Islamic Banking

Islamic finance, which borrowed features such as products from conventional banks, can now return the favor by lending its set of principles for good governance and responsibility, the Raja Muda of Perak, Raja Dr Nazrin Shah said on Tuesday.

“To date, Islamic banks have borrowed from conventional finance in terms of products.But, I think, the time has come where the flow of information and knowledge can and should flow the other way as well,” he said in his keynote address at the second day of the World Capital Markets Symposium, here.

He said Islamic finance could also help the global finance industry to be more aware of following the rules and curtailing excess as well as create an infrastructure of honesty, fairness and integrity.

“But, I also believe Islamic finance can offer much more than this,” Raja Nazrin, who is also the financial ambassador for the Malaysia International Islamic Financial Centre, said.

“At its heart, Islamic finance is an ispiration towards good finance.As we have seen, good finance is about trust, and trust is a cornerstone of stability.

“Therefore, I believe that Islamic finance can help break the vicious cycle of boom and bust that has come to characterise global finance,” he said.

Islamic finance is now a truly global market, participating across borders with a vast range of investment alternatives including sukuk, mutual funds, commodity funds, equity traded funds, real estate investment trusts, shariah compliant derivatives and hedge funds.

Recent developments also included the possibility of an Islamic bank in France, the publishing of a book on Islamic finance in Italian and shariah compliant real estate funds in Australia.

There is also news of expected sukuk issuances from the United Kingdom, Australia and Korea.

There have also been a diverse range of issuers of shariah compliant products including the World Bank, the Islamic Financial Centre, the German state of Anhalt-Saxony, Aston-Martin and Shell, which pioneered the sukuk.

“The world is interested and I believe Islamic finance to be up to the challenge,” Raja Nazrin said, adding that the industry is growing with more demand seen from non-Muslim investors, not only in Malaysia but also abroad.

He stressed that one of the most important goals of the Islamic finance industry should be to integrate into the global financial system.

–BERNAMA

The global market for sukuk (Sharia-compliant bonds) has grown tremendously in recent years. Total outstanding sukuk rose from $8 billion in 2003 to around $100 billion in 2008. Sukuk provides companies and governments with access to financing and liquidity and offer a much needed Sharia-compliant instrument to investors. While the growth of the fixed income market in the Kingdom has been dwarfed by that of the equity market, we think that conditions are in place for strong growth in sukuk issuance and trading.

An important step was the launch by Tadawul of an automated order-driven secondary market for sukuk in mid-June. Previously, sukuk transactions were in an over-the-counter market, meaning that they were executed through bank treasuries and settled by Tadawul. Liquidity was very low, as most sukuk issues were held until maturity. The introduction of the new platform is intended to encourage investors to more actively trade sukuk. With the new system, investors can buy and sell sukuk through their brokers.

With the new trading platform in place, we think the following factors will stimulate supply from issuers and demand from investors in Saudi Arabia:

* Predictability and portfolio diversification: The collapse in the stock market last year has encouraged investor interest in more predictable assets such as sukuk. Given the very limited investment channels open to investors in the Kingdom, sukuk could also play in important role in portfolio diversification.
* Problems raising finance from traditional sources: Companies needing to raise finance have generally used a combination of bank loans and IPOs. With banks reluctant to lend and low valuations making IPOs unattractive, sukuk issuance should emerge as an important source of funding.
* Balance sheet mismatches: Little long-term bank lending is available, meaning that companies borrowing to finance long-term projects face an asset-liability mismatch on their balance sheets. Long-term sukuk would ease this problem.
* Healthy sukuk pipeline: Following two successful sukuk issues earlier this year, other local companies have announced their intention to issue sukuk, in addition to some GCC governments.

Notwithstanding the bright future for sukuk, there are still formidable challenges may impede growth. Liquidity is very low; there were only 50 transactions in the first two months of trading on the sukuk market. In addition, the local market lacks breadth and depth (there are only five listed sukuk) and there are no indications that the government will begin actively issuing sukuk (government support is generally a key factor in the development of debt markets). Furthermore, the lack of skilled human resources, Sharia-compliance standardization and innovative product development remain serious issues.

Background

The use of sukuk has become increasingly popular in recent years both for governments and companies. In part this has stemmed from the dramatic growth in Islamic banking that has been the result of the large inflows of liquidity (primarily oil revenues) into the Islamic world and a greater appetite among businesses and individuals to conduct their finances in a Sharia-complaint way. As the take up of Islamic financial services grew, demand from issuers for a product that performs a similar function to a bond leapt. Demand from investors has also surged as growing wealth within the Islamic world has made regional credit risk more attractive and greater understanding of the instrument and clarity of documentation, supported by credit ratings from international agencies, has enhanced investor comfort with sukuk.

Malaysia accounts for around 47 percent of global sukuk issuance by market value, followed by the GCC, which is the source of a further 46 percent. Sukuk issuance is not limited to Islamic countries and there have been issues from institutions in Singapore, Sri Lanka, Canada, Thailand, the UK and US. Recently, the second largest bank in Russia, VTB, indicated that it is considering a sukuk. The growing interest in sukuk worldwide reflects the spread of Islamic banking and the desire of foreign issuers to tap the liquidity within the GCC. As it is the structure of the instrument that has to be Sharia-compliant, rather than the issuer or the purchaser, the supply and demand for sukuk is set to grow in nontraditional markets.

Sukuk are generally built around one of six main contracts: Ijara, Mudaraba, Musharaka, Murabaha, Istisina and Istithmar. Ijara accounts for around 32 percent of global sukuk issuance followed by Musharaka and Mudaraba. The Saudi sukuk market is dominated by the Istithmar. The variation in the dominance of structures is explained by the lack of Sharia-compliance standardization. It is the responsibility of Sharia boards to determine what structures are Sharia-compliant and given that there are no universally agreed standards, boards across countries exercise considerable discretion in arriving at their opinions. Some countries adopt a conservative interpretation of Sharia, while others are more flexible, leading to an inconsistency about what is considered Sharia complaint. For instance, most Ijara structures that have been issued in other countries do not meet Sharia-compliance requirements in Saudi Arabia. This lack of Sharia standardization poses a great challenge to growth of sukuk.

Source

MALAYSIA must look at developing other areas of Islamic finance beyond just Islamic bonds, or sukuk, experts said.

“Malaysia has all the right ingredients to trailblaze in Islamic finance, but it must go beyond sukuk. We need to develop other new products as well,” said Ali Abbas Zaidi, Maybank Investment Bank’s head of Islamic markets.

Ali was a panellist in a discussion yesterday on the future of Asia’s Islamic investment industry at the IFN Issuers and Investors forum in Kuala Lumpur.

Malaysia is an international Islamic hub and widely known for having the world’s largest sukuk market. It also houses some 145 syariah investment funds.

Securities Commission managing director Datuk Nik Ramlah Nik Mahmood, who chaired the session, agreed with Ali on the need for product innovation in other areas.

“From our perspective, sukuk is very important. But there’s also a whole host of petro-market products that can be (introduced),” she said.

Ali said that new products could be developed in all areas, such as private equity, infrastructure, liquidity, asset and project financing.

“It could underpin any type of economic activity,” he remarked.

Ali said there was much that could be learned and leveraged on from the conventional finance industry.

What makes a difference is the way the products are used, he pointed out.

Mohamad Nedal Alchaar, secretary-general of standard setter Accounting and Auditing Organisation for Islamic Financial Institutions, highlighted that there was no such thing as “toxic products” in the industry, only “toxic practices”.

To a question by Nik Ramlah on whether Islamic finance should take advantage of the recent failures in conventional finance to become more prominent, Nedal said he did not think it was appropriate to do so.

“I recognise the opportunities that we have today after the global financial crisis, but … I don’t think it’s appropriate for us to ride on ailing bodies.

“I think we have our own merits. Islamic finance has a lot to offer and should rise independently from this crisis.

“We should detach ourselves from the crisis and sell what we have on ethics, governance,” he said.

An estimated 1,200 delegates attended the three-day IFN forum, an annual event said to be the world’s largest gathering of industry experts and practitioners.

BY: Adeline Paul Raj

The Securities & Investment Institute (SII) has signed an agreement with the Institute of Islamic Banking and Insurance (IIBI) to promote the UK as the hub of Islamic finance.

The London-based IIBI is one of the world’s leading independent organisations dedicated to the development and implementation of Islamic finance, achieved through education, training, research and publications.

The SII and IIBI will share their expertise and advocate the services of each other. As part of the deal, the IIBI will encourage its members to study for the SII’s ground-breaking Islamic Finance Qualification (IFQ) as an entry level exam in the field. The SII will promote the IIBI’s Diploma and post graduate Diploma in Islamic finance as qualifications for further progression for students following achievement of the IFQ. IIBI and the SII may choose to also develop a long-term strategy to include market research and demand relating to specialist Islamic Finance modules such as Sukuk (Islamic bonds).

The SII managing director, Ruth Martin, said: “We are delighted to work with the IIBI to promote our common goals for the development of Islamic finance skills within the UK.”

Mohammad A. Qayyum, director general, IIBI, said: “We are looking forward very much to working closely with SII in strengthening the UK’s position as the leading centre for Islamic finance qualifications. The agreement with SII will undoubtedly afford greater scope of advancement of competent persons in the Islamic financial services industry.”

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