Islamic Banking

By YVONNE TAN

PETALING JAYA: With efforts intensifying to promote Malaysia as an Islamic banking hub, experts say the time may be right for the establishment of a mega Islamic bank in the country. 

The idea for a mega Islamic bank, first mooted by the General Council for Islamic Banks and Financial Institutions (CIBAFI), clearly has been on the minds of many industry players. 

In June, CIBAFI chairman Sheikh Saleh Abdullah Kamel was reported as saying that Bank Islam Malaysia Bhd was “one of the banks interested to be a founding member” (of the mega bank). 

He did not reveal the names of the interested parties but it is learnt that other local Islamic banking players are also keen. 

An analyst said RHB Islamic Bank Bhd (formally launched on March 1, 2005) for instance, was a “consistent performer”, and could be a likely candidate. 

This could involve RHB Bank, which has a conventional banking business, being converted into a fully Islamic financial institution that would possibly be merged with RHB Islamic. 

RHB Islamic’s assets have grown about 18% to about RM8.5bil compared with last year. For the half year ended June 30, RHB Islamic posted a net profit of RM36.9mil. 

The bank is reportedly looking to set up an international Islamic banking unit by early next year to tap the financing potential for Middle Eastern investors seeking quality assets to invest in. 

Meanwhile, Middle Eastern players such as Kuwait Finance House (KFH) seem to have been also caught up in the furore of the local Islamic banking scene. 

KFH (M) Bhd, which started operations last year, is the first fully licensed foreign Islamic bank to operate in Malaysia. 

Saudi Arabia’s Al Rajhi Banking & Investment House and a consortium led by Qatar Islamic Bank have also been awarded licences to operate locally. The latter is due to start operations later this year. 

Despite recent denial of talks to acquire a stake in banking group Rashid Hussain Bhd (RHB), the market is still abuzz with speculation that certain Middle Eastern players are making initial forays into RHB. 

With so much excitement over the possible scenario, analysts point out that KFH itself is a product of the conversion from conventional bank to an Islamic bank. 

KFH is one of the largest Islamic banks in the world. Headquartered in Kuwait, its business covers corporate, investment, commercial and retail banking. 

Efforts to promote the Islamic banking sector in Malaysia is exemplified in Budget 2007 where full tax exemption for 10 years – effective year of assessment 2007 – will be given to any international Islamic banks or international takaful operators that are established as well as all transactions under the international currency business units. 

More recently, a new entity – the Malaysia International Islamic Financial Centre (MIFC) – was launched. The MIFC is aimed at further developing Malaysia as an international Islamic financial hub of vibrant, innovative and competitive financial services. 

Additionally, earlier this month, Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz said the local Islamic banking industry remained well capitalised with a risk-weighted capital ratio of 14.8% at end-August, while the net non-performing financing ratio (for the whole Islamic banking system) had declined to 4.2%. 

Meanwhile, according to RAM Consultancy Services Sdn Bhd chief economist and managing director Dr Yeah Kim Leng, the growth potential of Islamic financing remained good. 

“For the January–August period this year, funds raised in the capital market through new private debt securities (PDS) rose by 43.2% to RM27.5bil. 

“The bulk of the increase was contributed by a large increase in Cagamas bonds and medium-term notes while Islamic bonds accounted for 14% or RM3.85bil of the new issues. 

Yeah said although there was a drop (13%) in the issuance of Islamic bonds up to August this year, RAM expected Islamic financing to continue to be a major feature in Malaysia’s financial landscape. 

“This is because Islamic bonds have become a major financing instrument as well as an asset class due to their cost competitiveness and growing attractiveness as a safe and liquid asset. 

“Other supporting factors include the growing international recognition of the tremendous potential of Islamic-based funds and financial markets along with the push by the Government to develop Malaysia into a major Islamic financing centre,” he said. 

Link

THE Islamic Bank of Britain has joined the world of internet banking, making Islamic banking more accessible to its customers, writes Sara Black The bank, which has a branch on South Road, Southall, has also launched a Sharia’a compliant direct savings account, making it the only British bank to offer Sharia’a compliant savings.

Sharia’a is the principles of Islamic law and the IBB is the only totally Islamic British bank in the UK.

Although designed to cater for Mulslims, the bank welcomes customers of all religions.

It has been voted best provider of Islamic finance in Europe.

Ashraf Piranie, IBB’s finance director, said: "Since 2004, when the FSA gave us permission to launch, we have grown to become a leading provider of Islamic financial services in the UK.

"The launch of our internet banking facility means that our unique service is now available to a much broader range of customers.

"We see the launch of our internet banking as a major milestone in the development of Islamic finance in the UK, which will make it accessible and appealing to many more of the UK Muslim population."

Link

Infosys has won its first contract from a Saudi bank for its Islamic banking solution.

Merwin Fernandes, VP and business head for Infosys’ banking solution Finacle, said talks were at advanced stages with at least three Gulf-based banks for its core banking solution. "Saudi Arabia’s Arab National Bank is our first customer for the Islamic banking solution that is currently under development. We are seeing a favourable response from several banks in the Gulf and Middle East and expect more customers," Fernandes told a local news channel today. The full-fledged Islamic banking solution is part of the Finacle core banking solution, which will be ready in early 2008. Infosys also has an on-going contract with Egypt’s Bank of Alexandria and support centres in Egypt and Saudi Arabia.

Mumbai; A two-day national workshop on the Roadmap for Islamic Banking in India was held by Jamaat-e-Islami Hind, a leading Muslim organization of India, on 16-17 Sept 2006 at Mumbai. Various International and national finance experts, professionals and bankers discussed diverse aspects to implement Islamic Banking in India and jointly drafted a resolution.

At the workshop several panels were formed, under experts’ guidance to study on micro and macro levels on the Roadmap to Islamic Banking in India.

Under Dr. Ausaf Ahmed’s supervision a panel concluded that "Islamic banking is the greatest need of the hour and valid for all centuries because it promotes justice and equity among human beings. It encourages the participation of all communities in profit and loss of economy. It also generates employment in finance sector and benefits global economy." Another panel analysed the Steps to develop Islamic Banking in India and stated that; "few working groups need to be established to work on mobilizing public opinion and regulatory amendment for Islamic Banking. Political will to be developed. To be collaborated with HSBC and City banks for opening Interest Free or Islamic Banking Windows/ products and to promote more cooperative societies."

Discussing on Success and Sustainability of Islamic Banking the panel said that, "The professional expertise and entrepreneurial skills of the population need to be developed so as to cultivate abilities to run and manage financial institutions in a professional manner. To ensure involvement of each and every section of the country."

Exploring the Possibilities of Islamic Banking in existing Indian legal framework and the panel depicted that, "Existing framework does not permit Islamic Banking. Only selective activities like equity investment is possible while trade finance aspects like taking title to goods is not possible. A lot of amendments need to be carried out in existing legal framework. Appropriate models to be selected and implemented to suit society’s diverse financial needs. Islamic Bank of Britain, Islamic banks of Thailand, Singapore and USA may be glaring models for Indian Bankers. The reputed domestic and international banks may be involved in the process of determining and implementing Islamic Banking products to the extent possible in India under the current regulatory framework." Renowned international Islamic finance expert and Shah Faisal awardees scholar Dr. Najatullah Siddiqi and Mufti Barkatullah (Shariyah advisor of Lloyd Bank and Islamic Banking, Britain), Mr. Mohammed Talha (First manager Qatar International Islamic Bank, QIIB), Mr. Nizar Kochery (Legal advisor & President Middle East Indian Management Association, Qatar ) these leading international finance personalities were the part of this historical workshop.

Well-known finance expert and Islamic economist Dr. Fazlur Rahman Faridi was the chief patron, Dr. Rahmatullah (AICMEU ) was the organiser and Jamaat-e-Islami Hind’s media secretary and Tamil Nadu state president H. Abdur Raqeeb was the convener of the workshop.

Dr. Ausaf Ahmed (Islamic Development Bank, Saudi Arabia) , Dr. M. I. Bagsiraj and Dr. Shariq Nisar, Dr. Abdus Salam (Retired manager RBI, Cochin ), Dr. M Y Khan (SEBI ), Mr. Ashraf Ab. Haq Mohamadey (IDAFA Investment Pvt. Ltd.), Mr. I.H.Zaki, Mr. Anwar Batki (Ex-Legal Advisor, RBI) , Mr. Zahooruddin (Hyderabad), Mr. K.K. Ali (Alternate Investment & credit Ltd. Cochin), Mr. Maqbool Ahmed (Bengalore) have attended the workshop.

The participants unanimously concluded that, "Islamic Banking can play pivotal role to facilitate growth with equity and to attract foreign investment, especially Petrodollars which are moving very fast from the developed countries to the emerging markets after 9/11. ‘Development with human face’ the agenda of UPA Government may definitely be fulfilled by Islamic banking. So we appeal the government to accommodate Islamic Banking in the Banking Regulation Act."

Contact for further information: H. Abdur Raqeeb, Convenor Islamic Banking Workshop : 0944407550301, abdraqeeb_h@yahoo.com

Gordon Brown, England’s chancellor of the exchequer, has stated that he wants to make Britain the global center for Islamic finance. The chancellor said the Labour government will continue to implement the "tax and regulatory reform to support the development of Shari’a-compliant finance."

Addressing business leader at a conference organised by the Muslim Council of Britain on Tuesday, Brown said, "Entrepreneurial vibrancy and dynamism of Britain’s Muslims, combined with Britain’s openness to the world and the historic ties with Muslim countries, that makes the ambition to make Britain the gateway to Islamic finance and trade a realistic and realisable ambition."

Ahmed Mohammed Ali, president of the Islamic Development Bank, also present in London, welcomed the chancellor’s openness to Islamic finance.

"London has traditionally been a major center for structuring and arranging Islamic finance since the 1980s," said Mohammed Ali. The president of the IDB underlined the important support of the Financial Service Authority, Britain’s banking watchdog, which authorized in 2004 the complete inclusiveness of the Islamic Bank of Britain in the UK banking system.

Analysts in the city of London appreciated Brown’s move to grab a slice of the Islamic financial market, which is estimated to be around $400-$500 billion.

"Brown’s position and reform implementation is good news for the banking sector," said Amy Waldron, spokesperson for Lloyds TSB, a British bank that will launch on Wednesday a range of Islamic financial services in all its UK branches.

Muslims and non-Muslims living in Britain will have the possibility of opening current accounts and get mortgages for their house in compliance with their religious faith. According to Shari’a law "interest" or "usury," known as riba, is banned.

"As a matter of faith, a Muslim cannot lend money to, or receive money from someone and expect to benefit," states the Islamic Bank of Britain on its website. "To make money from money is forbidden — wealth can only be generated through legitimate trade and investment in assets."

A bank which offers Islamic current accounts cannot charge interest and savings will not be invested in industries and stock markets. For Islamic mortgage, banks pay up to 90 percent of the house cost and then charge the customer a monthly rent to repay the money borrowed.

"Instead of lending money the bank buys the property for the customer," said Paul Sherrin, head of Islamic Financial Services at Lloyds TSB. The interest rate is embedded in the "rent payback system" said Waldron, but in this way the client of Muslim faith is not going against the financial laws set by his religion.

The total Muslim population in Britain is over 1.6 million according to the Office for National Statistics and recent research led by Lloyds TSB show that over 75 percent of British Muslims would prefer a banking system that conforms with Islamic laws rather than adopting Western financial services.

Sherrin said, "Having spoken to Muslims across the country we know that more than three-quarters want current accounts and mortgages that fit with their faith. By making these products available nationwide we’re bringing Islamic banking into the mainstream and we’re giving the Muslim community access to financial services that meet their needs without compromising their religion."

However, to satisfy the growing demand for Islamic finance in Britain, banks have started a talent battle to hire internationally renowned and financially literate Muslim scholars as advisors to the emerging Islamic banking business.

Humayon Dar, managing director of the London-based shari’a consultancy Dar Al Istithmar insitute, told the Financial Times that there is a real shortage of qualified Imams and scholars who can issue fatwas (religious edicts) that are trusted by Muslim citizens. "There are perhaps 150 [such scholars] worldwide who are involved with Islamic finance but only 20 are internationally recognized," says Dar.

In the UK several prominent banks, including HSBC, Citigroup, Barclays Capital, Lloyds TSB, Deutsche bank, BNP Paribas and Standard Chartered, have hired Imams and Muslim scholars as consultants for their Islamic financing branches.

Ekmeleddin Ihsanoglu, secretary general of the Organisation of the Islamic conference, which represents over 1.2 million in the world, commented positively the effort of Western banks in addressing financial concerns of Muslim devotees. "The OIC would be more than happy if Islamic finance products became available outside the borders of the [57] member states," he said.

The secretary general of OIC added that the increased economic and trade commitments between the West and OIC member states "will open a whole new avenue for the cooperation and engagement of the West with the Muslim world to promote peace and dialogue at the time when misunderstandings, misrepresentation and defamation of Islam is on the rise."

Link