Shariah scholars turn to AAOIFI over tawarruq

by Habhajan Singh
The issue of tawarruq featured widely at a key meeting of regional scholars of Islamic finance in Jakarta, almost a month after the International Council of Fiqh Academy issued a ruling banning the mechanical use of the Shariah concept employed to raise cash financing.
It is understood that the issue of tawarruq was keenly discussed by the Islamic finance scholars from Malaysia, Indonesia, Singapore and Brunei, at the two-day regional meeting that aimed to bring about better understanding and coordination amongst Shariah scholars in this region.
"One common consensus of Shariah scholars at the muzakarah was to wait for guidance from AAOIFI," one Islamic finance scholar from a local Islamic bank told The Malaysian Reserve.
Unlike the Fiqh Academy whose Shariah board comprises experts from various fields, the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) is better regarded when it comes to matters concering Islamic finance as its board of experts comprise people with expertise relevant to finance.
"AAOIFI is more specialised in Islamic finance," the scholar said.
The scholar, who declined to be named, was one of the participants at the two-day regional Islamic finance Shariah scholars meeting "Muzakarah Cendekiawan Syariah Nusantara ke-3".
In 2008, he said AAOIFI had issued a standard on tawarruq in which it permitted its use only as a tool of last resort. "This tawarruq issue is not new. It had been discussed a number of times before,” said another Shariah scholar.
On May 11, The Malaysian Reserve reported that the decision by the Fiqh Academy, which wields authority on Shariah-related matters including Islamic finance, may put a damper on move by local Islamic banks. Banks had recently begun structuring new products, with tawarruq as its Shariah enabler, in order to make them acceptable beyond Malaysian shores.
In March, Bank Negara Malaysia introduced the Commodity Murabahah Programme, known as tawarruq in some jurisdictions, to provide a more diverse range of policy instruments in managing short-term liquidity in the Malaysian Islamic interbank money market.
On the commercial front, outfits like Bank Islam Malaysia Bhd and Bank Rakyat Bhd were understood to have been studying the tawarruq concept to replace Shariah contracts like bai inah and qardh when offering credit card facilities.
The decision will likely force Islamic bankers to go back to the drawing board before deciding on their next course of action.
At a five-day session which ended on April 30 in Sharjah, the United Arab Emirates, the Fiqh Academy said it has resolved that it is not permissible to execute both tawarruq (organised and reversed) because simultaneous transactions occur between the financier and the mustawriq, whether it is done explicitly or implicitly or based on common practice, in exchange for a financial obligation.
This was done after the council reviewed research papers on tawarruq, its meaning and its type (classical applications and organised tawarruq).
"This is considered a deception, i.e. in order to get the additional quick cash from the contract. Hence, the transaction is considered to contain the element of riba," the council ruled, according to an English translation of the ruling made available by the Kuala Lumpur-based International Shariah Research Academy for Islamic Finance (Isra).

(This story appeared in The Malaysian Reserve on June 1, 2009. 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)

HSBC Amanah Takaful sees Islamic insurance as the industry of the future

By Alfean Hardy
HSBC Amanah Takaful (Malaysia) Sdn Bhd is bullish on the local takaful sector both locally and internationally, said its executive director and chief executive officer Zainudin Ishak.
He said the players in the local Islamic insurance sector should count themselves lucky to be in Malaysia at this stage in the development of the takaful industry overall.
"The takaful industry is set to boom and the local industry is fortunate enough that we are here to witness what is probably the industry of the future. We're still at the infancy stage but we have the brain power to lead," he told The Malaysian Reserve in an interview yesterday [May 28, 2009].
Formed in 2006, HSBC Takaful is a joint venture (JV) that is 49%-owned by HSBC Insurance (Asia Pacific) Holdings Ltd, 31% owned by Jerneh Asia Bhd and 20% owned by the Employees Provident Fund (EPF).
Zainuddin said initiatives from Bank Negara Malaysia and the government, like the MIFC (Malaysia International Islamic Financial Centre) and changes to the framework of how Islamic finance, Islamic insurance and the Islamic capital markets work and work together, had created a platform for Malaysia to reach its target of becoming a global Islamic financial hub.
MIFC was launched in 2006 by the government to strengthen the country's position as a centre of excellence in Islamic finance by creating a vibrant, innovative and competitive Islamic financial services industry.
Such vibrancy, Zainudin said, was important for the country as it would be difficult for Malaysia to be a centre for conventional finance and insurance when there were more established rivals out there.
"If you want to compete on conventional, a country like Singapore has been a conventional financial leader many years before us. They have superb infrastructure and regulation and self-regulation. Then there are financial super markets like Tokyo and Hong Kong. We can't compete on conventional," he said. "So, if you want to be a leader, you need a niche market. This means that the Islamic insurance industry here has huge potential. The journey will be a long journey but based on the aspirations and direction of the government, Malaysia will be a centre for takaful." he added.
Zainudin said one challenge that the industry here faced was talent. "You need enough talent. Take London for example. As a centre for insurance, you have talents that are attracted to it," he said.
However, short, medium and long term programmes being implemented by the government, he said, would help as it was the new frame work by the central bank that made it easier to bring in expatriate talent.
"Under the new framework, it's easier to import foreign talent if there are any. Bank Negara is doing the right thing. Previously you had to move Heaven and Earth to bring in expatriate talent," he added.
For HSBC Amanah Takaful, aside from wanting to maximise its bancassurance relationship with HSBC Bank Malaysia, Zainudin said there were bigger plans afoot that could only be a benefit to both the HSBC group as well as the takaful industry as a whole.
"This is all hypothetical and I'm not saying that this will happen but what can happen is that we can expand the same model here to any other part of HSBC's world. Malaysia can be a pioneer and then bring some of the business from the world back here," he added.

(This story appeared in The Malaysian Reserve on May 29, 2009. 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)

TWO YEARS AGO: Islamic Finance emerging as the new Silk Road

(THIS STORY APPEARED EXACTLY 2 YEARS AGO, IN THE INAUGURAL ISSUE OF THE MALAYSIAN RESERVE)
By Habhajan Singh
Of late, Islamic finance has figured prominently in most of speeches by Bank Negara Malaysia (BNM) governor Tan Sri Dr Zeti Akhtar Aziz. In fact, 10 out of 12 Zeti's speeches on the central bank's website are on Islamic finance, the latest being her address intended for the 4th Islamic Financial Services Board (IFSB) Summit in Dubai, UAE.
"She is without doubt the main driving force behind Malaysia's foray into Islamic finance. There is a feeling that, being a Muslim majority country, Malaysia needs to get a handle on Islamic finance," says one banker involved in Islamic finance.
HSBC Amanah's Managing Director Mohamed Ross Mohd Din agrees, noting a predominantly Muslim population and the country’s comprehensive regulatory framework and infrastructure, Islamic finance has demonstrated its viability and robustness.
"More importantly, with BNM as the driving force behind the industry’s growth, and the personal commitment of the Governor, we are undeniably well-positioned to succeed as the global hub of Islamic finance," he said.
Another banker observed that Zeti's new mantra is the 'New Silk Road' in reference to the emergence of Islamic finance. She had first used the term in her address to the second World Islamic Economic Forum (WIEF) in Pakistan last year.
The enthusiasm and conviction in Zeti's talks about Islamic finance, a topic expected to feature prominently at the third WIEF, comes from the sector's future potential.
"Just as historical Malacca was a key port along the ancient trade routes between Asia and the Middle East, it is envisaged that Malaysia would serve as a key destination along the New Silk Road," she told a gathering during the recent Global Islamic Financial Forum (GIFF).
Indeed, the nation's Islamic finance sector has made some great strides, both in terms of statistics and the growing number of players. According to central bank figures, Malaysia's Islamic banking assets amounted to about RM115 billion (US$34 billion) or 13% in terms of market share while the takaful sector stands at RM5.8 billion.
"The Malaysian Islamic banking system a strong performance, saw in particularly in 2006, with higher profitability. It has remained well capitalised," said BNM deputy governor Datuk Mohd Razif Abd Kadir in a recent speech. Malaysian regulators have kept themselves busy putting in place the necessary infrastructure and regulatory framework for the development of Islamic finance.
Among recent initiatives was the launching of the Malaysia International Islamic Financial Centre (MIFC) in August 2006. he centre provides an environment to conduct Islamic financial services in foreign currencies from anywhere in Malaysia. In the country's national budget for 2007, Malaysia announced substantial tax incentives as a boost to the Islamic banking and takaful industry.
A key element was a 10 year tax exemption for the income of Islamic banks and takaful companies derived in international currencies. There has also been tremendous growth in the nation's Islamic capital market front with Islamic corporate bonds now valued at about US$36 billion, or 48% of the total corporate bond issuance in Malaysia.
Malaysia is home to Asia's second largest private debt securities market, including the conventional.
"Sukuk, the Islamic finance world's equivalent of a traditional bond, has taken the Islamic finance industry by storm over the past two years, with most of the origination in Malaysia and the GCC [Gulf Cooperation Council] countries," noted a recent KPMG report entitled 'Growth and Diversification in Islamic Finance'.
In 2006, the report, quoting London law firm Trowers & Hamlins, said some 80% of the 'burgeoning GCC bond market' was accounted for by sukuk, up from just 26% in 2005.
With regards to Malaysia corporate watchers feel that Singapore is certainly a threat to Malaysia's desire to become the region's Islamic finance hub. "We need to be able to move fairly quickly to move ahead. The policies are already in place.
However, sometimes, the implementation may not be as smooth as one hopes," says John Lee Hin Hock, KPMG's executive director for financial risk management.
BNM's Mohd Razif noted that the domestic bond market plays a crucial role in ensuring that the financing needs of the economy are being fulfilled.
"The multinationals and multi-lateral institutions such as the International Finance Corporation and the International Bank for Reconstruction and Development have begun to tap the fund from the Malaysian capital market by issuing ringgit sukuks, thus increasing its depth and diversity," he said.
In Malaysia, the overall management of the Islamic financial services sector falls under the supervision of BNM, which oversees the nation's monetary policy and financial stability of the financial system.
More issuance will be one of the keys to the growth of a global Islamic capital market, observed Badlisyah Abdul Ghani, head of Islamic finance at Malaysia's CIMB Group and chief executive of CIMB Islamic Bank.
"The development of a global Islamic market has been slow because people are unwilling to take the necessary steps. The more players that arrange issuance in the market, the better. You cannot have an active secondary market until you have well in excess of 100 issuances," he said. -- The Malaysian Reserve, May 28, 2006

Minister: Islamic financial system a viable component

Higher Education Minister Datuk Seri Mohamed Khaled Nordin says the Islamic financial system has now emerged as a viable and strong component, complementing the conventional financial system.
He said that the robust progress achieved by the Islamic financial system in Malaysia had shown the way for its integration in the global market.
He also said that efforts undertaken at the international level to place the Islamic financial system as a credible component would further help strengthen the development of Malaysia's financial system.
"As an example, the establishment of the Islamic Financial Services Board and the International Islamic Financial Market in Kuala Lumpur to draft international regulatory standards based on the unique features and risks of Islamic banking institutions, will contribute towards ensuring the strength and stablity of the Islamic financial system," Mohamed Khaled said his speech at the International Conference on Islamic Economy at the Kolej Universiti Islam Antarabangsa Selangor (KUIS) in Bangi yesterday [May 26, 20089].
The text of his speech was read by the Deputy Director-General of the Higher Education Department, Prof Dr Reyhan Mustafa.
Meanwhile, at the same function, KUIS signed a memorandum of understanding (MoU) with a number of educational institutions from Indonesia, Turkey and Kazakhstan. The educational institutions are the Academy of Banking (Kazakhstan), the Islamic University of Europe (Turkey) and the Institut Studi Islam Darussalam Gontor, Universitas Andalas, Universitas Yarsi, UIN Syarif Hidayatullah, Jakarta, (Indonesia). KUIS Rector Datuk Mohd Adanan Isman in his speech said the MoU created a network of smart cooperation in the educational field, the exchange of students and lecturers as well as knowledge growth. — Bernama (May 26, 2009)

Alternative accounting standards sought

The Islamic financial industry needs a corresponding alternative set of accounting standards which can best be harmonised, not standardised due to the different nature and activities of the Islamic banks and financial institutions, says an accounting expert.
"These standards already exist, developed by AAOIFI (Accounting and Auditing Organisation for Islamic Financial Institutions). The International Accounting Standards Board (IASB) should reconsider its position and allow alternatives live and let live, just as there is a need for differential reporting requirements for small and medium businesses," says Associate Professor Dr Shahul Hameed Mohamed Ibrahim of International Centre for Education in Islamic Finance (Inceif).
Dr Shahul, a qualified accountant now with Inceif's department of finance and accounting, moderated an Inceif discussion series on Friday. Malaysian Institute of Accountants (MIA) Nik Mohd Hasyudeen Yusoff, who was the key speaker at the series, said International Financial Reporting Standards (IFRS) were developed by IASB as a single set of high quality, understandable and internationally-recognised financial reporting standards.
"The IFRS concept and operational model demonstrates the ability of Shariah-compliant structures to co-exist with the conventional framework," he said, according to an Inceif statement.
PricewaterhouseCoopers partner Mohammad Faiz Azmi and Amanie Business Solutions Sdn Bhd principal consultant Dr Syed Musa Alhabshi were the two commentators at the discussion series.
Nik Hasyudeen added that as Islamic finance transactions are backed by productive assets, structured through contracts within the same legal framework with conventional transactions, there is no likelihood that such transactions cannot be accounted for using the IFRS.
In any occasion, he said the contracts entered into by the parties should ensure that the principles of Shariah are complied with. Commending the efforts of AAOIFI, Nik Hasyudeen suggests the Bahrain-based organisation to consider working with and compliments IASB in ensuring the convergence incorporates the Islamic finance agenda.
"This does not mean that IFRS is perfect and the accounting standards developed by AAOIFI are inferior," he said, adding that serious participation in the development and enhancement of the IFRS by promoters of Islamic finance could influence the acceptance of the values and principles promoted by Islamic finance into the IFRS.
The AAOIFI standards are not intended to fully replace the IFRS but merely cover those standards and transactions that IFRS does not.
In most cases the differences between the IFRS and AAOIFI's standards are more apparent than real, the statement said. IASB's refusal to recognise the AAOIFI standards has resulted in Islamic financial institutions in countries such as Bahrain which adopts the latter's standards, having to have their financial statements qualified by auditors who are affiliated to IASB.
Auditors affiliated to IASB through the International Federation of Accountants (IFAC) are obligated to enforce IFRS, it added.
IFRS is currently mandatory for all domestic listed entities in 85 countries and encouraged in 113 countries including Malaysia. The AAOIFI's standards, which have yet to be widely accepted, are seriously being considered by countries in the Gulf and Malaysia.

(This story appeared in The Malaysian Reserve on May 26, 2009. 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)

Standardisation needed for takaful mart

By Habhajan Singh
Standardisation of some takaful practices may be necessary to usher the industry to the next level of market penetration, a takaful Shariah expert told a conference recently.
Shariah compliance is the ultimate goal of all products innovated in the takaful industry while juristic differences must be viewed positively and considered as a main driver for product innovation, said Associate Prof Dr Younes Soualhi from the International Islamic University Malaysia (IIUM).
He noted that there are a few issues in the contracts of takaful and retakaful that would raise some Shariah concerns, including those regarding the type of contracts (whether it be individual or combined) and the nature of contracts (exchange or tabarru). Dr Younes, who is a Shariah advisor at Munich Re Retakaful, also highlighted issues regarding the underwriting surplus.
The sharing of the underwriting surplus by the takaful operator has been discussed for some time. The debate is whether any surplus in the special accounts should be returned to the participants or paid as a performance fee to the operator. In one explanatory note, the central bank said that one unique feature of a takaful plan is the sharing of the surplus of the fund between the takaful participant and operator based on a pre-agreed ratio. The surplus is arrived at after deducting expenses such as claims, retakaful, technical reserves and management expenses.
The participant is entitled to this surplus if he had not made a claim during the period of the takaful. Dr Younes was one of the presenters at the Isra Shariah Conference on Takaful (ISC 2009) organised by the International Shariah Research Academy for Islamic Finance (Isra).
Takaful, a protection plan based on Shariah principles, consists of customers contributing a sum of money to a common takaful fund in the form of a participative contribution (tabarru).
Another presenter, Dr Asmak Ab Rahman from Universiti Malaya (UM), discussed Shariah views on the practice of a takaful company reinsuring with conventional reinsurers. She said it is time for regulators to have a standard parameter on what conditions the takaful business could reinsure under so that the industry would be able to operate within the right framework with Shariah stability.
She noted that Shariah permits Muslims to do what is prohibited in the situation of 'darurah' (loosely translated as necessity), adding that measuring and determining the darurah situation in the industry must be based on consultation with professionals.
However, she said practitioners in the takaful industry have to be aware that, if there is adequate capacity among retakaful operators to reinsure the takaful operators, then the darurah law will be abolished and conventional reinsuring will be forbidden by Shariah.
"If we strictly disallowed takaful operators from reinsuring with conventional reinsurance it might harm the whole takaful industry especially during unpredictable risks like major catastrophes or even the insolvency of a takaful company.
"It will affect policyholders as well when they are not able to pay compensation to customers who are in need of help," she said. On offering Islamic REITS in the Islamic capital market, she said the Securities Commission (SC) allows real estate to be insured by conventional insurance only when takaful schemes are unable to provide the insurance coverage.
At present, she said most Takaful operators still have to reinsure with conventional reinsurers, as a consequence of the lack of retakaful companies that are capitalised to the levels required by insurers, and more particularly the lack of 'A' rated retakaful companies.
"The 'authorisation' from Shariah scholars to deal with conventional reinsurers however is temporary and conditional. Only in situations when Shariah compliant capacities are not available and there is no practicable Shariah compliant alternative is it permissible to use a conventional reinsurer," she wrote in her paper.
The one-day seminar ended with a panel discussion comprising the CEO of Etiqa Insurance and Takaful Tarmizi Ahmad Nordin, MNRB Retakaful CEO Ismail Mehboob, ACR ReTakaful CEO Zainal Abidin M Noor and Shariah scholar Associate Prof Dr Engku Rabiah Adawiah Engku Ali. The session was chaired by ISRA research head Dr Asyraf Wajdi Dusuki.

(This story appeared in The Malaysian Reserve on May 25, 2009. 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)

Indonesia's BCA plans to launch sharia bank in Sept, Reuters

JAKARTA, May 19 (Reuters) - Indonesia's third-largest lender, PT Bank Central Asia Tbk, is planning to launch a shariah bank in September following its acquisition of a small bank last year, its vice president director said on Tuesday. BCA, which has a market capitalisation of nearly $7.9 billion, acquired Bank UIB in October last year and planned to convert the small lender into a sharia bank as part of its effort to tap a growing Islamic banking segment, reports Reuters.
BCA's vice president director, Jahja Setiaatmadja, said all necessary procedures with the central bank were due to be completed soon to launch the bank. "We've done the fit and proper test last week and if Bank Indonesia can complete the process soon then we expect that the conversion into sharia bank can be completed in September," he said. "We're targetting loans to the micro-, small- and medium- enterprises segment," Setiaatmadja said when asked about the sharia's segment, adding it would inject 100 billion rupiah as the paid up capital, the report added.

The worst is over for Abu Dhabi Islamic: GIH

Abu Dhabi Islamic Bank (ADIB) posted a net profit of AED851.3 million in 2008, reporting a profitability growth of 11% YoY in the bank’s bottom-line. The bank’s earnings growth, though considerably over-shadowed by the 35% YoY growth in 2007 or the herculean 2004 – 2008 CAGR of over 62%, still signifies the resilience of the bank’s bottom-line in troubled times.
Albeit, the bank exhibited a tremendous growth in the top-line, erosion in net profits emanated from severe provisioning against non-performing loans and impairments in investments.
We believe that profitability growth will remain relatively the same in 2009 (at 10%YoY) before the net profit embarks on an even healthier trajectory with a CAGR of 18.3% for the 2008 – 2012 period.
The continuance of bottom-line growth is expected to be driven by a confluence of factors including sustainable though slower movement in net commission income (NCI) easily offsetting the expected 18% YoY decline in non-fund income.
Net earnings will remain under pressure in 2009 owing to continuation of high provisions against loans complemented with slight impairments in investments.
Higher profit growth is anticipated to kick in beyond 2009 as investment income improves and provisioning requirements ease off while the NCI follows a due sustainable course.
Investment Summary
Asset quality maintenance will pose the biggest challenge to the bank which is already hovering at a very low coverage ratio. Even keeping the NPLs [non-performing loans] ratio maintained at around current levels and just providing enough to reach a 100% coverage in four yearly strides, will siphon-off a significant portion of the income.
Exposure of investments to the stock market and the RE market may pose a threat the bottom line, however with the bank’s focus on the Abu Dhabi markets does offer a certain cushion given the better performance exhibited by them.
Albeit, the era of super-normal growth is a bygone and will remain a bygone, ADIB may still witness a very healthy growth going forward. The 4-year CAGR of 42% in assets that we have witnessed till 2008, may drop down to the early double-digits; for ADIB we see a 4-yr CAGR of 16% for the forecast period. That combined with range-bound spreads, is expected to keep net commission income (NCI) growth in check.
Attributable to the sheer magnitude and persistence of provisions, a modest growth in the net commission income and low capital gains on investments, we forecast a modest growth in the bottom-line of the bank in 2009 to the extent of 10% YoY. Better top-line performance supplemented with lower provisions is expected to provide the profitability with the necessary thrust in 2010 and onwards.
We expect a modest growth of 15% YoY in the NCI in 2009, which is anticipated to maintain an average rise of 13% over the forecast period. Non-commission income generating from fees and commission income and capital gains from investments is expected to lay low over the forecast period given the prevalent and expected market conditions.
(Excerpts from a research report by Global Investment House released in May 2009)
(This story appeared in The Malaysian Reserve on May 25, 2009. 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)

Islamic banking unclear on conventional arbitration-scholars

MANAMA: The Islamic finance industry is still searching for a stance on to what extent conventional international law should be accepted in arbitration cases, Islamic scholars said on Monday. Many Islamic finance products and contracts are being scrutinized in courts for the first time during the current global economic downturn, after the industry got caught up in last year's global liquidity freeze and now feels its exposure to slumping real estate markets in the Gulf Arab region, reports Reuters (May 18, 2009).
"We have to find a solution, this should be discussed in terms of legal needs and necessities, this hasn't been discussed by Islamic financial institutions collectively," it quoted Islamic scholar Sheikh Saleh Abdulla al-Haidan said during a conference held in Manama.
Islamic law, or sharia, in principle does not accept human-made law besides those derived from Islam unless Muslims have no choice, for instance when living in countries without Islamic law. But conservative scholars argue that non-Muslim courts and non-Muslim courts should not be written into contracts as a reference for arbitrations, the report added.
Al-Haidan said contracts, in which both parties agree that British law should be reference for the contract and therefore any arbitrations, violates Islamic law. On the other hand, Western businesses partners are often reluctant to use sharia as a legal reference for contracts, as they are not familiar with it, he said.

Malaysia's Maybank Islamic says not eyeing strategic partner: Reuters

Maybank Islamic, Asia Pacific's largest sharia bank, is not currently seeking a strategic partner, its acting chief said on May 18, after earlier talk that it would merge with the country's No. 2 Islamic bank. "Not at the moment ... not at entity level," acting CEO Ibrahim Hassan told reporters, when asked if the bank was seeking a strategic partner, Reuters reported (May 18, 2009). Ibrahim said Maybank Islamic, a unit of Malayan Banking, is only interested in partnerships for specific business products such as the joint issue of credit cards. Malaysian financial group BIMB Holdings Bhd in February denied that it was in talks to merge its sharia banking subsidiary Bank Islam with Maybank Islamic. The report added that talk of a Maybank Islamic-Bank Islam merger came as several other banks in the rapidly growing sector said they were seeking acquisition opportunities to boost their size -- although a global economic slump could put a brake on expansion plans.

HSBC Amanah Takaful keen to maximise bancassurance ties

By Alfean Hardy
HSBC Amanah Takaful (Malaysia) Sdn Bhd is looking to maximise its bancassurance relationship with HSBC Bank Malaysia Bhd (HSBC Malaysia) in order to reach an internal target of contributing 20% to HSBC Amanah Malaysia Bhd's revenue by 2011, its executive director and chief executive officer Zainudin Ishak said.
Although part of the HSBC group in Malaysia, HSBC Amanah Takaful is 49% owned by HSBC Insurance (Asia Pacific) Holdings Ltd, 31% owned by Jerneh Asia Bhd and 20% owned by the Employees Provident Fund (EPF).
HSBC Amanah is a fully fledged Islamic bank and is a wholly owned subsidiary of HSBC Malaysia.
At a media briefing in Kuala Lumpur yesterday [May 19, 2009], Zainudin said the strategy going forward was to maximise its bancassurance model, which had already seen new premiums grow from RM15 million to RM30 million over the past six months.
"We need to do it well and unleash the full potential partnership with HSBC Malaysia and this will be our theme over the next three years," he added.
HSBC Amanah Takaful currently had access to HSBC Malaysia's 40 conventional branches as well as the four branches of HSBC Amanah nationwide.
Asked whether HSBC Amanah Takaful would take advantage of the recent liberalisation in the financial and insurance sectors and open branches of its own, Zainudin said there was no need.
"If you look at the bancassurance model, there's no real need for us to have a presence of our own independently," he said.
"We should leverage on the whole might of HSBC Malaysia without duplicating as it would involve costs to set up a branch.
The success of bancassurance is when you intertwine our product and the bank's products, which is our direction going forward," he added. To a question about having bancassurance distribution agreements with other parties aside from HSBC Malaysia, Zainudin said HSBC Amanah Takaful was open to opportunities but it was not a priority for the Islamic insurer.
"It's important for us, as a startup, to maximise our bancassurance potential with HSBC Malaysia and we don't want to distract our focus by getting into other forms of relationship at the moment. But if the need is there or if opportunities arise, we will do a proper evaluation on that," he added.

(This story appeared in The Malaysian Reserve on May 20, 2009. 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)

Islamic finance assets now top RM2t

The total assets under management by Islamic financial institutions now exceeds US$600 billion (RM2.11 trillion), according to a report.
State Street Corporation, the world's leading provider of financial services to institutional investors, in its Vision Report on Islamic Finance stated that Islamic finance grew as much as 20% annually since 2003.
"In fact, demand for Islamic finance products and services in the global market, may be exceeding current availability," said State Street senior vice president, Rod Ringrow in a statement yesterday.
"Islamic finance will attract an increasingly global group of investors in the years ahead.
"We believe the industry as a whole will respond with new products offering greater variety and sophistication for a host of complex, cross border transactions," he added.
"Against the backdrop of a challenging global environment, Islamic finance is emerging as a competitive form of intermediation in the international financial system.
"It has a key role to play in restoring confidence in the market," Ringrow highlighted.
He said the global financial crisis has had a limited direct impact on Islamic finance as investors seek out asset classes and markets they hope would provide stability. He noted that the Islamic financing industry had become a growing option for investors and a competitive form of financing for commercial enterprises.
"It is also allowing for the further diversification of risks and is contributing to an efficient international allocation of resources across borders," he said. — Bernama (May 19, 2009)

RHB Capital profit up on higher income: STAR

PETALING JAYA: RHB Capital Bhd recorded a net profit of RM228.6mil for the first quarter ended March 31, 2009, up 3% from RM222.4mil in the previous corresponding period due to higher net interest income, impairment loss no longer required and improved Islamic banking business income.
In a filing to Bursa Malaysia, the group said the improved performance was largely offset by lower other operating income, higher loan-loss allowances and elevated other operating expenses.
In a statement, RHB Bank chairman Datuk Azlan Zainol said: “Keen competition is expected to continue among the various industry players coupled with lower interest rates and demand, hence we expect there would be further pressure on net-interest margins.”
He added that the group would remain focused on building its core businesses as well expand its market share during the more challenging period with improvement in its sales, service and support infrastructure.
“Barring any unforeseen circumstances, the group expects to achieve a satisfactory performance in 2009,” he added. During the first quarter of 2009, the statement said, the net interest income amounted to RM573.5mil, an increase of 8% or RM43.2mil compared with the previous corresponding period.
“The increase was largely due to lower interest expense as a result of reduced treasury money market operations and benefits due to lower overnight-policy rate,” the statement said.
Other operating income declined by 12% to RM213.1mil for the first quarter due to lower fee income and lower net gain on foreign exchange.
Meanwhile, loan-loss allowances was higher by 15% as result of further pre-emptive specific provision made during the period under review in the light of weaker economic condition.

(The Star, Wednesday May 20, 2009)

PLUS plans RM600m sukuk issue

PLUS Expressways Bhd, the country's biggest toll road operator, plans to sell about RM600 million of Islamic bonds, known as sukuk, to repay maturing debt, reports Bloomberg (May 19, 2009).
CIMB Investment Bank Bhd is helping the company sell Musharakah sukuk in an offer that may close as soon as today, PLUS corporate affairs general manager How Seet Ming told the newswire. The money may be used to repay a RM550 million of senior sukuk due this month, she said. PLUS has another RM558 million of bonds maturing in 2010 and another RM1.36 billion in 2011, according to Bloomberg data.

Maybank Islamic eyes RM2b in new deposits

By Sumathi Wong
Maybank Islamic is aiming to secure RM2 billion in new deposits within a year and RM4 billion in deposits for its fiscal year to June 2010 with the launch of two new financial products. The products — Foreign Currency Mudharabah-i (FCM-i) and Profit Now Account-i (PNA-i) — which were unveiled yesterday are term deposit accounts that are Shariah-compliant.
Speaking to reporters in Kuala Lumpur yesterday [May 19, 2009], acting CEO Ibrahim Hassan said, "Being the only such product of its kind in the market under the mudharabah concept, we believe the FCM-i is timely given the increasingly globalised world we live in, and with Malaysians seeking alternative investment options as well as having investment and educational spending needs in foreign currencies."
The new products will appeal to a wide segment of customers comprising the consumers and corporate sector, he added.
The FCM-i is a short-term Islamic foreign currency term deposit account based on the principle of mudharabah, which is the concept of profitsharing between the bank and customer. Its dividends are based on an agreed profitsharing ratio that is set upfront.
The minimum deposit for individual customers is equivalent to US$5,000 (about RM17,770), with the dividend calculated at this ratio. Customers will only know the amount upon maturity of the investment, ranging from one to 12 months.
Business customers may opt for various currencies equivalent to US$20,000 for a minimum tenure of one day for the US dollar and seven days for the euro, Australian dollar and British pound.
The New Zealand dollar, Hong Kong dollar, Canadian dollar, Singapore dollar, Swiss franc and Japanese yen have a one-month tenure with a maximum of 12 months.
Meanwhile, the PNA-i is the Shariah concept of murabahah, or cost-plus sale, which offers a fixed return and dividends are paid upfront once invested. This product requires a mi n imum deposit of RM10,000 with increments of RM1,000 with an investment tenure of one to six months.
Ibrahim said that the demand for its consumer financing comes from the automobile and housing sector as well as the Amanah Saham Bumiputera unit trust and personal financing.
Up till December 2008, Maybank Islamic's total deposits stood at RM18 billion and is expected to grow by another RM1.5 billion by its fiscal year ending June 2009. As for the expansion of new branches, Ibrahim said that while the bank hopes to open a branch in each state, this would depend on business viability given the current economic slowdown.

(This story appeared in The Malaysian Reserve on May 19, 2009. 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)

Danajamin appoints rating expert as deputy CEO

By Habhajan Singh
Danajamin Nasional Bhd (Danajamin), the financial guarantee insurer set-up under the second national economic stimulus package, has appointed a rating expert as its deputy chief executive officer Khoo Boo Hock (picture), the head of infrastructure and utilities at RAM Rating Services Bhd, has been roped in to assist the yet to be named chief executive officer in steering the national financial guarantee provider, sources say.
Khoo, a rating specialist at the country's first rating agency, was involved from the inception of outfit meant to provide financial guarantee insurance to issues of private debt and Islamic securities, one of the measures intended to boost the bond market.
"He understands the bond market well," said one industry source.
Last Friday [May 15, 2009], Bank Negara Malaysia (BNM) announced that Datuk Seri Abdul Hamidy Abdul Hafiz, formerly the managing director and chief executive officer of Affin Bank Bhd from June 2003 to March 2009, as Danajamin chairman.
He was former the managing director of Pengurusan Danaharta Nasional Bhd, the nation's asset management company tasked to acquire the non-performing loans (NPLs) of banks following the 1997 financial turmoil.
Danajamin is one of the measures put into place to offer better access to capital for local businesses and is seen as the missing link in the local bond market.
The outfit is an AAA-rated financial guarantee insurer with a mission to facilitate capital raising by Malaysian companies from the capital markets by providing insurance protecting the holders of both Islamic and private debt securities against any missed payments or defaults. It was established as part of the RM60 billion stimulus package announced by the government on March 10.
It is a government owned entity which at present has an issued and paid-up capital of RM1 billion with a capacity to underwrite policies of up to RM15 billion. Danajamin facilitates access to long-term capital from the capital markets for investment grade Malaysian companies.
In exchange for a Danajamin insurance, issuers will pay a premium which will be competitively benchmarked against the prevailing cost of raising capital. Issues that have obtained a Danajamin insurance will be rated AAA(fg).
Danajamin is a licensed insurance company under the Insurance Act 1996 and is regulated and supervised by Bank Negara Malaysia.
The other Danajamin directors are Datuk Mohd Hanif Sher Mohamed (former CEO of Credit Corporation (Malaysia) Bhd), Datuk Albert Yeoh Beow Tit (former CEO OCBC Bank Malaysia Bhd and a current director at Cagamas Bhd and Great Eastern Assurance Malaysia Bhd, Datuk Mohammed Hussein (former executive director and deputy President of Malayan Banking Bhd), George Ratilal (former managing director of RHB Sakura Merchant Bankers Bhd and now a vice president for finance at Petronas), Philip Tan Puay Koon (former country treasurer of Citibank Bhd), Nik Mohd Hasyudeen Yusoff (current president of the Malaysian Institute of Accountants), and Abdul Kadir Md Kassim (current managing partner of Messrs Kadir, Andri & Partners).

(This story appeared in The Malaysian Reserve on May 19, 2009. 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)

HSBC plans more Islamic banking branches: THE STAR

By SHARIDAN M. ALI
SHAH ALAM: HSBC Bank Malaysia Bhd plans to open more Islamic banking branches under its unit HSBC Amanah Malaysia Bhd this year after carrying out a post-implementation review on its four branches.
“There are plans to increase our branches this year but, more importantly, we have to review our existing four branches so that we can avoid any possible hiccups and improve our future undertakings.
“We are in the midst of identifying the location for our future branches,” HSBC Amanah executive director Musa Abdul Malek said after the official opening of the company’s latest branch in Shah Alam yesterday [May 12, 2009].
Irene M. Dorner and Shah Alam mayor Mazalan Md Noor at the launch of HSBC Amanah branch in Shah Alam
HSBC Amanah also has branches in 1Utama Shopping Centre, Ampang Point and Juru Auto City in Penang.
Chairman Irene M. Dorner said the Shah Alam branch hoped to have at least 3,000 customers by year-end. “It now has about 300 customers since it started operations three weeks ago,” she said.
Islamic banking contributed about 10.5%, or RM257.9mil, to HSBC Bank Malaysia’s total operating income for the financial year ended Dec 31.
HSBC Amanah, which was formed as HSBC Bank Malaysia’s Islamic banking subsidiary in February last year, recorded a net profit of RM22.7mil from February to December 2008.
HSBC Amanah’s total shareholders fund stood at RM683.8mil as at Dec 31.

(The Star, Wednesday May 13, 2009)

Bank Islam ends IT deal with Temenos; picks rival

By Habhajan Singh
Bank Islam Malaysia Bhd (Bank Islam) has terminated its core banking system contract entered into just over a year ago with Swiss banking software maker Temenos Group AG.
Sources told The Malaysian Reserve that the nation’s first Islamic bank had parted ways with Temenos even before the new core banking system could be set up.
The contract has now been transferred to its rival, Singapore-listed Silverlake Axis Ltd.
The move might delay the bank’s IT restructuring plans mooted in 2006. However, the bank's management has insisted previously that plans were still on track for completion next year.
"Bank Islam and Temenos will have to resolve issues arising from the decision to pull the plug in this venture. You cannot rule out legal wrangling," said an industry source.
In a recent email, Temenos told The Malaysian Reserve that it "can confirm that the Bank Islam project in Malaysia is currently under review".
"Due to contractual agree-ments with our customers, we cannot offer any further comment on this particular project at this time," Temenos said in an email reply.
The project was deemed key to putting Bank Islam’s information technology plans into motion.
On Jan 29, The Malaysian Reserve reported that Bank Islam was on the verge of terminating its core banking system contract with Temenos, potentially causing it to incur millions of ringgit in losses.
The IT revamp is one of the five pillars of a turnaround plan announced in mid-2006, shortly after Datuk Zukri Samat was appointed as Bank Islam's new managing director.
His coming onboard was part of the bank's fresh start following a net loss of RM507.8 million for the financial year ended June 30, 2005, and a net loss of RM1.31 billion the following year. It is understood that several issues were raised over the project agreement signed with the Swiss banking software maker in October 2007.
In March 2008, Zukri told reporters that the bank had allocated some RM100 million to revamp its IT system, including the bank’s core banking system, which was due to be completed in 2010.
While Temenos did not say what caused the termination or what the implications were, it said in an email reply that the firm remains committed to servicing the Malaysian market and supporting its existing clients with core banking products and expertise.
"We are also pleased to confirm the recent T24 'go live' at AmBank in Malaysia," it added. On Feb 9, Temenos announced that AmBank Group went 'live' with the Temenos T24 (T24) to support its treasury division.
It said the T24 Model Bank is a packaged core banking software which includes banking best practices based on Temenos’ implementations in over 600 financial institutions and 120 countries.
This is similar to the core banking system now in dispute with Bank Islam. In October 2007, Temenos announced that its system had been selected to replace Bank Islam’s two in-house systems — a Silverlake core banking platform and an i-Flex Internet banking system — which the bank had operated over the last 10 years.

(This story appeared in The Malaysian Reserve on May 18, 2009. 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)

Islamic Bank of Asia may shun LME transactions

The Islamic Bank of Asia, a venture of Singapore’s DBS Group Holdings Ltd, aims to stop using London Metal Exchange transactions as the basis for products after religious advisers said some may not comply with Shariah, reports Bloomberg (May 14, 2009).
The bank is in talks with Olam International Ltd to use its trading in commodities such as rice, coffee, cotton and cocoa as the basis for financing compliant with Muslim law, its chief executive officer, Vince Cook, said in an interview in Singapore recently, it said.
"Industry practice is based on the LME, but our Shariah board would like us to explore alternatives as they’re concerned some t rades through the LME may not involve the physical movement of goods," Cook told the newswire.
THE REPORT GOES ON:
Using contracts including Murabahah sale-and-deferredpayments and Ijarah leases, Islamic banks seek to comply with Shariah’s ban on interest and stipulation that financial agreements are based on the transfer of goods or services.
With the help of Shariah scholars who judge which products are compliant, the Islamic finance industry has attracted as much as US$1 trillion (RM3.56 trillion) of Muslim wealth, according to the Malaysia-based International Islamic Financial Services Board.
The Islamic bond market was roiled last year after a group of scholars led by Pakistan-based Sheikh Muhammad Taqi Usmani said as much as 85% of the securities may not comply fully with the precepts of Shariah. Sales of Islamic bonds, known as sukuk, plunged to US$13.9 billion in 2008 from a record US$31 billion a year earlier, according to data compiled by Bloomberg.
"Olam are doing real business, buying and selling food commodities," Cook said.
"We think we could use this to facilitate an awful lot of our business.
"There would be no time difference and it would also help the local commodity industry create better liquidity."
Olam, which is also based in the city-state, operates in 60 countries and trades more than five million tons of commodities each year, according to its website.
Pioneering work with The Islamic Bank may lead to the creation of a trade-finance system that other banks can use, according to K Ravikumar, Olam’s chief financial officer.
"There is a great requirement in the Islamic world for a product like this," he said in a phone interview from Singapore recently.
"Our commodities are all agri-products and are all Shariah-compliant, so no meat or tobacco."
The Islamic Bank’s board of Shariah scholars comprises Sheikh Nizam Yaquby, Sheikh Mohammed Elgari, Mohammed Daud Bakar and Abdul Sattar Abu Ghuddah, according to its website.
Bahrain-national Yaquby has advised the Islamic units of banks including BNP Paribas SA, Citigroup Inc and Standard Chartered plc, while Saudi Arabia-based Elgari’s clients have included Merrill Lynch & Co, according to the website of HSBC Holdings plc’s Amanah unit.

[See The Malaysian Reserve report on May 11, 2009, entitled 'Islamic organisation bans use of organised tawarruq']

MOODY'S: Need to prioritise risk management

By Habhajan Singh
Appropriate systems and infrastructure to address risk issues need to be in place to support sustainable growth for Islamic banks, says an international rating agency.
Noting that most Islamic banks' strategies try to achieve asset growth, Moody's Investors Service said that risk management should be implemented first followed by growth.
In a report released on May 11, Moody's identified various characteristics found in strategies adopted by Islamic banks that enhance their financial strength ratings, which it said included strategies that improve franchise value, risk positioning and financial fundamentals.
"While Islamic banks in different countries operate under different environments, are at different stages of development and therefore require different strategies, we can still find a set of common characteristics among their various strategies, which benefit their long-term ratings," Christine Kuo, a Moody's vice president/senior analyst and author of the report, said in a statement.
Risk management was one of the issues raised at the 6th Islamic Financial Services Board (IFSB) Summit 2009 in Singapore between May 5-8.
In a banking forum in Kuala Lumpur on May 11, HSBC Bank Malaysia Bhd deputy chairman and chief executive officer Irene M Dorner highlighted the preparedness of regulators to modulate the Islamic finance industry, particularly when it moves beyond replication of the conventional product profitsharing and risk-sharing.
"If you move into the next phase of Islamic banking, beyond the conventional products — the profitsharing, risk-sharing, and so on — I'm not sure how you can regulate that," she told the 13th Malaysian Banking Summit 2009.
The issue of regulation is closely tied to risk management.
In its report, Moody's said that when it comes to global comparisons, it is more important for Islamic banks to build strong franchises in selective markets and businesses, and to maintain sound financial profiles as opposed to big balance sheets.
The report assesses strategies adopted not just by Islamic financial institutions (IFIs), whose scope of business must comply with Shariah law, but also conventional banks which operate Shariah-compliant departments.
According to the report, while size is important — as diversification is harder when an institution is small — banks that enjoy dominant positions in smaller but more favourable markets may have a higher franchise value (which could translate into greater earnings stability) than a bigger bank with a highly price-sensitive customer base operating in a competitive market.
"It follows that it is better for Islamic banks to have a strategy that helps achieve a stronger position in a few selective markets than one which results in marginal positions in many competitive markets," adds Kuo.
The report notes that Islamic banks tend to have greater concentration in assets and liabilities compared with conventional banks, and face challenges in managing liquidity and risk due to the limited range of instruments available.
Moreover, Islamic products are less commoditised and require more tailoring and oversight leading to substantial overheads and operation risk.
"Additionally, for Islamic banks with significant exposures to equities and properties, conservative financial leverage is particularly important in view of the volatility in the values of these investments," notes Kuo.

(This story appeared in The Malaysian Reserve on May 18, 2009. 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)

GIH on Al Rajhi

Al Rajhi Banking & Investment Corp's (RJHI) marginally improved results as compared to the sector performance signals encouraging outcome of the diversification strategy adopted by the bank in managing both its financing and investment portfolios.
The bank’s strict adherence to Shariah-compliant activities along with no exposure to the global mortgage market has largely facilitated it in escaping the severe repercussions, which could have arose if exposed to toxic financial assets.
Thus, better positioning the bank to be preferred by the market segment inclined towards Islamic over conventional finance. In addition, RJHI’s focus on overseas expansion will better enable the bank to more effectively diversify its income sources.
However, as witnessed across the sector, RJHI may not be able to escape the contraction in banking spreads (especially because the demand deposits constituting the majority of its funding base would allow less flexibility to adjust in a falling interest rate environment). Although the bank’s dominance in retail segment provides it with a chance of earning relatively better returns on its investment portfolio, it may not be in a very strong position to re-price its corporate investments. The slowdown in the economy also calls for greater attention to avoid deterioration in retail investments exposure. We believe that the bank’s near term focus will be towards better managing investment spreads rather than balance sheet growth.
Income Statement
RJHI’s profitability results posted an increase of 1.2% (from SR6.4bn in 2007 to SR6.5bn in 2008) as compared to the decline of 11.7% in 2007. The bank’s improved performance (attributable to income growth from both core banking and non-commission activities) was somewhat better than the listed Saudi banking sector that registered a marginal growth of 0.5% in FY08. The Saudi banks’ 2008 performance was mainly dampened by 4Q08 results that witnessed pressure due to setting aside of higher financial allocations by the banks in consideration to the decline in their investment portfolios.
The bank’s investments income (FY08) recorded an increase of 9.8% (from SR8.5bn in 2007 to SR9.4bn in 2008), while the investments expense during the period showed a rise of 7.6%. At times of the softening interest rates environment, RJHI’s successful management of its investments income and expenses led to an overall improved core banking performance posting an increase in net income from investments of 10% (from SR7.7bn in 2007 to SR8.4bn in 2008).
However, the higher impairment charge for investments and others in 2008 had a dampening impact on the net income from investments after PILs (provisions for investment losses), resulting in a decline of 0.8%. RJHI’s top-line performance was augmented by an increase (y-o-y) in non-commission income by 30.1% in FY08. The bank’s continued efforts to cope with the challenging capital market conditions (TASI decline of 56.5% in 2008), showed positive results as the net fees from banking services (supported by fees from share trading services, payment services, remittance business, etc) recorded an increase of 26.6% in FY08. It is noteworthy that an increase of other operating income by 265% (FY08: SR279.6mn) could be one-off, so even after taking that into account the bank’s non-commission income still showed an increase of 12.6% in FY08.
-- Extracted from an equity research report released in May 2009 by Global Investment House
(This story appeared in The Malaysian Reserve on May 18, 2009. 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)

Race to excel in Shariah Banking

By Habhajan Singh
The Islamic finance landscape in Malaysia has attained a certain level of maturity and depth with the country being one of the pioneers in crafting legislation to govern the sector that began to emerge in the Middle East in the mid-1970s.
The Islamic Banking Act (IBA) 1983 remains the core reference for regulations for Islamic banking, while Malaysia’s experience with Islamic finance and banking has probably been put to the test more vigorously than in most other jurisdictions. For example, Islamic financing contracts have been challenged legally, with some cases going all the way to the Federal Court, the nation’s highest court.
"Some other jurisdictions dream of becoming centres for Islamic finance. But wait till one of the cases goes to court, (we need to) see if the system is able to handle it," one banker with a local Islamic bank told The Malaysian Reserve recently.
This may be true at the present moment but it may not hold for too long. Jurisdictions like Singapore and Hong Kong are already adjusting and padding their regulations to allow them to embrace Islamic finance.
They are tweaking their laws and planning new regulations to accommodate this new kid on the block. In fact, just last week, Singapore’s financial regulatory authority issued a set of guidelines on the application of banking regulations to Islamic banking. Issued to coincide with the Sixth Islamic Financial Services Board (IFSB) Summit meeting in Singapore, the Monetary Authority of Singapore (MAS) said the guidelines consolidated the various regulations and clarifications which it has issued and offers specific information on the regulatory treatment of various Islamic structures.
"This set of guidelines will provide greater clarity and certainty for financial institutions offering Islamic banking products in Singapore," it said in a statement.
On top of that, MAS had also issued two regulations clarifying that, with immediate effect, Singapore-based banks may enter into diminishing musharakah financing and spot murabahah transactions. However, there's no doubt that, on this score, Malaysia is a couple of steps ahead.
"In addition, MAS has ensured equal tax, regulatory and liquidity treatment of the Singapore dollar sukuk Singapore Government Securities, effective immediately. Taken together, these various changes will allow banks to conduct a wide range of Islamic financing activities, and to have greater flexibility in structuring instruments to meet their risk management needs," MAS said.
Such is the vigour abroad when it comes to Islamic finance. Battle lines are being drawn and knives sharpened to secure future Shariah-compliant deals.
Comprehensive Landscape
Malaysia’s experience in pushing forward the agenda for Islamic finance has been one of continuous innovation and preparing the ground on multiple fronts. Innovation is something that many Malaysian Islamic bankers pride themselves in. Malaysia has been at the forefront of engineering innovative products and developing various enabling infrastructure to facilitate the progress of the industry.
As far back as 1990, Malaysia emerged with one of its early "firsts" for Islamic finance when Shell MDS Sdn Bhd issued the first bai bithaman ajil (BBA) Islamic debt securities worth RM125 million. Four years later, in 1994, Cagamas Bhd issued the first sukuk mudharabah worth RM30 million.
On the global plane, the first global corporate sukuk ijarah also came from Malaysia in 2001, with Kumpulan Guthrie Bhd making an issuance worth RM540 million. On the legal framework, besides the IBA, Malaysia promulgated the Takaful Act 1984 to regulate and supervise Islamic takaful companies. Similarly, the country has also shown foresight on the Shariah framework front.
Malaysia is one of the first nations to establish central Shariah councils, vested with regulatory powers. The Shariah Advisory Councils were established under the wings of Bank Negara Malaysia (BNM) and the Securities Commissions (SC), the central bank and capital markets supervisor, respectively. These councils were established to act as the reference on all Shariah matters pertaining to Islamic banking and takaful as well as the Islamic capital market.
The nation had also, earlier on, emphasised the requirement for Islamic financial institutions to establish in-house Shariah commitees to ensure that business operations are in adherence with Shariah values and principles. The country also played an instrumental role in addressing a key need for the industry such as trained Islamic bankers.
No industry can survive without properly trained and equipped human resources. Here, BNM stepped up to the challenge by establishing the International Centre for Education in Islamic Finance (INCEIF), a dedicated university for the industry. Prior to that, the International Islamic University Malaysia (IIUM) had played its part in providing the much needed expertise for the sector.
Many of today’s Shariah scholars come from IIUM and some of them are still teaching staff from this higher educational outfit. Today, the university has also established the IIUM Institute of Islamic Banking and Finance (IIiBF), allowing those involved in the sector to equip themselves with the proper knowledge and understanding of the nuts and bolts that make up Islamic finance. Future Landscape As with most fields, Islamic finance is set to undergo tremendous changes in the years to come. On the local front, the stage is being prepared for the emergence of mega Islamic banks.
On April 27, BNM governor Tan Sri Dr Zeti Akhtar Aziz declared that Malaysia will be the first country to have a mega Islamic financial institution with a paid up capital of at least US$1 billion (RM3.51 billion).
"In the present economic environment, there is no such Islamic financial institution. In fact, we don’t have it in any part of the world," she said.
The announcement was made at a press conference after Prime Minister Datuk Seri Mohd Najib Razak announced measures to liberalise the financial sector, which included the issuance of two new Islamic banking licences for foreign players this year with a paid-up capital of at least US$1 billion. This is one of the core changes and future main challenges for local Islamic banks.

Legal wrangles to test Islamic banking: Reuters

A wave of debt defaults is set to hit Islamic banks as deals sour amid the global slowdown, testing the legal framework and stability of an industry already facing the biggest slump in its 30-year history. The global economic downturn that punctured Islamic banking's growth bubble is also expected to bring many sharia financing structures under the legal microscope for the first time in centres such as Dubai, Bahrain and Malaysia, reports Reuters (May 12, 2009).
The report added that expected increase in commercial disputes raises questions about whether conventional legal systems can deal with the highly specialised niche industry which has evolved into a $1 trillion industry handling government and corporate debt.
It could also test the foundations of the Islamic banking system, which the Asian Development Bank estimates is growing by 10-15 percent a year, but which some bankers and lawyers say still lacks a strong cohesive regulatory and legal framework.
Judges will have to weigh conventional law and sharia (Islamic law) used in contracts, and legal uncertainty over key contract provisions could hurt the industry's ability to bounce back when the global economy recovers, it added.
"The industry will be watching to ensure any legal disputes are settled in a transparent manner which gives certainty to the contract terms entered into," Davide Barzilai, a London-based Islamic finance lawyer with Norton Rose told the newswire. "If there a string of cases which result in contracts being overturned by the court for breach of sharia alone, then this could have a material impact on the growth of the industry."
THE REPORT GOES ON:
Fuelled by a recent rush of oil money, Islamic bankers innovated on the basic financing model, taking it beyond sale and profit-sharing contracts to more complex derivatives which are harder for courts to deal with.
Islam's rules on transparency kept sharia banks from subprime mortgage loans that mauled Western banks, but their vast exposure to the property sector, especially in the Gulf, is taking a toll as global real estate markets slide.
Gulf Arab companies deemed most vulnerable to the downturn include large United Arab Emirates (UAE) real estate developers, such as Dubai-listed Islamic mortgage firms Amlak and Tamweel.
CRUNCH TIME?
Defaults and litigation are expected to jump as the ailing world economy, tough financial markets and stalled projects make it harder for firms to repay banks and asset values plummet.
Over half of the residential and commercial property projects due for completion in Dubai between 2009 and 2012 have been cancelled or suspended, Jones Lang LaSalle said in March.
But Islamic banking's legal framework is as fragmented as other aspects of the industry, with little case law to guide judges. Many judges are also unskilled in sharia, and the relationship between Islamic and secular law is unclear.
"It's a contest between sharia law and common law," said Islamic banking lawyer Mohamad Illiayas.
"Cases have gone to court where there is a problem of conflicts and inconsistencies but the English courts have always ruled in favour of common law."
He cited a 2004 case involving Shamil Bank of Bahrain where an English court refused to apply sharia law to a murabaha contract (a popular contract of sale). The court said two systems of law cannot govern one contract.
In Malaysia, home to the world's top Islamic bond market, only a handful of cases have come before the high courts in almost three decades, with most involving basic home loan cases.
Judges' expertise has been in focus after some courts questioned the validity of the bai bithaman ajil contract, a type of deferred payment sale, sowing confusion in the industry.
The contract was recently declared valid by an appellate court, but Malaysian authorities now plan to force judges to refer to national sharia advisers when handling Islamic finance cases.
"Looking purely at the formal qualifications and experience of judges, it would be hard to expect them to be fully aware of all the relevant intricacies of Islamic finance," said Megat Hizaini Hassan, an Islamic finance lawyer with Zaid Ibrahim.
In the Gulf Arab region, law firms have started to build up Islamic finance expertise but their skills is almost exclusively limited to consulting banks on deal structures and drafting contracts, and most have yet to see a court room from inside.
Islamic finance disputes can be referred to arbitration by specialists but many Malaysian cases still go court. In Bahrain, such cases have mostly gone to dispute resolution committees staffed by judges and specialised central bank officials.
But arbitration is not problem-free, either.
"We will still have to resort to common law at one stage or the other," said Illiayas. "Even after the arbitration award is given, if you want to enforce that award you still have to go to court."

Islamic Finance Needs To Be More Regulated

SINGAPORE, May 8 (Bernama) -- Islamic finance needs to be further regulated as it is now growing and becoming an increasingly important component in the international financial system, according to Bank Negara Governor Tan Sri Dr. Zeti Akhtar Aziz.
Despite the current challenging global financial environment, the growth momentum of Islamic finance had continued, she said when chairing a discussion on direction of regulatory policies at the 6th Islamic Financial Services Board (IFSB) Summit here today.
She said regulation issues had significantly now become the subject of world discussion in the current crisis, and in this context it was critical regulations that would ensure the soundness and stability of the Islamic finance system be developed.
Zeti said the recent G-20 Summit had also declared that it would continue to take action to strengthen, regulate and supervise the financial sector following the fallout in the global financial system.
She said the Islamic Development Bank and IFSB earlier this year had formed a high level Task Force on Islamic Finance and Global Financial Stability, which she chairs, to examine the key elements of Islamic finance that could contribute to its viability and resilience.
The task force would also "examine the building blocks in the development of the international financial architecture that would contribute to its resilience including issues relating to regulations and crisis management," she said.
Reminiscing on Malaysia's experience, Zeti said the country was saved from the financial crisis that hit Asia in the late 1990's because its financial system was more regulated than others.
She said there was no 'bursting of bubble' in the property asset markets as Malaysia had been placing greater emphasis on financial regulation prior to the crisis then.
"When the currency crisis happened and money depreciated, we were not highly indebted," she said stressing the importance of having good financial regulations.
She said the need for an effective regulatory supervisory framework for Islamic finance was critical as the rest of the world now was on transition towards consideration for more regulation. -- BERNAMA

‘Islamic finance not a panacea for all ills’

By Sumathi Wong
The global economic crisis may not necessarily have been averted by Islamic finance as the sector has yet to reach a critical mass to prove it, says the head of a foreign bank in Malaysia.
HSBC Bank Malaysia Bhd deputy chairman and chief executive officer Irene M Dorner said another critical issue for Islamic finance is the preparedness of regulators to modulate the industry, especially when it moves beyond replication of the conventional product profitsharing and risk-sharing.
"Whilst Islamic banking is definitely the future, please don't go away with the idea that it's the panacea for all ills. It's not. "If you move into the next phase of Islamic banking, beyond the conventional products — the profitsharing, risk-sharing, and so on — I'm not sure how you can regulate that," Dorner told the 13th Malaysian Banking Summit 2009, organised by the Asian Strategy and Leadership Institute (ASLI), in Kuala Lumpur yesterday.
Other panelists at the CEO forum, entitled "Coping with tough times: How banks can survive and thrive amidst the global financial crisis", were Malayan Banking Bhd (Maybank) president and chief executive officer Datuk Seri Abdul Wahid Omar and Hong Leong Bank Bhd group managing director and chief executive officer Yvonne Chia.
Dorner noted that there have been suggestions the current crisis would not have happened if the whole world had been utilising Islamic finance. "There have been various pundits in the press saying it wouldn't have happened.
"Actually, there's insufficient Islamic finance in the world for anybody to say whether that is true or not true," she said.
Malaysia's Islamic banking sector registered double-digit growth over the past eight years with an average annual growth rate of 20% in terms of assets. As at the end of 2008, the share of Islamic banking assets in the total banking sector has expanded to 16.7% compared to 6.9% in 2000. Dorner's caution, particularly on the critical role of the regulators, was also was raised at the 6th Islamic Financial Services Board (IFSB) Summit held in Singapore last week.
IFBS secretary-general Prof Rifaat Ahmed Abdel Karim told the summit that "every financial institution requires close supervision, regardless of whether it is conventional or Islamic".
Monetary Authority of Singapore's (MAS) managing director Heng Swee Keat in his welcoming remarks at the meeting said, "While Islamic finance has features that make it robust, there are also risks such as liquidity and concentration risks that demand special attention."

(This story appeared in The Malaysian Reserve on May 12, 2009. 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)

Islamic organisation bans use of organised tawarruq

By Habhajan Singh
An influential international Islamic organisation has slapped a ban on organised tawarruq, a Shariah concept that has picked up steam in Malaysia in the last few years.
It is widely used in the Middle East particularly for cash financing. The decision by the International Council of Fiqh Academy, which wields authority on Shariah related matters including Islamic finance, may put a damper on the moves by local Islamic banks.
The banks had recently begun structuring new products, with tawarruq as its Shariah enabler, in order to make them acceptable beyond Malaysian shores.
The decision will likely force Islamic bankers to go back to the drawing board before deciding on their next course of action, which could very well be to ignore the Fiqh Academy decision and to carry on with the usage of tawarruq, several bankers and Shariah scholars told The Malaysian Reserve.
"We have to see how the industry and other Shariah scholars react to this decision. Even in the Fiqh Academy, there were scholars who were for and against the decision," said local Shariah scholar Dr Engku Rabiah Adawiah Engku Ali.
Tawarruq means purchasing a commodity on a deferred price, and later selling it to a third party with the objective of obtaining cash, according to a definition by Bank Negara Malaysia (BNM).
In March, the central bank introduced the Commodity Murabahah Programme, known as tawarruq in some jurisdictions, to provide a more diverse range of policy instruments in managing short-term liquidity in the Malaysian Islamic interbank money market. On the commercial front, outfits like Bank Islam Malaysia Bhd and Bank Rakyat Bhd were understood to have been studying the tawarruq concept to replace Shariah contracts like bai inah and qardh when offering credit card facilities.
The Fiqh Academy's decision is likely to echo the flurry of debates and discussions that ensued following comments by Sheikh Muhammad Taqi Usmani on sukuk in February 2008. Adding fuel to the fire were comments by the chairman of the Shariah Council of Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), who said that a good number of Islamic bonds, or sukuk, were not Shariah-compliant.
Meanwhile, at a five-day session which ended on April 30 in Sharjah, the United Arab Emirates, the Fiqh Academy said it has resolved that it is not permissible to execute both tawarruq (organised and reversed) because simultaneous transactions occur between the financier and the mustawriq, whether it is done explicitly or implicitly or based on common practice, in exchange for a financial obligation. This was done after the council reviewed research papers on tawarruq, its meaning and its type (classical applications and organised tawarruq).
"This is considered a deception, i.e. in order to get the additional quick cash from the contract. Hence, the transaction is considered to contain the element of riba," the council ruled, according to an English translation of the ruling made available by the Kuala Lumpur-based International Shariah Research Academy for Islamic Finance (Isra).
In the translated document, tawarruq is described as follows: "Technically, according to the fiqh jurists, tawarruq can be defined as a person (mustawriq) who buys a merchandise at a deferred price, in order to sell it in cash at a lower price. Usually, he sells the merchandise to a third party, with the aim to obtain cash. This is the classic tawarruq, which is permissible, provided that it complies with the Shariah requirements on sale (bai)."
The document also noted that the contemporary definition of organised tawarruq is when a person (mustawriq) buys a merchandise from a local or international market on a deferred price basis. The financier arranges the sale agreement either by himself or through his agent. Simultaneously, the mustawriq and the financier execute the transactions, usually at a lower spot price. Reverse tawarruq is similar to organised tawarruq, but in this case, the (mustawriq) is the financial institution, and it acts as a client, according to the document. In relation to this, the Shariah powerhouse has made two recommendations.
"To ensure that Islamic banking and financial institutions adopt investment and financing techniques that are Shariah-compliant in all its activities, they should avoid all dubious and prohibited financial techniques in order to conform to Shariah rules, and so that the techniques will ensure the actualisation of the Shariah objectives (maqasid Shariah).
"Furthermore, it will also ensure the progress and actualisation of the socio-economic objectives of the Muslim world. If the current situation is not rectified, the Muslim world will continue to face serious challenges and economic imbalances that will never end."
In its second recommendation, it urged financial institutions to provide qard hasan (benevolent loans) to needy customers in order to discourage them from relying on tawarruq instead of qard hasan.
"Again these institutions are encouraged to set up a special qard hasan fund," it said.

(This story appeared in The Malaysian Reserve on May 11, 2009. 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)

Tawarruq fatwa: Translation from ISRA

(Translation from the Arabic as provided by ISRA)
Resolution 179 (19/5) in relation to Tawarruq: its meaning and types (classical applications and organized tawarruq)

The International Council of Fiqh Academy, which is an initiative of the Organization of Islamic Conferences (OIC), in its 19th session which was held in Sharjah, United Arab Emirates, from 1 - 5 of Jamadil Ula 1430 AH, corresponding to 26 – 30 April 2009, decided on the following:

Having reviewed the research papers that were presented to the Council regarding the topic of tawarruq, its meaning and its type (classical applications and organized tawarruq), a resolution were passed. Furthermore, after listening to the discussions that revolved about the applications of tawarruq, the resolutions were presented at the International Council of Fiqh Academy, under auspices of the Muslim World League in Makkah.

The following were the resolutions:
First: Types of tawarruq and its juristic rulings:
Technically, according to the Fiqh jurists, tawarruq can be defined as: a person (mustawriq) who buys a merchandise at a deferred price, in order to sell it in cash at a lower price. Usually, he sells the merchandise to a third party, with the aim to obtain cash. This is the classical tawarruq, which is permissible, provided that it complies with the Shari’ah requirements on sale (bay’).
The contemporary definition on organized tawarruq is: when a person (mustawriq) buys a merchandise from a local or international market on deferred price basis. The financier arranges the sale agreement either himself or through his agent. Simultaneously, the mustawriq and the financier executes the transactions, usually at a lower spot price.
Reverse tawarruq: it is similar to organized tawarruq, but in this case, the (mustawriq) is the financial institution, and it acts as a client.

Second: It is not permissible to execute both tawarruq (organised and reversed) because simultaneous transactions occurs between the financier and the mustawriq, whether it is done explicitly or implicitly or based on common practice, in exchange for a financial obligation. This is considered a deception, i.e. in order to get the additional quick cash from the contract. Hence, the transaction is considered as containing the element of riba.

The recommendation is as follows:
To ensure that islamic banking and financial institutions adopt investment and financing techniques that are Shari’ah-compliant in all its activities, they should avoid all dubious and prohibited financial techniques, in order to conform to Shari’ah rules and so that the techniques will ensure the actualization of the Shari’ah objectives (maqasid Shari’ah). Furthermore, it will also ensure that the progress and actualization of the socioeconomic objectives of the Muslim world. If the current situation is not rectified, the Muslim world would continue to face serious challenges and economic imbalances that will never end.
To encourage the financial institutions to provide Qard Hasan (benevolent loans) to needy customers in order to discourage them from relying on Tawarruq instead of Qard Hasan. Again these institutions are encouraged to set up special Qard Hasan Fund.

Financial tawarruq may be here to stay, says scholar

By Habhajan Singh
The local Islamic banking fraternity may not go in the way of the International Council of Fiqh Academy with the usage of financial tawarruq, says a local Shariah scholar.
Dr Engku Rabiah Adawiah Engku Ali, an associate professor at the International Islamic University Malaysia (IIUM) and a Shariah advisor at a local bank, said that it would be an option moving forward in dealing with this issue.
Asked if the local Islamic finance fraternity may decide to carry on with the practice here, just as how they practice bai inah which is frowned upon in the Middle East, she agreed it could be a possibility.
"Compared to inah, this is less controversial. Inah is more controversial. So, if Malaysia had allowed inah, the possibility of allowing tawarruq is there," she told The Malaysian Reserve.
Bai inah, a concept of sale with an imediate repurchase, used to a great degree for personal and corporate financing, is widely used by Islamic financial outfits locally, but rejected by Shariah scholars in most jurisdictions in the Middle East and some other parts of the world.
At its meeting which ended on April 30, the influential Fiqh Academy announced that it had slapped a ban on organised tawarruq, a Shariah concept that had been widely used in the Middle East all these years and which began gaining currency locally in the last few years.
The decision, if adopted, would mean that local Islamic banks would have to steer away from the Shariah concept that is being injected into personal financing products like credit cards and personal loans.
"We have yet to see how the industry would react to this. It is to be seen if they would adopt this decision," she said.
Dr Engku Rabiah said the other possibility is to look for possible exceptions to overcome the objections towards deploying the tawarruq concept in Shariah contracts.
Upon an initial reading of the ruling, she said local banks could still apply tawarruq if they could weed out the parts that are found to be not permissible, since tawarruq itself is not the bone of contention. Locally, bankers from Islamic banks would start the process of trying to understand better the latest ruling from the Fiqh Academy.
"They are starting to talk about it. We need more information before we can decide on the next course of action, if any," said one banker with a regional Islamic bank.

(This story appeared in The Malaysian Reserve on May 11, 2009. 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)

Singapore: Guidelines on Islamic banking

THE Monetary Authority of Singapore (MAS) has issued another two regulations on Islamic banking - an area which it says will become more popular in the post-crisis world. The regulations mean that with immediate effect, Singapore-based banks may enter into what is known as diminishing musharaka financing and spot murabaha transactions, MAS managing director Heng Swee Keat told an Islamic finance conference on May 7, reports Singapore's Straits Times.
A diminishing musharaka transaction, for example, is a joint ownership arrangement where a bank gradually sells its portion of the jointly owned asset to the customer. This allows the bank's share of the asset to 'diminish' over time. Ultimately, the ownership of the asset - which can be in the form of property, vehicles, machinery or commodities - is transferred entirely to the buyer, the report added.
The central bank has also issued a 'consolidated set' of guidelines that provide 'greater clarity and certainty' for financial institutions offering Islamic banking products here, the report said.
MAS said the guidelines basically consolidate the various regulations and clarifications that it has made about the 'regulatory treatment of various Islamic finance structures under its rules'.
Mr Heng, who was speaking at the sixth Islamic Financial Services Board summit, said Islamic finance will assume a more prominent role in the coming years.
'In this crisis, both conventional and Islamic financial markets have been affected, but the restrictions on the use of leverage and speculation has put Islamic finance in a better stead,' he said.
Global Islamic finance assets today range from US$700 billion to US$1 trillion, according to some estimates. Oliver Wyman, an international management consulting firm, has even estimated that global Islamic finance assets could potentially grow to US$1.6 trillion by 2012.
Mr Heng stressed that MAS will continue to work towards a regulatory approach that is clear, relevant and consistent across the range of Islamic financial activities.
'We face challening times, but the dynamism of Asia, including the Middle East, will return and the structural economic changes are likely to accelerate,' he said. 'The focus on the role of finance to develop productive sectors will raise the profile of Islamic finance, and create new opportunities.'