TMR: Sumitomo Mitsui starts Islamic finance in Malaysia

By Sathish Govind

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

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

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

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

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

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

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

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

[THE MALAYSIAN RESERVE, 13 March 2014]

PAKISTAN: Govt committed to nurturing Islamic finance

Federal Minister for Finance Mohammad Ishaq Dar said the government believed in the supremacy and utility of Islamic finance for inclusive development and socio-economic well-being of the masses, reports Pakistan newspaper Daily Times.

“We are fully committed and determined to nurture the Islamic finance industry on sound foundations”, he said while addressing the inauguration ceremony of second Global Forum on Islamic Finance at Lahore campus of COMSATS Institute of Information and Technology.

THE REPORT GOES ON:

Dar said a steering committee on promotion of Islamic banking had been formed with representation from all key stakeholders for formulating a comprehensive framework to address challenges and hurdles, which were adversely affecting the growth momentum of industry. 

The committee would also suggest a roadmap and timeframe for progression of various phases of the Islamic banking in the country, he said and added that the government had also formed a steering committee on Qarz-e-Hasna. 

“The government is, thus, fully committed to facilitate and nurture development of Islamic finance industry on sound footings through an enabling policy and regulatory environment,” he added.

Ishaq Dar said the efforts of this Forum in disseminating scholarship on Islamic economic system to cope with the current financial challenges were admirable. 

He hoped that the Centre of Islamic Finance would perform research, impart training and strengthen the syllabi of Islamic finance and, thus, play an instrumental role in bridging the gap between academia and industry.  

He said the Islamic finance industry constituted over 10 percent of the country’s financial system and maintained strong growth momentum, but it, however, was below the huge potential. 

“We are a country of over 180 million people, predominantly Muslims, with a significantly large population excluded from the financial system due to, among others, faith sensitivities of the masses; a large agricultural base which meets its financial services needs largely from informal players as only 20 percent of the farmers have access to the formal financial system; and just 5 to 6 percent of SMEs having access to bank financing,” added the minister.

He said the country’s banking system had taken the initiative to develop financial instruments, in keeping with the spirit of the Islamic economic system. 

He said Islam provided a complete code of conduct and gave solutions for all spheres of life. “Adherence to Shariah principles will not only help us in achieving financial system stability and broad-based welfare of the masses, but will also help us in pleasing Allah,” he added. 

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.

BADLISYAH: Standalone Islamic bank versus Islamic window

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



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



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



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



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



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



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



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



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



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



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



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



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



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

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

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



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



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



  

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

BOOK REVIEW: Doorway to Islamic legal maxims

BOOK: Islamic Legal Maxims & Their Application in Islamic Finance

Authors: Mohamad Akram Laldin, Said Bouheraoua, Riaz Ansary, Mohamed Fairooz Abdul Khir, Mohammad Mahbubi Ali & Madaa Munjid Mustafa

Publisher: ISRA 

Pages: 249

PRICE: RM130 (Malaysia); US$50 (international)

By Habhajan Singh

A Malaysian outfit researching Islamic finance has come out with a neat job of publishing a book on Islamic legal maxims that are key to the sector.



Let me start by saying that this is a must-have for those involved in the fast-expanding Islamic finance, especially for those who rely heavily on materials in English. They will be delighted with the 249-page Islamic Legal Maxims & Their Application in Islamic Finance.



This is the latest work to come from the International Shariah Research Academy forIslamic Finance (ISRA), an outfit that was set-up six years ago with a generous backing of the Malaysian central bank.



This book, authored by ISRA ED Dr Mohamad Akram Laldin and five others [Said Bouheraoua, Riaz Ansary, Mohamed Fairooz Abdul Khir, Mohammad Mahbubi Ali & Madaa Munjid Mustafa], targets the English-speaking readers to develop an understanding of the themes that run through the Shariah and appreciate the salient featurs of the philisophy of Islamic jurisprudence.



“Not only does it make available an important part of the intellectual legacy of classical Islamic jurisprudence in fluent English, it demonstrates the relevance of this knowledge to the modern world,” writes Dr Akram in its preface. This adds to ISRA’s ealier works: ISRA Compendium for Islamic Finance Terms and textbook- styled Islamic Financial System - Principles & Operations.



In this work, the team had taken the trouble to sift the various legal maxims and narrowed down to 40 that are most relevant to muamalat (transactions) and Islamic finance.



Maxims play a critical role in fiqh and Islamic finance. Fiqh is the Islamic term for jurisprudence.



It may also be termed as the jurists’ understanding of the Shariah, as explained in a glossary which runs at the end of the book, a convenient guide.

The legal maxims of fiqh are statements of principles that derives from the detailed reading of the rules of fiqh on various themes, writes Prof Mohammad Hashim Kamali, the founding chairman and CEO of International Institute of Advanced Islamic Studies (IAIS) Malaysia. It is “particularly useful in depicting a general picture of the nature, goals and objectives of the Shariah”.



One crucial maxim for Islamic finance and muamalat is this: “The presumption of validity and permissibility applies to all contracts and conditions”. The book explains that what this means is that evidence must be provided to prohibit a contract of of one of its terms. The burden of proof of dispute lies with the claimant that the contract, of one of its terms, is
prohibited.



You may hear of this maxim from Shariah scholars and Islamic bankers at forums when putting forward new transactions and innovative products. Some maxims included are “Judgment is to be based on knowledge and understanding”, “The fundamental requirement in every contract is justice”, “Deferent constitutes a part of the price”, “Matters are determined by intentins”, “Hardship begets facility”, “Necessities render the prohibited permissible , and “Ecolution of Shariah rulings [based on custom and ijtihad] due to changing times is not to be denied”.



The presentation is neat and tidy. Each maxim is spelt out in Arabic, accompanied by its English translation. The authors then explain the maxim and then point out the authority that validites it. They then show how it is applied in fiqh and Islamic finance.



For research purposes, each of the key statements are referenced to its original source. Now, this is heaven to folks who undertake research. It makes their life so much easier. The book is priced at RM130 for the Malaysian market and US$50 (RM165) for the international market.

[THE MALAYSIAN RESERVE, 24 Feb 2014. Original article is entitled ‘Book on Islamic legal maxims a must have for industry playershttp://themalaysianreserve.com/main/sectorial/islamic-finance/5474-book-on-islamic-legal-maxims-a-must-have-for-industry-players’]

REUTERS: Malaysia's AmIslamic plans region's first Basel III sukuk

AMMB Holdings , Malaysia's fifth largest lender, said its sharia-compliant unit would issue up to 3 billion ringgit ($903 million) of Islamic bonds, the first sukuk from East Asia structured to meet the capital requirements of Basel III, reports Reuters (13 Feb 2014).

AmIslamic's sukuk will fund working capital and boost Tier 2 capital reserves at the bank, AMMB said in a statement. The sukuk will use the murabaha format, a common Islamic structure, and have tenors of at least five years, it added without specifying when issues might occur.

Banks around the world will face larger capital requirements under Basel III standards that are being phased in over a period of several years.

Conventional banks in Malaysia have already begun issuing Basel III bonds; last September, CIMB Group Holdings sold a 750 million ringgit bond to raise Tier 2 capital.

The country's Islamic banks have not yet done so, partly because they are not now in urgent need of additional capital, bankers say. But the AmIslamic sukuk could help to start a trend.

"With Basel III regulation on capital components coming into effect early last year, we expect more issuances of Basel III-compliant sukuk in the Malaysian debt capital market," Kuala Lumpur-based RAM Ratings said.

AmIslamic's sukuk received regulatory approval from Malaysia's central bank and securities commission this week. RAM assigned a preliminary long-term rating of AA3 to the sukuk programme, citing the company's "strategic importance" to the AMMB group.

Since 2012, Islamic banks in the Gulf have been more active in using sukuk issues to boost their capital because of Basel III.

Saudi Hollandi Bank is among Saudi Arabian banks which have raised Tier 2 capital with sukuk, while in November 2012 Abu Dhabi Islamic Bank issued a hybrid sukuk, one with equity-like characteristics, to boost its Tier 1 capital. Dubai Islamic Bank sold a similar $1 billion instrument in March 2013.

SYED OTHMAN: Islamic finance education: What does it entail?

By Dr Syed Othman Alhabshi 

When we talk about finance, we are really talking about the way the finance is managed at the individual, corporate or public levels. However, when we add the adjective Islamic to finance, it gives a completely different picture.

Islamic finance as is being used, though not so widely, perhaps connotes all aspects of finance that is Islamic, including Islamic banking, Islamic capital market, Islamic insurance or takaful and Islamic wealth management. This usage is quite unique in the sense that one would have expected that Islamic finance means all finances that are Islamic. If this is the case, then it would connote Islamic personal finance, Islamic corporate finance and Islamic public finance. This is not true in terms of usage.

For example, Islamic public finance would imply that the main revenue should be based on zakah which is a wealth tax. It is only when the total collection of zakah does not cover the government expenditure that other forms of revenue sources would be introduced such as the direct and indirect taxes; tax on agricultural land (kharaj), poll tax (jiziah) or tax on the non-Muslims living in Muslim lands, etc. Similarly, Islamic corporate finance is basically corporate finance that is being conducted in accordance with Shariah, while Islamic personal finance is also conducted in accordance with Shariah.

The most important component of Islamic finance which distinguishes itself from conventional finance is the element of Shariah.

Without Shariah, there is clearly no Islamic finance because Shariah determines how the contracts, the mechanisms, the transactions, should be developed or designed. Shariah requirements in terms of the dos and don’ts are very clear, and leads to the correct contract and its consequences.

Since Shariah itself is very wide, selectiveness is needed so the most relevant aspect of Shariah is being exposed to the students of Islamic finance. The starting point has to be “Usul Al- Fiqh” which embodies the study of the sources of Islamic law and the methodology for its development. The second most important aspect of Shariah that is relevant to Islamic finance has to be laws of contracts, and this is for two reasons. Firstly, in any Islamic transaction, it is always a form of contract between two or more parties, hence, it is imperative for students to understand the different types of contracts for ease in applying such contracts in the correct context.

Secondly, it is becoming clearer that products based on a simple contract are no longer meeting the commercial objectives of such products that combine a few contracts in a more sophisticated fashion being promoted by the scholars from time to time.

While these two aspects of Shariah form the main body of Shariah knowledge in Islamic finance, it is imperative for the students to appreciate the various Shariah issues that are begining to emerge in the market. If the list of issues discussed in class cover a wide range of topics, then it would certainly help the students to identify the real issues that seem to occur and sometimes blur the market.

Then there is the technical knowledge, the first of which is that of finance itself, which covers the basic theories of finance such as the riskreturn trade-off, annuity and arbitrage pricing theory. These theories can become very useful in the course of evaluating certain parametric changes in the commercial environment.

The second part of the technical knowledge in finance covers banking, insurance, capital market and wealth management. Specifically, we should be touching on Islamic banking, Islamic insurance, Islamic capital market and Islamic wealth management, which are interrelated and in addition, it helps to make the student knowledgeable all round.

Development of Islamic Finance Programmes

The best practice especially in the banking industry is to recruit staff from various backgrounds, including staffs whose disciplines are not related to economics and finance as they can be engineers, medical doctors, quantity surveyors and lawyers, but can easily learn the tasks in banking. I know a statistician who was given a chance to work in an Islamic bank. Eventually he became one of the most efficient senior staff of the bank. We also know of engineers and lawyers who do extremely well in the banking industry. Learning from such experience would be proper practice for students of Islamic finance to come from various academic backgrounds, enriching the discussions in class with different views from different perspectives.

I, for one, strongly believe that the students would do extremely well if the professor shows tremendous patience in nurturing them inside and outside classroom. I read of a story of a sociology professor who wanted to know whether the young children of about 10 years old, in a particular slum area in US would make it in life or not. He sent two hundred of his MBA students to the slum area and selected two hundred children to find out if they would make it in life. Based on the environment, the way they dressed, the materials they wear, etc, the two hundred MBA students had only one answer: These children will never make it in life.

Twenty-five years later, another sociology professor who happened to read the report sent two hundred of his Masters students to the same slum area to find out from the same two hundred children. They found that out of two hundred children, only one hundred eighty three were around, seventeen having either moved out of the area or have passed away. The Masters students found that the rest of the children who were about 35 years old had actually succeeded in life, becoming engineers, lawyers, doctors, teachers, corporate executives.

They then asked how come they were so successful. The answer was, “there was a teacher” who happened to be an old lady of about seventy years old. When she was asked how come those children had achieved tremendous success, she answered with a broad smile on her face, “I LOVE THEM ALL”.

I strongly believe that the approach to be adopted in nurturing students whoever they are is to show them respect and confidence we have in them, the dedication and commitment we give them to really make them successful in life. It is not just the quality of students that we have but more importantly what our real intention is when teaching them.

Some Challenges

Having a very comprehensive programme with high quality curriculum and content is very essential to produce the talents we need in any field. Of course we also need quality students with the positive attitude to learn. Above all, we need the right approach to coach, train and educate the students in the most effective way.

One of the major challenges in producing the right type of talent in Islamic finance is to provide them with the right input so that they will be able to manage and handle all situations that they face in the industry. This is a major challenge because Islamic finance as a subject or discipline of study is still very new, without standard texts for all the subjects that we teach.

Most of the time, we use texts that are not complete and hence have either to use many texts or to be added with our own materials.

This poses a problem of standardisation or harmonisation, especially with regards to Shariah, principles or concepts and products.

We know that there are conflicting views on Shariah matters between jurisdictions. Hence, we do get products that are acceptable in one market but rejected in other markets. Even these differences are not considered as major issues, which can be explained, thus, mitigating such conflicts.

There is yet a bigger challenge where some scholars simply feel that the current practice of Islamic banking and finance are not Shariahcompliant because the beneficiaries do not include the poor and the have-nots. They prefer to take the view that the benefits of Islamic banks today which directly benefit the rich and the bankable only have ignored one of the objectives of “Maqasid Shariah” that is meant to bring about benefits to all and sundry. Such a view simply denies the benefits that Islamic finance as practiced today has brought about to society. Those who adopted this view do not have the alternative system that could resolve the problem of those poor and not bankable. The challenge then is how to ensure that there is financial inclusion. One possible answer is Islamic microfinance.

Conclusion
Although Islamic finance is growing at a faster rate than conventional finance, which under the present circumstances is unstoppable, the biggest challenge is acute shortage of human talents who have very high technical knowledge and at the same time have excellent Shariah knowledge. We have also observed many qualifications in Islamic finance that have been introduced to the market that do not provide the right level, quality and scope of the subject. We need to find ways of attracting students to the right programmes so that the objective of bringing Islamic finance to the next level can be effectively achieved.

***

Prof Dr Syed Othman Alhabshi is the chief academic officer of  International Centre for Education in Islamic Finance (INCEIF). This article appeared in THE MALAYSIAN RESERVE, 17 Feb 2014

 International Centre for Education in Islamic Finance — The Global