Islamic finance & microfinance, law firms see need for Islamic finance expertise

John Foster comments regarding Ramadan touch on the idea that GCC-based Islamic financial institutions could make a huge difference in reducing poverty if they devoted a fraction of their resources to helping provide financial services to the poor in nearby countries in Asia and Africa.

The head of global strategy for Reed Smith L.L.P., a law firm based in Pittsburg, Pennsylvania, responds to a question about why they feel they need to have expertise in Islamic finance.

Q: Do you have an Islamic finance practice?
A: We do have some Islamic finance work out of Dubai and Abu Dhabi. It is increasingly important because that is where the money is. Let's face it: Money is basically pouring into the Middle East and, to the extent that it is going to be invested in debt instruments, it will have to be in instruments that are sharia [the Islamic legal code] compliant, and you have to have expertise to do that.

DIFC Authority CEO Nasser Al Shaali says that Islamic finance is providing one of the driving forces attracting "new, more sophisticated investors".

La Trobe University in Sydney, Australia launched the country's first master's degree in Islamic commerce.

HSBC enters Islamic microfinance market

HSBC Amanah, the Islamic finance part of HSBC, announced that it will launch a pilot project for Islamic microfinance in Rawalpindi, Pakistan with Islamic Relief. There were few details about how the microfinance will be carried out, but HSBC will provide the Shari'ah advisory and product structuring part and Islamic Relief will screen beneficiaries and administer the program. Dinar Standard discussed the opportunities for Islamic finance, particularly Islamic microfinance, to use the rapid growth in mobile phones to expand.

The Principal Financial Group becomes the latest western financial firm to enter Islamic finance, announcing that it will work with CIMB Islamic in Malaysia.

Islamic finance will also soon be available in the Maldives.

A Malaysian paper presents a basic introduction to Islamic finance using the example of how takaful differs from conventional insurance. An Kenyan paper features an article by the CEO of Gulf African Bank, an Islamic bank in the country, about the idea of 'time value of money' in Islamic finance.

Hong Kong will likely not change the tax law before the Airport Authority issues the first sukuk from a government agency in the city-state, although taxes (mostly asset transfer taxes) will be waived to ensure that the sukuk can be competitive with a conventional bond.

Failaka, a company commonly known for its survey of Islamic mutual funds around the world, recently published a guide to Shari'ah scholars with biographical, educational and professional details about the 100 most active Shari'ah scholars in the world.

Islamic financial firm Siraj Capital is launching a web portal on Islamic finance called Sukuk.net to provide information on the rapidly growing area of finance.

CPI Financial has an article on the higher than market returns seen in Shari'ah-compliant indexes in the second quarter of 2008, largely due to their exclusion of financial stocks.

Birmingham, UK is becoming the hub for retail Islamic finance in Europe and business there are encouraged to enter the Islamic finance market.

The Indonesian sukuk will be launched using an ijara structure using Finance Ministry assets. A domestic local currency sukuk will be issued while an international, dollar-denominated one will follow in October. UPDATE: Reuters reports that Indonesia will push back the dollar-denominated international sukuk to November because of lower business activity during the month of Ramadan.

Islamic financial institutions face risks not only from cloning conventional products in Shari'ah-compliant forms, but also from cloning business models of established Islamic financial companies says the governor of the Central Bank of Bahrain.

Islamic finance globalizes, receives growing attention as a 'safer' alternative to conventional finance

The governor of the Central Bank of Bahrain met with his counterpart from the Monetary Authority of Singapore, the city-state's central bank, to discuss ways that Bahrain can help Singapore develop its Islamic finance industry. Singapore is planning to issue a sukuk soon. Meanwhile, Dubai will work with Hong Kong to develop Islamic finance in China. A Shari'ah-compliant ETF will be launched in the second half of 2008 on the Taiwan stock exchange. The Financial Times discusses new efforts from policymakers in Paris to rival London as the European center of Islamic finance.

The most recent article I wrote is in the current issue of Islamic Business & Finance. The article focused on Islamic microfinance.

Islamic finance is becoming viewed as a 'safer' alternative to conventional finance in the wake of the subprime crisis. The Islamic Bank of Asia is seeing similar growth in demand for Islamic finance from both Muslims and non-Muslims because of its perceived status as 'safer'. The same idea is one of a number discussed in a Washington Post article on the growth in Islamic home finance in the United States, even as the mortgage market shrinks.

The African Development Center in Minneapolis has been providing small business loans with the city's Community Planning and Economic Development agency. The loans provided through ADC are the first in the U.S. to be provided from a public agency and also be Shari'ah-compliant. The CPED description does not provide a description of the structure of the finance that makes it Shari'ah-compliant.

An interview with the head of Praesidium Consulting covers continuing fall out from the questions over Shari'ah-compliance of sukuk.

A paper in Sri Lanka discusses the differences in treatment of Islamic finance by the country's tax authorities.

An article from Reuters highlights the continued push for 'standardization' of Islamic finance.

Toyota plans to issue its first sukuk in Malaysia.

Sukuk, UAE to head council on Islamic finance, Islamic finance in Canada & the U.K. and growing interest in Islamic microfinance

The Islamic Development Bank is planning a $150 million sukuk issue in Malaysia that it expects to use within two years to finance projects in Malaysia, mostly relating to education, healthcare and basic infrastructure. The IDB also plans on another sukuk to be issued elsewhere to fund the bank's operations. Moody's expects the global sukuk market will reach $200 billion by 2010 (Moody's also expects to see significant growth in the number of Shari'ah-compliant funds). The GCC sukuk market has focused on larger sukuk issuance (like the $3.5 billion sukuk from DP World used to fund the purchase of UK-based P&O Ports), while small and medium sized companies have more luck issuing in Malaysia.

2008 will see first sovereign sukuk issuance from the U.K., Indonesia and Hong Kong.

The UAE will head a council with representatives of the Islamic financial industry as well as finance ministers, central bankers, the IDB, accounting and audition agencies the Islamic Financial Services Council, the World Bank and the IMF.

Further response to the Archbishop of Canterbury's comments about allowing some Shari'ah courts in the U.K. uses the example of how Islamic finance has incorporated Shari'ah principles into modern finance.

Ethical investing guided by faith is growing rapidly in Canada, with mutual funds that select investment based on religious principles. The most common faith-based funds appeal to Christians or Muslims. A range of additional services are available to Muslims in the U.K. including banking and home finance that have only limited availability in Canada.

Islamic microfinance is succeeding in Afghanistan where non-profits like FINCA offer Shari'ah-compliant microfinance. The success of Islamic microfinance has led to people like Joyce Lehman, a microfinance program officer for the Gates Foundation, to say that there should be greater availability of Shari'ah-compliant products: "Out in the field, MFIs are losing clients to other organisations that provide Shariah loans and it’s that type of market competition that is making MFIs look into providing Shariah products," she says.

Recently, a microfinance institution in Nigeria converted to only offer Shari'ah-compliant microfinance products.

Weekly update, December 8th

Australia may be one of the winners from the rapid growth of Islamic finance.

The Financial Times released a story last week on the global race to offer Shari'ah-compliant products with competitive returns to conventional products.

Malaysian-based Islamic bank, Asian Finance Bank has received a license to enter the Indonesian market. Indonesia is home to the largest number of Muslims of any country in the world, but the growth of Islamic finance in the country has been low while countries in the Middle East and Malaysia have seen rapid growth.

A delay in legislative changes in Indonesia has delayed the issuance of government sukuk until next year.

New risk management techniques designed specifically for Islamic financial institutions are being developed.

Islamic real estate financing is growing rapidly and many customers are using Shari'ah-compliant alternatives because they feel there is a financial benefit of doing so.

The Shari'ah Supervisory Board of Pakistani Islamic bank Meezan Bank approved products to allow the company to enter into Islamic microfinance.

Special report on Islamic Banking, Islamic accounting qualification from U.K. body

The Pakistani newspaper The News has a special section on Islamic banking.

• "Shari'ah-compliant credit cards"
• "Is Islamic banking in Pakistan really Islamic?"
• "Islamic investment instruments"
• "Interviews on Islamic banking"
• "Special report on Islamic banking"

Malaysia plans on helping neighboring Hong Kong with Islamic finance and opened the door to new sukuk issues from Japan and China

Pakistani bank Meezan Bank is exploring microfinance.

The International Islamic Trade Finance Corporation (ITFC), a part of the Islamic Development Bank will launch on January 10, 2008. The ITFC will provide Shari'ah-compliant trade financing to IDB member countries.

The U.K. Chartered Institute of Management Accountants (CIMA) will provide training in Islamic finance.

Islamic microfinance in Afghanistan

The USAID's microlinks highlights the development of Shari'ah-compliant microfinance to meet client demands in Afghanistan. The note has a link to a prior note also on the Islamic microfinance program run under the ARIES program as well as information from USAID's FIELD group.

Singapore-based Overseas Chinese Banking Corp (OCBC) and HSBC received licenses to open Islamic banking subsidiaries in Malaysia.

Islamic finance is losing its share of GCC area project finance.

The IFSB released a compilation of prudential and structural Islamic finance indicators.

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.

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.

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 securitizations, Islamic branding

Islamic finance is moving from asset-based sukuk where noteholders cannot claim underlying assets to asset-backed securitizations where they do. However, as Mahmoud El-Gamal notes, until there is a large sukuk default, we won't know how accurate ratings and sukuk pricing.

One lesson from the sub-prime meltdown: it is unrealistic to assume that pricing can be accurate where there is not a large secondary market actively trading asset being priced.

HSBC Amanah is waiting for a rule change allowing majority foreign ownership of Islamic banks before it enters Brunei's market.

Another article about Islamic branding

The Aga Khan is visiting Africa to check on his foundation's work, including the microbusiness program

Islamic microfinance

There is a good article written by Dr. Mohammed Obaidullah, a senior economist at the Islamic Development Bank, about the connection between Islamic microfinance and conventional microfinance in terms of the 'best practices'. The one comment I have is about the statement that "Often the poor own high-market-value assets, such as, land in a prime city location without being able to derive income or benefit from the asset." One of the major problems the urban poor face (particularly if they are migrants from rural areas) is that they have no ownership of the land they occupy (see, for example, this article about the removal of the poor from urban land on which they are squatting in the Philippines). I believe that microfinance based on Islamic principles will be successful and the IHI is working on a nondenominational model based upon Islamic principles.

Opinions on Islamic finance, plans & reports denied

An opinion piece about whether Islamic finance should continue creating Islamic versions of conventional products or whether it would be better served in the long run by focusing on providing products which are not currently available.

Conventional and Islamic real estate financing in the UAE should rely more on securitization, says Nasser Saidi, the cheif economist at the Dubai International Financial Centre

Gillian Tett of the Financial Times explores the new innovations in Islamic finance, as well as critics' claims that the industry should fully develop a smaller set of products before introducing new products such as Shari'ah-compliant hedge funds and derivatives. In addition to rapidly increasing the complexity of the Islamic financial industry, critics argue that despite having the contracts approved by scholars, contravene the prohibition of gharar (speculation).

Professor Bala Shanmugam of Monash University in Malaysia argues that Islamic Financial Institutions (IFIs) should offer micro loans to the poor using murabaha (cost-plus financing) or qard hassan (benevolent loan).

Another description of Gulf Finance House's (GFH) plan to issue Global Depository Receipts (GDRs) on the London Stock Exchange.

The Kuwaiti government denies reports that it is selling its stake in Kuwait Finance House.

Sri Lanka Islamic microfinance & Opposition to UK Islamic gilts

Sri Lankan Islamic microfinance

Islamic financier Amana Investments introduced an Islamic microfinance program on a limited scale (20 entrepreneurs will be selected out of 1,000 applicants). The initial capital for the program will be Rs. 1.5 million (US$13,639). The bank will work with Muslim Aid, an aid organization with significant capacity building in Islamic microfinance, and initially offer murabaha (cost-plus asset sale) but as the program develops they plan on offering mudabara (investment with a profit-sharing agreement with the entrepreneur). The program will not limit the program by religion or ethnicity and will begin in Slave Island, a suburb of Colombo, Sri Lanka.

Plans for U.K. Islamic gilts encounter first resistance

In an editorial in the Financial Times, Andrea Minichiello Williams of the Lawyers' Christian Fellowship, an evangelical Christian organization whose self-stated mission is to "is to influence lawyers and the law for Christ" complains about the proposed U.K. Islamic government bond. She argues that issuing sukuk would hamper the ability of the British government to use the funds received and, while it would, Ms. Williams goes to great length to make the requirements made by Shari'ah scholars seem unreasonable by adding to the commonly used ethical guidelines and suggesting that sukuk funds could not be used for "animal welfare (which promotes the welfare of non-halal animals)[, the] furtherance of many individual freedoms, or in the promotion of any idealistic or political worldview other than Islam (including secular democracy)." While the complaints are unlikely to influence the government's decision on their own, they demonstrate some of the potential hurdles Islamic finance needs to overcome in the West in spreading knowledge about how Islamic finance works, the role of Shari'ah scholars and the ethical screens used to decide Shari'ah-compliance.

Other News

Dubai Islamic Bank will offer a new product to high net worth individuals incorporating the principles of Socially Responsible Investing with the ethical screens of Islamic investing. The product, a Shari'ah-compliant four-year principal protected note with a 'minimum guaranteed annual return' of 2% and a 'maximum potential annual return' of 11%, would be based on a basket of 10 stocks involved in purification, desalinization and waste management.

Another discussion of the new S&P and MSCI Shari'ah indices.

Hong Kong-based Bank of East Asia will raise its stake in Malaysian bank, Affin Bank, in part to avail itself of the Bank's participation in the thriving Malaysian Islamic banking market.

Plans for Dubai Islamic Bank to issue sukuk to fund a Jakarta monorail project have been disrupted by the lack of a proper regulatory environment. Two bills on Islamic banking are under consideration by the Indonesian House of Representatives; one would set the regulatory environment for Islamic banking and one would do the same for sukuk.

The agreement between al Rajhi Bank and e-Kencana Sdn Bhd (a company involved in the MEPS Cash system in Malaysia) was signed which will create a Shari'ah-compliant fund transfer system between Saudi Arabia and Malaysia with future plans to expand to other countries.

Article added to the IHI website

I wrote an article (an earlier version of which was added to this blog) about the Harvard Islamic Finance Project's conference on Islamic microfinance called "Financing the Poor: Towards An Islamic Microfinance" which I attended last Saturday at the Harvard Law School. The article is in PDF format and is called "Islamic Microfinance: A New Approach to Fighting Poverty".

Equity mortgage investment, poverty alleviation and Islamic microfinance

Equity investment in mortgages

On his blog, Mahmoud El-Gamal points out a Business Week article describing parents' investing in their children's mortgages. The product, in which the investor provides some financing, often towards the down payment in exchange for a share of the equity appreciation of the house at some point in the future resembles a musharaka partnership where the profits and losses (in this case, appreciation of the house value) are shared. It provides an example of where conventional financial products overlap with Islamic products (see, for example, the ISNA Canada's Ansar Co-operative Housing Corporation Ltd.).

Islamic microfinance conference in Brunei

The recent conference in Brunei on micro-, small- and medium-sized businesses and Islamic finance turned its focus to poverty alleviation and particularly the important contribution Islamic financial institutions can and need to play.

Other News

Sukuk is growing rapidly in the GCC.

Arcapita Bank celebrates its recent five-year $1.1 billion syndicated murabaha. [Press Release (pdf) from Arcapita]

The Islamic finance industry in the U.K. continues to expand. Today, the former Finance Director of the Islamic Bank of Britain joins the Nottingham Building Society in the same position to focus on the development of Islamic financial products at the Society.

Towards an Islamic Microfinance

UPDATE: The text I included in the blog included an incorrect statement. Please use the following article in PDF format from the Institute of Halal Investing website instead.

Conference on MMEs & Conversation with Salman Younis

First International Conference on Inclusive Islamic Financial Sector Development
ENHANCING ISLAMIC FINANCIAL SERVICES FOR
MICRO AND MEDIUM SIZED ENTERPRISES (MMEs) (Program)
April 17-19, 2007 at the Universiti Brunei Darussalam
Sponsored by Islamic Research and Training Institute (IRTI) and the Centre on Islamic Banking Finance and Management (CIBFM)

This and other conferences are listed on the IHI Conference listing page.

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The Asian Banker sits down with Salman Younis, Managing Director of Kuwait Finance House (Malaysia) Bhd who was recently awarded the Asian Banker Achievement Award for Islamic Finance.

Islamic banking to the poor, women in Islamic finance and Luxemborg vies to be a western hub for IF

Islamic banking underserves the poor

An article that came out this weekend addressed an interesting point. Do Islamic banks address only a few wealthy Muslims or can they do more to reach poorer Muslims. My personal belief is that the Islamic finance has not yet developed a model for serving poorer Muslims, but that the success of the Grameen Bank at reaching the poor has caught the attention of the industry and halal microfinance will develop over the next few years. Here at the IHI, we are working on a halal microfinance program and there is an Islamic microfinance conference occuring on April 14th at Harvard University's Islamic finance project to try and bridge the gap between the Islamic finance industry and the microfinancing industry. I think this is an area with significant potential which will be a valuable asset for the Islamic banking portfolio. One of the other areas in which Islamic banking should look to expand is providing additional services for middle class Muslims, particularly those in the West.

IIFF discusses role for women in Islamic finance

The International Islamic Finance Forum which opened today in Dubai addressed the role for women in Islamic finance. Addressing the forum was HE Sheikha Lubna Al-Qasimi the UAE Minister of Economy and Chief Executive of Tejari, a Middle Eastern business-to-business online marketplace. The article describes how "It is important for women to take their place in IF not only to broaden the appeal, but also to alleviate a potential bottleneck in the growth of IF due to a general shortage of suitable professionals." While there are cultural barriers to increasing the role of women in Islamic finance, the industry has a need for female professionals to continue growing rapidly and to provide service in banks like the Saudi women-only branches.

Luxembourg jumps into competition as western hub of Islamic finance

The Luxembourg Stock Exchange entered the competition to become the western hub for the Islamic finance industry by reducing the regulatory burden for issuing sukuk. The new regulations will treat sukuk in a similar way they are treated in the U.K. A lawyer working in the industry describes that "It's not exactly the same and it's still considered best to be asset-backed, but they will not apply the same disclosure rules to securities, so you won't have to provide the same detail on the underlying assets."

Other news

The Bahrain Chapter of the Institute of Chartered Accountants of India will hold a seminar on Islamic finance this week.

A forthcoming five year plan will reveal plans by Gulf Finance House to expand into Asia

Dow Jones will begin two new indexes as part of its Islamic Market Indexes tracking Shari'ah compliant stocks on the Dubai Financial Market. The indexes are the Dow Jones DFM Index and the Dow Jones DFM Titans 10 Index.

After reports that EPF wanted two English banks to be strategic partners, Rashid Hussain Bhd, the banking group for which the partners were sought denies knowing of the partners.

Islamic finance not creating new entrepreneurs, new liquidity management tools, EPF seeks partners, Islamic capital markets

Islamic finance has not created new entrepreneurs

Experts in Islamic finance believe that, contrary to expectations, the rapidly growing Islamic finance market has not created many new entrepreneurs, instead creating greater wealth for bankers and lawyers and has served the already-banked market. Creating shari'ah-compliant microfinancing will allow banking services to become more widely available, but this has not been developed. One of the Institute's priorities is creating a model for halal microfinance that will be as successful as conventional microfinance but using an equity-based rather than a debt-based model.

KFH-Bahrain to start Shari'ah Compliant Overnight Fund (SCOF)

The Bahraini branch of Kuwait Finance House will launch the SCOF as a tool for Islamic banks to manage short-term liquidity through investments in real estate companies. They will work in partnership with Fortis Direct Real Estate.

EPF to talk to potential strategic partners; KFH expected to be one of them

Speculation is still strong that Kuwait Finance House (KFH) will be a strategic partner with Employees Provident Fund in Rashid Hussain Bhd. The Financial Times also pointed to Barclays, RBS or an unnamed Japanese bank.

Islamic Capital Markets

There is a comment in the Business Times (Malaysia) advocating for development of parallel Islamic capital markets which operate along side conventional capital markets.

GCC and Asia

Dr. Zeti Akhtar Aziz, governor at Bank Negara Malaysia, the Malaysian central bank, highlighted the growing links between the Gulf Cooperation Council and Asia which has been reinforced by the growth of Islamic finance.

Other news

Kuwait Finance House (Malaysia) Bhd does not plan any more acquisitions and will focus on organic growth instead following its unsuccessful bid for Utama Banking Group Bhd 32.8% stake in Rashid Hussain Bhd. KFH also plans to unveil new products in the second and third quarters of this year.

Islamic finance requires different regulation to account for Shari'ah risk, asset price risk, rate of return risk and the investor-manager relationship between Islamic banks and their clients.

Asian Finance Bank plans RM1 billion ($289 million) in investment funds by the end of 2006 with most of these invested in real estate.

The Malaysian Securities Commission will now release its list of Shari'ah-compliant securities on the last Friday of May and November. Previously, the list was released in April and October.

The International Islamic Financial Market (IIFM) will continue to work on new projects