WSJ conference, GCC surpasses Malaysia in sukuk, Islamic finance brain drain

The Wall Street Journal will team up with the Dubai International Financial Centre (DIFC) to have one day of DIFCweek devoted to Islamic finance called "Islamic and Ethical Finance".

The Gulf region has had more Islamic bond (sukuk) issuance this year than Malaysia for the first time according to Moody's with $13.2 billion so far this year.

Malaysia tackles the problem of brain drain to the Gulf states.

Islamic banking in the West

The Islamic Bank of Britain today announced a halal business loan program in Bolton. While the loans will all be halal, they will be available to entrepreneurs of all faiths. The £25,000 ($50,365) will be available for business interested in halal financing and those that do not engage in haram activities like selling alcohol or tobacco.

A research professor at the University of Toronto's Wycliffe College provides an interesting insight into the historical prohibition on interest in non-Muslim faiths. Professor Stackhouse also provides a historical warning about the tendency for some to subvert the rules against charging interest through various unnecessary transactions. It is an important reminder that when there is a rule prohibiting something, some people may try to subvert the rule while appearing to be in compliance.

External Shari'ah auditors licenced in Bahrain, Dutch Islamic banking

The Shariyah Review Bureau was granted a licence by the Central Bank of Bahrain. The organization is an external Shari'ah auditor. Currently most Islamic financial institutions hire their own Shari'ah boards (except in Malaysia which has a national Shari'ah board).

The Islamic Development Bank is partnering with the World Islamic Economic Forum to work on the integration of Islamic economies.

Banks in the Netherlands are exploring how to enable Muslims to purchase homes in a way that is Shari'ah-compliant way within the financial regulatory environment in the country.

Kuwait Finance House will open a new subsidiary to trade sukuk on the secondary market. Although sukuk issuance is growing rapidly, the growth in the sukuk secondary markets lag significantly behind. The company is as yet unnamed.

Hong Kong will host a seminar from January 15th - 16th, 2008 about Islamic finance. It will be organized by the Islamic Financial Standards Board (IFSB), the Malaysian standard-setting organization, and the Hong Kong Monetary Authority.

Canadian Islamic banking applications

Two unidentified companies have applied to the Canadian banking regulators asking to be allowed to open Islamic banks in the country and four more groups may be contemplating applications. Some critics are worried that the difference in product type may be difficult for regulators and may pose increasing risk, particularly if they are not able to become members of the Canada Deposit Insurance Corporation, the Canadian equivalent of the FDIC in the U.S.

Islamic finance is becoming more widespread in Pakistan and West and South Asia.
An interesting comment from M.A. Mannan, deputy CEO of Dubai Islamic Bank, was that "80% of Pakistanis would prefer Islamic products if all things are equal". This sets a high bar for Islamic banking given that over 95% of Pakistani's are Muslims and that Shari'ah-compliant products are costlier than their conventional equivalents.

Standard & Poors, the credit rating company, will begin issuing stability ratings for Islamic banks that have profit-sharing investment accounts.

UK needs to do more to bring Islamic finance into the market on equal footing with conventional financial institutions, says Lloyd's TSB product manager Aktar Ahmed. Lloyd's TSB, which last week made a public commitment to expand Islamic finance in the U.K.

IMF Survey Magazine on Islamic finance

The IMF Survey Magazine devotes the 'IMF Research' section to Islamic banking and finance.

• Islamic Banking Makes Headway

• Malaysia: An Islamic Capital Market Hub

Doha Bank, a Qatari bank, is working to expand into Japan and provide Japanese financial institutions with a link to the Middle East. The Japanese Bank for International Cooperation (JBIC) is exploring a sukuk issue, which would be the first from a government organization within the Group of Eight countries.

Malaysia looking to develop standards for Islamic financing of construction.

Islamic products may provide a higher return than conventional investments, according to economists in Kuwait.

Pakistan will see its first mortgage-backed sukuk.

Lloyd's TSB made a public commitment to Islamic finance.

Sukuk and Kenyan Islamic banking

Standard & Poor's estimates that there is $80 billion in sukuk outstanding worldwide as of June 30, 2007.

As the banking and finance industry grows in Kenya, so does the Islamic banking industry.

New products, new IFSB members, new Islamic finance in Europe

CIMB Islamic will begin offering a new Shari'ah-compliant deposit account that provides the profit in advance using a commodity murabaha tawarruq.

Bank Islamic Malaysia Bhd (BIMB) signed an agreement to offer Shari'ah-compliant products in Europe including capital markets, treasury manangement and wealth management services.

The Bank of Japan became an observer of the Islamic Financial Services Board (IFSB).

Thailand sovereign sukuk, GCC financial centers and Islamic hedge funds

Thailand could issue its first sovereign sukuk in 2008.

The Economist has a description of the growth of the GCC region financial centers in Bahrain, UAE and Qatar.

Shari'ah Capital, a New Canaan, Connecticut-based firm is working with Barclay's to offer the first Islamic hedge fund. The fund uses Shari'ah-compliant alternatives to options and short selling and will allow investors to choose from several different hedge fund managers and investment strategies.

African Development Center, Prospect editor on Islamic finance

The African Development Center receives positive press in African-focused paper Mshale:

"One of ADC’s most notable achievements is the tailoring of loans to be Sharia-compliant to make them attractive to Muslims. Minneapolis is the first city in the United States to offer such a financing product. These loans targets low and moderate income borrowers."

David Goodhart, editor of Prospect magazine and senior correspondent for the Financial Times, describes a recent trip to Malaysia. Initially a skeptic about Islamic finance, he writes:

"Islam, I discovered, may have stumbled upon a new economic motor in the shape of Islamic finance. I used to think that Islamic finance was a slightly absurd game—a means to respect the Koranic prohibition on usury by dressing up interest payments as something else, usually fees. It turns it out that it is rather more than that; in fact, it has spawned a big and sophisticated financial sector of its own (Malaysia is a centre of the Islamic bond market). But Islamic finance has a wider symbolic role for Muslim reformers, like Badawi—it shows that you can hold to the underlying principles and values of the religion but adapt those principles to the modern capitalist world so that Muslims need not lose out on prosperity and economic growth."

BNP Paribas plans to issue two sukuk it was forced to postpone with the problems in the credit market originating from the U.S. subprime crisis.

Views of Islamic finance

A former governor of the State Bank of Pakistan wrote an article in Dawn which provides a very good description of the industry and its similarities and differences with conventional finance.

State Bank of Pakistan governor Dr. Shamshad Akhtar lays out her vision for how the Islamic finance industry should grow.

The Islamic Development Bank board finished a two-day meeting, which included the approval of a Phase-1 Pilot Project in Indonesia, Bangladesh and Sudan of an Islamic microfinance model.

Growth of Islamic finance as a part of the overall growth of Dubai.

A few new details about the motivation for Hong Kong's new attention to Islamic finance.

Offshoring beneficial or detrimental to Islamic finance image in the West?

Barclay's, with the assistance of Shariah Capital, is launching Islamic hedge funds, which provide investors with exposure to "six or seven long-short hedge funds". Given the Shari'ah problems likely to arise from investing in hedge funds which take short positions, it is not surprising that Barclay's has an aversion to transparency similar to much of the hedge fund industry. The rationale by which the product is deemed Shari'ah-compliant is proprietary.

Does offshoring of Islamic banking make sense? A Reuters article about the drive by the Cayman Islands to capture some of the Islamic finance market addresses the additional scrutiny Islamic finance receives in the U.S.:

"Islamic finance still struggles outside the Middle East against the perception, widespread since the Sept. 11 attacks on the United States, that it is tainted by terrorist funds. [..] 'Sharia law or no sharia law, all funds have to be regulated by the same anti-money laundering and anti-terrorism laws as traditional funds,' said Rod Palmer, a managing partner of Walkers in Dubai."

While the additional scrutiny given to Islamic finance is probably unneccessary (based more on misconceptions and misunderstandings), it might be easier to clear these misunderstandings up if the industry was concentrated in on-shore financial centers. It would also provide a larger constituency to lobby governments to introduce financial regulations that do not discriminate against Islamic finance, as has already occured in the U.K. around home financing, banking, and sukuk.

The head of Malaysian Affin Islamic Bank says that Malaysian banks should expand regionally to meet the demands throughout Asia for Islamic banking.

Hong Kong wants in on the Islamic bond market

The growth of Shari'ah-compliant banking has greatly increased the demand for unique banking software for Islamic banks. Most Islamic banks are either using modified conventional banking software, although a few have probably taken the expensive dive into custom-made Islamic banking software. Perhaps the growth of Islamic banking-specific software could reduce the trend of just 'Islamizing' conventional financial products.

Bahrain Islamic Bank established a separate real estate company called Abaad Real Estate. With the recent property price collapse in the U.S. due to massive overbuilding and under-regulated finance companies, I can't help but start to worry about when a similar thing occurs in the GCC region, where new real estate finance companies spring up with suprising frequency.

Islamic finance growing rapidly, other news

Islamic finance continues to grow rapidly.

Thailand hosts conference to attract firms in the halal market to the country. This, and other conferences, are listed on the IHI conference listing page. The International Center for Education in Islamic Finance (INCEIF) signed a memorandum of understanding with a Thai University, Chulalongkorn University, to atract more Thai students.

Malaysia is deciding whether to allow foreign banks to open standalone Islamic banks in Kuala Lumpur. The new Malaysian proposed budget includes many tax breaks to attract Islamic finance companies and experts

Takaful growing rapidly in Brunei.

Christian business practices similar to Islamic business practices, Islamic finance can help with social development

Islamic microfinance could be very profitable, as well as successful in reducing poverty according to a speaker at a conference in Bahrain. The Islamic Development Bank wants to "standardise and regulate" the collection of zakat. This would be a mistake, I believe, and would hamper effective Islamic microfinance because it would concentrate funding in IDB-supported institutions, which may not be able to create the most effective model. Allowing individual Muslims to distribute their zakat to organizations that are able to use zakat correctly keeps organizations efficient and innovative (within the bounds of the Shari'ah).

The Financial Times has a story about a growing number of Western executives who want to bring their (Christian) faith into the workplace. The description of how Christianity fits in with capitalism overlaps with many of the restrictions in the Qur'an and Sunna:

Christians who look on capitalism as an embodiment of New Testament principles - of justice, individual freedom and responsible risk-taking - might see now as a good moment to speak up.

The Accounting & Auditing Organization of Islamic Financial Institutions (AAOIFI) secretary-general Dr. Mohamed Alchaar draws a distinction between Islamic financial products and Islamized financial products with a distinct preference for the former. He said, "We have to differentiate between what we call Islamic products and what we call Islamised products - products that were made Islamic. These [the latter] are conventional products made into Islamic products. This type of product I believe is not the right way to go". He followed by saying that Islamization of financial products, the "taking of conventional products and fitting things around it [...] and calling them Islamic is not sustainable".

International Islamic Finance Market chief executive Ijlal Ahmed Alvi believes it will take five years to integrate the GCC and non-GCC sukuk markets due to different standards and a lack of transparency in existing sukuk.

Islamic finance should focus on social development in addition to economic growth.

Adeem Investment, the firm which bought Aston Martin earlier this year, wants to open up an Islamic bank in the U.K.

Islamic financial services have been hampered in Thailand due to tax rules and a lack of understanding about Islamic finance. Thailand plans on working with its southern neighbor Malaysia on issuing sukuk to fund up to $50 billion (1.63 trillion Thai baht) infrastructure projects.

Thailand and Islamic microfinance in Sri Lanka

Islamic finance receiving attention in Thailand and the Islamic Bank of Thailand wants to lead the way in financing the halal food industry.

Muslim Aid and Amana Investments launched their Islamic microfinance program today in Colombo financing 10 microbusinesses with between 10,000 and 60,000 Sri Lankan Rupees (between $88 and $531).

The Institute of Halal Investing is also working on a Shari'ah-based microfinance program, which we are preparing to launch in a pilot study later this year. The website for this project is http://www.halalmicrofinance.org/

Islamic banks in Indonesia

Although Indonesia has the largest number of Muslims of any country in the world, the Islamic finance industry is very underdeveloped, representing less than 5 percent of total deposits. The Wall Street Journal has a story about the advertising techniques of different Islamic banks with an interesting conclusion: most Islamic banks in Indonesia focus on their competitiveness with conventional financial institutions and market themselves to both Muslims and non-Muslims. Many Islamic banks have about a 50-50 split between Muslim and non-Muslim customers.

Ambitious growth projections, regulatory challenges and the domestic vs. global divide in Malaysia

As sukuk issuance breaks previous records, the Financial Times reporter Farhan Bokhari discusses the future prospects for growth of the Islamic finance industry as a whole.

The General Council for Islamic Banks and Financial Institutions (CIBAFI) is reviewing all the Islamic financial institutions to gauge whether they "fail to adhere to proper rules". The ones that do not will be given 1 year to fix the problems and then their names will be released to the public. While this could provide oversight over organizations to prevent some 'scholar shopping,' it also leads to questions about what standards are used and generate criticism that CIBAFI is imposing its interpretation of the 'correct practice' of Islamic finance, which could reduce the incentive for Islamic financial institutions to innovate.

30-40 percent of all assets in the Islamic financial system are managed in Malaysia, accounting for $0.85 trillion (RM2.98 trillion), according to an industry expert quoted in the Malaysian newspaper Business Times. This would translate to total assets in the Islamic financial system of $2.125 to $2.8 trillion worldwide, many times the estimates usually cited.

Professor Dr Bala Shanmugam, one of three co-authors of “Islamic Banking – A Practical Perspective”, believes that 50% of Muslims will deposit their money in Islamic banks by 2015 and 50-60% of all savings held by Muslims will be managed by Islamic financial institutions. One of the questions that needs to be addressed industry-wide is whether this growth will come among high-net worth Muslims (fewer in number, but higher in average net worth) or among poor and middle-class Muslims (much greater in number, but lower in average net worth). The former group has been targeted extensively and the ability to move from the former to the latter group will determine the extent of the industry's success in reaching these targets/

Albaraka banking group wants a banking license in Malaysia although Central Bank governor Zeti Akhtar Aziz said Thursday that no new licenses would be issued to foreign investors.

Industry experts debate the changes needed to transform Malaysia into a global Islamic finance hub. Underpinning this debate is evidence that domestic demand has been growing rapidly.

What happens when Islamic banks run into trouble? The State Bank of Pakistan (SBP) is grappling with this now in regards to large losses incurred from Shari'ah-compliant export finance transactions. An added level of interest is whether AAOIFI standards will be followed given that SBP governor Dr. Shamshad Akhtar is currently vice-chairperson and will be chairwoman next year.

India, Middle East project finance & Indonesia's sovereign sukuk

A conference met on September 1 to discuss the necessary regulations needed to bring Islamic banking to India. Kuwait-based Bayt Al-Maal has expressed interest in opening an Islamic bank in India.

In the next decade, the Middle East will spend $1 trillion on large project finance projects and many will use Islamic finance.

Indonesia's planned issue of $1 billion in sovereign sukuk has been delayed by complications in the tax code relating to Islamic bonds.