HUMAYON: New proposal for Islamic investment funds

It is time for Islamic investment funds to start offering some real value addition to investors beyond just Shariah compliancy. Islamic investing so far has by and large been concerned with assurance of Shariah compliancy by screening out forbidden activities (such as gambling, interest-based financial services, liquor, pork and adult entertainment); it also excludes some other activities deemed undesirable for social responsibility or political correctness (like tobacco and arms).

In addition, it also ensures that balance sheets of the companies chosen are in compliance with Shariah. There is, however, a growing need for a detailed set of rules and regulations to be developed to categorise Islamic investment funds into merely Shariah-compliant and purely Islamic funds.

As a starting point in this direction, a fund may be called a Shariah-compliant fund if:

1. It does not invest in the companies involved in production, distribution, marketing and sale of Shariah repugnant goods and services; and

2. It does not get involved in Shariah-repugnant activities to conduct its finances (both in raising and deploying funds).

A fund may be categorised as an Islamic fund if:

1. It is Shariah-compliant in its product offering and in terms of its finances and operations, and;

2. It promotes any or all of the broader objectives of Shariah, which include promotion of the well-being of all mankind in terms of safeguarding faith, life and self-esteem, intellect and human capital, and posterity and wealth.

The term Islamic Shariah funds industry can be used for both Shariah-compliant and Islamic funds.

While a Shariah-compliant fund may not take a political view on its investments, it is important that an Islamic fund ensures that its investment strategy promotes at least one of the objectives of Shariah.

Thus, prohibition of investing in companies that support movements and ideologies against Islam and Muslims may fall under screening of Islamic funds. On a company level, while a stock like Starbucks Corp can be included in a Shariah-compliant fund (if it comes out of the chosen Shariah screens successfully), it must not be included in the portfolio of an Islamic fund, because Starbucks publicly supports an ideology blameworthy for the killing of innocent people including women and children in the West Bank and Palestine.

It is also important for the Islamic financial services industry to start taking a view on the Islamicity of the fund manager.

After all, if an ethical fund manager is not committed to the ethical values, its credibility as an ethical fund manager must be questioned. Similarly, an Islamic fund manager must demonstrate its full commitment to the objectives of Shariah (as outlined above).

The above proposals are not meant to bring a hostile investing culture in the Islamic Shariah funds industry; rather they simply point to the need for developing this industry on the pattern of investors activism.

This is important for the very sustainability of the Islamic financial services industry as a whole.

It is also important to emphasise that the proposed Islamic Shariah funds industry should not be a platform for political Islam. What is being suggested here is that the Islamic fund managers must accommodate the Islamic political views in their investment strategies and processes to win business from the Shariah sensitive investors who have strong political views on some international issues and phenomena that are deemed anti-Islamic.

One may like to argue that this will help the radical Islamic movements. On the contrary, this will provide the Shariah sensitive Islamic investors an opportunity to express their preferences in financial markets to influence some of the phenomena and activities in light of their faith and political views.

At this early stage of development of Islamic banking and finance, it is absolutely important that the Islamic Shariah funds industry remains completely independent of the political movements and parties. Failing to do so may adversely affect the industry in its infancy.

It is critical that the Islamic financial services industry enjoys government support and patronage, in the absence of which it will be almost impossible for it to grow substantially.

Although Islamic banking and finance is a demand-driven phenomenon, it has taken off only in those countries where the governments have supported and promoted it. Malaysia provides the best example in this respect. Needless to say, that the future of Islamic Shariah fund industry and Islamic banking and finance as a whole relies on the government support.

Therefore, the non-political nature of Islamic banking and finance must be retained and further developed. Furthermore, it is definitely the right time to start looking into creating alliances with the Western ethical and socially responsible investments movements to learn effective tools of investors activism and shareholders advocacy in the Islamic Shariah funds industry.

Combining the Shariah principles articulated hitherto as well as garnering the support of governments and alliances with ethical movements will lead to a dynamic and vibrant Islamic funds industry.

[Dr Humayon Dar, chairman of EdBiz Corp Ltd, is also an adjunct professor at International Centre for Education in Islamic Finance. This article appeared in the 15 April 2013 issue of The Malaysian Reserve)

HUMAYON: The correct terms — Islamic banking or banking for Muslims?

Many Islamic bankers tend to believe that Muslims are using Islamic financial services because such services are offered to them; otherwise (according to them) customers are indifferent between Islamic and conventional products. This thinking may be partially true. It is certainly the case where Islamic banking is either non-existent or is insignificant in magnitude and proportion.

Once, Islamic banking gathers a meaningful size (about 10% of the overall banking sector), Muslims choose Islamic banking, even if it happens to be slightly more expensive.

Malaysia has by far come out of the nascent phase of Islamic banking, with Islamic banking representing over 20% of the banking industry. Hence, Muslims in the country demand Islamic banking because it is Islamic first and not just because it is banking that happens to be Shariah-compliant.

Shariah authenticity is central to Islamic banking. If the customers are convinced of Shariah authenticity of the products offered by Islamic banks, they are not much bothered about what rate of return they get on their investment accounts.

The notion of commercial displacement risk (the risk that Muslim depositors will withdraw their funds if Islamic investment accounts offer a return lower than the market rate of return) is a fiction created by conventional bankers managing Islamic banks. This thinking is popularised by conventionally trained, and inclined, Islamic bankers (and their bosses sitting on the conventional side of the fence if the Islamic bank happens to be part of a conventional banking group) to ensure that they do not share profit with the holders of Islamic investment accounts. They are interested in cheaper funds of Islamic customers and do not like sharing profits with them because of the so-called “cost of capital” considerations.

When a regulator — like Bank Negara Malaysia (BNM) — starts emphasising offering restricted investment accounts, the conventional mindset comes into action and the managers of Islamic banks start offering fixed-return accounts based on commodity murabaha or wakala.

There is a need to read the unfolding story in most of the Islamic banks in the country, which are gradually replacing their unrestricted Islamic investment accounts with accounts based on commodity murabaha or wakala.

While there is no denial of the fact that BNM is trying its best to improve Shariah authenticity of Islamic banking in the country, it does not need a foreigner like me to tell the regulator that many Islamic bankers are adamant that the status quo is the best way to move forward.

There is a need to improve perception of Shariah authenticity of Malaysian Islamic banking and finance in the international markets. The new guidelines on the use of bai’ina are an excellent step in the right direction.

In my opinion, no one in the entire world will have problems with bai’ina if it is practised the way it has been prescribed in the new guidelines.

With malpractices in bai’ina being rooted out of Islamic banking and finance and reconsideration of the issue of bai’ dayn, the Malaysian model of Islamic banking and finance will serve as an ideal blueprint for many other countries that are embarking on the task of developing Islamic banking and finance.

The new markets in Africa, Turkey and Central Asia are all looking for a cost-effective way of developing Islamic banking and finance in their respective countries.

Malaysia must grab this opportunity by presenting to the whole world a model of Islamic banking and finance it has developed over a period of three decades.

The Malaysian investment into Islamic banking and finance — with the establishment of International Centre for Education in Islamic Finance (INCEIF), International Shari’ah Research Academy (ISRA), Islamic Financial Services Board (IFSB) and International Islamic liquidity Management Corp (IILM) — must start bringing financial benefits now.

The government should devise a policy framework for exporting Islamic financial advisory and capacity building services to the countries in the Organisation of Islamic Conference.

It may not be a bad idea at all if Malaysia takes a lead role in setting up and hosting what may be called International Islamic Development Bank.

The Jeddah-based Islamic Development Bank has been playing a lead role in the OIC bloc, and now it is time for Kuala Lumpur to play the role of a global leader in Islamic banking and finance. As Malaysia has done it domestically, it can certainly do it globally.

[Dr Humayon Dar, chairman of EdBiz Corp Ltd, is also an adjunct professor at International Centre for Education in Islamic Finance. This article appeared in the 15 April 2013 issue of The Malaysian Reserve)

BADLISYAH: Islamic finance as an economic tool

When I was a young man newly started in the Islamic banking industry, I was asked to join a business trip to Mindanao, the Philippines, sometime in the late 1990s. It was my first major business trip and naturally I was excited. It remained to this day as one of the most memorable, sobering and enriching experiences in my 16-year career.

The purpose of the trip was to explore how Islamic finance could assist in the redevelopment of Southern Philippines.

Early on, I had personally identified that Islamic finance was the natural partner and catalyst to bring about economic and infrastructure development.

It could support the then brokered peace process, after years of guerilla warfare by the majority Muslim locals who were seeking their own rights to govern.

I was also pretty nervous because I thought I was going into a war zone. At least that was what my young inexperienced mind was concocting despite the assurance from my bosses that there was no danger to life or limb. The things I had to do for Islamic finance!

I spent a gruelling 20 hours travelling to Manila — yes it was 20 hours because I had to fly from Labuan to Kuala Lumpur, slept at the airport overnight on the bench (since I was not qualified to stay in the transit hotel then) and flew off to Manila the next day before taking a flight onwards to Mindanao. This was despite Labuan being located next door to Mindanao! I wished there was a direct flight to Mindanao from Labuan or Kota Kinabalu, but I digress.

The flight to Mindanao gave me the impression of how poorly connected it was from major business routes and how isolated it was from the rest of the world at that time, which highlighted the importance of the trip I was on. When we landed, all the nervousness that I was carrying dissipated and was replaced with a sense of excitement. Being the most junior in the entourage, I naturally had to carry the bags and sort out the logistics.

Everything about the trip was looking up until we reached our car and saw the armed guards that will be escorting us throughout our visit. There were a dozen of them armed to the teeth plus outriders. It brought back all the imagined danger to the fore especially when our host explained it was for our safety and we were not to travel alone without at least two guards escorting us.

Since I was already there and didn’t want to be seen like someone really wet behind the ear, I pushed aside my worries and did what was expected of me. Backed by an allocation of funds from various parties including from supranational bodies, we set about to identify viable commercial projects.

We visited the local rebel leaders, local governments and businessmen. We looked at one of the largest fish ports in the world, fish canneries, sugar cane fields and many other potential projects that could be supported by way of Islamic finance.

The whole trip took about a week including the overnight stays in Manila to meet with government officials, i.e. senior Philippines legislators keen to see peace in Southern Philippines. I was involved in all of the discussions since I was tasked with note-taking.

Although I did not fully understand everything that transpired in the discussion, the experience made it clear that Islamic finance was a central tool that could ensure lasting peace in Southern Philippines.

Unfortunately, nothing happened after the visit as the peace process envisaged did not materialise. We could not implement what could have been done under Islamic finance to help make it successful.

Many years have passed and I have fairly put aside any hope of seeing Islamic finance playing a role in the redevelopment of Southern Philippines.

That was until the recent announcement on the signing of the Framework Agreement between the Philippines Government and the Moro Islamic Liberation Front, successfully brokered by Malaysia.

I was excited again at the prospect of Islamic finance catalysing a lasting peace in the area and sat as a keen observer of the new peace process albeit from a distance.

The Lahad Datu incident was unfortunate but it showcased again the need to bring the people in Southern Philippines into the mainstream economic activities. To me, this can be achieved best through Islamic finance. Real peace cannot exist without economic empowerment.

Of course this can only happen if Islamic finance is fully enabled and facilitated to operate on a level playing field with conventional finance in the Philippines.

In fact, considering that Islamic finance has proven to be the best tool for the democratisation of the financial market to promote a truly inclusive society in countries like Malaysia, I would even go so far as to recommend that special incentives be given to Islamic banks to operate at least in the Southern Philippines so that it can truly serve the peace agenda.

At the end of the day, Islamic finance is a public good and an economic tool created to benefit all mankind. Since this is the case, it should be the most natural tool to be employed for the peace process not just in Southern Philippines but anywhere else in the world.

[Badlisyah Abdul Ghani is the ED and CEO of CIMB Islamic Bank Bhd. This column appeared in the 1 April 2013 issue of The Malaysian Reserve]

HUMAYON: Gold as a currency in Islamic finance?

Dr Humayon Dar

Many advocates of Islamic banking suggest using gold as a replacement for the money created through the interest rate mechanism. This is an interesting proposition, especially in the context of Malaysia where the state of Kelantan has already started using gold and silver coins as a potential replacement for the federally issued legal tender of currency notes and coins.

It is important to assess its economic implications with respect to growth and overall economic activity in the country.

Americans find it difficult, and painful, to revert back to the gold standard for reasons peculiar to the US economy, but these limitations are not relevant to Malaysia.

In Malaysia, the government can experiment with the gold currency by limiting the use of gold and silver coins issued by the state governments for investment purposes only. This will allow people to buy gold and silver coins through paying in ringgit providing an alternative tool for saving on a long-term basis, even if gold and silver coins are not treated as legal tender.

Furthermore, the Malaysian government can use Islamic banking as a tool to introduce gold deposits for customers who would like to save for the long term. In fact, Bank Negara Malaysia (BNM) may continue to issue coins like Kijang Emas bullion coins and distribute them through Islamic banks.

At present, Malayan Banking Bhd (Maybank) designates 32 branches to sell Kijang Emas bullion coins but an extended programme may be rolled out with the help of Islamic banks in the country.

While Islamic banks could be allowed to use gold deposits (by way of selling gold for cash), they must return the depositors’ gold if the latter wish to redeem after a specified time period. Alternatively, the gold deposits must be kept for safe custody, in which case the depositors must be willing to pay a safe custody fee to the banks.

This alternative arrangement will also have a dampening effect on the ability of the Islamic banks to extend credit to their customers as they will not be able to use the depositors’ gold (by selling it for cash) to offer financing to those who may need it. This will, in turn, have implications for economic growth.

If Islamic banks are reluctant to offer gold deposits, the government may use the likes of Lembaga Tabung Haji and similar institutions to allow Muslims to save in gold and silver. It is expected that an overwhelming demand for the proposed gold deposits will compel Islamic banks to start offering such deposits out of market pressure.

If the introduction of gold coins in the states of Kelantan and Perak proves successful (which appears to be the case so far), monetary authorities — ie BNM — may consider using gold coins to bring about monetary reforms in the country. Indeed, advocates of monetary reform have long advocated a return to the gold standard. Some prominent economists, like Nobel laureate sRobert Mundell and James Robertson, have written extensively on the benefits of returning to the gold standard.

In the context of Islamic banking and trade, the likes of the former Prime Minister Malaysia, Tun Dr Mahathir Mohamed and activists like Tarek El Diwani have been influential figures in advocating the introduction of gold dinars and replacing the fractional reserve based banking system.

While it may take some time for BNM to expand its Kijang Emas bullion coins issuance, the increasing demand for Islamic banking in Malaysia (25% of the country’s financial sector’s assets derive from Islamic banking) offers Islamic banks a window of opportunity to exploit the trend by offering bullion-based investments to those who consider gold coins to be more Shariah-compliant than conventional money created through an interest based credit system.

If the gold deposits look like a radical idea, there are some other more acceptable ideas floating around.

James Fierro of Recipco Holdings Ltd has for some time been advocating for an international currency based on the excess capacity the world’s businesses have at any given point in time. This concept has similarities with the gold dinar in the sense that both the currencies are based on the real value of goods and services they represent (gold dinar representing the intrinsic value of the gold, and the Recipco’s proposed currency representing the value of goods and services excessively produced by businesses).

As these ideas are seen as radical by many, including Islamic bankers, it is important that the governments take a proactive role in implementing these proposals. As the government of Malaysia is spearheading an initiative to develop tools for liquidity management for Islamic banks, gold dinar and the issuance of a currency based on excess capacity may not be entirely abstruse concepts.

[Dr Humayon Dar, chairman of EdBiz Corp Ltd, is also an adjunct professor at International Centre for Education in Islamic Finance. This article appeared in the 18 March 2013 issue of The Malaysian Reserve)

Fear of incursionists carrying out protracted guerilla warfare

By Habhajan Singh

A prolonged guerilla-style militant presence in Lahad Datu and other areas in Sabah is one of the concerns on the minds of the Malaysian security authorities who are still trying to figure out how the engagement with the so-called Sulu sultanate army escalated into a gunfight that led to deaths on both sides.

“There is a concern that the situation may escalate into a long-drawn guerilla war. You have some 30,000 to 40,000 Sulu people in Sabah,” one senior government official told The Malaysian Reserve.

“We are not sure what led to the killing (by the Sulu sultanate army). The police were not aggressive. This is one of the things that is baffling us,” added another official who is in the loop on the security response in Lahad Datu.

After the Sulu army made their way to Lahad Datu on Feb 9, and holding their position past the Feb 26 deadline imposed by the Malaysian side, March 1 saw a dramatic escalation of the stand-off when two Malaysian police commandos were killed and three others injured in a gun battle with the Sulu terrorists.

All 12 members of the Sulu group in the gun battle were subsequently killed in the incident.As at press time, the death toll had increased to 60 — 8 Malaysians and 52 Sulu terrorists.

Prime Minister Datuk Seri Mohd Najib Razak visited Lahad Datu for the first time yesterday, announcing the establishment of a special security area to safeguard the sovereignty and security of the state’s east coast. It encompasses the districts of Kudat, Tawau, Kunak, Sandakan and Lahad Datu.

“This Special Security Area will have Lahad Datu as its central command and several temporary cabins will be placed there so that it can begin functioning immediately,” Bernama quoted him telling a news conference after checking on and attending a briefing on the ongoing “Ops Daulat” operation against the armed incursionists.

The security officials who spoke to The Malaysian Reserve also said the Malaysian authorities were “quite clear” that the incursion by the Sulu army was more to do with Philippines internal politics rather than the claim for Sabah.

“It’s more to destabilise the present Philippine administration, and less to do with any real claim over Sabah,” said one official.

Philippine President Benigno Aquino will be facing mid-term elections in May and presidential elections in 2016.

There is speculation that the incursion could have been linked to forces that wanted to apply pressure on the president as the local elections come closer.

But some quarters believe that it could genuinely be related to Sulu claim over Sabah, a matter that Malaysia claims to have been firmly settled in 1963 when Sabah joined Sarawak, Singapore and Malaya to form the enlarged entity called Malaysia.

Phillipines’s Inquirer News, for example, reported that Malaysia pays a token sum of RM5,300 a year to the Sulu sultanate as lease on Sabah, adding that there are reports in Manila that the paltry amount may be one of the reasons for Jamalul Kiram III to send the “Royal Security Forces to the Sultanate of Sulu and North Borneo” to Sabah on Feb 9 to occupy the territory.

As to why negotiations were allowed to prolong, the officials who spoke to The Malaysian Reserve also said that the Malaysian authorities went into the situation with the mindset that they were dealing with parties that were not entirely alien to them.

Malaysia was actively involved in brokering the historic peace deal signed in October 2012 between the Philippine government and Muslim rebels to end 40 years of bloody conflict.

“Until the shooting, the Malaysian authorities were willing to negotiate its way out of this. But when the killing started taking place, the whole ball game changed,” said one official.

Yesterday, Bernama reported Najib as saying that Kuala Lumpur will not consider any request for a ceasefire so long as the armed incursionists in Sabah do not lay down arms unconditionally.

Najib said Aquino had contacted him for Malaysia’s reaction to the call for a ceasefire by Jamalul Kiram III, reports Bernama.“I informed Aquino that they need to surrender unconditionally and their weapons have to be handed over to us,” he told a news conference, the report added.

SALUTING THE HEROES: The prime minister (left) says Sabah would continue to be maintained as a state within Malaysia and no one should dispute that absolute status. Najib met with a few armed forces personnel after the briefing on the ‘Ops Daulat’ in Felda Sahabat 16 in Lahad Datu (pic: The Malay Mail)

[THE MALAYSIAN RESERVE, 8 March 2013]

Malaysia Airline holds Subang staff migration

TheMalaysianReserve (@TMReserve) tweeted at 2:37 PM on Mon, Mar 11, 2013: MAS staff migration from Subang to KLIA put on hold http://t.co/N37TdtEAnp (https://twitter.com/TMReserve/status/311002931891679233) Get the official Twitter app at https://twitter.com/download

Noor Awqaf formed to tap Islamic finance

Noor Awqaf formed to tap Islamic finance A Memorandum of Understanding (MoU) has been signed to establish a new asset management firm, specialising in Awqaf (Islamic endownments), in Dubai’s bid to become a global centre for the business of Shariah-compliant in line with the emirate’s vision to position as the world’s capital for the Islamic economy. Ahmed Kalim, Deputy Group chief executive officer, Noor Investment Group, and Tayeb Abdel Rahman Al Rayes, secretary-general of Awqaf and Minors Affairs Foundation (Amaf), have signed the MoU to set up Noor Awqaf LLC in the UAE. Noor Awqaf will complement the work of Amaf in offering enabling financial services to Awqaf entities around the world. The initiative is in line with the recent announcement of His Highness Shaikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, to transform the emirate into the world’s capital for Islamic finance and other businesses based on Islamic principles. Noor Awqaf has been set up as an independent limited liability company, with an initial issued and paid-up share capital of Dh10 million. Noor Awqaf is 60 per cent owned by Noor Investment Group and 40 per cent by Amaf. It will manage Awqaf funds and provide other asset management services. It will also offer due diligence, financial analysis and assistance in the creation and implementation of strategic objectives for Amaf and other similar entities around the world. One of the Islamic economy sectors that will be targeted by Noor Awqaf is the $2.1 trillion Halal industry. Noor Awqaf intends to build a business model to position Dubai as a Halal centre which facilitates and adds value to the globally expanding market force, in food, pharmaceutical, cosmetic, additives and ingredients, lifestyle and services sectors. Dr Ahmed Al Janahi, deputy group chief executive officer, Noor Investment Group, said: “The cooperation with Amaf, which is aligned with Dubai’s vision to shape the future of the Islamic economy, is in line with our strategy to give back to the society through support for charities and foundations in the UAE. We will provide expertise with respect to the set-up and management of Noor Awqaf, including fund and asset management services, the creation of appropriate legal structures and the investment of funds under management.” Al Rayes said: “The cooperation with Noor Investment Group, to establish an independent company, will ensure the enhanced management of the Awqaf fund, in addition to extending product and financial services to other funds. Amaf will on its part provide access to its relationship with other entities and expertise in Awqaf best practices, policies and procedures.”

[Khaleej Times, 4 March 2013]