REUTERS: UK government extends mortgage aid scheme to Islamic finance

Britain's government sought to bolster London's position as a centre for Islamic finance on Tuesday by extending its 'Help to Buy' mortgage scheme to loans that comply with Islamic law. Help to Buy was launched last year and offers banks insurance against the risk of lending to home-buyers who cannot afford large mortgage deposits, reports Reuters (London, 11 Feb 2014).

Britain's finance ministry said property finance plans that circumvent Islam's bar on interest payments would now be eligible in the same way as standard mortgages.

"The Help to Buy extension builds on the government's commitment to support the UK Islamic finance market ... and retain London's position as the premier western Islamic financial centre," the report quoted a finance ministry statement.

THE REPORT GOES ON:

Islamic finance is worth around 11 billion pounds a year to Britain, the government added.

Later this year Britain aims to become the first Western country to issue a bond that complies with Islamic law, known as a sukuk, in a further attempt to cement London's place as the main Western centre for Islamic finance.

However, the sum of money that it intends to raise - around 200 million pounds - is small and in the past the government's debt issuance agency has had doubts about whether Islamic finance offers value for money and said the bond is likely to be a one-off.

The Treasury said Help to Buy Islamic mortgages would be provided by the Islamic Bank of Britain, which is owned by Qatar's second-largest bank Masraf Al Rayan MARK.QA.

Under the mortgages, the property is owned by the bank and home-buyers purchase it in stages, paying the bank rent on the rest of the property.

STATEMENT FROM UK TREASURY:

The government’s Help to Buy mortgage guarantee scheme can now also be used by providers of Home Purchase Plans, the Financial Secretary to the Treasury, Sajid Javid, announced today (11 February 2014). Home Purchase Plans (HPPs) are a Sharia law compliant alternative to mortgages and are often known as ‘Islamic Mortgages’.

The Help to Buy scheme has already helped thousands get on or move up the housing ladder, and the government remains committed to making the aspiration of home ownership a reality for as many households as possible.

In line with this, the government has been looking at how to open up access to the Help to Buy mortgage guarantee scheme, so that providers of HPPscan also benefit. From today the rules have been amended to enable banks that sell HPPs to purchase a government guarantee for them. Additionally, the Islamic Bank of Britain have stated their intention of participating to offer Home Purchase Plans under the scheme.

This will be particularly supportive to some Muslim homebuyers who have been unwilling to use a traditional Help to Buy mortgage because of their religious beliefs. However, the inclusion of HPPs in the Help to Buy schemeintroduces more choice for all consumers and perspective homebuyers.

MORE HERE.

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)

Islamic Finance Investors Can Expect The Best In Malaysia: Bernama

SINGAPORE, May 6 (Bernama) - Foreign investors can expect to get the best in terms of facilities and incentives when they invest in the growing Islamic financial banking and services in Malaysia, the country's top government bank official said.
Bank Negara Deputy Governor Datuk Mohd Razif Abd Kadir gave this assurance at a dialogue to showcase Malaysia's efforts in making the country as a premier international Islamic financial centre.
The over 200 people in the dialogue are participants who will be attending the 6th Islamic Financial Services Board (IFSB) Summit beginning here tomorrow.
Mohd Razif said Malaysia was the right place for business players who were serious in wanting to engage in Islamic finance and business.
He said the country had developed a comprehensive Islamic financial system to the extent that it could compete side by side with the conventional banking system, which had long been entrenched.
Foreign investors should also not be scared of the religious aspects of the Islamic financial revolution "because we are not trying to transform the conventional banks into Islamic banks", he added.
Mohd Razif said Malaysia offered a conducive and cost-efficient platform for investors to come to Malaysia and to conduct international and domestic Islamic finance business.
Apart from Malaysia being business-friendly and forward looking plus a supportive government, he said there were a lot of opportunities for Islamic finance and product innovations in the country.
The Deputy Governor said it was not easy to establish a country into an international Islamic financial centre, as it needed experience and the right ambience or environment to create such a hub.
He said Syariah-compliance alone was not adequate as the banking industry was a competitive one, and which needed its players to be innovative or their Islamic bank clients would run away as they were not getting their fair share.
Thus, Mohd Razif said it was important for the Islamic finance players to come up with products that could compete with their professional counterparts.
He also said Malaysia was not restrictive in its approach to Islamic finance as it did not dictate how it should be run but let the market decide instead.
Mohd Razif said Malaysia would like to share its experience in Islamic finance with others, and invite them to the country and together they could drive Islamic finance to be one of the significant players in the international mainstream business.
-- BERNAMA

Islamic banks and financial stability

By Habhajan Singh
The unique features of the financial contracts of Islamic banks mean that their operational risk can be substantially different from what the conventional ones are exposed to, according to a paper presented at an Islamic economics conference last week.
The potential risks faced by Islamic banks were among the topics of dicsussion at the International Conference on Islamic Economics and Economies of the OIC Countries (ICIE) 2009.
It is timely to look at the this aspect of the growing business, more so as some harbour the notion that Islamic banks are altogether free from the potential rough ride faced by their conventional counterparts. Although in terms of operational risks, Islamic banks have certain similarities to the conventional banking system due to working in a similar financial environment, the challenges are more complex for Islamic banks owing to their particular contractual and financial transactions, according to two scholars from the United Kingdom's Durham University.
"For this reason, it is understood that operational risks faced by Islamic banks are perceived to be significantly higher," explained doctoral fellow Hylmun Izhar and lecturer Dr Mehmet Asutay in a paper entitled 'A theoretical analysis of the operational risk framework in Islamic banks'.
This paper was among 78 presented at the two-day conference organised by the International Islamic University of Malaysia's (IIUM) Department of Economics at its Kulliyah of Economics and Management Sciences, whose dean is Associate Professor Dr A Khalid Ahmed.
The conference, which ended last Wednesday, was jointly organised in association with the Islamic Research and Training Institute (IRTI) of the the Islamic Development Bank Group.
The authors noted that operational risk management within financial institutions has undoubtedly attracted more attention from regulators, practitioners, and academics over the last decade.
One of the reasons is because of the huge losses incurred by a number of financial institutions such as Barings, Daiwa and Merril Lynch, due to the malfunctioning of their operational risk management systems.
"The relative complexity of contracts, combined with the fiduciary obligations of Islamic banks, imply that for Islamic banks, operational risk is a very important consideration.
"More importantly, Shariah compliance risk as part of operational risk is paramount to Islamic banks, which means Islamic banks must ensure, at all times, that all activities and products are in conformity with Shariah principles.
"It is, then, apparent that the dimension of operational risk exposure in Islamic banks is more sophisticated than in conventional banks," they argued.
Operational risk is a recent addition to the list of risks faced by financial institutions. The management of operational risk in Islamic banks is similar to that of conventional banks but includes several additional elements. They said that an operational risk is now recognised as a type of risk which can contribute to significant losses within all financial institutions.
"Having been regarded as an alternative financial intermediary with profit and loss sharing contract (within the mudarabah and the musharakah contracts) as its cornerstone, an Islamic bank is, theoretically, expected to bring more stabilisation and efficiency in resource allocation.
"In addition to that, an Islamic bank is also equipped with contracts which may, slightly, look similar to what a conventional bank has been commonly practising; ie debt financing (within the murabahah contract).
Nevertheless, they noted that the nature of debt in an Islamic bank is qualitatively different from that of conventional banks since the debt contract in an Islamic bank requires to be tied to some underlying assets.
"Consequently, the distinctive contractual structure that an Islamic bank embodies necessitates a different type of treatment on the management of the operational system within an Islamic bank," they wrote.
In another paper, it was pointed out that though Islamic banks operate on an interest-free basis, the economic environment in a dual banking system may expose them to the problem of rate of return risk. The paper entitled 'An analysis of Islamic banks' exposure to rate of return risk', notes that Malaysia's dual banking system with Islamic banks and conventional banks operating in parallel means customers are free to choose either system and also gives them the right to switch between systemd.
"In this regard, the customer would act to take advantage of any arbitrage opportunity due to the rate differentials and fund flows," said the authors, doctoral candidate at IIUM's Institute of Islamic Banking and Finance Zairy Zainol and assistant professor Salina H Kassim. At the same time, the study indicated the profit motive among the Islamic bank depositors when the Islamic banks' rate of return have a significant impact on Islamic banks' total deposits.
"The implication of this finding is that Islamic banks might be exposed to the rate of return risk. Ironically, the depositors will increase their deposits only when the rate of return is increased. "Otherwise, when the rate of return decreases, they will definitely decrease their total deposits within Islamic banks and they could switch their funds to the conventional banking system. This also implies the problem of rate of return risk and displaced commercial risk within the Islamic banking system," they concluded.
Hence, they said that policymaker should be aware that Islamic banks are largely exposed to the rate of return risk, noting that one previous sugestion to protect Islamic banks from risks which are caused by the interest rate movements is to reduce the maturity on loans on the asset side. However, the method is dangerous since it can harm the Islamic banking structure in general.
"Thus, two alternatives are recommended for Islamic banks. Firstly, Islamic banks should move away from fixed rate instruments like murabahah and BBA (bai bithaman ajil) into profit and loss sharing contracts like musyarakah and mudharabah.
"The advantage of the profit and loss sharing contracts is that the financing will be detached from the rate movements since they are directly independent on profit or loss from the financed business," they said.
Their second suggestion is that a risk-sharing agreement between Islamic banks and their customers should take into account the customer of long maturity loans agreeing to partially compensate the banks if the average rate of return exceeds the predetermined level. In return, the banks would agree to reduce the mark-up on an outstanding balance if the rate is below the predetermined level.

(This story appeared in The Malaysian Reserve on May 4, 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)

ICIE09: World ‘desperately’ looking for sustainable financial system

By Habhajan Singh
The world is desperately looking for a viable solution towards a sustainable financial system now that is in the midst of the worst financial crisis, said Organisation of Islamic Conference (OIC) secretary general Prof Ekmeleddin Ihsanoglu.
In this connection, he told a two-day conference on Islamic finance that the Islamic banking and finance now has an opportunity to be an important stakeholder of what he calls the new world financial order in regaining trust and confidence.
He said that a number of experts and Islamic bank officials have confirmed that Islamic banking has not been affected by the global financial crisis and that "bad effects" would be limited due to the nature of Islamic banking.
"The on-going global financial crisis promted many to question the integrity and the sustainability of the existing international monetary and financial system," he said in his keynote address at the International Conference on Islamic Economics and Economies of the OIC Countries (ICIE) 2009 in Kuala Lumpur on April 28.
The two-day conference, which ended yesterday [April 29], was jointly organised by International Islamic University Malaysia's (IIUM) economics department and Islamic Research and Training Institute (IRTI) of the the Islamic Development Bank Group.
Dr Abbas Mirakhor, a professor of economics and a former executive director at the International Monetary Fund (IMF), was the keynote speaker on the second day.
In his speech, Ihsanoglu noted that Islamic banking and finance has some way to go before it can be a serious alternative to conventional finance and banking.
He said OIC has played a role in areas like dialogue among civilisations, defending the image of Islam and combating the phenomenon of Islamophobia.
"In the face of the mounting phenomenon of Islamophobia in the West, the OIC has placed this issues at the top of its priorities and pre-occupations by conducting a large-scale world-wide effort to confront it.
"We have been able to achieve convincing progress at all levels, mainly at the UN Human Rights Council in Geneva and the UN General Assembly in New York," he said.
OIC is the second largest intergovernmental organisation after the United Nations which has membership of 57 states spread over four continents. ICIE 2009 had four focus areas.
In Islamic economics, it is to evaluate the current state of art in the various sub-areas, from environmental economics to monetary economics, and theoretical and policy studies dealing with the development of Islamic economics.
On Islamic banking and finance, it is looking at the fundamentals of Islamic finance, regulatory structures, Shariah compliant investment, takaful, risk management, branding opportunities for Shariah compliant products, socially responsible investment strategy, wealth management, sukuk, zakat, hedge funds and derivatives, housing finance and Shariah compliant mortgage products.
On economies of the OIC countries, the conference is evaluating the performance and current status of economic development in the OIC member countries, and the role of the OIC and IDB in facilitating development in OIC countries.
The fourth area is in the economic cooperation among the OIC countries where it looks at the current status, challenges and problems, strategies to increase cooperation and trade, and the potential role of the OIC and IDB in enhancing economic integration.

(This story appeared in The Malaysian Reserve on Apr 30, 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)