OMAN: National Sharia board soon for Islamic banks

Muscat: The formation of a national Sharia board for regulating Islamic banks and window operations of conventional banks will be completed soon, the country's central bank executive president Hamoud Sangour Al Zadjali told the media here yesterday, reports Times of Oman (18 March 2014).

"The regulation for the (high-level) Sharia board has been published in the gazette. Now, we are in the process of formulating the board, which will consist of five members selected by the Central Bank of Oman. The regulations are already out and now we have to nominate the members," added Al Zadjali, on the sidelines of Oman Economic Forum here yesterday. 

The members of the board will be Sharia scholars and some of them will be Omanis. "But we may need one or two experts from outside the country." Presently, Islamic banks and window operations of conventional banks are governed by Sharia boards of individual Islamic institutions. Elaborating on the role of the national Sharia board, he said it is going to be a supervisory board, which will advise the Central Bank of Oman on the issues concerning Sharia compliant products. In fact, it is intended to be a reference point for Islamic financial institutions, if required. 

"Also, they will look into any difference in opinion of the Sharia boards of Islamic banks or commercial banks' Islamic window operations," noted Al Zadjali. Sukuk issue The central bank chief also noted that plans are afoot to issue sukuk by the government. "Also, within the central bank, we might be looking at the possibilities of creating some sort of instruments for managing excess liquidity with Islamic banks," he added. 

While the central bank may issue short-term instruments, similar to certificates of deposits, to "manage the liquidity problems of banks, while sukuk will be floated by the government." 

Asked whether the present relaxation given to Islamic banks for deploying funds abroad will be extended beyond one year, he said the central bank would re-asses the market condition once the period gets over and take a decision accordingly. Two Islamic banks -- Bank Nizwa and alizz islamic bank -- have been given an exemption in ceiling on overseas investment due to lack of such instruments in local market.

Apart from two full-fledged Islamic banks, six commercial banks have started window operations to offer Islamic banking products. "We want Islamic banks to invest in the country, to finance the projects here, rather than just keep the money outside without benefiting the local economy with its liquidity. Islamic banks have to work hard to finance corporates and local projects." 

The Oman Economic Forum was organised under the patronage of Darwish bin Ismail Al Balushi, Minister Responsible for Financial Affairs. The opening address was delivered by Dr. Ali bin Massoud bin Ali Al Sunaidy, Minister of Commerce and Industry and Deputy Chairman of the Supreme Council for Planning. Also, Myung Bak Lee, former president of South Korea was the keynote speaker at the conference, which was attended by top-level officials from both private and government sectors.

REUTERS: Gulf Islamic banks' extra product costs shrinking, study finds

The extra costs which Islamic banks in the Gulf charge consumers relative to conventional banks appear to be falling, according to a study by credit rating agency Standard & Poor's.

For years, bankers have assumed that Islamic institutions charge higher costs because of several factors, including the relative complexity of sharia-compliant products compared to conventional ones, and the fact that Islamic financial markets tend to be younger, smaller and less liquid.

Other factors that may push up costs are a lack of clear regulation, in an industry where scholars may issue contradictory rulings, and adverse tax treatment, since Islamic deals often involve multiple asset transfers.

Now the cost gap for Gulf banks rated by S&P seems to narrowing, to as little as 30 basis points in the first half of 2013 from a high of 110 bps in 2009.

The study used financial data from 2007 to 2013 to calculate the ratios of interest income to average assets for conventional banks and the equivalent ratios for Islamic institutions, said Paris-based Mohamed Damak, primary credit analyst at S&P.

READ FULL STORY HERE.

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

RAK Bank says new Islamic finance unit makes small profit

National Bank of Ras Al Khaimah, also known as RAK Bank, said on Wednesday that its new Islamic Finance unit achieved a small profit during its first year in operation.

The UAE bank said its AMAL division broke even ahead of target, recording a small profit of AED3 million ($816,792) for the year, according to Arabian Business [29 Jan 2014].

Overall growth in net profit for the year was subdued due to the bank taking a further conservative stance on provisioning, the bank said in a statement.

Total impairment charges rose to AED340.6 million from last year’s AED209.1 million.

“In 2013 RAK Bank continued to produce robust results, affirming the bank's strategy to focus on personal and SME banking, continued focus on product innovation and customer service, and generally improving market conditions,” said Peter England, RAK Bank CEO.

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Bloomberg: Fitch Joins HSBC Seeing Record 2014 Sukuk Sale

Persian Gulf government spending will help drive what may be a record year for Islamic bond sales, Fitch Ratings said, echoing HSBC Holdings Plc (HSBA) forecasts, reports Bloomberg (Jan 20, 2014).

Sales will probably match the 2012 high, the rating company said in a note last week even amid the slowest start to issuance since 2010. Mohammed Dawood, global head of sukuk financing at HSBC, said last month that sales will rebound from a decline last year.

Borrowers sold $133 million of syndicated sukuk to Jan. 19, the least since $47 million in the same period four years ago, according to data compiled by Bloomberg.

Economic growth in the oil-rich Gulf Cooperation Council countries and possible debut Islamic debt sales from the U.K. and Hong Kong will help the long-term outlook for sukuk sales, Fitch said. Qatar’s plans for the 2022 soccer world cup, Dubai’s preparations for the Expo world fair in 2020, and Saudi Arabia and Abu Dhabi’s spending commitments should boost issuance, according to the rating company.

The report quoted Rizwan Kanji, Dubai-based partner at King& Spalding LLP, as saying: “There has been preparation work done, issuers just haven’t gone to market yet. Everyone is taking a breather after the record close to last year. We expect an active, fruitful year.”

Anxiety over Qatar: It's 'wait and see' over in Malaysia

As Qatari markets are still reeling from its central bank's ban on Islamic banking windows, the Islamic finance industry in Malaysia watches the developments unfold with a measure of trepidation.

Earlier this month, Qatar Central Bank (QCB) issued a circular to convent ional banks with Islamic banking arms in the emirate to close their Islamic operations by end-2011.

Although, in general, Malaysian Islamic banks are not directly impacted by Qatar's announcement, the move took most market players by surprise. For now, though, the industry seems to have adopted a wait-and-see stance as the policy is implemented.

"There has not been clarification from QCB at this stage, so the industry will need to wait and see how QCB will implement this," Deloitte Corporate Advisory Services global Islamic finance leader Daud Vicary Abdullah told The Malaysian Reserve in a telephone interview.
He said QCB had earlier flagged a move in the direction, but had initially indicated that a maximum percentage of Islamic finance business was permissible at a conventional institution.
"The directive to shut it down came as a bit of a surprise," he said.

In a report posted on the website of law firm SNR Denton, it said the circular followed an earlier decision in August 2010 by the regulator requiring the assets of Islamic banking operations to be limited to 15% of a conventional bank’s total assets.
QCB's motives, according to the circular, is to ensure that conventional and Islamic banking operations become entirely segregated, in full compliance with Shariah principles.
To this end, a Malaysian-based lawyer believes that the Qatari regulators would have made the decision "upon due considerations".
"Islamic windows within a conventional banking set-up basically create a shadow-banking operation, ie the formation of a bank-within-a-bank, which makes it quite opaque for the regulators to supervise and monitor the bank's operations as well as the risks associated with it," said Madzlan Hussain, a partner and head of Islamic financial services practice at Zaid Ibrahim & Co.

Perhaps this was amongst the issues bothering the regulator's mind, he said.
In implementing the policy, Madzlan sees the year-end deadline given by the regulator for Islamic windows to wind down as 'challenging', as any such radical change requires the market to be adequately prepared with appropriate infrastructures.
"Here we are not only looking at the market readiness in terms of its human capital and financial capacity to adapt to such change, but quite importantly, whether the public themselves are ready to adapt to such change?" he said.

Reports have indicated Qatar's directive is a step towards emulating Malaysia's comprehensive Shariah framework for its Islamic banks.
Malaysia, which has adopted a dual financial system comprising conventional and Islamic systems under its new central bank laws, has in place an established regulatory and supervisory framework for standalone banks and subsidiaries offering Shariah-compliant products.
Most countries practicing Islamic finance do not yet have such legal framework in place. As such, major policy decisions such as the one made by Qatar should be approached cautiously, said one Islamic banker.
"Surely the regulator does not want to shock the market and cause it to destabilise. There is no one-size-fits-all answer to some of these issues; every policy decisions must take into consideration the specificities of each jurisdiction," the banker said.

(This story appeared in The Malaysian Reserve on 21 February 2010. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays, edited by Habhajan Singh)

M'sian takaful firms ‘outperforming’ Middle East ones

by Habhajan Singh

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

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

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

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

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

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

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

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

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

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

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

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

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

Amanie plans expansion into Australia, Europe

By Habhajan Singh

A local Islamic finance consulting company anchored by prominent Shariah scholar Dr Mohd Daud Bakar is looking to expand its presence in Australia and Europe to tap the growing business opportunities in those regions, attempting to tap into changes in regulation to accommodate Islamic finance and also the growing need to structure Shariah-compliant products.

Amanie Business Solutions is looking at opening up offices or partnerships in Australia, while the choice for Europe is between London and Luxembourg.

"There are concrete proposals to the [Australian] Government to amend some laws to accommodate Islamic finance. These are some of the areas of interest," Dr Daud Bakar told The Malaysian Reserve.
He was referring to the Australia financial centre report presented to the Australian Parliament and made public in mid-January which had recommended on withholding tax on offshore borrowings and on Islamic finance, to improve its ‘access to offshore pools of savings at competitive rates, so as to provide more diversified and cheaper funding for Australia’s investment needs’.
Commonly known as the Johnson Report, it was commissioned by the Government in September 2008 as part of its commitment to secure Australia’s future as a leading financial service centre.

The move would make Amanie a Shariah consultancy with one of the widest global presence. Most Shariah consultants tend to concentrate in either London or Dubai, while Malaysia is populated more by individual Shariah scholars who work mostly with Islamic banks and takaful operators who require their services.
The developments coming out of Australia would have been the impetus for legal firm Zaid Ibrahim’s to open offices in Sydney and Melbourne in the December 2009.
One of the largest local legal firms in Malaysia, Zaid Ibrahim had stated that its primary focus would be to promote Shariah-compliant business. Zaid Ibrahim, with offices in Singapore, Thailand, Indonesia, Vietnam and Dubai, had set up in 2008 an Islamic finance advisory firm called ZI Shariah Advisory Sdn Bhd.

Dr Daud Bakar, who also chairs the influential Bank Negara Malaysia’s Shariah Advisory Council (SAC), is no stranger to the Islamic finance scene in Australia. Amanie has advised a number of deals originating from there, including LM Investment Management Ltd’s (LM) Islamic property fund and Crescent Investments Australasia Pty Ltd’s equity fund, both being the first of their kind in that part of the world.
"LM came to see us in Dubai. In fact, they were our first clients in Dubai," he said. The Dubai-based vehicle, Amanie Islamic Finance Consultancy and Education LLC chaired by Dr Mohamed Ali Elgari, signed off the fatwa for Crescent’s fund. The other signatories on that document, displayed on the company’s website, are Dr Daud Bakar, Dr Muhamad Amin Ali Al-Qattan and Dr Osama Al-Dereai.
LM, which described itself as privately owned specialist Australian income funds manager, floated the LM Australian Alif Fund. It said that it is a 'Shariah compliant fund, with fatwa confirming the Shariah compliant status' of the funds and its investments, suitable for investors seeking 'Australian assets delivering profit in a Shariah compliant manner, and is available for investment in a range of major international currencies'.

As for the European move, industry observer note that European cities like London, Dublin and Luxembourg are vying to be international hubs for Islamic finance.
Luxembourg, for example, is key domicile of funds in Europe and have amended a number of taxation laws to accommodate Islamic finance funds. "Here, they would be interested in originating and listing of funds," said one observer.
Dr Daud Bakar said that Amanie sees 'potential business expansion' in Luxembourg. "We have some experience endorsing few Islamic funds licensed from Luxembourg using UCIT 3 and SICAV structure," he said.
UCITS3 is an European Union initiative. Funds go through a stringent regulatory process which then allows it to be floated in the EU jurisdictions without much further local clearance. SICAVs, a vehicle much like an umbrella for funds, are increasingly being cross-border marketed in the EU under the UCITS directive.

Asked what prompted the move to expand further, Dr Daud Bakar said: "Looking at global financial movements, we’ve seen some strong interest in some jurisdictions like South Korea, Australia, Luxembourg, Kazakhstan. We like Kazakhstan, where we have partners who take care of our interest.
"We are a global Shariah firm, originating from Malaysia. We then expanded to DIFC [Dubai International Financial Centre] in 2008. Now we are seriously considering to position Amanie in other new potential markets and jurisdictions. Islamic finance is a global industry. We need to be close to out clients, be in the same time zone. We’re proud to fly the Malaysian flag in other countries."

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

Banks moving away from organised tawarruq

Some Middle Eastern banks are avoiding organised tawarruq after a ruling against the practice, an industry official said, a trend that could signal a shake-up for the $1 trillion Islamic financing sector. Shrugging off criticism of the OIC Fiqh Academy’s controversial decree, the organisation’s secretary-general said some institutions have heeded the call to abandon the popular financing arrangement, reports Reuters (Nov 18, 2009).
The report quoted Abdul Salam Al-Abadi, interviewed on the sidelines of a sharia scholars meeting in Malaysia, as saying: "I have been hearing that some banks have agreed that what they were doing is wrong and they have begun changing the method of their tawarruq transaction,’ Abdul Salam Al-Abadi said in an interview on the sidelines of a sharia scholars meeting in Malaysia. They are trying to do it the way it should be done."
He did not identify the banks, it added.
THE REPORT GOES ON:
The International Council of Fiqh Academy, a powerful group of scholars led by the OIC, rocked the industry in April this year with an order forbidding the use of organised tawarruq, a cornerstone of the sharia banking sector.
With the global tawarruq market estimated at more than $100 billion, practitioners had warned of catastrophic results if the rule were to be implemented strictly.
‘If tawarruq were suddenly withdrawn, this would have a dramatic effect because many Islamic financiers routinely use this instrument as a means of liquidity management and to provide their customers with working capital facilities,’ law firm Denton Wilde Sapte had said in a note.
Tawarruq is widely used as a source of financing. It involves the sale of an asset to a purchaser with deferred payment terms. The purchaser then sells the asset to a third party to get funds.
Organised tawarruq is similar, although the transactions are executed through banks. Some scholars say it is wrong to pre-arrange the parties’ contractual obligations although bankers want this for legal protection and commercial certainty.
Al-Abadi said the Muslim World League’s fiqh academy had similarly prohibited the use of organised tawarruq.
‘After all these discussions, the majority of the scholars say it is forbidden,’ said Al-Abadi, a Syria and Egypt-trained sharia expert and former Jordanian government minister.
‘Our council consists of more than 70 scholars and at the meeting, there were more than 20 experts besides these 70 scholars and the majority said it’s forbidden.’ Several influential sharia scholars have defended the use of tawarruq, although some say the structure needs further refinement.
‘It’s the right of any scholar to say ‘That’s my view, it’s not forbidden,’ Al-Abadi said.
‘We say to the people ‘The way in which you deal is not correct’ and let the people decide in future.’ Some scholars have said organised tawarruq is a mere paper shuffle, without assets actually changing hands, violating the sharia’s rule that financial transactions must involve specific assets.
Islamic banks and their clients rarely, if ever, take delivery of commodities used in tawarruq transactions, as their purpose is to use the assets as fund-raising tools. — Reuters

‘Debate on legality of products irrelevant’

Top Islamic banker Badlisyah Abdul Ghani is a contrarian when it comes to the present debate on the Shariah compliance of Islamic bankng products.
The CEO of CIMB Islamic Bank Bhd opines that the ongoing debate on the issue of the legality of products from a Shariah perspective had no real tangible benefits for the industry. "The debate is superfluous and irrelevant," he said, in what seems to challenge conventional wisdom and may even ruffle some feathers. Certainly, we cannot merely brush aside his views, given that in his short three-year stint at the helm of CIMB Islamic, the bank has seen its assets grow to more than RM20 billion from just RM1 billion in 2006. The Malaysian Reserve's Jason Ng speaks to Badlisyah to find out his views on the industry.

TMR : The Islamic finance industry is presently seen as replicating conventional banking products and services. How will the industry move forward beyond replicating into innovation?
Badlisyah: We have to offer what the market wants and the market naturally wants what is available in the conventional market. Where it is possible in Shariah for us to offer the same products, we have to make sure we have all the products because we are here to serve customers' needs. On the overall Malaysian market, I believe we have effectively most of the basic products in the market. For CIMB Islamic, we have gone beyond offering basic products. We have come up with innovative products that even conventional markets do not have in Malaysia. We have gone a long way in coming up with products both replicating and of pure innovation.

TMR : How is CIMB Islamic navigating the different sets of Shariah rules and regulations in different regions as well as countries presently?
Badlisyah: We are not bothered. We provide products based on where we do business. Just like when you are a car manufacturer, you make the car based on the specification and requirements of the laws in the respective markets. So when we market our products in different market, we behave the same way, making sure we meet the requirements of the jurisdiction of the local market we are serving.

TMR : But what about the present ongoing debate on the permissibility of certain products such as bai bithaman ajil (BBA) and derivatives under Shariah laws?
Badlisyah: The debate is superfluous and irrelevant. Shariah works on a jurisdictional basis just like any other laws. So to us, it is wrong to ask for Shariah laws to be an international standard law when other laws in conventional banking are not. You must remember Shariah has been there for more than 1,400 years and operated on a jurisdictional basis. But all of a sudden in the modern era, you want to force Shariah to operate across borders. It is a total waste of time.

TMR : So the current dispute has no benefit to the industry?
Badlisyah: What the industry should be bothered about is making sure their relevant domestic market is properly regulated and supported by the right infrastructure. In this regard, Malaysia has managed Shariah issues in the most efficient manner by having an Islamic Banking Act that says Islamic banking activities are all activities that do not contradict the religion of Islam. What that means is that all Shariah schools of law are applicable. Therefore, we do not waste time debating which one is right and which one is better. We allow market forces to determine which is more popular. Every interpretation based on the Quran and backed by legitimate hadith, is valid and enforcible. That is what Shariah says and Malaysia recognises what the Shariah framework is all about and the principles involved.

TMR : How do you regulate the market when there are elements such as profit sharing, partnership and risk-sharing which exist in Islamic finance?Badlisyah: At the end of the day, we have to identify what exactly we are doing. We are doing financial transactions, so irrespective of the Shariah principles used, it is predominantly a financial transaction. For example, most of our deposit products are under the mudarabah principle. You look at the substance of it and if it is a deposit, then you regulate it as a deposit product. Let's say you have a financing product based on a combination of mudarabah and musyarakah but in substance, if it is a financing product, then you regulate it as a financing activity irrespective of the Shariah principles involved. While a single principle may be applicable for many different activities, you regulate based on the activities undertaken.

TMR : Can you share with us your regional expansion plans?
Badlisyah: CIMB Islamic is present through our franchise across all legal entities within the group in Indonesia, Singapore and Brunei, mostly in the corporate investment banking and asset management segment. From a mere 200 branches selling Islamic products in Indonesia, by the end of the year, we should have more than 500 branches selling Islamic products. We hope to roll that business in the same manner we have grown the business in Malaysia, by adopting a dual banking leverage model, using the same resources and infrastructure that the group has and use some of the successful products that we have in Malaysia. It may be tweaked to fit Indonesian Shariah laws, but we have the intention to export it to Indonesia.

TMR : How do you see the growth of Islamic finance globally?
Badlisyah: It will still be in the double digit growth rate. While we had more than 20% growth year on year for quite a number of years previously, it will now be back to the teens because of the liquidity and credit crunch in the global market. Nevertheless, it will still be a double digit growth and is expected to continue without any slowdown because ultimately new interest shown by many jurisdictions to facilitate the investments and funds coming from many new countries will boost growth.

TMR : With so many other jurisdictions vying to be an Islamic finance hub, what advantage does Malaysia have over the rest?Badlisyah: We have more than 40 years of experience in doing the business. We have the most established legislative, regulatory and Shariah framework. We have put all the necessary infrastructure in place. As a result, we have all sorts of players in the market to spur the activities in the market. Years of existence in the market will result in a high level of awareness among consumers. We have the advantage of a very strong domestic market which would allow it to expand the platform to the international market without really much effort and this differentiates us from other markets.

TMR : Do we have the necessary expertise and skills to support the growth?
Badlisyah: Ever since Malaysia started Tabung Haji, after more than 40 years of developing and doing the business, we have a strong base of people with the necessary skills for all business segments including banking, takaful and the capital market of the Islamic finance industry. The scenario at this moment is that we have an acute shortage of people in the industry because all the relevant educational platforms to address the shortage have just recently been set up. It will take time before they can enter into the market. It's a shortage across the board that creates the core of the industry today. In CIMB, we are undertaking in house programmes to train them in Islamic banking and to be competent in the Islamic banking business. It is a good problem though, because it shows the industry is growing faster than we can cope with.

(This story appeared in The Malaysian Reserve on Nov 17, 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)