REUTERS: Bahrain eyes external sharia audits for Islamic banks

Bahrain's Waqf Fund, a non-profit body set up by the central bank, has proposed mandatory external sharia audits for Islamic financial institutions to help strengthen compliance and improve the image of the industry, reports Reuters (3 March 2014).

Regulators around the world are increasing their scrutiny of Islamic finance, including the boards of sharia scholars who rule on whether activities follow religious principles.m Since sharia boards tend to be paid by the institutions whose activities they oversee, the scholars can be open to accusations of conflicts of interest - prompting calls for separate and independent oversight, the report adds.

The report adds: The Waqf Fund, established in 2006, is backed by 21 institutions such as banks and mostly focuses on educational initiatives. Bahraini regulators do not have to accept its proposals but since it is chaired by the central bank's executive director of banking supervision, Khalid Hamad, its recommendation appears likely to be adopted. While the proposal is for Bahrain, it may have an impact on Islamic finance globally because of Bahrain's central role in the industry.

WHAT IS THE WAQF FUND:

The Waqf Fund was established in November 2006 under the auspices of the Central Bank of Bahrain (CBB) in partnership with Islamic Financial Institutions (IFIs) in Bahrain. Among the founding IFIs were Arcapita Bank, Bahrain Islamic Bank, Kuwait Finance House (Bahrain), AlBaraka Banking Group, Unicorn Investment Bank, ABC Islamic Bank, Shamil Bank (now Ithmaar Bank) and Gulf Finance House. The member institutions made one-time contributions to the Waqf Fund's corpus which is invested in Islamic money market instruments and the return is used to finance the Fund's initiatives. These initiatives are executed through partner organisations. - INFORMATION ON THE FUND FROM BAHRAIN CENTRAL BANK

MORE INFO ON THE FUND:

The fund has a budget of US$1.4 million for 2014, approved at its 19th Board of Trustees meeting at the Central Bank of Bahrain in December 2013.

In a press release then, available on the website of the Central Bank of Bahrain, the fund was described as 'a Bahrain-based special fund to support Islamic finance training, education and research'. At the meeting, its board approved the leadership grooming program for member institutions and providing financial support to help Accounting & Auditing Organization for Islamic Financial Institutions (AAOIFI) in further developing the Certified Islamic Professional Accountant (CIPA) qualification.

In July 2013, according to another statement, the fund started a monthly discussion session is planned with prominent Shariah scholars to 'an opportunity to interact with the scholars, ask questions, seek clarifications and discuss new ideas'. In a statement, the sessions were meant 'to groom the next generation of Shari’a scholars'.

THE REUTERS REPORT GOES ON:

The proposal ties in with growing pressure for reforms to the sharia oversight system in other countries. For example, Kuwait's central bank governor Mohammad al-Hashel suggested in a December speech that an independent legal entity should oversee the way in which Islamic financial institutions certify they are following sharia principles.

The Waqf Fund will develop a framework for external sharia audits with a team of audit firms, scholars and the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI).

"An independent sharia audit should be made mandatory by regulators in order to achieve the desired benefits," the fund said in a statement on Sunday.

Many countries, including Malaysia and Pakistan, have over the past year taken steps to overhaul their Islamic finance rules; the reforms have included taking a more active role in monitoring sharia scholars. In Malaysia, scholars are now legally accountable for the financial products they approve and liable to fines and prison time for wrongdoing.

RUSHDI: Knowing the numbers game in Islamic Finance

‘A good decision is based on knowledge and not on numbers.’ — Plato.

A day does not go by in the global media without an article on Islamic finance, but it’s mainly rear view coverage and/or analysis.

Yes, we know about the prohibitions, as stories are generally about the “don’ts,” no interest, pork, alcohol, gambling, etc. Surely, the spirit of Islamic finance is about the “positives” of sustainability, governance, stewardships, financial inclusion, etc.

Yes, we know about the connection to ethical finance, meaning financing, investing, and insuring in the non-sin economic sectors. But, is ethical finance talking about Islamic finance? Yes, we know Islamic finance is about connecting the real economy to finance economy, hence, excesses, derivatives and speculation are prohibited. But, if Islamic finance is both commodity Murabahah centric and real estate biased, then where is the innovation that finances the other nine economic sectors?

Yes, we know the size, US$1.3 trillion (RM4.3 trillion), and growth rates, 15%-20% per annum, but is it profitable growth? What happens to Islamic finance when the price of oil goes to less than US$50 per oil barrel? When will it de-link from oil?

Yes, we know about sukuk, from size, issuance, growth, league tables, etc. If sukuk has become the alter ego of Islamic finance, when will we see Mushrakah and Mudarabahah Sukuk spark development of the Islamic equity capital market?

Islamic Finance 1.0

It took Islamic finance 40 years to reach 1.0, that is, US$1 trillion in size, or less than the 1% of global banking assets. During the launch phase, the KPI (key performance indicator) was general awareness about the collateral based finance niché market, ie, rules of engagement.

It was a Muslim country phenomenon, led by the UAE (Dubai), Malaysia, Bahrain, etc, and “international” transactions took place in London and money was managed in a compliant manner by the private Swiss banks for high net worth individuals.

The key takeaway question during this time period: Was the enabling foundation and infrastructure for growth, innovation, development, and cross border expansion established?

Islamic finance 2.0

Depending on how one views the numbers games, Islamic finance has not breached the US$2 trillion mark, but is expected to reach the milestone before 2016. But, if it’s still Murabahah centric with real estate biased, and continues to focus on the Islamic debt capital market (DCM) with nominal compliant SME, VC, and micro-financing, then we are quick-sand stuck in stage 1.0.

The best way to describe 2.0 is to mention sampling of its attributes, as that will get us to US$2 trillion, satisfying those who are numbers obsessed. It should be remembered that a milestone is just a sign post on the road to development and the positioning of Islamic finance as an efficient alternative to conventional finance.

Some of the signs for 2.0 include:

(1) Wakala based Islamic inter-bank benchmark rates;

(2) short term sukuk (programmes) to address asset/liability mismatch and liquidity;

(3) expansion of project based sukuk to build out infrastructure in Organisation Islamic Cooperation (OIC) and municipality needs indebted western countries;

(4) Islamic bank and Takaful consolidation to achieve critical mass, and robust Retakaful to address “leakage”; and

(5) establishment of OIC (subset is Islamic) asset management hub which implies expansion of Islamic asset classes to include, say, compliant trade finance funds (implies increased trade).

Notice, I have deliberately omitted the usual suspects of standardisation, arbitration, cross currency swaps, bankruptcy/lender of last resort, Shariah scholars, qualified human capital, etc., as we need to “do rather than rehash talk of the known knowns”.

Islamic Finance 3.0
It should no longer be a numbers game, at, say US$3 trillion, as it will still be less than 5% of conventional banking. Islamic finance 3.0 should be about:

(1) Branded as Participation Finance, where focus is on business and over religion and does not represent a “threat” or favouritism towards one religion by a country.

(2) A dedicated sovereign wealth fund that builds out Islamic asset classes and acts as feeder to pension funds in Muslim (and non-Muslim) countries.

(3) An authentic (electronic) Islamic stock exchange of only Shariah based (OIC/Non-OIC) companies (Islamic banks, Takaful operators, leasing companies, iREITs), Islamic closed end funds, exchange-traded funds, listed tradeable Sukuk, etc. Starts process (a) financing a knowledge based economy and (b) reducing DCM bias!

(4) Harvard-like business school for Islamic finance and the US$2.6 trillion halal industry, as today’s kaleidoscope of Islamic finance certificates, courses, diplomas, training, etc, scattered in many countries produces varying qualities of graduates! Furthermore, Islamic finance industry seems to cherry experienced conventional bankers to train them in Islamic finance over few weeks/months, and the graduates cannot compete!

(5) Convergence by financing Muslim consumerism of the US$2.6 trillion halal industry’s six silos, food/beverage, clothing/fashion, media/ entertainment, pharmaceutical, cosmetics, and tourism/travel.

Conclusion

“Anyone who thinks there’s safety in numbers hasn’t looked at the stock market pages.” — Irene Peter.

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Rushdi Siddiqui, a former global director at Dow Jones Indexes and global head at Thomson Reuters in Islamic finance, is now president/ED of a (halal) US-based agro-food company. This article first appeared in The Malaysian Reserve, 17 Feb 2014

Bahrain’s Ithmaar Bank sees 1Q net profit plunge 88%

Established in 1984, Ithmaar Bank (Ithmaar) is a regional banking and financial services group, whose services include investments, private, retail and commercial banking, private equity, Islamic insurance and assurance, equipment leasing and real estate development. It has an operational presence and investments across Mena and Asia.
Moreover, in a view to broaden its GCC presence, Ithmaar is also cross listed on the Kuwait Stock Exchange in 2008. During 1Q09, Ithmaar’s net profit plunged 88% to US$3.83 million (RM13.34 million) from US$32.01 million in 1Q08 on falling operating income, rising impairment provisions and a foreign currency translation loss. The bank’s total operating income declined 51.1% to US$49.26 million in 1Q09 from US$100.76 million in 1Q08 on falling interest rate and noninterest incomes. Its annualised net interest margin and net spread decreased 260 bps and 120 bps to 1.1% and 2.4% in 1Q09, respectively. As a result, net interest income plummeted 58.2% to US$9.39 million in 1Q09. Moreover, fees and commission income and income from fund management and services fell 20.2% and 54.5% to US$7.55 million and US$2.19 million in 1Q09, respectively. Income from investment properties was lower by 60.4% q-o-q at US$24.46 million from US$61.74 million q-o-q. However, the bank reported a trading income of US$1.82 million as against a trading loss of US$0.25 million in 1Q08. On the expenses side, its operating expenses decreased 21.8% to US$31.85 million on account of a 20.5% decline in staff costs and a 39.6% fall in general and administrative expenses, countered by a 14.4% increase in depreciation and amortisation expenses. However, share of profit of associated companies rose to US$9 million from US$0.67 million during the same quarter of the last year on the increase in its total associates. Outlook and Valuation Driven by the ongoing financial crisis and subsequent global economic slowdown, consolidated balance sheet of wholesale banks witnessed a negative growth of 3.8% to reach US$188.9 billion in 2008. This negative growth has continued and assets have further declined to US$179.9 billion in 1Q09. However, the industry is well supported by the regulator, which encourages innovation while providing sound regulatory framework. Moreover, Fitch expects writedowns will continue to impact across the Bahraini retail and wholesale banking sectors along with an "adequate" profitability for 2009.
(Extracted from a equity research note issued by Taib Research in May 2009)

(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)

Unicorn Malaysia eyes regional opportunities

By Alfean Hardy
Unicorn International Islamic Bank Malaysia Bhd (Unicorn Malaysia), which generated a profit for its first year of operation, is confident of building on this success in 2009 as it seeks to position itself as a hub for its parent's Asia Pacific expansion strategy.
The bank, a unit of Bahrain's Unicorn Investment Bank BSC, was granted an international Islamic bank licence by Bank Negara Malaysia in December 2007 to conduct a full range of nonringgit investment activities under the Malaysia International Financial Centre (MIFC) initiative.
For its fiscal year ended December 2008, the bank posted a net profit of RM812,546 at bank level, while at group level, it posted a net profit of RM777,572.
At a media briefing in Kuala Lumpur on Mar 26, Unicorn Malaysia chairman Datuk Vaseehar Hassan said, although the profit is not big, it is a morale booster given the fact that 2008 was the bank's start-up year.
"We started operations in January 2008 and, for the first eight months to nine months, we were still recruiting people," he said. "In fact, if it wasn't for the financial meltdown, we had some signed mandates on hand and we would have ended 2008 with a much better result. Some of these mandates had to be either deferred or aborted.
"Moving on to 2009, we have some work in the pipeline and we feel our 2009 results will be even better. We're in a resonably good position in spite of the financial crisis," he added.
Vaseehar said Unicorn Malaysia's 2008 performance was driven by its financial advisory, cross-border transactions and placement. This year, he said the bank would be focusing on the medium-sized — US$50 million (RM181.24 million) to US$100 million — sukuk issues and cross-border transactions.
"There's plenty of demand for these kinds of transactions from the SMEs (small-to-medium enterprises) and mediumsized corporations," he said, adding that it was its parent's strategy to make its Malaysian operation as a hub to penetrate the Asia Pacific market.
Unicorn Malaysia CEO Khalid Bhaimia said under the MIFC initiative, international business rather than domestic business was encouraged and that being able to do both cross-border transactions and placements in its first year was encouraging. On whether the current global situation would be a stumbling block to such operations, he said that international transactions were still on-going.
"The scale may be different, there may be not very many large-scale transactions because of the liquidity situation," he said. "However, we're not a very large bank for that purpose but, so far, in our segment of the market we believe that there are opportunities and we're seeing such opportunities now.
"But you won't see the billion US dollar cross-border transaction that you saw in 2007," he added.
Reuters adds: Unicorn expects to do US$400-US$500 million of transactions this year, with a strong market projected for medium-sized deals.
"Treasury is key element for our business here. Without funding support, it's difficult to go out and do business.

(This story appeared in The Malaysian Reserve on Mar 27, 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)

Bahrain’s Unicorn keen on investing in Malaysia

By Habhajan Singh & Ishun P Ahmad
Bahrain-based Unicorn Investment Bank (Unicorn), an Islamic investment bank with an outfit in Malaysia, is actively looking at investing in a number of areas locally, with plantation and real estate emerging strongly on their list.
"They have come and done their research some time ago," said chairman of Unicorn International Islamic Bank Malaysia Bhd (Unicorn Malaysia) Datuk Vaseehar Hassan.
Vaseehar said that the investments will probably be driven initially out of Bahrain until the Malaysian outfit has "enough size" to handle them locally.
Unicorn Malaysia, the first Islamic bank licensed under the Malaysian International
Islamic Financial Centre (MIFC) initiative, received permission to set up its operations from Bank Negara Malaysia early this year.
The Islamic banking outfit, which is licensed to conduct cut out non-ringgit transactions, is said to already have a number of deals in the pipeline and is reportedly confident of posting a profit by year-end.
However, when investing in the plantation sector, Unicorn will have to take into account the lower valuations of plantation assets due to the recent fall in crude palm oil prices and the current bearish sentiments on the edible oil.
"This, however, also provides opportunity in cheaper plantation assets," an analyst said.
According to him, the plantation sector continues to be relevant as CPO is likley to
rebound in the near- to medium-term. Hence, plantation assets would likely be revised upwards if this pans out.
In a recent interview, Vaseehaar, formerly chairman of RHB Islamic Bank Bhd, told the The Malaysian Reserve that Unicorn Malaysia had several deals in the pipeline, including a couple of mandates already signed that its teams are working on.
(The Malaysian Reserve, Page 1, Sept 23, 2008)