New standards

GLOBAL: The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) has adopted three new Shariah standards.

These rulings set the standards for the disposal of rights, bankruptcy and the management of liquidity, collection and use.

AAOIFI secretary general Mohamad Nedal Alchaar said there is a need for formulating such standards because of the increased complexity in the industry’s different products and transactions, as well as the increasing growth of the Islamic finance industry.

Double Index launch

GLOBAL: NASDAQ OMX Group (NASDAQ) has launched two Shariah compliant indexes — the NASDAQ 100 Shariah Index and OMX Stockholm Benchmark Shariah Index.

Based on the NASDAQ 100 Index and the OMX Stockholm Benchmark Index, the two new Islamic indexes have been introduced to meet the increasing demand for a wider variety of Islamic investment opportunities.

Need for growth drivers

GLOBAL: Introducing competitive products backed by better pricing would cater to the growing demand from different customer requirements, predict PricewaterhouseCoopers (PwC).

PwC global Islamic finance leader Mohammad Faiz Azmi (pic) said: “The demand is based on the fact that it is Shariah compliant and the lesser returns compared to conventional investments are secondary concerns.

The pricing and the risk averseness in Islamic products are additional advantages.”

High demand for Sukuk

GLOBAL: Islamic fund managers are facing difficulties in finding new Islamic financial products and a sufficient number of Sukuk issuances for investment. The decline in new Sukuk issuances and the slow development of moderate Shariah compliant investment products are identified as key reasons for this.

During the first half of this year, Islamic bond issuances declined by 3% to US$6.1 billion and as a result the growth of the Islamic finance industry has slowed to 15% worldwide.

Pick-up in Sukuk

GLOBAL: The Sukuk market is expected to regain its growth levels in 2011 propelled by new issuances proposed in Asia and the Middle East.

These issuances will be primarily based on the infrastructure development projects in Malaysia and Saudi Arabia.

Malaysia has already drafted a five-year plan to increase the annual development expenditure by 23% to RM142.4 billion (US$44 billion) in 2015 from the current RM115.5 billion (US$35.3 billion).

In addition, Saudi Arabia is planning to spend US$400 billion on basic infrastructure development projects including roads, airports and water project developments.

High growth

GLOBAL: The global value of assets managed by Islamic banks is expected to reach US$4 trillion by 2020, according to industry analysts.

Kuwait Finance House Research managing director and vice chairman Baljeet Kaur Grewal said this projection is attributed to the increasing popularity of Islamic based products, as well as huge investment and financing requirements in Asia and the GCC.

Under one roof

GLOBAL: Gulf countries may have a single Shariah board for the region’s Islamic financial institutions by 2013 in order to standardize the industry and increase services available.

According to Dubai Islamic Bank’s Shariah committee head Hussain Hamed Hassan, Gulf countries should be focusing more on creating Shariah products instead of proving other Shariah scholars wrong.

Conflicting interest

GLOBAL: Islamic finance faces an increasing challenge aligning the ideas of the Shariah board with those of the management.

According to Dr Jasim Al-Ajmi, the University of Bahrain scholar and National Corporate Governance committee member, this challenge involved who the board reports to, the level of transparency and the amount of information disclosed by the Shariah supervisory board.

Al-Ajmi added that conflict will always arise between Shariah and performance because compliance could be regarded as a cost by the management.

Room for improvement

GLOBAL: Islamic fund managers are finding it increasingly difficult to move into new countries and territories due to unclear regulations or lack thereof.

Sameer Abdi, a partner at Ernst and Young, said that as many as 80% of Islamic fund managers risk failing due to the lack of understanding of their products.

He went on to say that Islamic fund managers should target mass affluent markets in Malaysia and the UAE rather than to high net worth individual investors.

Wrong perception

GLOBAL: Industry experts have identified credit risk as the key reason for increased failures of Sukuk in some markets. Neil Miller, global head of Islamic finance at Norton Rose, said that all defaults and potential defaults are driven by market and credit risks.

He added that these deals would have gone wrong even if conventionally financed.

Not up to scratch

UK: Despite having hopes of becoming a pioneer in the Islamic banking industry, Shariah compliant bank accounts and other financial products have failed to take off in the country, said industry insiders.
Mohammad Qayyum, director general at the Institute of Islamic Banking and Insurance, attributed this problem to the absence of intensive campaigns by Islamic banks to promote their products.

Qayyum added that Islamic products are pricier than conventional alternatives in the UK, which further contributed to the problem.

Sukuk in the pipeline

TURKEY: Kuveyt Turk Participation Bank will launch a US$100 million Sukuk in the next two to three months.

The bank plans to raise the funds from GCC investors.

According to Rahim Albayrak, senior executive officer at Kuveyt Turk’s Dubai subsidiary, the proceeds will be used to boost the bank’s capital and fuel expansion plans.

Safety device

UK: Professor Rifaat Abdel Karim, secretary general at Islamic Financial Services Board (IFSB), stressed the need for a mechanism to protect the Islamic bond investors in the event of default.

“Investors have the right to access the underlying assets in the event of a default, however many of these assets are governed by different laws and jurisdictions.”

“These different regulations prevent easy access, making it complicated for property transfers,” he said.

Riba defined

GLOBAL: Shariah scholars in Pakistan have agreed on the importance of setting up a committee to characterize the definition of riba and when it is allowed.

This was concluded during a recent Islamic workshop where different schools of thought highlighted that riba, though prohibited in Islamic finance, can be allowed in some cases.

Room for growth

GLOBAL: Analysts are expecting an increase in Shariah compliant investment. There are growing signs that investors are once again looking at Shariah compliant opportunities. According to Ken Eglinton, director of Islamic finance at Ernst & Young, this renewed interest can be attributed to the large amount of wealth in the Arabian Gulf and increasing determination among young Muslims to be seen as Shariah compliant.

Better recovery prospects

GLOBAL: The Islamic bond market in the Gulf’s oil producing countries is expected to remain stagnant for 2010 but will likely pick up in 2011 on the back of better global economic conditions, according to Moody’s Investment Services (Moody’s).

Khalid Howladar, vice president and senior credit officer for structured and Islamic finance at Moody’s, said: “As for 2010, the beginning has been slow because of prevailing uncertainty. Investors from abroad are not investing much in the GCC countries because they have their own problems at home.” Howladar said during good market conditions, investors will start thinking of investing rather than saving on the grounds that risk will be low.

Trade enhancer

BERMUDA: Indonesia and Bermuda have completed negotiations of a proposed bilateral tax information exchange agreement (TIEA) which would provide for a full exchange of information on criminal and civil tax matters between these countries.

According to Bermuda’s minister of finance
Paula A Cox, the TIEA would significantly enhance business ties and investment opportunities between the two countries. The agreement would also facilitate Bermuda in expanding its Islamic finance offerings, especially in Shariah based investment funds.
The agreement is expected to be signed later this year after completion of the approval process. Bermuda has currently signed TIEA agreements with 21 countries including the US, Australia and Bahrain.

Shariah investments to expand

RUSSIA: Russia and the Commonwealth of Independent States (CIS) have been identified as promising destinations for the introduction of Shariah compliant banking and finance.

According to Mark Smyth, executive director at Dubai based Amanie Islamic Finance Consultancy and Education: “Russia has managed to maintain its per capita income levels at US$15,100 despite the global recession and lower oil prices.

The untapped markets in the CIS should be the key focus for Shariah compliant investments.”

Rural banking growth

KENYA: Gulf African Bank has recorded a gross profit of KES25 million (US$312,000) in the first quarter of 2010. The first profit since its 2008 launch.

During this period, customer deposits have doubled to reach estimated levels of KES16.4 billion (US$204.6 million).

The Gulf African Bank was launched with an investment of KES1.75 billion (US$21.8 million).

It was formed to provide banking services to Muslim communities and those neglected by mainstream financial institutions.

Focus on strengths

IRELAND: Enda Faughnan, tax partner at PricewaterhouseCoopers, highlighted that Ireland should leverage on its strong position in fund administration, debt issuance and aircraft leasing to satisfy the growing demand among European banks for Shariah compliant products.

“We’ve only just got into this game,” said Faughnan.

“The penetration is so low, there is a lot of room for high growth. Ireland could get a big slice of the European business.”

Meeting Shariah needs

US: The North Jersey Federal Credit Union has designed an Islamic banking division to cater to the needs of its Muslim members.

According to the credit union, New Jersey is home to the second largest percentage of Muslims in the US.

Founded in 1936, the North Jersey Federal Credit Union is a member owned, non-profit financial cooperative that serves 30,000
members.

Temporary delay

GLOBAL: Lack of investor interest in low return Islamic bonds has forced several issuances to be postponed in the GCC.

According to analysts the increased costs in issuances in the GCC has been another factor which has hampered the proposed issuances.

However, the future prospects of the Islamic finance industry stays promising and the number of Sukuk issuances are expected to increase with enhanced regulatory guidelines and global economic recovery.

Hedging technology

UK: Bank of London and the Middle East has deployed Reval in place of its original in-house software application for fair value hedging of its large portfolio of Sukuk,
and for cash-flow hedging of its portfolio of deposits.

Reval is a risk management and hedge accounting solutions provider.

Asian reigns

GLOBAL: Sukuk issuers in Asia are likely to sell at least 10% to 20% more Sukuk this year, as the impact of the European debt crisis fails to limit Asia’s growth prospects, according to HSBC Amanah.

Mukhtar Hussain, global CEO at HSBC Amanah, predicted that Malaysia and Indonesia would probably remain the region’s main Sukuk issuers, while Hong Kong, Japan, Singapore and South Korea are likely to emerge as issuers over time.

High confidence

TURKEY: Four participation banks, Albaraka Turk, Bank Asya, Turkiye Finans and Kuveyt Turk, are expecting asset growth of 55% in 2010, said Fahrettin Yahsi, chairman of the Participation Banks Association and general manager of Albaraka Turk participation bank.

In 2009, assets in the four banks grew by 30.5%. This is compared to the total assets of the Turkish banking sector growing by just 13.8% in the same period.