Who watches the watchers? (By IFN)

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In last week’s issue of Islamic Finance news, we brought up the role of the fourth estate in helping to police authorities and regulators. While accepting that those in power have a crucial role to play in the development of society and industry, in this era, where institutions – especially those in the financial industry – are under scrutiny more than ever, we also acknowledge that regulators too should be kept under close watch to ensure the effectiveness of their functions.

Our cover story this week continues our inspection of regulators, in a continuation of the previous issue’s look at Shariah standard setting bodies. In one of our most thought-provoking pieces yet, we go one step further by outlining a blueprint for Shariah governance in Islamic finance, as we seek to propel the industry towards a more unified front to encourage the further global acceptance of Islamic finance.

The standardization of our industry has become especially important as more markets join the Shariah compliant finance sector. One such new entrant is Oman; and our issue this week also features an article by Abid Shakeel of Ernst & Young’s Islamic Finance Services Advisory, who writes on the sultanate’s preparations for introducing Islamic finance to its domestic market.
In another example of our industry’s inability to see eye-to-eye, we also feature a report by Gregory Man of Clifford Chance Hong Kong on the development of the Islamic derivatives market and its impact on Islamic structured finance.

Dr Moneer Hasan Saif of Yemen’s CAC Bank contributes our Takaful feature on the Islamic insurance industry in Yemen; while our IFN Reports cover the opening up of foreign investment in Saudi Arabia, regulatory developments in the Indonesian Sukuk market and the potential Islamic finance could hold for education funding.

Our IFN Correspondents write on Indonesia’s potential as a center for Islamic finance; Shariah compliant microfinance in Afghanistan; and new developments in Hong Kong’s Sukuk market.
Meet the Head talks to Robert Minnegaliev, the chairman of Russia’s AK BARS Bank, while our Case Study looks at the Saudi Electricity Company’s US$1.75 billion Sukuk.

China’s growing credit market to spill over into Islamic deals? (By IFN)

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CHINA: The recent move by the Hong Kong government to proceed with draft amendments ultimately aimed at creating a fairer market between Sukuk and conventional bonds may prove astute as China sees further interest from Muslim markets as a source of funding.

Emirates NBD (ENBD), which issued a US$500 million Sukuk in January this year, has come to the market as the Middle East’s first issuer of Chinese yuan-denominated debt, dubbed dim sum bonds.
On the 21st March, the bank issued CNY750 million (US$119 million) three-year conventional notes, priced at 4.88%, followed by a CNY250 million (US39.54 million) tranche on the 24th March.
The issuance came on the heels of Malaysian sovereign wealth fund Khazanah Nasional’s US$357.8 million exchangeable Sukuk issuance on the 15th March. The Sukuk is convertible into shares of Khazanah’s Hong Kong-listed Parkson Retail Group.

Apart from Hong Kong’s draft amendments for Sukuk, China has also implemented a slew of measures aimed at gradually liberalizing its currency.
Its latest move involves the expansion of quotas for US dollar and Chinese yuan qualified foreign institutional investor schemes; and also includes a pilot program allowing offshore funds to raise Chinese yuan funding onshore for offshore investment. “If implemented, [this] would open up a new onshore-to-offshore cross-border investment channel,” said HSBC in a report on the 5th April.

As China loosens its grip on its currency and sees continued and growing foreign interest for funding and investments, it could just be a matter of time before the country entices more Islamic transactions; especially as entities seek more diversified funding in the wake of slowing credit from the west.

Malaysia’s Sukuk market faces stiff competition (By IFN)

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GLOBAL: Malaysia is poised to retain the lion’s share of the global Sukuk market this year, but could the country see stiffer competition from its neighboring Asian countries?
According to Herwin Bustaman, the head of HSBC Amanah Indonesia, Indonesia is most likely to see record Sukuk issuance this year with another US$1.5 billion sovereign Sukuk issuance, on top of US$1.5 billion already issued in March. The second sovereign sale is expected in the second half of this year.

In addition, he said that: “For the first time, we think Indonesia will see one or two corporates issue the country’s first US dollar-denominated Sukuk.” He noted that this is now possible following the country’s new tax and Sukuk laws, which allow for the issuance of US dollar-denominated Sukuk by corporates; and enables local companies to reach out to investors in the Middle East.

Meanwhile, although Malaysia is forecast to issue 60% of the US$44 billion-worth of Sukuk HSBC projects to be offered globally this year, other Asian countries are also proactively marketing themselves to boost their standing in the lucrative Sukuk market. One notable and new player to the fore is Hong Kong.

"Hong Kong has issued a consultative paper on Sukuk laws seeking response from the market whether provisions drafted in the country were adequate to provide the right platform," said Rafe Haneef, CEO of HSBC Amanah Malaysia. He also said that while the Malaysian market caters to investors seeking Shariah compliant solutions, jurisdictions such as Hong Kong and Singapore cater to investors seeking alternative sources of financing.

Furthermore, Malaysia must increase the issuance of US dollar-denominated Sukuk to achieve its aspiration of becoming a financial hub.
"The advantage of US dollar Sukuk issuances in Malaysia will be that the credit of companies will be regularly monitored by investors abroad and this will enable support from international investors,” said Rafe.

Playing by the rules (By IFN)

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In a world bound by rules, regulators and the authorities play a key role in ensuring that we toe the line. While the importance of those authoritative bodies cannot be denied, their presence also puts forth the question: Who regulates the regulators?

Quite often, it is the theoretical fourth estate which helps keep the higher-ups in check; and this week, we at Islamic Finance news play our part with a closer look at our industry’s standard setting bodies; as covered in our lead story.

However, there is no escaping regulations and regulators, which are crucial to growth and development; and our issue this week also gives a nod to the support that the law and the authorities provide to our fledgling industry. Dr Wan Nursofiza Wan Azmi of the Asian Institute of Finance provides an excerpt of a chapter in the Global Islamic Finance Report 2012; covering the Malaysian government’s support in developing Islamic microfinance in the country.

Tanzania’s budding Islamic banking market has also benefited from a sound conventional regulatory framework; as Khalfan Abdallah of Amana Bank Tanzania writes on the development of the industry in the east African country; while we cross to the UK with a feature on Islamic financial products on the London Stock Exchange (LSE) by Gillian Walmsley of the LSE.

We return to Malaysia with an article on the performance of the country’s Sukuk market by Meor Amri Meor Ayob of Bond Pricing Agency Malaysia; and our Takaful feature on the country’s various models of Shariah compliant insurance by Mohammad Mahbubi Ali of ISRA.

Insider takes a look at developments at Kuwait Finance House; IFN Reports cover the development of Islamic finance in Hong Kong and provide a snapshot of first quarter 2012 financial results of banks and corporates in Malaysia and the Middle East; and IFN Correspondents contribute reports on the establishment of charitable foundations in Saudi, new Takaful rules in Pakistan and the structuring of Sukuk Wakalah.

Meet the Head talks to Dr Shahinaz Hanem Rashad Abdellatif of Egypt’s Metropolitan Consultancy; and our Case Study highlights Tanjung Bin Energy Issuer’s US$1.07 billion Sukuk.

Participation banks shy away from Treasury’s revenue-linked bonds (By IFN)

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TURKEY: The country’s Islamic, or participation, banks have reportedly shied away from the Treasury’s auction of revenue index bonds on concerns that the papers are not Shariah compliant.
The banks’ decision is said to have been fuelled by comments from local Shariah scholar, Professor Hayrettin Karaman, who noted that the structure of revenue-linked bonds does not comply to Shariah as the revenue is based on interest.

Turkey’s Treasury last issued revenue index bonds on the 19th February this year, with a total issuance amount of TRY109.2 million (US$61.3 million). Coupon payments for the instruments are linked to revenue from state-owned enterprises, the Turkish Petroleum Corporation, the State Supply Office, the State Airport Authority; and the Coastal Safety Administration.

As a result of the doubt cast over the revenue-linked bonds, the country’s participation banks, comprising Kuveyt Türk, Albaraka Turk, Türkiye Finans and Bank Asya now reportedly await to invest in Sukuk instead. Turkey, which issued legislative changes in 2011 to allow for tax neutrality measures for Sukuk Ijarah, has yet to issue a sovereign Islamic bond. Kuveyt Türk was the first Turkish issuer to offer a Sukuk in 2010; and was also the first to sell papers under the new Sukuk Ijarah law last year.

Osman Akyüz, the secretary general of the Participation Banks Association of Turkey, is also quoted as saying that the banks are looking to invest in Sukuk by this August. According to the data from the association, as of March this year, three of the country’s participation banks invested in TRY984 million (US$553 million)-worth of revenue index bonds.

IIFM and ISDA launch Shariah compliant profit rate swap standard (By IFN)

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GLOBAL: The International Islamic Financial Market (IIFM) and the International Swaps and Derivatives Association (ISDA) have launched standards for profit rate swaps for Shariah compliant hedging; as the growing global business of Islamic financial institutions point to the need to mitigate foreign currency risks.

The new agreement, known as the Mubadalatul Arbaah (MA) standard, follows the ISDA/IIFM Tahawwut (Hedging) Master Agreement launched in March 2010.

“Islamic financial institutions have largely shown resilience in the current difficult financial environment and some are even going through an expansion phase. However, due to the inter-linkages with the global financial system, the balance sheet of Islamic financial institutions are exposed to fluctuations in foreign currency rates and also cash flow mismatches due to fixed and floating reference rates,” said Khalid Hamad, chairman of the IIFM.

The standards allow for the bilateral exchange of profit streams from fixed rate to floating rate, or vice versa.

While some quarters still disagree on the use of hedging under Shariah, it cannot be denied that Islamic banks need an instrument to protect against foreign currency risks. Banking giants such as Abu Dhabi Islamic Bank (ADIB) and Dubai Islamic Bank reported foreign currency exposure on assets worth AED70.68 billion (US$19.24 billion) and AED85.17 billion (US$23.2 billion) for 2011, respectively.

In its financial statements, ADIB also noted that a 5% increase in the US dollar exchange rate would decrease its net profit by AED116.55 million (US$31.2 million) in 2011, against a decline of AED67.41 million (US$18.35 million) in 2010.

The new standard from IIFM and ISDA will provide product schedules based on two separate structures for transacting MA to mitigate cash flow risks. The documentation was developed under the guidance and approval of the IIFM’s Shariah advisory panel, in coordination with Clifford Chance as external legal counsel, as well as other global market participants.

Bahrain bouncing back? (By IFN)

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BAHRAIN: Despite talk of the kingdom losing its sheen as a financial hub amid its political instability, new data shows that a growing number of financial institutions registered in Bahrain up to the end of January, bringing the amount registered to 415 from 403 a year earlier.

While banks such as Crédit Agricole CIB and BNP Paribas grabbed headlines last year on news that some of its operations in Bahrain will move to Dubai, it has since emerged that those decisions were not based on the political situation in the kingdom. Instead, Bahrain’s financial sector has appeared to remain resilient, charting a 1.7% growth during the first half of last year.

According to data from the Bahrain Economic Development Board (EDB), among new financial firms that registered in the kingdom in 2011 include India’s Canara Bank, AMP Capital Investors from Australia and Deloitte Corporate Finance.

“That these businesses are choosing Bahrain as their base for accessing the Gulf economies and the wider Middle East is testament to the strength of the local Bahrain workforce, the quality of the Central Bank of Bahrain’s regulation and the access we provide to the strong-growing Gulf market,” said Mohammed Essa Al-Khalifa, the chief executive of the EDB.

Furthermore, while a need for consolidation in the financial industry remains and despite the dead-end in merger negotiations between Bahrain Islamic Bank and Al Salam Bank-Bahrain; local banks appear positive of bright prospects ahead. These include local giant Al Baraka Banking Group, which has projected a 15% growth in group profits this year and has embarked on an aggressive expansion plan covering Algeria, Egypt, Indonesia and Turkey.

Bankers are also reportedly looking toward a recovery in local infrastructure spending, which has been estimated at between US$15-20 billion in the next two-three years, in addition to the kingdom’s proximity to Saudi Arabia, to boost business.

Nonetheless, it cannot be ignored that concerns remain, with market players noting local bank liquidity levels; with a number of maturities due this year, the closure of retail shops, lower office occupancy levels and rising unemployment as among limitations that still prevail.

Islamic finance makes headway in Arab Spring countries (By IFN)

GLOBAL: A year on from the Arab Spring, prospects for Islamic finance to play a role in the rebuilding of affected countries has gathered pace; even as the countries continue to grapple with the impact of the uprisings.

The industry’s progress in the MENA countries has been especially marked in the first two months of this year. Markets such as Libya have announced the establishment of a Shariah compliant fund; the Libyan Foreign Bank said that it will offer Islamic banking services in tandem with the completion of the country’s Islamic finance regulations next month; Tunisia is looking to team up with the IDB to strengthen its banking sector, especially in Islamic banking; and the Yemeni government has announced plans for a sovereign Sukuk sale.
Furthermore, while Egypt has seen speed bumps in its effort to launch Islamic bonds due to uncertainty over the country’s financial system, optimism remains that the Islamic financial industry has a major role to play in the recovery of the Arab Spring countries as a whole.

In Syria, Islamic banks have grabbed the spotlight as the banking industry braces for a tough year ahead amid continuing political bedlam. Privately-owned Islamic bank Chambank’s net profits soared by 533% in 2011; while Qatar International Islamic Bank-owned Syria International Islamic Bank reported a 12% rise in pre-tax profit. The strong showing last year may put the banks on a firmer footing for this year; as the banking industry expects to face declining deposits and rising bad debt.

With its positive performance, Syria could emerge as the next country in a long list suffering from political turmoil to tap into Islamic finance to restore itself to its former glory.

Online forex trading causes a stir (by IFN)

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MALAYSIA: The trading of foreign exchange (forex) has grabbed the spotlight in Malaysia following a ruling by the National Fatwa Council that the practice is haram.

Bank Negara Malaysia (BNM), the central bank, has since issued a statement on the matter, saying that the buying and selling of foreign currency in Malaysia is only allowed with licensed commercial banks, Islamic banks, investment banks and international Islamic banks as provided for under the Exchange Control Act 1953; and with licensed money changers as provided for under the Money Business Act 2011.
“In addition, Shariah compliant financial products, including foreign exchange related transactions, offered and transacted by licensed Islamic financial institutions are approved by the Shariah committee of the respective financial institutions with endorsement from the Shariah Advisory council of BNM,” it said.
According to Dr Abdul Shukor Husin, the chairman of the National Fatwa Council, a study by the committee found that forex trading involves currency speculation, which contradicts Islamic law.

Speaking to Islamic Finance news, Dr Asyraf Wajdi Dusuki, the head of research affairs at the International Shari’ah Research Academy for Islamic Finance, who has written a commentary substantiating the ruling, clarified that the decree only applies to forex trading executed online by individuals.

According to Asyraf, the practice invokes several Shariah issues including leveraging, where individuals trading forex on online are allowed to provide only part of the amount being invested; with the remainder put up by the forex broker. Not only does this allow over-leveraging of up to 100%, but also results in a combination of two contracts; namely the sale and purchase of currency and the provision of credit, which is prohibited by Islamic law.

He added that the sale and purchase of currency, in itself, is subject to its own rules in accordance to Shariah, including that it is limited to spot transactions. Other illegalities include the absence of currencies in-hand when transactions are executed and the emergence of prohibited, as opposed to permissible, risk.
Asyraf also pointed out that at the very base of it, online forex trading platforms have not been authorized or licensed by BNM, making them illegal and hence, in violation of Shariah.

Risk management instruments still lacking at Islamic financial institutions (By IFN)

(See IFN):Islamic finance has proven to be more resilient amid financial crises, but experts believe that more can still be done to manage risks.

Despite Islamic banks’ high liquidity, namely; in the form of cash, the industry still lacks the necessary depth to manage risks effectively, commented Jaseem Ahmad, the secretary general of the Islamic Financial Services Board.

“In that sense, there is still a shortage of Shariah compliant instruments and securities. A capital market is being developed but it is still not as liquid or as deep as we would want it to be; and it needs to be deeper,” Jaseem was quoted as saying.

Hence, there is room for substantial improvement in the equity management framework; as more instruments will afford Islamic banks more opportunity for risk management.

In addition to providing the banks access to a wider range of instruments, the banks should also be incentivized and provided with the necessary resources to strengthen their capabilities. Jaseem also noted that even high levels of loss-absorbing capital could be negated if risk management frameworks are not sufficiently strong and in spite of Islamic banks practising more conservative banking methods.

“There is a very high ratio of tier one capital and common equity among Islamic financial institutions which is loss-absorbing; and the kind of capital that Basel III has brought in now for conventional banks,” he noted. However, insufficient risk management and risky activities can still lead problems to crop up at any bank, “even if it is an Islamic bank,” added Jaseem.

PLUS sells landmark US$9.67 billion Sukuk; world’s largest Islamic bond offering to-date (By IFN)

SEE IFN> MALAYSIA: Projeck Lebuhraya Usahasama (PLUS) issued a landmark RM30.6 billion (US$9.67 billion) Sukuk on the 12thJanuary, in what is widely seen as the world’s largest Islamic bond offering to-date.

The deal, managed by CIMB Investment Bank, AmInvestment Bank, Maybank and RHB Investment Bank, was made up of a RM19.6 billion (US$6.3 billion) ‘AAA’-rated program and an RM11 billion (US$3.5 billion) government guaranteed program.

Speaking to Islamic Finance news, Badlisyah Abdul Ghani, the executive director and CEO of CIMB Islamic, said that the ‘AAA’-rated program was priced at between 3.9-5.75% for 21 tranches with maturities ranging from five to 25 years. The government guaranteed program was priced at 5.5% for two tranches maturing in 26 and 27 years.

He also said that the program was privately placed; taken up by the transaction’s lead managers and pension funds.

The success of the issuance has also led to optimism on Malaysian Sukuk sales this year, with Badlisyah noting that: “This will be the best year ever.”

He said that although the PLUS deal makes up the largest Sukuk sale from a single issuer to-date, another transaction is expected to follow this year due to the number of projects coming on-stream in Malaysia from the government’s economic transformation program.

The CIMB Group is also expected to continue dominating the market this year for arranging Sukuk, Badlisyah added.

PR from IFN: Can EIB Sukuk beat global credit gloom?

(See IFN): Emirates Islamic Bank (EIB), a unit of Emirates NBD (ENBD), has reportedly mandated six banks for the potential sale of a benchmark-sized, US dollar-denominated Sukuk.
This follows news in December 2011 that ENBD decided to shelve its own plans for a five-year Sukuk; with an Islamic bond sale being looked at by EIB instead.

According to reports, EIB has hired HSBC Holdings; Standard Chartered; Citigroup; The Royal Bank of Scotland; Emirates NBD Capital and the National Bank of Abu Dhabi to manage the possible issuance.

PR from IFN: The best in Islamic finance

(See IFN): With the turbulence in the global markets this year and the political and financial volatility making any transaction a risky business, the Islamic finance industry has sailed through stormy waters in 2011 to emerge battered but not broken at the end of what has been a challenging twelve months for all participants in the market.

But what doesn’t kill you makes you stronger, as the saying goes, and we have not only grown and strengthened, but had the opportunity to learn valuable lessons from the challenges of the past year. The Sukuk market has bounced back to record levels, with a strong performance right up to the end of the year: including the US$1 billion Indonesian sovereign issuance on the 14th November and the US$750 million issuance by the Kingdom of Bahrain on the 16th November, and the US$500 million issuance by Abu Dhabi Commercial Bank on the same day.

The global economy is still extremely shaky, however, and we must shore up our foundations and look to consolidation and commitment to strong ethical and operational principles in order to prosper in 2012. The EU is still undergoing severe political and financial problems, especially in the PIGS countries of Portugal, Ireland (and Italy), Greece and Spain, and Eurozone funding pressures are expected to continue into the new year with the euro falling to a 10-year low against the yen and losing more than 3% against the dollar. The US is still struggling with high unemployment and unsustainable debt levels, and although the Dow Jones ended the year with a 5.5% gain, 2012 looks to be another turbulent year in the run-up to the November elections. The Middle East experienced extreme disruption in 2011 with the Arab Spring sweeping across north Africa and the Gulf region, and despite financial markets settling down somewhat towards the end of the year, oil prices still ended 2011 up 13% due to supply concerns, including Iran’s recent threat to shut the Strait of Hormuz, a vital oil shipping point.

However, Islamic finance has carved itself a strong niche in the global financial industry, and can look forward to a positive new year. Asia is performing strongly, and countries such as China and India have made big strides in entering the Islamic finance industry, offering new and exciting areas for development. France, the UK, Luxembourg, Japan and Australia have also entered the market and taken some positive steps towards encouraging their domestic industries, while in South Asia Pakistan, Bangladesh, Sri Lanka and the Maldives have all also been industriously encouraging development. In more established regions, Malaysia also consolidated its position as the global hub for Islamic finance, accounting for 68% of Sukuk issuances in 2011.

So it is with brave faces and high hopes that we face the next twelve months, and in anticipation of what 2012 will bring, Islamic Finance news kicks off the new year by celebrating the best of 2011 with this special awards issue, revealing the winners of the sixth annual Islamic Finance news Awards, including our industry-leading Deals of the Year awards and the results of our groundbreaking Best Banks Poll. In a break from tradition and to add to the excitement, however, please note that the results for four awards categories (Most Innovative Islamic Bank, Best Overall Islamic Bank, Most Innovative Deal, and Deal of the Year) will be announced on the night of the awards ceremony itself and are not included in this issue. The KL awards ceremony will take place on the 15th February 2012 while the Dubai ceremony will be on the 29th February.

So in this issue, let us celebrate the achievements of 2011 and look forward to an even better 2012. We wish all of our readers a prosperous and successful new year!

Cementing Malaysia's position as Islamic financial hub (by IFN)

MALAYSIA: The government and the central bank, Bank Negara Malaysia (BNM), have launched the Financial Sector Blueprint 2011-2020 in a further effort to transform Malaysia's financial sector and economy; and cement the country's position as a global hub for Islamic finance.

The plan projects that Islamic financing will account for 40% of the country's total financing in 2020 from 29% in 2010. It also seeks to create a domestic system conducive for increasing international financial flows and hence, increase the internationalization of Islamic finance.

Among efforts identified to achieve this is the positioning of Malaysia; including the Labuan International Business and Financial Center, as a global re-Takaful hub.
The blueprint has also called for the presence of more diverse players in the local Islamic finance industry to aid the development of a wider range of products and services, with BNM to issue new Islamic banking and Takaful license only to institutions with specialized expertise.

Malaysia will allow foreign banks to own bigger stakes in local lenders, grant more licenses and loosen short-selling rules, seeking to triple its financial sector by the end of this decade, the central bank said.
In addition, the plan recommends the issuance of more Sukuk from the government and government-linked companies to improve the development of a benchmark yield curve and increase the country's issuer base. Other recommendations include the establishment of global alliances in Islamic finance.

Other initiatives under the plan include the development of Malaysia as a global platform for the listing and trading of Shariah compliant asset classes; in an effort to maximize the country's potential as an international Islamic financial market. This will be achieved by collaborating with other regulatory agencies.
The blueprint also calls for the establishment of alliances with commodity exchanges in other jurisdictions and the identification of different types of commodities to be used as underlying assets.

SEE IFN NEWS.

AAOIFI names new secretary general

GLOBAL: Following months of anticipation and the surprise announcement that AAOIFI’s outgoing secretary general, Dr Mohamad Nedal Alchaar, will leave the post to assume the position of Syria’s minister of economy and trade, the industry accounting body has announced the appointment of Dr Khaled Al Fakih as its new secretary general.

In announcing the decision, Shaikh Ebrahim Khalifa Al Khalifa, the chairman of AAOIFI’s board of trustees, expressed his confidence in Khaled’s ability to steer the organization to an even stronger position in discharging its responsibilities in developing and issuing standards for the global Islamic finance industry.

Currently the head of Islamic banking operations at Lebanon’s Bank Audi, Khaled’s experience covers Islamic law, risk management, audit and technical finance. He possesses a PhD in Islamic studies from Lebanon’s University of Saint Joseph; and an MBA in banking and finance.

He is also a certified financial risk manager, certified management accounted, certified internal auditor and certified financial services auditor. In addition, Khaled is a member of the Association of Banks in Lebanon’s (ABL) Islamic banking committee; and AAOIFI’s Shariah standards committee.

Khaled has also gained experience on the global scene, having participated in international initiatives in collaboration with the IMF, the Union of Arab Banks and the ABL.

Meanwhile, Mohamad Nedal will continue to oversee AAOIFI’s operations during the transition period leading up to the 1st February 2012, when Khaled’s appointment takes effect. The outgoing secretary general will also continue to serve as a member of the organization’s board of trustees.

SEE ISLAMIC FINANCE NEWS

HSBC Amanah to focus on Middle East and Asian emerging markets

GLOBAL: HSBC Amanah, which is optimistic on its growth this year and going into next, sees the emerging markets of Asia and the Middle East as an integral component of the growth of the Shariah compliant financial industry.

"Islamic finance is an emerging markets phenomenon; 80% of the world's Muslims live in Asia and the Middle East. Given that these regions are set to grow faster than the world average, Islamic finance is thus likely to continue growing faster than conventional banking. This is further helped by the fact that growth of Islamic finance has been primarily led by customer pull and not a regulatory push," said Razi Fakih, the global deputy CEO of HSBC Amanah.

SEE IFN NEWS

Dubai's state-linked firms in solidarity over debt repayments

UAE: Markets in the UAE went into a tailspin in the second week of December after talk emerged on the potential restructuring of Dubai debt; and as ratings agency Moody's issued a report that the emirate's state-linked firms could need further financial support to repay obligations due next year.

However, perhaps in an unofficial show of solidarity, the firms and even Ahmed Saeed Al Maktoum, the chairman of Dubai's supreme fiscal committee, have reaffirmed their commitment to repaying the debt, around US$10 billion of which, according to Moody's estimates, are due next year.

Nakheel has emerged as the latest of the emirate's state-linked companies to report a paying down of its debt, announcing on the 8th December that it has paid nearly US$2 billion-worth of overdue payments to its trade creditors, marking "significant progress" in its recapitalization plan. The plan included the issuance AED4.8 billion (US$1.3 billion) in Sukuk, of which the first tranche amounting to AED3.8 billion (US$1.03 billion), was issued in August this year.

SEE ISLAMIC FINANCE NEWS

Governors of OIC Central Banks Recommend Role of Islamic Finance in Promoting Growth and a Diversified Financial Sector

The Meeting of Central Banks and Monetary Authorities of the Organisation of Islamic Cooperation (OIC) Member Countries was held at Sasana Kijang in Kuala Lumpur on 16 November 2011. The meeting, which was organised and hosted by Bank Negara Malaysia in collaboration with the Statistical, Economic and Social Research and Training Centre for Islamic Countries (SESRIC) agreed that it was important to build a diversified, progressive and inclusive financial sector including exploring the role of Islamic Finance in achieving these objectives.

Delegates were officially welcomed by the host, Dr. Zeti Akhtar Aziz, Governor of Bank Negara Malaysia (BNM). The proceedings included an opening address by Dr. Savas Alpay, Director General of SESRIC; a keynote address by Mr. Shaukat Aziz, former Prime Minister of Pakistan, who spoke on 'Accelerating Financial Sector Development for Economic Growth: Distilling Global Lessons for OIC Member Countries'; and a panel discussion moderated by Professor Rifaat Abdel Karim, former Secretary General of the Islamic Financial Services Board (IFSB).

Dr. Martin Redrado, former Governor of the Central bank of Argentina, delivered a luncheon keynote on 'Central Banking in the 21st Century: Implications of Economic and Financial Globalisation'.

The governors emphasised in their final communiqué that emerging economies were expected to continue to contribute towards driving global economic recovery and growth, and that the potential role of Islamic finance in supporting this endeavour should be given special attention.

The governors agreed that the global financial crisis has highlighted that weaknesses in the financial sector and fiscal policies could have destabilising effects and negative consequences on the real economy. This has reinforced the importance of an effective functioning financial sector in supporting sound and sustainable economic development.

There was consensus that the financial sector has an essential role to efficiently intermediate funds towards productive economic activities and generating sustainable and balanced growth. A well developed financial sector can improve standards of living, create high value employment, and drive the economic transformation process.

The governors stressed on the importance of building strong financial institutions to serve the economy, and having the necessary financial infrastructure supported and balanced by a strong regulatory and supervisory framework, including macro and micro-prudential framework, to safeguard financial stability. The need to create an inclusive financial sector towards achieving balanced economic growth and greater shared prosperity, was also recognised.

It was acknowledged that the role of central banks in collaboration with the relevant government agencies, was crucial in facilitating a nation's developmental agenda towards achieving sustainable and non-inflationary economic growth. The governors concurred that it was imperative for central banks to continuously undertake transformation and modernisation in enhancing organisational capacity and governance to effectively perform their mandate. Towards this end, the governors reaffirmed their commitment to strengthen collaboration by leveraging on their individual strengths and cooperating in building their capacities.

The 2012 Meeting of Central Banks and Monetary Authorities of the OIC Member Countries will be hosted by the Central Bank of the Republic of Turkey, and the Saudi Arabian Monetary Agency and Bank Indonesia will be the hosts in 2013 and 2014, respectively.

Key thrusts to develop Malaysia as an Islamic Financial Hub

Malaysia is a small country. With just over 26 million people and categorized as a “developing” nation, we must get our strategy correct as we may not be given the chance to start over if we miss the boat. After being involved in this industry for the last 19 years, in my humble opinion, these are the comparative advantage that we need to leverage on.

Impressive Human Capital

Without doubt, Malaysia has produced some of the best minds in Islamic finance. The experienced gained from the very vibrant Islamic finance market within Malaysia has been instrumental in building the skill sets as well as interest in the industry. In this context, I am referring to the professional human capital and not just the management class. Financial engineering, risk management, Syariah and legal are key components for a successful Islamic finance market and Malaysians are at the forefront in all these fields. In fact, Malaysia has been exported experts on these fields all over the world.

Vibrant Capital Raising Conduits

Malaysia has many capital raising conduits for Islamic Finance. From multinationals all the way down to the individual consumer, the ability to raise financing is very easy in Malaysia. The Sukuk market is very active and the numerous Islamic banks also help in the reallocation of capital to those that need them. The various options available to get capital are an important component that has helped the country to grow.

Ample Liquidity to Meet Demand

Malaysia has ample liquidity due to the high saving nature of the populace. Demand for capital has been met by overwhelming response by investors. The availability of numerous Islamic financial institutions that are able to aggregate savings makes Malaysia as a favorite destination to issue capital. Many multinationals have done so via the Sukuk market.

Transparent Legal and Regulatory Regime

The laws and regulatory regimes in Malaysia are second to none. The symbiotic existence of the Islamic finance laws with the English Common law makes Malaysia a very safe destination for all stakeholders as their rights are easily known and any disputes can be litigated using transparent rules.

Free Flow of Information

It is easy for financial information to be obtained in Malaysia. From trading data up to legal documents, users can easy access it. Everyone can make an informed decision based on the information available. Compared to other countries in the world, Malaysia is one of the top in terms of getting financial information.


We only need to focus on this four items and we can place Malaysia on the map.

A History Lesson on the Development of the Malaysian Bond Market

Today's lesson is a history lesson. A history lesson on how the Malaysian bond market got developed. It started with the developmental needs of the nation which was then young and required a lot of investment.

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The growth of the Malaysian bond market can be traced back to the 1970s, when the Government started issuing bonds to meet the massive funding needs for the country’s development. By the mid-1980s, the private sector had assumed a more important role in the strategic development of the Malaysian economy, with the aim of making it the main driver of growth as well as finance. During that period, the corporate sector had relied heavily on bank loans, which had in turn prompted the Government to pursue the development of the corporate bond market as a key strategic priority. 

Since the introduction of Bank Negara Malaysia’s (the Malaysian Central Bank) Guidelines for the Issuance of Private Debt Securities in January 1989, the domestic bond market has developed significantly in terms of size, efficiency and the array of available debt instruments. The progress achieved to date has rendered the bond market an influential avenue for economic growth.

The Malaysian bond market can be characterised as being in a developing phase. High growth rates have been its hallmark, attributable to increasing recognition of the local bond market as a viable alternative for capital formation. Borrowers can have substantial influence over the structure of a proposed bond issue; coupled with the vast number of potential investors with varying risk appetites, this has effectively fuelled growth. The push by financial institutions to reprioritise lending activities to the retail sector after the regional crisis of the late 1990s has also accelerated market disintermediation, with corporate borrowers moving away from the banking sector to the bond market.

The regulatory push to mould Malaysia into a global hub for the development of Islamic finance is also an important plus for the bond market. On the supply side, the issuance of Islamic sukuks in terms of innovativeness and volume has been equally matched by growth on the demand side. The issuance of new licences for Islamic financial institutions and the rising number of dedicated Islamic sukuk funds all point to a bright future for the Malaysian bond market.