Islamic Banking

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Comic explainer: how does Islamic finance work?

In this comic the University of Queensland’s Mamiza Haq explains the foundations of Islamic fincance and the Dana Gas sukuk case.

Tapping the Islamic banking potential in Africa

Africa represents a huge untapped market for Islamic Banking. The demand for Sharia-compliant products in Africa has been growing for both Muslims and non-Muslims. Most countries such as Senegal, Uganda, Morocco, Kenya, Gambia and Nigeria have already reformed banking laws to allow the setting up of Islamic institutions. While there is a large demand for Islamic Banking, the availability of Islamic Wealth Management Products is still relatively small, leaving a large opportunity for UAE banks. At Noor Bank, for example, each international client is assigned a dedicated relationship manager and customer service officer. Going forward, the African market holds great potential for the UAE Banking sector. Latest forecasts indicate that Africa’s GDP will grow to 3.7% in 2018, according to the African Development Bank.

An example of the risk to international investors from local country legal regimes

The Dana Gas sukuk case illustrates the dangers of local country courts favouring domestic companies. Wherever possible, international investors should avoid local law. The most commonly used is English law, even for commercial arrangements that have nothing to do with the UK, because English law is well-developed and English courts have a deserved reputation for legal competence and impartiality. Dana Gas raised money from international investors by issuing sukuk. The money so raised was invested in a mudarabah agreement with Dana Gas, written under UAE law. Dana Gas also entered into a purchase undertaking, written under English law. Under UAE law, sukuk investors would have been sunk, having to litigate about whether the commercial arrangements were or were not Shariah compliant. However, they were saved by the purchase undertaking being under English law.

Long-term Islamic financing facility launched

The State Bank of Pakistan (SBP) launched the Islamic Long- Term Financing Facility (ILTFF) based on Modaraba for exporters with a maximum limit of Rs1.5 billion. The central bank currently provides the Long Term Financing Facility (LTFF) through conventional banks. The ILTFF will allow exporters an opportunity to avail long-term refinance facility of SBP for purchase of new machinery from eligible Islamic banks. The period of financing under the ILTFF will not exceed more than ten years including a grace period of maximum two years. Islamic banks and Islamic banking branches of conventional banks may also apply to SBP. The allocation is subject to a maximum of 20pc of the limit under LTFF for utilisation under ILTFF. The State Bank’s move would support both the Islamic banking as well as exporters who achieved a positive growth after five years.

Islamic Capital Markets and Products. Managing Capital and Liquidity Requirements Under Basel III. Wiley Finance – Business and Finance, Capital Markets, Finance Industries

The Islamic Capital Markets and Products. Managing Capital and Liquidity Requirements Under Basel III. Wiley Finance Report has been published. It provides updated in 2018 year analysis of industries from Business and Finance, Capital Markets, Finance, Home Markets. According to Dr. Zeti Aziz, Former Governor of Bank Negara Malaysia, the authors Simon Archer and Rifaat Abdel Karim have succeeded in creating greater awareness about Basel III and other global prudential regulation requirements for the Islamic capital markets. The implementation of these requirements will ensure the sustainability of Islamic finance and banking.

#Uganda to publish Islamic banking rules soon -central bank

The government of Uganda has approved regulations covering Islamic banking. Governor Emmanuel Tumusiime-Mutebile said that once the regulations are gazetted, the central bank would be open for applications from financial institutions to offer sharia-compliant products. Uganda joins several African countries that have sought to develop interest-free banking in recent years, including Nigeria, Morocco and Senegal. Despite small populations of Muslims, countries such as Uganda, Kenya and Ethiopia are also developing the sector to expand financial access and inclusion. In December, the central bank of Uganda became an associate member of the Islamic Financial Services Board (IFSB), one of the industry’s main standard-setting bodies.

Time for Islamic finance to move away from replicating debt contracts

2017 was in many ways a dichotomous year for the global economy. The US, Western Europe and industrial Asia had all seen strong growth. While developed countries have had a good year, the Muslim world, by both economic and political measures, appeared to have had a fairly miserable 2017. With a few exceptions like, Malaysia, Indonesia, and Turkey, the traditional powerhouses, Saudi Arabia and the Gulf Cooperation Council (GCC) countries have had quite a dismal year. Looking ahead to 2018, the geopolitical problems of 2017 will not simply disappear this year, the many underlying causes of the last global recession remain unresolved. The hope for the restructuring of the financial sector never really happened. The tough regulatory initiatives then proposed, have also been pushed back. For its own rejuvenation and to truly contribute to the Muslim world, Islamic finance needs to move away from merely replicating debt contracts to risk-sharing contracts.

Cover Story: Rediscovering the spirit of Islamic banking

At 37 years old, Arsalaan Ahmed is the youngest chief executive in the Malaysian Islamic finance industry. As CEO of HSBC Amanah Malaysia, his vision is to change the industry’s narrative on Islamic finance. So far, the narrative has focused a lot on the technicalities of products and services. Arsalaan says these discussions should be focused on the principles of social justice and create a positive impact on society. He plans to allow retail investors to invest directly in sukuk. Currently, individual sukuk requires an initial investment of RM500,000. By lowering the initial investment amount, investors with sufficient knowledge of the market could invest directly. Arsalaan says 2018 is a good time to democratise sukuk because of China’s One Belt, One Road (OBOR) initiative, which aims to improve the infrastructure of land and maritime routes. According to HSBC, the initiative involves US$4 trillion worth of investments and 900 planned projects.

Islamic finance assets seen at $3.8tn by 2022

The Islamic finance industry is climbing to new heights on the back of strong global demand for sustainable and socially responsible investments. According to the fifth edition of the Islamic Finance Development Report and Indicator, the growth of the industry is unabated despite an economic slowdown caused by the decrease in oil revenues. The report is the result of a joint research made by Thomson Reuters and the Islamic Corporation for the Development of the Private Sector (ICD). Mustafa Adil, Head of Islamic Finance at Thomson Reuters, says that Islamic finance can serve as a strategic tool for policymakers to cope with the slowdown, especially in the Middle East. The report estimates that the Islamic finance industry will reach a global asset volume of $3.8tn by 2022, up from $2.2tn at the end of 2016, which translates into an expected compound annual growth rate of 9.5%. The leading country remains Malaysia and the leading region the Gulf Cooperation Council (GCC).

Introduction of Islamic banking in #Azerbaijan delayed

Elshan Rahimov, chairman of the Cooperation of Azerbaijan and Arab Countries Public Association, said the introduction of Islamic banking in Azerbaijan was being delayed.

#Innovation in Islamic finance

Islamic finance is one of the fastest growing areas of international finance. The mid 1990s saw Islamic finance offer a limited number of services, but today it is a fully integrated financial system which spans continents. Modernisation of the practice has also been driven by technological advances. New services such as online and mobile banking and payment services are essential. Financial institutions are also responding to the emergence of digital currencies and the blockchain which underpins them. The Islamic finance market is embracing both fintech and robo-advisors to analyse thousands of global securities and pinpoint those with the highest growth potential. An example of a robo-advisory firm in the Islamic finance market is Wahed Invest. Aside from FinTech, other Islamic microfinance models have had a larger impact over the last couple of years. Platforms such as Micro-Takaful and social finance have gained traction. FinTech is ideally suited to achieving Shariah compliance and will continue to prosper along with Islamic finance.

IFSB to Develop Detailed Guidance on Safety Nets in Islamic Finance

The Malaysia-based Islamic Financial Services Board (IFSB) plans to develop more detailed guidance on financial safety nets relating to sharia-compliant transactions in areas such as insolvency and bankruptcy. Such efforts are important as Islamic finance expands in both established and new markets, while transactions are under heightened scrutiny due to the perceived risk of non sharia-compliance or sharia risk. IFSB Secretary General Zahid ur Rehman Khokher said the safety net may include more detailed work on deposit insurance in 2018, while work on dispute resolution and insolvency may be completed later. The IFSB currently has a membership of 75 national regulators. Last month, the IFSB admitted eight new members, including Saudi Arabia’s Capital Market Authority, the Abu Dhabi Global Market and German financial watchdog Bafin.

IFSB to develop detailed guidance on safety nets in Islamic finance

The Malaysia-based Islamic Financial Services Board (IFSB) plans to develop more detailed guidance on financial safety nets for Islamic finance. Such efforts are important as Islamic finance expands in both established and new markets, while transactions are under heightened scrutiny due to the perceived risk of non sharia-compliance or sharia risk. IFSB Secretary General Zahid ur Rehman Khokher said the safety net may include more detailed work on deposit insurance in 2018, while work on dispute resolution and insolvency may be completed later. The IFSB currently has a membership of 75 national regulators. Last month, the IFSB admitted eight new members, including Saudi Arabia’s Capital Market Authority, the Abu Dhabi Global Market and German financial watchdog Bafin.

IDB, WB eye $1.9 trillion Islamic finance market

The Islamic Development Bank (IDB) and the World Bank are to use the Islamic finance market for infrastructure development projects through public-private partnerships (PPP). The IDB recently organized a forum in Washington in partnership with the World Bank on this subject. The World Bank suggested that the Islamic financial market has reached $1.9 trillion over the past six decades. IDB spokesperson Dr. Abdul-Hakim Elwaer said the aim of the forum was to create awareness about the potential for infrastructure development through PPP. This falls in line with the new development orientations of IDB member countries. For example, Saudi Arabia is targeting to increase the private sector’s contribution to the GDP from 40 to 65%. The Kingdom aims to achieve this through increasing the use of PPPs and through the privatization of government entities.

Bank Islam launches social finance platform, Sadaqa House

Bank Islam Malaysia has recently launched its social finance initiative, Sadaqa House. It aims to provide products and services to collect sadaqah, waqf and hibah. The public can contribute to realising social finance projects for sectors such as healthcare, education and entrepreneurship through the bank’s digital crowdfunding partnership with Ethis Ventures and GlobalSadaqa.com. Bank Islam CEO Khairul Kamarudin said the bank was utilising technology in its Shariah solutions to deliver a service that is aligned with the current digital trend. Also, contributors can ensure the funds contributed are being channelled accordingly and track the progress of the chosen project. Ethis Ventures founder Umar Munshi said the platform was not limited to Muslims and Malaysians. Any amount of money can be donated by the public into the Sadaqa House fund account, while Bank Islam will match the raised fund at the rate of 1:1 to a maximum of RM500,000.

#Saudi Arabia asks banks for proposals to refinance $10bn loan, raise more debt

Saudi Arabia has asked banks for proposals to refinance its $10 billion international syndicated loan. The refinancing of the loan, which was raised in 2016, will include a repricing of the facility and the extension of its maturity to 2023 from 2021. An Islamic finance tranche using a murabaha structure will be added to the loan. Fahad al-Saif, president of the debt management office, said the plans were a step towards Saudi Arabia's ambition of establishing a prominent position in international debt markets as part of its economic reforms. The country's $10 billion syndicated loan in early 2016 was followed later that year by a $17.5 billion debut bond issue, the largest bond ever sold by an emerging market issuer.

Islamic finance assets projected to reach $3.8tr by 2022

According to the Islamic Corporation for the Development of the Private Sector (ICD), Islamic finance assets are projected to reach $3.8 trillion by 2022 from $2.2 trillion in 2016. In cooperation with Thomson Reuters, the ICD released its new report on Islamic Finance. In the report Bahrain features prominently among all GCC countries and second globally behind Malaysia. Bahrain is at the forefront of providing access to Islamic finance in addition to promoting it via education and financial literacy initiatives. The Central Bank of Bahrain recently released a new Shariah governance module which is impacting the Shariah compliance and governance standards of Islamic banks. Also, Bahrain continues to invest in technology and capitalize on the development of the ICT sector.

Digital currencies remain tricky subject for Islamic finance

The role and status of cryptocurrencies remains a hotly disputed issue in the Muslim world. While entrepreneurs and Islamic finance startups openly encourage the use of digital currencies, others keep thinking otherwise. The latest escalation in the dispute was a fatwa against all cryptocurrencies issued by the Egyptian Grand Mufti Shawki Allam. He said that since trading of cryptocurrencies was similar to gambling, it was forbidden in Islam. His fatwa came after Bitcoin in mid-December soared to almost $20,000 per token but then lost one third of its value in just 24 hours. In addition, Egypt’s legitimate bodies also do not consider trading a virtual currency to be acceptable. However, nations that play a substantial role in Islamic finance, namely Malaysia, Indonesia, UAE, Turkey and even Saudi Arabia have no problem to accept cryptocurrencies. In Dubai, OneGram was the first company to set up the Shariah-compliant cryptocurrency called OneGramCoin. There are already two real estate developers in Dubai, which accept payments in digital currencies.

An Islamic Bank for The Poor, Including 4% Hindus, Who Can't and Need Not Pay Interest

Reserve Bank of India guidelines specifically state that banks are compulsorily required to charge an interest and pay taxes to the central government. However, the Muslim Fund Trust in Deoband headed by Haseeb Siddiqui is a financial institution that works on an interest-free loan module. The trust offers loans to only those who have a savings deposit account with them. Conventional banks demand security before issuing loans, which it has the option of falling back upon, in case the consumer defaults. The Muslim Fund Trust accepts only ornaments as security. Locals who avail the services of the Muslim Fund Trust identify Siddiqui as a social worker. Popularly known as Abbaji, Siddiqui has been politically active as a member of BSP. The trust neither has debit or credit cards, nor does it have netbanking facilities like other banks. The Muslim Fund Trust also runs an eye-care hospital, driver-training centre and an orphanage.

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