, allocation, storage and service — was to 'specifically address the vehicle flow from manufacturing plant up to delivery to end customers'.

The memo stated that each hub would be equipped with facilities to support centralised services such as stock management, vehicle storage maintenance, pre-delivery inspection and repair jobs. Prior to this, car dealers handled areas like the predelivery inspection and repairs before handing the car to customers.

"On paper, the idea is perfect. The logistics hub is to benchmark the qualit y standard for all Proton cars leaving the hub. The hub was supposed to standardise that portion of the job," said Proton Edar Dealers Association Malaysia (PEDA) president Armin Baniaz Pahamin.

Hence, Armin said that customers would benefit in the long term after enduring this short term delay as Proton Edar sorts out the glitches at the logistics hub. Proton Edar is now also looking at back-up plans in the face of the problems at Sijangkang.

"We are devising Plan B and Plan C, should the hub face similar problems. We had done trial runs earlier, and things moved smoothly," said Sidik when asked if the national car maker's distribution arm had done a test run.

As at the end of last week, Sidik said the cars stuck at the Sijangkang hub have been allocated to the respective dealers.

Konsortium, a public listed company that in 2008 earned 27% or RM70.3 million of its revenue from the automotive logistics segment, has yet to revert to queries on the problems at the logistics hub. It is understood that the project comes under the purview of its executive director Che Azizuddin Che Ismail. He is responsible for overseeing the logistics operations of Konsortium, specifically the automotive, oil and gas, container haulage, Westport Distripark, distribution logistics and group human resources, according to the company's most recent annual report available on its website.

[THE MALAYSIAN RESERVE, MON, MAY 3, 2010, PAGE 1]

M'sian takaful firms ‘outperforming’ Middle East ones

by Habhajan Singh

Malaysian takaful operators have fared better than their Middle East counterparts in terms of returns on equity since 2007 when world economies underwent the global financial crisis stress.

Malaysian takaful companies also came out better than their Gulf Cooperation Council (GCC) counterparts in terms of risk retention, an indication that Malaysia has a more sophisticated operational capability, according to a global study on takaful by Ernst & Young (E&Y).

The study, in E&Y's third annual edition of its World Takaful Report, showed that Malaysian takaful operators also came out better on technical fronts like claims ratio and underwriting income.

On retention, Bank Negara Malaysia's (BNM) Financial Stability and Payment Systems Report 2009 released in March, had noted that the 'consistently high' net retention level of 72.3% for Malaysian general and general takaful business enabled counterparty reinsurance risks to be kept at 'manageable level'.

It added that as a majority of the offshore and foreign reinsurers were reputable and strongly rated companies, it further reduced the extent of counterparty risk during the challenging financial climate in 2009.

Looking at claims ration, the E&Y report said that claims ratio for takaful operators in the GCC - which includes Bahrain, Saudi Arabia, United Arab Emirates (UAE) and Qatar — 'remain significantly higher' than Malaysian takaful operators 'where underwriting practice appears more structured'.

The report also said that underwriting income has consistently contributed to the profitability of the Malaysian operators while the GCC operators traditionally relied on investments.

Among the GCC takaful operators that contributed data to the study's sampling were Bahrain's Takaful International Company and Solidarity Group Holding; Saudi Arabia's Allied Cooperative Insurance Group, Al Ahlia Cooperative Insurance Company and Alahli Takaful Company; UAE's Abu Dhabi National Takaful Company, Dubai Islamic Insurance and Reinsurance Company, Dar Al Takaful; Qatar's Qatar Islamic Insurance Company; and Kuwait's First Takaful Insurance Company, Wethaq Takaful Insurance Company and Gulf Company for Takaful Insurance Malaysia.

Malaysian players involved were CIMB Aviva Takaful Bhd, Hong Leong Tokio Marine Takaful Bhd, Prudential BSN Takaful Bhd, Takaful Ikhlas Sdn Bhd, AIA Takaful International Bhd and Syarikat Takaful Malaysia Bhd. On ROE, the report study showed that both Malaysian and GCC operators were closest in 2007, with GCC operators averaging at 6.2% while Malaysian operators averaged at 5.7%. Before that, GCC players were constantly scoring higher on the ROE score.

However, post-2007 debt debacle and the financial crisis, the Malaysian operators performed better, with an average return of 11.1% in 2008 and 7.6% in 2009, while GCC players were in the negative zone (-5.3% in 2008 and -6.5% in 2009).

When it comes to operating efficiency, the study found that Malaysia has been consistently stronger in its combined ratios to the GCC, 'although the gap is shrinking'. in 2005, Malaysian operators surveyed had averaged at 41.3% to GCC's 130/8%. In 2009, it was Malaysia at 53.3% and GCC at 71.9%.

"Profitability is under unprecedented stress. In the aftermath of the financial crises, takaful operators are coping with depressed capital levels, distressed asset values and difficult capital markets," E&Y said in a statement when the report was released.

(This story appeared in The Malaysian Reserve on 26 April 2010. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays, edited by Habhajan Singh)

Takaful in each region ‘faces unique challenges’

by Habhajan Singh

Takaful in the Gulf Cooperation Council (GCC) and Malaysia are at very different stages of development with each region facing unique challenges, said a global study on takaful by Ernst & Young (E&Y).

The World Takaful Report report, based on a combination of quantitative data and qualitative comments, had made some observations on areas like on efficiency operations, quality of underwritten business and ensuring investment discipline.

On efficiency operations, the report said most takaful operators have yet to achieve critical business volume, despite incurring substantial establishment costs over the years. Also, players have combined ratio is much higher than conventional peers while service quality remains sub optimal for many operators.

It made some recommendations on lowering cost of operation, which included targeting economies of scale and scope through organic and inorganic growth; articulate cost strategy for customer acquisition, servicing and retention; improve loss ratios through changed business mix and better claims management; and consider shared service arrangement for back office operations.

On risk retention, it noted that Malaysian takaful operators, on the average operators cede between 5%-15% of gross premiums to retakaful entities while retaining a larger proportion of business on their books and converting this into better technical results.
"This strategy requires greater underwriting competence and track record (using historical data) to build a quality book," it noted. On the other hand, GCC operators on average cede between 30%-50% of gross premiums to retakaful companies, which reduces their ability to generate potentially positive underwriting results, and that the broking approach causes excessive reliance on investment returns to generate profitability.
On technical results, Malaysian operators' average claims ratio of between 25%-35% is reflective of stronger underwriting discipline and diversified business.
"Strong underwriting results allow operators to benefit from a larger participants pool and ability to re-distribute surplus, generating strong customer c onfidence. Underwriting results account for the majority of overall profitability," it said.

On the GCC front, the higher average claims ratio of between 40%-60% can be improved through stronger underwriting competence.
"As historical data becomes more readily available, operators should strive to build cleaner books of diversified business. Weak technical results have led operators to become heavily reliant upon investment income, that are volatile, to achieve shareholder expectations," the report noted.
The report noted that global takaful contributions grew 29% in 2008 to reach US$5.3 billion (RM16.9 billion) and remain on course to surpass US$8.9 billion (RM28.38 billion) by 2010.
"Strong growth in health takaful in GCC, and family takaful in Malaysia are two noteworthy trends that have delivered growth for many operators. Government safety nets are being reduced providing new opportunities to offer product solutions in these respective business lines," E&Y said in a press release when announcing the report.
Saudi Arabia, with contributions totalling US$2.9 billion in 2008, and Malaysia with US$900 million are the top two takaful markets in the world. Sudan is the most significant market outside of the GCC and South-East Asia, with contributions totalling US$280 million in 2008, it said.

(This story appeared in The Malaysian Reserve on 26 April 2010. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays, edited by Habhajan Singh)

Bar Council calls for ‘third party’ committee

The Malaysian Bar Council, which is opposing a Bank Negara initiative to revamp the motor insurance sector, is calling for the central bank to set up a cross-industry working committee to review feedback from all parties before implementing a scheme that would limit the liability of motor insurers to third party claimants to RM2 million.
The move by Bank Negara is in line with the government's aim of ensuring access for motorists to the mandatory third party bodily injury and death insurance coverage that is reportedly a longstanding grouse of motor insurance underwriters. According to reports, citing central bank data, losses from such third party motor policies are estimated at about RM1 billion annually.
Bank Negara was said to be considering the RM2 million cap but had yet to finalise the capping level. Speaking at a media briefing in Kuala Lumpur yesterday, Bar Council president Ragunath Kesavan said the proposals by Bank Negara, which it outlined to the council in a dialogue on Monday (Apr 19), could not be agreed upon by just conducting dialogues with concerned stakeholders.
"There should be proper, true consultations. There has to be a working committee, and not a one-off dialogues, to look at the issues. It seems to be a huge transformation with very little thoughtthrough process, with minimal consultation and it all seems to lead to one direction, profitability of the insurance companies," he said.

Under the scheme being proposed by Bank Negara, a newco would be established to manage the new scheme with the government holding a majority stake in this new entity.
Ragunath said the formation of the newco would be expensive at the onset as there was a need to set up a nationwide infrastructure and network, which would ultimately be paid for by the tax payers.
"What we're saying is to look (and make) use of the current system (in place). The cost of setting up a parallel system will be very high. The solution is to maintain the current system, no caps, and look at where the losses are (occuring) and address those issues.
"If it's inevitable that there is a need to increase premiums, then do it gradually. The tariffs have not been increased since 1978. What has the regulator being doing for the last 30 years? What about periodical reviews? Why hasn't it been done? You don't need a 300% increase in premium, you can do (an annual) 10% increase over the next four years, or look at the comprehensive sector and use it to subsidise the poorer sector," he added.

Asked whether the Bar Council could get Bank Negara to backtrack, Ragunath said, "It's an uphill battle. I don't think it's going to be easy. The only way to resolve this is if there's a public outcry. We need the support of the public otherwise it's an extremely uphill battle."
"We're commited to working with the various indsutry groups, hosting road shows, spoken to members of Parliament and we want to escalate awareness of this issue. We want public participation of this issue. We're committed to ensure that the public interest is protected.
"We can only do what it's right. We will keep pushing and maintain our campaign. It's about time to have transparency in the industry and such issues need to be looked at. We don't this to be a burden to the people. That's the crux of what we're trying to say," he added.

(The Malaysian Reserve, Jan 24, 2010, Page 1)

Affin eyes Islamic finance foray

Affin Bank Bhd will work with its parent company to convert PT Ina Perdana into a syariah bank once the purchase of the Indonesian lender is concluded, as the group expands into the populous Muslim country, reports Business Times.
"Our holding company is looking at it, it will acquire the bank and then we will work together to convert it into an Islamic bank. It is now a conventional lender," Affin Bank managing director Datuk Zulkiflee Abbas Abdul Hamid told the business section of NST in an interview in Kuala Lumpur.

THE REPORT GOES ON:
The legal and financial due diligence have been done recently.
Affin Holdings Bhd, the bank's parent, in January said it was granted the regulatory approval to start negotiating for a controlling stake in PT Bank Ina Perdana, making Indonesia its first overseas venture.
The group's deputy chairman Tan Sri Lodin Wok Kamaruddin told reporters this month that he hopes the purchase will be concluded by the third quarter this year.
PT Bank Ina Perdana is a tiny lender in Indonesia's fragmented market, which has 121 commercial banks. It operates about 20 branches, most of them in Jakarta.
Despite its small size, Zulkiflee said the bank is profitable with relatively low non-performing loans. Most of PT Bank Ina Perdana's business comes from consumer banking, like car loans, while business banking only takes up a small portion of its portfolio.
The purchase will give Affin Holdings a toehold in Indonesia, and it will slowly grow from there, he added.
"We are of the view that, if we want to go (into Indonesia), this is the time for us to go. There are not too many Islamic banks in Indonesia considering its big population. Islamic finance is still in the early stage of development as compared to Malaysia, so there is vast potential for growth," he said.
With a population of 230 million and a fast growing economy, Indonesian banks have been a highly sought after asset. Global banks in the likes of HSBC plc, have all scrambled to get a slice of the market there.
Malayan Banking Bhd, Malaysia's top lender, had paid hefty premiums to buy Bank Internasional Indonesia two years ago, while CIMB Group Holdings Bhd also has a major presence there through CIMB Niaga. RHB Capital Bhd recently bought into PT Bank Mestika Dharma.
Indonesia aside, Zulkiflee said Affin is not eyeing expansion into other countries yet, and it wants to strengthen its operations back home for now.
"True, people say that the Malaysian market is saturated, but we think there are still pockets of opportunity. The big banks probably must go out, otherwise not sexy. But for us, I don't think we should follow them yet."
He said although the net interest margin (NIM) has been narrowing for Malaysian banks over the years, it is still decent at around 2 per cent to 2.5 per cent. Affin Bank's NIM stood at 2.57 per cent last year, improving slightly from 2.46 per cent in 2008.
This year, Affin Bank will hire more sales people to help grow loans by the targeted 13 per cent to 15 per cent. It is eyeing a deposit growth of 10 per cent this year.
Affin Bank will also beef up the branches to let every walk-in customer feel like a premier guest, no matter how much a customer is banking with it. It plans to put more branches within the city and create some flagship outlets in certain locations, overall adding between five and 10 more to the existing 90 branches.
The bank, which has significantly expanded its business banking in the past two to three years, also wants to increase the number of business centres to cover all the major cities.
Last year, the bank's profit after tax fell 4.1 per cent to RM317.8 million, even as operating profit was 17 per cent higher at RM614.1 million.
"Our business has grown. The profit after tax was lower because we had a lot more (loan) recoveries in the previous year," Zulkiflee explained. Loans grew at 12.7 per cent last year, slightly slower than the 15.8 per cent growth in the previous year.
Net NPL has fallen to 2.36 per cent, from 3.22 per cent at the end in 2008. Its return on equity (ROE), which measures how efficient profits are being reinvested, came in at 11.4 per cent.
This year, he said, the bank is targeting a ROE of 12 per cent to 13 per cent.

High Court says BBA rebates ‘must be granted’

by Habhajan Singh

Islamic banks 'must grant' a rebate even if the Bai Bithaman Ajil (BBA) contract is silent on the issue when a default occurs, ruled a recent High Court judgment.

The judgment, in four BBA cases heard together by High Court Judge Datuk Rohana Yusuf, brings to the fore an issue that has been a bone of contention for consumers making avail of Islamic home financing as Islamic banks deem rebate, or ibrar as it is known in Arabic, as discretionary. Consumers, on the other hand, would want more certainty in that matter.

"In doing so, the bank should not be allowed to enrich itself with an amount which is not due while at the same time taking cognisance of the customer’s right to redeem his property.

"Therefore where the BBA contract is silent on issue of rebate or the quantum of rebate, by implied term I hold that the bank must grant a rebate and such rebate shall be the amount of unearned profit as practiced by Islamic banks," she wrote in a 29-page judgment dated Jan 28 in Bank Islam Malaysia Bhd v Azhar Bin Osman, and three other cases. She also noted that legal documentations used by Islamic banks in financing should specify a formula for rebate, which at the moment is loosely attached to the principle loan agreement and whose implementation is very much left to bank's discretion.

In the judgment, Rohana touched on the issues of ibrar and the quantum that banks can claim in an event of a default, two areas that have seen some debate and discussion from the Shariah perspective.

"If the documents of the banks had in fact specified a formula of rebate or ibrar, it will demystify the intricacies of a BBA transaction. It will be easily understood by the customer who would then not be put in the dark as to what is ibrar and what would be the amount of ibrar he should be receiving," she said.

The judgment seems to suggest that Rohana has taken a different tack from a recent Court of Appeal decision on a bundle of BBA contract cases which originated from the much publicised April 2008 decision by High Court Judge Datuk Abdul Wahab Patail, while maintaining that she is still within the bounds of what constitutes a binding decision from the higher courts.

"This is quite a departure form some of her earlier judgments," said lawyer Mohamad Illiayas Seyed Ibrahim who has dealt extensively in Islamic finance cases.

Ibrar, one of the two issues at the heart of this judgment, means surrendering one’s right of claim over debt either partially or in full, according to the definition from a published document by Bank Negara Malaysia (BNM) which regulates Islamic finance outfits.

Ibrar had been a bone of contention with consumers as banks generally do not give them a specific guarantee that they are entitled to a rebate should their loan end prematurely, either due to early payment or a default.

The path pursued by Rohana, in this judgment, seems to push local Islamic banks to insert the ibrar clause explicitly into their financing documents, thus bringing about certainty to the issue of rebate and also streamlining the practice with what is already approved by BNM's Shariah Advisory Council (SAC).

Rohana ruled that "when an Islamic bank practices granting of rebate on a premature termination, it creates an implied term and legitimate expectation on the part of the customer. Accordingly it is only proper that such expectation and practice be read into the contract."

The central bank's SAC — which has the last say on matters pertaining to Shariah in Islamic finance as further reinforced in newly promulgated central bank regulations — had resolved in 2002 that 'Islamic banking institution may incorporate the clause on undertaking to provide ibra’ to customers who make early settlement in the Islamic financing agreement on the basis of public interest (maslahah)'.

The four cases in this judgement came from two sets of appeal before the Court of Appeal relating to BBA contracts in Islamic banking. The plaintiff in all the four cases was Bank Islam Malaysia Bhd (BIMB) who were represented by Oommen Koshy from Skrine & Co and Aedyla Bokari from Nassir Hafiz Nazri & Rahim.

In the first set involving 12 cases heard together, the Court of Appeal had decided on Aug 26, 2009 [Bank Islam Malaysia Berhad v Lim Kok Hoe & Anor and Other Appeals] that a BBA contract is valid and enforceable, thus reversing an earlier decision of the High Court in Arab-Malaysian Finance Bhd v Taman Ihsan Jaya Sdn Bhd & Ors.

The Taman Ihsan Jaya case made headlines when Abdul Wahab had ruled that the widely used BBA contracts were contrary to Malaysia’s Islamic banking regulations. The Malaysian Reserve first broke that story on Sept 8, 2008.

(This story appeared in The Malaysian Reserve on 19 April 2010. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays, edited by Habhajan Singh)