‘No necessity for Islamic accounting standards’

By Bhupinder Singh
The Malaysian Accounting Standard Board (MASB) is expected to issue a statement of principle later this year stating that it does not think there is a need to have Islamic accounting standards.
"We feel that we can use the International Financial Reporting Standards (IFRS) unless someone can show us that there is a clear prohibition in the Shariah, then we will amend it accordingly. Until such a time, we'll use the IFRS," the new chairman of MASB Mohammad Faiz Azmi told The Malaysian Reserve.
The MASB is adopting this stance as there have not been many significant issues between Islamic and conventional accounting, which required a different set of accounting standards for the former. Even countries like Saudi Arabia have adopted the IFRS, Mohammad Faiz added. The main accounting issues in Islamic finance centre around disclosure and transparency in terms of how money is utilised. There has, however, been some confusion on the behaviour of products and how they are accounted for.
MASB will seek to use Malaysia's role as a pioneer in Islamic finance to share its experience in this field with other countries, as well as to raise concerns and issues about implementing the I FRS with the International Accounting Standards Board (IASB). According to Mohammad Faiz, the country's staggered approach to a convergence with the IFRS by January 2012 is progressing smoothly.
"We are 95% there in terms of convergence with the IFRS. We have left the two major standards because of their impact — the FRS 139 that is due for implementation in January 2010 along with the agricultural standard FRS 1431," he said.
The FRS 139 (financial instruments — recognition and measurement), an omnibus standard that covers a whole range of things, is set to impact corporate earnings reporting as this standard requires companies to record/recognise their derivative contract exposures and not just disclose them as potential claims.
The standard will also act as an anti-abuse mechanism requiring the management to state clearly their investment decisions. MASB's main challenge now is to educate the market on the need to converge and the benefits of converging, as well as to explain what and how these changes will impact the market.
"The reality is accounting does not just reflect on what you do, it may actually change the way you do business," Mohammad Faiz said. The new standards may require companies to rethink their human resource, remuneration or bonus policies, he added.
Meanwhile, the new chairman of MASB, whose tenure will run for three years, has a busy schedule ahead of him. In November, MASB will host the Asian-Oceanian Standards Setters Group's (AOSSG) first meeting in Kuala Lumpur. Set up last April, the AOSSG will be a forum for Asian countries to formulate viewpoints that will be forwarded to the IASB. The AOSSG comprises representatives from China, Japan, South Korea, Singapore, New Zealand, Australia, Hong Kong, Macau, Brunei and Indonesia.

(This story appeared in The Malaysian Reserve on Aug 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)

Islamic finance at crossroads

by Alfean Hardy
The Islamic finance sector, both locally and abroad, is now at a crossroad and is facing the possibility of not being able to present itself as an alternative to the conventional financial system, said KPMG executive director John Lee. In a presentation at the Malaysian Corporate Conference 2009 in Kuala Lumpur last week, Lee said that the global sector was in good shape, with excess liquidity and good growth rates.
"It's still recording good growth rates in spite of the global financial turmoil that we've been seeing. In Malaysia, we've seen tremendous growth rates as well, registering an over 20% growth rate.
"However, a lot of this (locally) has been because of the displacement of conventional banking rather than creating a new market. It's about market share, taking from the conventional rather than growing new market share. So we have to see this growth rate with some scepticism. "There's (also) been a number of people who have been saying that, if we'd had more Islamic finance, we would not be seeing what we've been seeing in the markets to some extent," Lee said.
"Also, we didn't see a lot of collapse of, or issues with, Islamic banks resulting from the global financial turmoil. "We have to be careful about saying that, (in the case of banks collapsing/being affected), it's not because they were insulated, better managed or smarter. It was simply that a lot of them were not exposed to toxic assets, that's all," he added.
Lee, who was involved in KPMG's report entitled "Growth and diversification in Islamic finance" released in 2007, added that the industry was now at point where the market was no longer in its infancy but was maturing.
"The risk of maturing is, where do we go (from here)? The risk, in my opinion, is that it's converging with conventional finance and not diverging from conventional finance.
"Initially, it was important for (the industry) to have some similarity with conventional financing. Because of familiarity, a conventional mirror was an asset but if we continue down that path, the fear is that we'll be converging with conventional. And my argument will be, why bother then?" he said. Lee said he would like to see the industry undergo a divergence from conventional finance, noting that the whole idea was one of alternative finance — to create a market that provides an alternative space to conventional banking.
"But, if it moves along the path I've seen, it's going to be a lot more convergence, to have more Shariah-compliant as opposed to Shariah-based products. A lot of the instruments out there (now) are Shariah-compliant products rather than Shariah-based products," he added.
At a question and answer session later, International Shariah Research Academy (Isra) associate researcher Shabnam Mohamad Mokhtar said economists have argued that Shariah-compliant products were conventional products that have been Islamised while Shariah-based products were those that truly originated from the Shariah perspective.
"If you go by that argument, if you go into murabahah, which is a sales transaction, and if you go into ijarah, which is a lease transaction, aren't these in the conventional space (as well)? "If you look at the Prophet's approach, he never differentiated between Shariah-compliant and Shariah-based. It's still the same contract. "If the contracts had any Shariah contradiction, he would take out the contradiction and it would be Islamised," she added.
Shabnam said the issue here was one of innovation and frustration in the market about the Islamising of conventional products.
"Consumers, however, understand the conventional and their demand is for (Islamic products) that are on par with conventional products, thus the supply from the banks is going that way.
"But, when you take the venture capitalist approach, then that is truly the Shariah way. Isra is looking at this but it's a matter of educating the industry," she said.

Balance between innovation and compliance in Islamic finance

CAPTION: (From left) Ibrahim, Norashikin, ASTRO head of treasury Latifah Mohamed Yusof and Jasani at the Malaysian Corporate Conference 2009 in Kuala Lumpur

By Alfean Hardy
The global Islamic finance sector already has a comprehensive range of products to offer to its clients and consumers but there still remains a need to find a balance between innovation and having to comply with the Shariah regulations if the industry is to continue to grow, several Islamic finance experts said.
In a session at the Malaysian Corporate Conference 2009 in Kuala Lumpur yesterday, Bank Islam Malaysia Bhd's treasury department general manager Norashikin Mohd Kassim said the Islamic finance sector was now at an interesting period.
"It's going to be a US$1 trillion (RM3.54 trillion) industry and it's important for all Islamic banks that any product that we introduce is going to be Shariah-compliant. But, at the same time, we must allow the market to innovate and not to stagnate, to meet market demand," she added.
Norashikin said it was the very nature of Islamic finance and its Shariah-compliance that has highlighted it as a viable alternative to the conventional system.
"It's all about ethical values and postulates the principles of equity and balance, the prohibition of speculation, and the requirement that transactions must create real economic value have helped evert the problems we have today due to the subprime crisis. So, even as we innovate, we must still abide by Shariah-compliance," she added.
Asked why Islamic finance practicioners did not come out with a killer product that did not have a counterpart in the conventional system, Maybank Islamic Bank Bhd acting chief executive officer Ibrahim Hassan said there were already financial institutions that were offering innovate products like musharakah financing.
"These are either pure or hybrid musharakah in the form of consumer and corporate banking or business banking markets. "It's already available but not actively offered by the Islamic banking institutions because it's a new type of risk, you're going beyond the normal lending or financing risk that banking institutions assume.
"It requires different capital requirements and not many institutions are ready to take up this kind of risk. It's already offered and some of the foreign and local institutions have already offered such products," he added. Hong Leong Islamic Bank Bhd shariah and product development head Jasani Abdullah said the question was a popular one.
"It's basically about whether Islamic banks are ready to become direct entrepreneurs. Some (banks) already do that," he said. However, he said that such a move required a massive change in perceptions and profiles.
"The training skillsets for bankers will also (have to) differ. The training is new, the framework is pretty new and is being looked at from time to time to see the success of banks embarking on such (new) portfolios.
"In short, it takes time. Corporates need time to look at such risky-based investments. Bankers also need time to get the skillsets required to do such undertakings because it's not just the bank's shareholders money that's impacted but it will also impact their depositors' money in undertaking such transactions," he added.

Corporate Murabahah Master Agreement to boost money mart

The Corporate Murabahah Master Agreement (CMMA), a standard document for deposit-taking between financial institutions and corporate customers, was launched yesterday, in a move to boost the Islamic money market.
Association of Islamic Banking Institutions Malaysia (AIBIM) President, Datuk Zukri Samat described the launch as timely as it would unlock the vast potential of the domestic Islamic money market. He said the average daily transactions is estimated to top RM6 billion, as such, CMMA could assume a significant role in raising the innovation level of deposit products.
"The adoption of the CMMA for corporate deposits is expected to result in cost and resource savings for both Islamic banks and corporations," Zukri said during the launch of the master agreement in conjunction with the Malaysian Corporate Conference 2009 in Kuala Lumpur yesterday.
AIBIM also signed a memorandum of understanding with Takaful Malaysia, ACR Retakaful, Astro, Maesat and the Employees Provident Fund to part icipate i n CMMA. Zukri said the standard agreement would specify a common modus operandi for Islamic financial institutions in accepting deposits via commodity Murabahah.
"It will help eliminate the need for corporate customers to vet through each and every agreement proposed by different Islamic financial institutions on the same product.
The agreement will also provide certainty and a standard methodology in ensuring principal and profit due to corporate depositors," Zukri explained. Being fundamentally a deposit-taking product, the Murabahah arrangement naturally involves two main parties, namely the Deposit Placing Entity (DPE) and the Deposit Taking Ent it y (DTE).
The DPE or the principal is a company or corporation which intends to place its surplus funds with the bank. Conversely, the DTE is the bank itself. The purchase by the bank, in its capacity as the agent of the principal, will be effected upon spot payment and immediate delivery by suppliers. Zukri said the sale price consisted of two elements, the purchase price initially paid by the principal, and an amount that represents the profit for the principal on the sale of the commodities to the bank.
Earlier, Second Finance Minister, Datuk Seri Ahmad Husni Hanadzlah, who attended the launch, said the Islamic banking association would definitely promote its usage and application with local and foreign Islamic financial institutions globally.
He said for Islamic finance to be accepted as a viable mainstream system on a global scale, there must be elements of cost competitiveness, accessibility and adaptability.
"Shariah compliant products need to have the ability to be replicated across as many markets, he said, adding that it would encourage Islamic finance to be adopted in relatively under-developed financial markets and also in the more sophisticated financial capitals of the world. — Bernama (The article appeared in The Malaysian Reserve, Aug 21, 2009, p8)

RHB Islamic tawarruq deal

RHB Islamic Bank Bhd (RHB Islamic) last week signed an agreement with Sedania Media Group and E-Pay for the introduction of telecommunication air time in its tawarruq offerings.
Signing the agreement were (seated from left) Sedania group CEO Azrin Mohd Noor, RHB Islamic MD Jamelah Jamaluddin and E-Pay CFO Yap Chih Ming. Witnessing the event were RHB Islamic chairman Datuk Faisal Siraj (2nd from left), Sedania chairman Tan Sri Halim Ali (3rd from left) and Deputy Minister of International Trade and Industry Datuk Mukhiz Mahathir (2nd from right). Tawarruq is an Islamic-based product which allows for users to raise funds. (The Malaysian Reserve, Aug 17, 2009, p32)

Tawarruq structure valid if conditions met, says scholar

Tawaruq must meet the standards of industry body AAOIFI and cannot be a standalone funding tool, a top scholar said, outlining conditions for the use of a structure that has split the Shariah banking sector, a Reuters report said.
Tawarruq is a bedrock of the US$1 trillion (RM3.51 trillion) Islamic finance industry and is widely used as a financing and liquidity management instrument. But growing disputes about the permissibility of some forms of tawarruq under the Shariah have thrown markets into disarray, with practitioners warning of catastrophic consequences if the structure were to be revoked, the report added.
Seeking to calm investor worries, it said influential Shariah scholar Sheikh Yusuf Talal DeLorenzo said tawarruq is allowed when it is applied properly, adding that arguments against it are removed from commercial realities.
"Tawarruq from my perspective has been carefully researched and explained by AAOIFI," the 60-year old American scholar told Reuters in an interview, referring to the Accounting and Auditing Organisation for Islamic Financial Institutions, which sets guidelines used by much of the industry. "AAOIFI has developed a standard through its own methodology which is very thorough and that standard, as far as I'm concerned, still stands.
"There's a great deal of misunderstanding in the marketplace that's a disconnect between scholars who are actively involved in the field of finance and scholars who are not."

THE REPORT GOES ON:
Other prominent Shariah scholars such as Sheikh Nizam Yaquby, Mohd Daud Bakar and Mohammad Akram Laldin have also recently defended the use of tawarruq. The International Council of Fiqh Academy, a leading industry body driven by the Organisation of Islamic Conferences, had earlier ruled organised and reverse tawarruq to be "a deception" that seeks to disguise the use of usury. Confusion over the structure's status has been compounded by by the fact that compliance with standards of Islamic finance industry bodies such as AAOIFI and IFSB is voluntary, and there is no ultimate arbiter in case of disputes. In its basic form, tawarruq is an asset sale 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. Reverse tawarruq is akin to organised tawarruq, although the buyer would be a financial institution seeking liquidity. "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 in May. DeLorenzo, however, said tawarruq should not be used as a financing instrument on its own. "Modern tawarruq is not intended as a transaction in and of itself. Rather it is intended as a means to an end," said DeLorenzo, a scholar of Islamic transactional law, who sits on about 15 Shariah boards including AAOIFI. "What people don't understand unfortunately is that they think tawarruq is just a way of disguising a loan. It's really a link in a transactional chain." — Reuters

AFB n RM50m chemical tanker financing

TANKER FINANCING: Onsys Energy Sdn Bhd is to invest US$92m (RM326.12m) on four chemical tankers, which cost US$23m each, its MD Jaafar Mohamad (2nd right) said at the signing ceremony between Onsys and Asian Finance Bank (AFB) Bhd for a RM50m Islamic financing facility in Kuala Lumpur yesterday. Also present at the event were (from left) AFB's CEO Datuk Mohamed Azahari Kamil and SVP & head of domestic banking Ismail Hj Aminuddin with Onsys director Alan Tan.
By T Vignesh Onsys Energy Sdn Bhd, a Malaysian-owned company with core activities in bunkering supply, oil trading, ship chartering, brokering and ownership, is to invest US$92 million (RM326.12 million) on four chemical tankers.
Managing director Jaafar Mohamad said the tankers cost US$23 million each with the first chemical tanker to arrive in November.
He said that Onsys will receive two tankers by early next year and the fourth chemical tanker is expected to reach Malaysian waters from China by March. Jaafar said that Onsys is still negotiating with a few foreign banks for the financing of the chemical tankers but for now, "the company can't say much".
"We are in talks with foreign banks as we have not received good feedback from local banks for the funding of the tankers. "The funding will be on a 50:50 basis as the other half of the funding will come from the company's internal funds," he told reporters at the signing ceremony between Onsys and Asian Finance Bank (AFB) Bhd for a RM50 million Islamic financing facility in Kuala Lumpur yesterday.
Meanwhile, the RM50 million term financing is to part finance the acquisition cost of two units of oil product tankers, Onsys Leo and Onsys Aries which sums up to US$26 million for both the tankers.
AFB's chief executive officer Datuk Mohamed Azahari Kamil said that yesterday's (Aug 17) signing ceremony marks yet another milestone for the bank as this is its first opportunity as a foreign Islamic financial institution, to part finance the acquisition of two oil product tankers. He said it is the governments vision to make Malaysia, the region's premier transhipment hub.
However, since the global economic downturn, Mohamed Azahari said the marine industry has been plagued by poor fundamentals and a lack of accessibility to funding which is necessary to develop and expand AFB's services in order to stay competitive. (The Malaysian Reserve, Aug 18, 2009, p1/7)