Islamic Banking

Boustead Holdings Bhd plans to establish an Islamic banking operations in China via a joint venture with its foreign partner the Bank of East Asia (BEA).

It was now “exploring that opportunity with BEA,” group managing director Tan Sri Lodin Wok Kamaruddin said, adding that the proposal was subject to approvals from the authorities concerned.

He said the potential for Islamic banking operations in China was “quite great” as there were some 100 million Muslims in the north-western region of the republic alone.

Source: the star online

Islamic banks have been largely shielded from the U.S. mortgage crisis, which may even open doors for expansion beyond traditional strongholds in Arab and Asian markets, Bahrain’s central bank governor said.

Islamic banks should have shunned collateralised debt obligations linked to subprime, or high risk, mortgages because such complex instruments do not comply with Muslim law, Rasheed al-Maraj told the Reuters Islamic Finance summit on Monday.

Islam bans lending on interest and trading of debt. Scholars vet every stage of a transaction to ensure compliance with sharia, or Islamic law, making it unlikely that risks were lurking in the balance sheets of unsuspecting lenders, he said.

"In Islamic banking, there is no black box that needs a genius to unwind it," Maraj said. "Many of these conventional products that have been under stress lately are very complex and need special risk management tools

"In Islamic banking you will not have this kind of thing. Some of these products would not be sharia accepted."

Global conventional banks from Citigroup to UBS have written down more than $80 billion (40 billion pounds) in credit market losses since October as defaults on subprime mortgages triggered a credit crisis that threatens to tip the U.S. economy into recession.

By contrast lenders in the Gulf and Malaysia, the global hubs of Islamic finance, have barely reported any subprime related losses. Bahrain-based Arab Banking Corporation ABCB.BH, a conventional lender which has an Islamic arm, on Sunday reported a 38 percent fall in 2007 net income on subprime writedowns.

"From the financial results, we have not had any kind of indication that there have been any damages to the balance sheets as a result of this." 

"This does not mean that Islamic finance is risk free. We still have some concern about the concentration of risk … There is a lot of focus on real estate," Maraj said, adding that tools to allow Islamic lenders to hedge risk should be developed.

The subprime crisis could provide the Islamic banking industry with greater opportunity for growth, both from conventional retail customers looking for an alternative, and also from the collapse of Western asset prices.

"Maybe Islamic banking will be a safe bet for them," he said.

"I think opportunities exist in the United States and Europe as a result of this financial distress. The high valuation of the assets will come down."

By Mohammed Abbas - in Reuters

From Ahmad Farizal Abdul Hajat

COLOMBO, Nov 28 (Bernama) — Sri Lanka is now well positioned to become a producer and supplier in Islamic banking and financial professionals with the newly established Faculty of Islamic Banking and Finance, International Centre for Education in Islamic Finance (INCEIF)’s chief executive officer Agil Natt said today.

He said the faculty was the first in the country and established as an affiliate between INCEIF and Sri Lanka-based Ceylinco Sussex Business School (CBS) to offer the Certified Islamic Finance Professional (CIFP) qualifications.

This, according to Agil, will develop the human capital needs for the Islamic financial services industry in Sri Lanka as well as those of neighbouring countries.

"The idea of establishing this faculty is to meet the needs of human capital, qualified in Islamic banking and finance, for the rapidly expanding global Islamic financial services industry," he said.

"Together with CBS, INCEIF hopes to drives the industry in Sri Lanka and help build up a meaningful pool of Islamic professionals, bankers and takaful operators with sound grounding of Syariah and corporate finance," he told Bernama after the signing of an agreement between INCEIF and CBS here.

INCEIF was represented by its chairman Dr Rozali Mohamed Ali and Agil while representing CBS were its chairman Dr Lalith Kotelawala and deputy chairman K.A.S. Jayatissa.

Bank Negara Malaysia’s deputy governor Datuk Mohd Razif Abdul Kadir and the Malaysian High Commissioner to Sri Lanka, Nazirah Hussain, witnessed the signing.

The agreement marked the appointment of CBS as the education provider and marketing agent for INCEIF in Sri Lanka.

The new faculty will be the latest addition of CBS, which is currently involved in producing professionals in the finance, accountancy, marketing, management and information technology fields.

Sri Lanka, with about 77 percent of its population Buddhists and Muslims constituting 8.5 percent, is one of the few non-Islamic countries to have legislations for Islamic banking.

The revised Banking Act No. 30 of 1988, amended in 2005, allows both commercial banks and specialised banks to operate on a Syariah-compliant basis.

Sri Lanka has 22 commercial banks, comprising two large state-owned banks — Bank of Ceylon and Peoples Bank — together with nine private banks and 11 foreign banks.

Their total assets as at end of July 2005 was US$11.76 billion. The two-state banks accounted for about 48 percent of the total assets while the foreign banks accounted for 14 percent.

The takaful concept in insurance is now experiencing increasing market acceptance in Sri Lanka.

The country has 13 licensed insurance companies, including a takaful operator named Amana Takaful.

According to a spokesperson for Sri Lanka’s insurance business, two of the country’s largest insurance operators have plans to offer takaful products to the market.

INCEIF was established by Bank Negara Malaysia in December 2005 to contribute towards the global development of human capital that is required to support the future growth and development of the global Islamic financial industry.

With the aim of producing high-calibre practitioners and professionals in Islamic finance as well as specialists and researchers, INCEIF has become a platform for training in this area.

– BERNAMA

By Gan Yen Kuan

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. 

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After 23 years of developing and regulating an Islamic Financial system hailed as a progressive model, Malaysia recently announced key measures to enhance inter-linkages in the global islamic financial markets and expand business in its efforts to entrench itself as a global hub for Islamic Finance.

At a recent Malaysian Islamic finance forum, Central Bank Governor Tan Sri Zeti Akhtar Aziz announced the launch of the Malaysia International Islamic Financial Centre (MIFC) which will pave the way for the offering of Islamic financial products and services in international currencies from anywhere in Malaysia.

The MIFC initiatives aim to provide operational flexibility, cost-effectiveness and a conducive environment for Islamic finance business in international currencies, noted Deputy Bank Governor Dato’ Mohd Razif bin Abd Kadir.  At the same time, the liberating measures are clearly intended to augment existing business and to draw new investment.

Notably, existing Islamic banks and takaful or Islamic insurance operators can now set up International Currency Business Units within their institutions to carry out foreign currency transactions. 

New conditional licences will also be issued for the setting up of International Islamic Banks and International Takaful operators, under the Islamic Banking Act and the Takaful Act respectively, to qualified foreign and Malaysian financial institutions who want to offer international currency products and services.

For greater flexibility, offshore Islamic banks and the Islamic divisions of conventional offshore banks are now allowed to open operational offices onshore in Malaysia to conduct non-ringgit business, while maintaining their presence in the Malaysian offshore financial centre of Labuan.

Further tax incentives for the Islamic finance industry are in the pipeline as a sweetener to enhance the country’s competitiveness against rivals like Singapore and Dubai.

Courtesy: ‘Accounting & Business’ - September 2006 - Volume 9 No.8 - Page 6 

By Stephanie Phang and Shanthy Nambiar

RHB Islamic Bank Bhd., a unit of Malaysia’s fourth-largest banking group, expects financing for agriculture to drive growth in assets that comply with Muslim religious tenets, said Chief Executive Officer Khalid Bhaimia.

Assets at the bank may expand more than 10 percent this year, Bhaimia said in an interview in Kuala Lumpur. Financing for farming and small and medium-sized companies will grow more than 20 percent in 2006, he estimates.

RHB Islamic is betting on rising demand for financing from plantation and commodity companies as the government encourages agriculture under a 200 billion ringgit ($55 billion) development plan. Agriculture made up 8.2 percent of the gross domestic product last year in Malaysia, the world’s largest exporter of palm oil and Southeast Asia’s second largest oil and gas producer. It also produces timber, rubber and pepper.

“Islamic finance seems to be gaining a lot of pace in terms of new funds going into these sort of products,'’ said Paul Teoh, who helps manage $272 million of Asian assets at Meridian Asset Management Sdn. in Kuala Lumpur, including Islamic bonds. Islamic finance in Malaysia is still “in its infancy so definitely we are going to see huge potential there.'’

Muslim investors may prefer to put money in commodities such as palm oil and rubber because Islamic law forbids interest payments and investment in businesses such as tobacco, alcohol and gaming.

Securing Market Share

“It’s a growing sector, so there’s a lot of potential for the bankers, not only for the Islamic banks,'’ said Chan Ken Yew, a banking analyst at OSK Research Sdn. in Kuala Lumpur. “Since Islamic banks have restrictions, this sector seems to be good for them and it makes sense for them to work even harder to secure market share.'’

Financial services companies are introducing more Islamic products to tap the funds of 1.5 billion Muslims worldwide. The global Islamic finance industry’s assets under management may have topped $1 trillion, according to a January report by the Malaysia-based International Islamic Financial Services Board.

In Malaysia, Islamic bank assets rose 18 percent to 112 billion ringgit last year, or 11 percent of the Southeast Asian country’s total bank assets. About 60 percent of Malaysia’s 27 million population is Muslim.

Under an Islamic financing concept called Murabahah, a bank may buy goods or land on behalf of a customer and sell them back at a higher price later to comply with the Islamic ban on the payment of interest. Such deals are common in short-term loans and trade finance. Commodity Murabahah involves mark-ups on asset prices in place of interest.

Plantation Companies

Malaysian plantation companies have been selling Islamic bonds to raise money for expansion. Dura Palms Sdn., a funding vehicle for plantation and investment company Teck Guan Holdings Sdn., sold 284 million ringgit of Islamic bonds in June. Boustead Holdings Bhd., a plantation and property group, raised 442 million ringgit from the sale of such securities.

RHB Islamic’s assets expanded 23 percent to 7.6 billion ringgit last year, according to its 2005 annual report.

Financing for agriculture and small and medium companies makes up about 30 percent of RHB Islamic’s financing portfolio, Bhaimia said. RHB Islamic also offers Bai Salam, or advance purchase financing, which allows the bank to finance a product to be delivered at a future date, he said.

Competition is increasing between Islamic banks in Malaysia, which has 12 such institutions, including Bank Islam Malaysia Bhd., the oldest, and Bank Muamalat Malaysia Bhd. The central bank has granted licenses to international banks, including Kuwait Finance House and Saudi Arabia’s Al Rajhi Banking & Investment Corp.

Competitive Market

“This is a very competitive market and it’s a very crowded market, and therefore you’ve got to get a strong foothold in the niche,'’ Bhaimia said.

Islamic banks in Malaysia may start merging over the next two years, he said, estimating about half the current number of such banks would be sufficient for a market the size of Malaysia.

RHB Islamic plans to expand outside Malaysia in the next five years to markets such as Vietnam, Indonesia, the Middle East and the Indian subcontinent, Bhaimia said.

RHB Capital Bhd. became the first commercial banking group to open a full-fledged Islamic financial services subsidiary last year, transforming its Islamic banking window into RHB Islamic.

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Small-and-Medium Enterprises (SMEs), usually considered to be the backbone of an economy, are set to receive a major boost especially in the Islamic banking and finance sector. Countries such as Saudi Arabia and Malaysia are encouraging greater allocation of financing for SMEs by the banking sector in an effort to stimulate the private sector and to boost rural and inner city poverty alleviation policies.

In Malaysia, for instance, according to Bank Negara, the central bank, financing for SMEs by the Islamic banking sector continued to increase from RM3.5 billion in 2002 to RM6.2 billion in 2003 to RM8 billion in 2004. The year-on-year increase in 2004 was almost 30 percent. More encouragingly, the market share of Islamic banking financing out of total financing for SMEs in Malaysia almost doubled from 7.5 percent in 2003 to 13.9 percent in 2004.

However, the Islamic SME financing in Malaysia in 2004 is merely RM8 billion out of a total financing by the Islamic financial sector of RM57.882 billion, which suggests that there is a huge challenge and business opportunity for Islamic banking in Malaysia in respect of financing SMEs.

This trend is reflected elsewhere in member countries of the Islamic development Bank (IDB), as the role and contribution of the SMEs to GDP and economic activity assumes greater importance.

Saudi Arabia is also encouraging the financing of SMEs. The country’s largest bank, National Commercial Bank (NCB), which is owned 69.3 percent by the Saudi Public Investment Fund (SPIF), earlier this year launched a Shariah-compliant financing scheme aimed at small businesses and self-employed professionals.

The "Al-Ahli Program for Free Tradesmen" offers Shariah-compliant loans of up to SR1 million repayable over three years to small businesses and professionals such as consultant doctors, engineers, and accountants who own and manage their own activities.

This financing program, according to Al-Sharif Khalid Al-Ghalib, head of NCB’s customer management group at the time, was the first of its kind on the Saudi market, and offers financing without collateral to all qualifying business people whether they are NCB customers or not.

"The small business sector makes up 80 percent of the Saudi market", stressed Ibrahim Al-Buloushi, head of NCB’s small business group, "and the bank’s aim is to expand the national economic structure; provide additional support to increase sources of income; and activate the economy to create more jobs and investment opportunities."

Some Islamic bankers have criticized the sector’s over-concentration on corporate, institutional and high networth clients, and its slowness in targeting SMEs.

"The reasons why SME financing should be a natural niche for Islamic banking," stresses Dr. Adalet Djabiev, CEO of Badr-Forte Bank in Moscow, which is Russian sole Islamic bank, "is that it deals directly with the real economy; creates employment; involves the productive use of resources especially capital and finance; and contributes directly toward the alleviation of poverty."

The IDB offers lines of financing for onward financing of SMEs in member countries along with extension, in principle, of full delegation of authority to selected National Development Financial Institutions (NDFIs), which are also encouraged to use the IDB’s technical assistance facilities.

At the 29th annual meeting of the IDB board of governors in Tehran in September 2004, SME financing was high on the agenda with particular emphasis on the need for using modern banking products to help alleviate poverty by generating wealth in rural areas.

The biggest policy boost for SME financing has come from Malaysia in the last two years. Bank Negara in October 2004 embarked on a project to enhance the capabilities of its development financial institutions (DFIs) such as Bank Pembangunan; Bank Industri; EXIM Bank; MECIB; and Bank Pertanian Malaysia.

The Bank Negara SME policy thrust is part of Prime Minister Abdullah Badawi’s so-called "agro-revolution", whose priorities include reducing poverty significantly, especially among the hardcore poor; rooting out corruption; and reforming education.

Indeed of the 22 banking measures introduced by Bank Negara in 2003, some eight dealt with measures to improve access to financing and those promoting active consumerism.

Malaysian Second Finance Minister Tan Sri Nor Mohammed Yakcop last year rightly called on Islamic finance to impact more on the ordinary citizens and not just bring value to shareholders, and bonuses to senior executives.

For instance, in the context even of an Islamic Capital Market (ICM), he is suggesting greater use of equity-based and hybrid financial instruments, and more non-collateral-based Islamic financial products to promote entrepreneurial development.

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Islamic banking is on track towards attaining the target of representing 20 percent of the financial market by 2010, said Minister in the Prime Minister’s Department, Datuk Mustapa Mohamed.

"The target is achievable. At present, it is already 11 percent and 20 percent is achievable," he told reporters after officiating Islamic Banking and Takaful Week 2005 (IBTW 2005) here Thursday.

According to Mustapa, Islamic banking in the country is growing at a rapid pace, faster than the domestic conventional banking and Islamic banking overseas.

For the past five years, the Malaysian Islamic banking industry grew at annual rate of 19 percent compared to between 10 and 15 percent annually elsewhere in the world.

IBTW 2005 was organised by the Association of Islamic Banking Institutions Malaysia and Bank Negara Malaysia.

In his speech, Mustapa welcomed the move by Bank Negara to encourage Islamic banking operations to be conducted by subsidiaries of conventional banks.

He said with this strategy, more attention could be given to the development of Islamic financial products and services in advancing the industry.

Mustapa said Malaysia now has six Islamic banks, 16 conventional banks and four development finance institutions with window for Islamic banking and four takaful companies.

There are also 70 Islamic unit trusts and various supporting institutions and mechanism like Cagamas, Credit Guarantee Corporation and Islamic indexes, he added.

Islamic banking assets have increased to over RM100 billion by end of July this year from only RM1.4 billion in 1990, Mustapa said.

He said the assets of the takaful industry rose to over RM5 billion by end of July this year from RM300,000 10 years ago.

Mustapa called on Bank Negara and institutions of higher learning to hold more courses on Islamic banking in order to raise the level of skill and expertise.

On plans to set up an education centre for international Islamic finance, he said: "I understand that an initiative is being undertaken to realise such a centre."

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