Dr. Humayon Dar said at a recent conference that a combined Islamic finance and halal industry could be greater than the sum of their parts, worth $3.5 trillion versus their current $2.35 trillion (I am assuming the article mistook billion for trillion). While it is unclear exactly how he arrived at the $3.5 trillion figure, I think the general idea does have some merit.
The two industries have developed largely separately and it is more common to hear people lament the lack of connection between the two industries than it is to hear about deals by Islamic financial institutions to provide financing for companies that serve the halal market. This is an unusual gap, because it seems to me that, when considering whether to use Shari'ah-compliant versus conventional finance, the halal industry would naturally have a preference for Islamic finance.
The mechanism, therefore, for why the industries would be worth more working together than they are alone is that Islamic financial institutions would provide financing to companies serving the halal market, replacing conventional debt financing with a Shari'ah-compliant alternative, which would lead to growth in the assets of the Islamic financial institutions.
I am not sure whether this would lead to greater growth for the halal companies, but it might since there are likely to be a portion who have growth with only equity financing, to avoid paying interest. Why then, if they are not using conventional debt, would they turn to Islamic finance only if the industries combined? There is not a clear answer except that Islamic finance has until now not placed a focus on seeking out companies serving the halal market, and have looked elsewhere to expand their financing.
The two industries should have a natural connection, and hopefully (if it is not already occurring) there can be growth of the two industries through greater interaction.
Showing posts with label halal. Show all posts
Showing posts with label halal. Show all posts
Saturday, September 22, 2012
Thursday, June 10, 2010
TID, Islamic CDs, the halal market and sustainability
The Investment Dar
The Investment Dar case became more complex with the Shari'ah board of TID requesting that the bank stop contesting the claim by Blom Bank based on the wakala contract's non-compliance with Shari'ah. In addition, the Shari'ah board asked that a similar defense not be used in the future without first consulting the Shari'ah board to determine the legitimacy of its contracts. An article in Arabian Business comments that "While the sharia board's statement puts a wrench in Investment Dar's ability to move forward with a case against Blom regarding the deal, legal experts say the reputational damage to the industry has already been done".
I disagree with the contention that TID's case has damaged the Islamic financial industry. In contrast, the UK courts held a skeptical view of TID's defense and now the institution's Shari'ah board has come out in support of the wakala product's Shari'ah-compliance. This accomplishes two things for the industry. First, the court's skeptical ruling on TID's defense provides another secular court precedent that a party to an Islamic contract cannot, ex post, argue that the contract is not Shari'ah-compliant to get out of their obligations. I have argued before that the court's ruling provides Shari'ah scholars and boards with more freedom to change their mind on Shari'ah-compliance without worrying about upsetting existing contracts.
Second, I believe it is positive is that TID's Shari'ah board came out against the institution and upheld their initial ruling. There is always a potential conflict of interest between a Shari'ah board and the institutions for whom they work. However, this provides one example of a Shari'ah board publicly demonstrating that their duty to ensure Shari'ah-compliance and preserve the integrity of their ruling is placed above their employment with one institution. The only clear loser in this development is TID, who are stuck between an adverse court ruling in a secular court and their own Shari'ah board's ruling that contradicts their claims in that court.
UAE central bank to offer Islamic CDs to Islamic banks
The UAE central bank is planning to offer Islamic CDs as short-term money market instruments for Islamic financial institutions. The lack of short-term money markets outside of Malaysia (and to a limited extent in Bahrain) hampers the Islamic banking industry because it leads banks to hold excess reserves in cash, which lowers Islamic banks' returns compared to conventional banks because they cannot generally generate returns from this cash. The Islamic CDs received preliminary approval last week from the Shariah Coordination Committee with what Hussain Hamed Hassan, the committee's chairman, described as "minor changes". It may receive final approved next week according to Mr. Hassan. Islamic CDs are offered in the US by one institution, the University Islamic Financial Corp and are used by some of the Islamic mutual funds in the US as a way to generate a return on their cash balances.
The halal market and social responsibility
The Managing Director of Al Islami said that Islamic branding is a "myth" at a halal market conference in Brunei. The point being made was that the halal brand--the certification--was important but without a quality product, it is not likely to succeed. The point was expanded by Shahed Amanullah, the founder of Halal Media, as a way to expand the market to non-Muslims as well either from incorporating organic and socially responsible halal certifications in food and through social responsibility in the broader marketplace so that "non-Muslims can see Muslims promoting halal values which includes social responsibility, stewardship of the earth and economic justice". I think that this is an often understated point. Although Islamic products, particularly in the financial world, were created to cater to Muslims' needs, they do not need to remain constrained to just Muslims. However, to reach out to non-Muslims, incorporating other shared ethical values and leverage the success of sustainable finance to expand the potential market for Islamic financial products.
Other News
The Investment Dar case became more complex with the Shari'ah board of TID requesting that the bank stop contesting the claim by Blom Bank based on the wakala contract's non-compliance with Shari'ah. In addition, the Shari'ah board asked that a similar defense not be used in the future without first consulting the Shari'ah board to determine the legitimacy of its contracts. An article in Arabian Business comments that "While the sharia board's statement puts a wrench in Investment Dar's ability to move forward with a case against Blom regarding the deal, legal experts say the reputational damage to the industry has already been done".
I disagree with the contention that TID's case has damaged the Islamic financial industry. In contrast, the UK courts held a skeptical view of TID's defense and now the institution's Shari'ah board has come out in support of the wakala product's Shari'ah-compliance. This accomplishes two things for the industry. First, the court's skeptical ruling on TID's defense provides another secular court precedent that a party to an Islamic contract cannot, ex post, argue that the contract is not Shari'ah-compliant to get out of their obligations. I have argued before that the court's ruling provides Shari'ah scholars and boards with more freedom to change their mind on Shari'ah-compliance without worrying about upsetting existing contracts.
Second, I believe it is positive is that TID's Shari'ah board came out against the institution and upheld their initial ruling. There is always a potential conflict of interest between a Shari'ah board and the institutions for whom they work. However, this provides one example of a Shari'ah board publicly demonstrating that their duty to ensure Shari'ah-compliance and preserve the integrity of their ruling is placed above their employment with one institution. The only clear loser in this development is TID, who are stuck between an adverse court ruling in a secular court and their own Shari'ah board's ruling that contradicts their claims in that court.
UAE central bank to offer Islamic CDs to Islamic banks
The UAE central bank is planning to offer Islamic CDs as short-term money market instruments for Islamic financial institutions. The lack of short-term money markets outside of Malaysia (and to a limited extent in Bahrain) hampers the Islamic banking industry because it leads banks to hold excess reserves in cash, which lowers Islamic banks' returns compared to conventional banks because they cannot generally generate returns from this cash. The Islamic CDs received preliminary approval last week from the Shariah Coordination Committee with what Hussain Hamed Hassan, the committee's chairman, described as "minor changes". It may receive final approved next week according to Mr. Hassan. Islamic CDs are offered in the US by one institution, the University Islamic Financial Corp and are used by some of the Islamic mutual funds in the US as a way to generate a return on their cash balances.
The halal market and social responsibility
The Managing Director of Al Islami said that Islamic branding is a "myth" at a halal market conference in Brunei. The point being made was that the halal brand--the certification--was important but without a quality product, it is not likely to succeed. The point was expanded by Shahed Amanullah, the founder of Halal Media, as a way to expand the market to non-Muslims as well either from incorporating organic and socially responsible halal certifications in food and through social responsibility in the broader marketplace so that "non-Muslims can see Muslims promoting halal values which includes social responsibility, stewardship of the earth and economic justice". I think that this is an often understated point. Although Islamic products, particularly in the financial world, were created to cater to Muslims' needs, they do not need to remain constrained to just Muslims. However, to reach out to non-Muslims, incorporating other shared ethical values and leverage the success of sustainable finance to expand the potential market for Islamic financial products.
Other News
- Hussain Hamad Hassan said it was "not a far-fetched reality" for a Gulf-wide Shari'ah board to be in place by 2013.
- Gulf Finance House continues to restructure its debts. In May, Mohammed Khnifer, Aatef Baig and Frank Winkler released an article called "The Rise and Fall of Gulf Finance House", which analyzes the pre-crisis years and how they might have led to GFH's current problems.
- Cagamas Bhd, the Malaysian national housing company, may issue up to RM1 billion ($303 million) in sukuk that are designed to be acceptable in Malaysia and the GCC.
- The Shari'ah-compliant non-bank financial company being established in the Indian state of Kerala has received significant interest from GCC- and Indian-based institutions (Doha Bank and Reliance Capital, respectively), although the government has said it will not sell more than 20% of the NBFC to any single investor.
- The Islamic Bank of Thailand became a major shareholder of a Thai leasing company, Nava Leasing Plc, in which it will own 49%.
- A Malaysia law firm has released a booklet in Australia to explain commonly misunderstood aspects of Islamic finance among Muslims as well as non-Muslims. The headline writers, of course, took the most sensationalistic topic titling the article: "Islamic finance not jihad".
Saturday, April 10, 2010
Islamic finance and financial stability
The Islamic Financial Services Board meeting recently saw the launch of the IFSB-IRTI-IsDB report on financial stability in the Islamic finance industry. I have not had a chance yet to read the report, but my initial impression of their effort is supportive. It recognizes that the global financial crisis did impact the Islamic financial system and can provide lessons as institutions grow larger. There have been many times, most recently a couple weeks ago where I question whether too big to fail is not a problem that could afflict Islamic finance. I argued (and still maintain) that because the industry is concentrated in small countries in the Gulf, a big institution (like the planned Islamic mega bank or institutions like Dubai World, which is not an Islamic financial institution, but has received significant Shari'ah-compliant funding) could endanger the financial stability of the country it is based in. This problem is heightened because there are no Shari'ah-compliant options for 'lender of last resort', the role the US Federal Reserve played to keep healthy banks from being destroyed as global liquidity dried up. The potential problem does not end there. There is inter-bank funding occurring (although not generally overnight funding which caused virtual runs on conventional institutions) and so one bank's trouble spills over to other banks with exposure to the troubled bank. If a few large lslamic banks became insolvent, it is likely that their debt would be held on other banks' balance sheets and the writedown of the insolvent bank's debts held by other banks could put stress on the solvency of the other banks. This could be heightened if this caused retail banking customers to withdraw their money, which could cause a liquidity squeeze that would put the previously healthy banks at risk of insolvency. With that rather gloomy (although relatively unlikely) prospect in mind, I think it is a good thing for the establishment of an Islamic Financial Stability Forum, which was recommended in the report.
Other News
Other News
- Rushdi Siddiqui, the global head of Islamic finance for Thomson Reuters, argues in a column in GulfNews that there should be more linkages between the halal industry and Islamic finance.
- Dar Al-Arkan made a periodic coupon distribution on one of its sukuk.
- To broaden its investments, Kuwait Finance House signed an agreement to invest $450 million in Canadian real estate working with Killiam Properties.
- The first takaful policy for a space satellite was announced recently.
- The Investment Dar is fighting over the buyback option on shares in Boubyan Bank it lost.
- Asharq Alawsat's columnist Lahem al-Nasser says that Shari'ah boards should be treated like external auditors and should be liable for their decisions.
- Pakistan will sell domestic sukuk within the next three months. The central bank is also considering ways to provide short-term sukuk for Islamic banks' liquidity management.
Thursday, May 14, 2009
UK sukuk, TID sukuk default
The UK Treasury plans to issue a sukuk appear to be back on the table again "A sovereign sukuk may form a part of our financing for the future, I am keen in principle to look to issue sovereign sukuk but conditions have to be right to do that," according to Business Minister Ian Pearson. The government had been expected to announce a GBP 2 billion ($3.03 billion) sukuk last year but plans were shelved due to challenging market conditions.
An article in the UK newspaper the Telegraph (with a fairly cynical view of Islamic finance) describes the default of the Investment Dar sukuk. I hope to take a more in depth look this weekend and post a summary either here or more likely on my blog at Zawya.com
A Time magazine article looks at the halal industry, including Islamic finance:
An article in the UK newspaper the Telegraph (with a fairly cynical view of Islamic finance) describes the default of the Investment Dar sukuk. I hope to take a more in depth look this weekend and post a summary either here or more likely on my blog at Zawya.com
A Time magazine article looks at the halal industry, including Islamic finance:
"Citing the kosher and organic industries as successful examples of doing well by doing good, some entrepreneurs even see halal products moving into the mainstream and appealing to consumers looking for high-quality, ethical products. A few firms that comply with the Shari'a code — the religious laws that observant Muslims follow — point out that already many of their customers are non-Muslim."
Thursday, August 02, 2007
Singapore, halal marketing & sukuk response to financial shocks
Singapore is positioning itself to absorb excess petro-liquidity from the GCC states, relying both on its stability and relative neutrality to attract funds from the Middle East.
The Economist has an article describing the demand for halal 'food, finance and packaged goods'. The article focuses primarily on food and packaged goods and does not mention halal finance at all.
Although sukuk are structured differently from conventional bonds, they respond in a similar way to conventional bonds in response to changes in the financial shocks like the subprime mortgage turmoil.
The Economist has an article describing the demand for halal 'food, finance and packaged goods'. The article focuses primarily on food and packaged goods and does not mention halal finance at all.
Although sukuk are structured differently from conventional bonds, they respond in a similar way to conventional bonds in response to changes in the financial shocks like the subprime mortgage turmoil.
Monday, July 23, 2007
Growth of Islamic finance in Scotland & Sri Lanka, Islamic finance education standards
One of the challenges in Islamic finance is education standards across the globe (Reuters), with different training programs in Malaysia, Bahrain and the U.K.
Islamic finance is growing in Scotland (The Scotsman, U.K.).
ABC Investments, a new Islamic investment group, will expand to other areas within Sri Lanka (Lanka Business Online, Sri Lanka) besides Colombo, the only area in which it currently operates. Mohammed Razeek, the firm's managing director, explaining a new plan for funding construction of middle-class housing describes "We will not go into providing luxury apartments as a lot of companies already have done that.”
Standard Chartered Bank Malaysia Bhd, the Malaysian subsidiary of the large U.K.-based bank, wants to expand its banking assets in Malaysia (Business Times, Malaysia)with a focus on Islamic banking.
"The Securities House [of Kuwait] announced that it has incorporated a wholly-owned public limited company in the UK, which is currently applying for a license from the Financial Services Authority (FSA) to act as a deposit taking banking entity within the UK regulatory environment. The new company intends to establish itself in London as a Shariah compliant wholesale investment bank, focusing on the Islamic capital markets, Islamic treasury business and asset management." Securities House Press Release, July 18, 2007
The Toronto Star (Canada) has an article about the growth of the halal industry in Canada over the past 30 years as the Muslim population has grown from 70,000 in the 1970s to 850,000 today. The potential for Canada to be a global hub in halal products will be difficult given the attention the halal industry receives from the Malaysian government.
Islamic finance is growing in Scotland (The Scotsman, U.K.).
ABC Investments, a new Islamic investment group, will expand to other areas within Sri Lanka (Lanka Business Online, Sri Lanka) besides Colombo, the only area in which it currently operates. Mohammed Razeek, the firm's managing director, explaining a new plan for funding construction of middle-class housing describes "We will not go into providing luxury apartments as a lot of companies already have done that.”
Standard Chartered Bank Malaysia Bhd, the Malaysian subsidiary of the large U.K.-based bank, wants to expand its banking assets in Malaysia (Business Times, Malaysia)with a focus on Islamic banking.
"The Securities House [of Kuwait] announced that it has incorporated a wholly-owned public limited company in the UK, which is currently applying for a license from the Financial Services Authority (FSA) to act as a deposit taking banking entity within the UK regulatory environment. The new company intends to establish itself in London as a Shariah compliant wholesale investment bank, focusing on the Islamic capital markets, Islamic treasury business and asset management." Securities House Press Release, July 18, 2007
The Toronto Star (Canada) has an article about the growth of the halal industry in Canada over the past 30 years as the Muslim population has grown from 70,000 in the 1970s to 850,000 today. The potential for Canada to be a global hub in halal products will be difficult given the attention the halal industry receives from the Malaysian government.
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