Islamic finance and food sector need convergence

The two Sharia-compliant industries could work together for their mutual benefit
Dubai’s recently unveiled strategy to be the capital of the Islamic Economy brings with it a range of exciting opportunities as well as some interesting challenges.

Islamic finance and food sector need convergence

Islamic finance and food sector need convergence

Food and finance are the two most emergent opportunities. Islamic finance has excess liquidity and limited Sharia-compliant investment opportunities; the expanding Halal food sector is under-supplied and in need of capital. So what is stopping these two from working together for their mutual benefit?
Over the past decades, the Islamic finance and Halal food industries have developed in separate, isolated silos. Despite having common roots in the Quran, (and specifically even in the same chapter, Surat al Baqarah) there has been very little interaction between these two Sharia-compliant industries.
On the one hand, there are continued reports of excess liquidity in the Islamic finance sector, albeit mostly related to institutional funds that are looking for fixed-income investments opportunities. According to data from Thomson Reuters, Islamic finance assets reached $1.32 trillion (Dh4. 8 trillion) at the end of 2012; average growth over the past four years has been at 19 per cent and sukuk market is growing at 10 per cent.
Overall, growth is 50 per cent faster than conventional banking in many of the core markets and, yet, somehow there is the feeling that something is missing; engagement with the real economy has not been achieved.

Islamic finance and food sector need convergence

Islamic finance and food sector need convergence

The food sector, on the other hand, struggles to keep up with demand from increasingly aware Muslim consumers who are becoming more vocal in terms of what products they want, as well as what they do or don’t consider to be Halal.
Level of traction
One glaring difference between the two is in terms of engagement. Over 70 per cent of the Muslim world is still “un-banked” in any shape or form, let alone with an Islamic bank. Islamic finance does not have much traction with the average man in the street, and most would not be that familiar with the technical terms.
In the food sector, it is a totally different story. Not only is the average Muslim fully engaged with the Halal food market, they also have strong opinions about what constitutes Halal compliance. Indeed, the expansion of the food sector is driven from both the consumer and producer ends, as consumers become more aware and vocal, and producers look for new opportunities in increasing saturated markets.
Another point of divergence is that in the Islamic finance industry, Sharia scholars tolerate minor amounts of interest or impermissible income, and the investment can still be considered compliant. In the food sector, any minor trace of haram ingredient would be rejected out of hand by the overwhelming majority of Muslim consumers. While there is zero tolerance among informed consumers, there is, paradoxically, a considerable degree of tolerance of the prohibited among educated Islamic finance scholars.
The Islamic Finance industry is largely controlled by Muslims, by scholars and senior executives. Yet, the common complaint within the industry is that a high percentage (one bank CEO stated as much as 85 per cent) of Sharia-compliant funds get re-invested in the mainstream interest-based markets to earn the profit that is later returned to the investor as being “Sharia-compliant”.
In direct contrast, the Halal food industry is largely in the hands of non-Muslim controlled companies, and yet the majority of them are very aware and respectful of the need to be compliant, and will convert their production lines to being 100 per cent Halal in order to secure the trust of the consumers.
As these two sectors expand, we can expect to see more avenues of convergence over the course of time. Following the example of Saudi dairy giant Almarai, major corporations in the food, personal care and pharmaceutical sectors could issue sukuk for expansion, and at the same time increase their credibility in the Halal marketplace.

Job creation
Given the real employment shortage within the Arab world — it is estimated that 60 million jobs will be needed by 2020 — one would hope the increasing focus on the Islamic Economy will be a catalyst to create more overlap between the twin pillars of food and finance. However, until there is greater awareness by governments, more transparent regulatory frameworks in the food sector, and more adventurous capital in the finance sector, one suspects that the silos may remain in place for some time yet.
From the perspective of the Islamic economy, these two sectors clearly belong together, but it will take time and some imaginative, bold moves to bring them closer together.
One gets the feeling that when and where that happens, there will be a real engine of growth kicking into gear.
CREDIT: The writer is an advisor to Thomson Reuters on matters relating to the Islamic economy.

Qatar Islamic Drops as Earnings Miss Estimates, Dividend Cut: Doha Mover

Qatar Islamic Bank (QIBK) led declines in the nation’s banking stocks after profit missed analysts’ estimates and the Shariah-compliant lender reduced its dividend.

The shares of the Persian Gulf country’s biggest Islamic bank dropped 3.1 percent, the most since March 14, to 80.3 riyals, at the 1 p.m. close in Doha. Doha Bank QSC (DHBK) lost 2.9 percent after reporting earnings that matched estimates.

Qatar National Bank SAQ (QNBK), the country’s biggest lender, retreated as much as 0.5 percent. QIB and Doha Bank had the biggest percentage declines on the country’s benchmark stock measure, the QE Index, (DSM) which fell 1.1 percent.

QIB’s “net income missed consensus by a significant amount which is now being priced in,” said Ali Khan, London-based head of Middle East and North Africa equities sales at Royal Bank of Scotland Group Plc. “The dividend has been reduced as well, which usually creates negative price action.”

The bank’s full-year net income was 1.37 billion riyals ($376 million) after 1.26 billion riyals a year earlier.

The mean estimate of eight analysts was for a profit of 1.46 billion riyals, according to data compiled by Bloomberg. The lender plans to pay a 4.5 riyal-cash dividend compared with 5 riyals a year earlier.Qatar’s QE Banking Index dropped 1.5 percent, bringing its drop for the year to 4.4 percent.

Doha Bank, the emirate’s third-largest bank by total loans, posted an 18 percent increase in 2011 profit to 1.24 billion riyals. The company may increase the size of a $500 million bond it plans to sell this quarter, said Chief Executive Officer Raghavan Seetharaman.

New Islamic banking branch of Standard Chartered inaugurated

As part of Standard Chartered’s commitment to provide high quality Shariah-compliant banking products and services to its customers, the bank inaugurated its Islamic Banking (Saadiq) branch at Khayaban-e-Hafiz, DHA, Karachi.



This branch provides a comprehensive value added Islamic Banking customer value proposition recently launched for its customers.

This key proposition offers its customers a similar range of products, quality of service and access to the same, extensive distribution channels that the conventional customers are accustomed to.

This branch also offers its unique Islamic Priority Banking offering through a dedicated Priority Banking Centre for its customers.

Present at the occasion were the Bank’s valued customers, Mohsin Nathani, Chief Executive, Standard Chartered Pakistan, Afaq Khan, Global CEO of Islamic Banking, Raheel Ahmed, Global Head of Distribution and other senior executives of the Bank.-PR

Morocco to promote Islamic finance

The issue of Islamic finance has taken centre stage in Morocco after the Justice and Development Party’s (PJD) electoral triumph.

Supporters of sharia-compliant banking pin hopes on the new government to create the first Islamic bank in the kingdom.

The PJD has talked of promoting Islamic finance on a number of occasions. Just a few days after his appointment as prime minister, Abdelilah Benkirane received a visit from Sheikh Khalid Bin Thani Al Thani, president of the Qatar International Islamic Bank (QIIB), who set out plans for establishing an Islamic investment bank and insurance company in Morocco.

Bank Al-Maghrib Governor Abdellatif Jouahri said last month that Morocco was interested in Islamic finance and viewed the idea of creating Islamic banks as part of the new financial platform in Casablanca.

A chapter on finance to meet the demands of sharia law will be included in the new banking law, he said.Meanwhile, economic analysts are critical of Morocco’s delay in enforcing Islamic banking.

According to economist Slimi Noureddine, the political will to promote Islamic finance is lacking. He insisted that Morocco should take the matter in hand to benefit from Arab investment, particularly from the Gulf states.

According to Bank Al-Maghrib, the worldwide market in Islamic finance will double in 2015, with a predicted value of $2.8 trillion (2.19 trillion euros). In Morocco, transactions coming under the umbrella of Islamic finance barely accounted for 800 million dirhams (72 million euros) in the third quarter of last year, which is a drop of 100 million dirhams (9 million euros) from 2010.

Officials blame this reduction on the reluctance of Moroccan banks to set up institutions which specialise in alternative finance, Noureddine said. He added that the expenses of alternative products can also be prohibitive, in addition to the slow-down in the housing market in recent months.

The analyst commented that Morocco should draw inspiration from successful experiences in other countries, so that this sector can be developed to meet public aspirations.

The African Development Bank, he said, has just published a report on the current situation of Islamic finance in North Africa.

“The report underlines that Islamic banking services in these countries, including Morocco, are struggling to develop, and looks at their future prospects and the extent to which they could contribute to economic development,” Noureddine said.

According to PJD Assistant Secretary-General Lahcen Daoudi, there has been much talk about the theory of Islamic finance in Morocco, but now the time has come to explore this channel which could bring considerable amounts of capital into Morocco.

He added that the sector is calculated to be worth more than a trillion euros worldwide.”Morocco needs to bring in regulations dedicated to this sector to attract a large part of it,” Daoudi said.

Tata’s Shariah fund targets $100 m from Gulf in 3 yrs.

Tata Group’s investment unit is seeking to attract about $100 million within three years to India’s first Shariah-compliant fund aimed at global investors, targeting equities in a country that lacks regulations for establishing an Islamic debt market.

Tata’s Shariah fund targets $100 m from Gulf in 3 yrs.

Tata’s Shariah fund targets $100 m from Gulf in 3 yrs.

The Tata Indian Shariah Equity Fund has $3 million after being set up in June to tap investment mainly from the West Asia, said Mumbai-based Tata Asset Management, which oversees $5 billion in stocks and bonds, on Tuesday.

India has no Islamic finance policies, restricting sales of Shariah-compliant bonds in a nation with 157 million Muslims, according to Paris-based BNP Paribas SA and Standard Chartered. The nation’s benchmark Sensex stock index rallied 16.5% this year, compared with a 13.6% advance for MSCI’s emerging-market share index. Overseas investment in Indian equities climbed 86% this year to a record $26.1 billion as of November 1.

“India remains a great story for most institutional investors globally,” Rohit Chawdhry, who helps manage $350 million of assets at Bahrain Islamic Bank, the Persian Gulf country’s second-largest Shariah-compliant lender, said on Monday. “An Indian sukuk would likely see a blow-out response if there is one, given that there is almost nothing in terms of external sovereign issuance from India.”

A 13-member panel of experts headed by Raghuram Rajan, a finance professor at the University of Chicago and former chief economist at the International Monetary Fund, recommended in April 2008 that India introduce banking that complies with the religion’s ban on interest to attract capital.

Prime Minister Manmohan Singh said last week during an official visit to Kuala Lumpur that he would ask the central bank to learn more about Islamic finance from Malaysia, the world’s biggest market for sukuk. “There have been, from time to time, demands that we should experiment with Islamic banking,” he said.

RBI will conduct a study when the need arises, deputy governor Subir Gokarn told reporters in Mumbai on Tuesday.

Kerala’s plan to set up an Islamic investment company to sell India’s first sukuk was blocked by a state court in January after a petition was filed against it by Subramanian Swamy, whose Janata Party opposes the national Congress Party-led government. The Kerala high court heard arguments from Swamy, a former member of the national parliament, against the plan on Tuesday.

Shariah-Compliant World Fund Launched In Guernsey

Investment manager Argyll Investment Services Limited has launched ‘the World Shariah Funds PCC Limited’, a Guernsey-based suite of Islamic-compliant investments which is to be listed on the Channel Islands Stock Exchange (CISX) and distributed globally.

The World Shariah Funds have brought together three major Islamic investment teams within a single fund structure: From Malaysia, Reliance Asset Management (Malaysia) with USD4.3bn assets under management; the south-east Asian CIMB Principal Asset Management Berhad with USD6.85bn assets under management; and Markaz of Kuwait with USD2.2bn assets under management.

This is the first time they have come together in a single offering and strict criteria have been applied to the selection of the companies whose shares are held within the funds. These specifically exclude, amongst others, companies dealing in alcohol, pornography, tobacco or those with highly leveraged balance sheets. From a ‘basket’ of Shariah-compliant companies, a selection is made of those whose earnings are most likely to exceed the market average and the result is an actively-managed portfolio intended to outperform an Islamic equity index.

Stuart Place, Marketing Director at Argyll, said: “Following the first phase of the world credit crisis investors are more wary of holding heavily indebted companies in their portfolios. The filter process for the World Shariah funds eliminates such businesses as non-compliant under Shariah principles.”

“As the next phase pans out, less leveraged companies will be less dependent on bank finance and should have more robust balance sheets; an attractive proposition in the search for value.”

The Administrator of the World Shariah Funds PCC Limited is Legis Fund Services Limited which has experience of administering Shariah compliant Guernsey open-ended funds. Managing Director Martin Tolcher said: “This fund adds to the Shariah compliant structures we already administer and the overall breadth of fund types under Legis’s administration. There continues to be increased demand for Shariah-compliant investment products, including offshore funds whose portfolios consist of Shariah-compliant securities.”

He added: “This specialist area of fund administration is a growth area for Guernsey. The increased awareness of and desire for these products globally, the presence of the Channel Islands Stock Exchange and Guernsey’s position as a highly reputable jurisdiction are a winning combination.”

United Kingdom: a leader in Islamic finance

KARACHI: More than any other country, the United Kingdom has been by far the largest Shariah-compliant banking hub for Muslims. The United Kingdom Islamic banking division was larger than that of Pakistan, according to a report published a while back. It is the first Shariah-compliant retail banking division in the West which was authorised by the Financial Services Authority in 2004.

There are about 2.5 million Muslims constituting 3.3 per cent of the total population of UK. Approximately 50 per cent of those are currently living in London. Islamic financial products in the form of current accounts and mortgage are available to Muslims and non-Muslims living in the country.

United Kingdom: a leader in Islamic finance

London has become a major financial centre with big international financial institutions, particularly from Saudi Arabia and other Gulf states offering attractive Islamic products. London is considered by many institutions – Islamic and non-Islamic – as a world centre for Islamic finance, both on the retail and wholesale sides. Continue reading

Islamic banking would make good on Indian ideals

The noted Islamic scholar Khurshid Ahmad once described the philosophy behind Islamic banking: “Money never becomes the objective, the hero of the cast. It remains an intermediary and an instrument for real productive effort, for asset creation, and for the expansion of physical economic activity.”

Islamic banking would make good on Indian ideals

Islamic banking essentially reminds us that money is not the end goal, but rather an intermediary that helps build non-monetary assets in society. As a result, say Sharia scholars, one should never profit from money alone, and one should never use money for unproductive purposes (including haraam activities like alcohol and gambling). This philosophy has resonated throughout the Muslim world for centuries. Today, Sharia-compliant banking is practised in more than 50 countries, and has even found a place in societies without a Muslim majority. Around the world, financial institutions have adjusted their offerings to comply with Islamic law.

Surprisingly, India is not included in these 50 countries. Even though India has the third largest Muslim population in the world (more than 160 million individuals today), Indian Muslims have few options to practise proper Islamic banking.

This is largely because of India’s strict banking laws. Regulations do not explicitly prohibit Islamic banking, but they certainly don’t encourage it either. Banks in India are supposed to further lend the deposits they accept, meaning that – in direct opposition to Islamic philosophy – they are supposed to profit from money. Banks are also not allowed to make investments in non-financial endeavours, which most Islamic banks regularly do.

But recently the Reserve Bank of India (RBI) has begun making strides in favour of Sharia-compliant banking. Citing the safer nature of debt-free Islamic banking, the RBI has been pushing for regulations that would allow Islamic banks to thrive.

For India, this could have huge consequences. If new legislation passes, devout Muslim households would finally be able to save their wealth with formal banks, as opposed to relying on poorly funded co-operative societies.

Amid these new opportunities, however, there is significant opposition. India is a secular country, detractors say, and financial services should not have religious elements attached to them. The fear is that Islamic banking cause further social divisions in society.

Hopefully, the RBI will not heed these concerns. There will always be naysayers to new propositions, especially when they involve communities as marginalised as Indian Muslims. There will also always be groups afraid of how concepts like Islamic banking comply with India’s democratic ideals.

In this case, however, the potential benefits from Islamic banking are too great to allow these arguments to become serious setbacks. And Islamic banking may actually foster India’s democratic ideals, rather than detract from them.

The Indian Muslim community would obviously be the largest beneficiary of Islamic banking. At present, there are very few avenues for Muslim households today to practise Sharia-compliant banking. Many families, as a result, simply do not access formal financial products. They keep money with relatives and friends, inside closets and under floorboards – essentially, in places that are less safe than banks.

Introducing Islamic banking would be revolutionary for this entire segment of Indian society. For decades, India has been touting the need for greater “financial inclusion”, the need to bring more citizens into the formal banking systems. Indian laws even require banks to locate a percentage of their branches in so-called “economically backwards” areas.

Islamic banking could help to achieve this goal. Millions of families could deposit their savings in formal banks in accordance with their religion. By doing so, these households would be on a more equal footing with non-Muslim ones, thereby promoting India’s democratic values.

India could also benefit from added investments. By opening Sharia-compliant banks, India could potentially gain investment opportunities from the Gulf that would otherwise have been lost. On several occasions, investors from the Middle East have been interested in Indian projects – particularly in infrastructure – but existing legislation has blocked them.

Worldwide, many countries have opened Islamic banks to cater for their Muslim constituencies. Some corporate giants – including Microsoft, GlaxoSmithKline and BP – have also taken steps towards being Sharia-compliant.

It is time for India to follow their lead. India has a sizeable Muslim population that needs tailor-made financial solutions. Over the next few months, the RBI should continue taking steps towards opening Islamic banking, while explaining to the public how important it is for India overall.

Islamic finance: The next big thing

At a recent meeting in Dubai, lawyers from several international firms talked about the legal issues surrounding Islamic finance. In spite of their reputation, involvement from lawyers signifies maturation of the market. More than 75 countries are involved in Islamic finance, and there are consulting firms built around advising companies and banks about Shariah-compliance.

Islamic finance: The next big thing

“Where we are in Islamic finance today is where [foreign exchange] was in 1971. We are on the cusp, technology is the next phase,” the global head of Islamic finance for Thomson Reuters, Rushdi Siddiqui, says.  But while these developments give reasons to hope that Islamic financing will soon move from an alternative to a mainstream option, the market still faces critical challenges. Experts say a lack of consistent rulings on Shariah compliance, short supply of Shariah scholars, isolation from broader financial markets, and constraints on the time-frame of debt instruments are major challenges to the growth of Islamic finance.

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The promoters of Islamic banking hope to attract Shariah-compliant Muslims

INDIA MAY soon allow Islamic banking or Shariah-compliant banking in the country. As a first step, the Reserve Bank of India is expected to permit some non-banking financial companies (NBFCs) to offer Shariah finance.

Globally, Islamic banking is growing at a rate of 15 percent to 20 percent, and according to a KPMG report, Shariah-compliant banking assets now stand at around $750 billion. Money raised by Islamic banking is typically invested in activity that is consistent with Shariah rules, which means not investing in companies dealing in liquor, gambling or sex. It also means not investing in pure interest-bearing instruments.

The promoters of Islamic banking hope to attract Shariah-compliant Muslims

Shariah banking functions on a profit-sharing model, as opposed to the traditional interest-rate governed model. At present, close to 75 countries from Europe, North America and Southeast Asia have adopted the Shariah model that is largely aimed at Muslim investors.

“Some time back, the RBI showed willingness to let Islamic banking take roots in the country. If only on an experimental basis, it is likely to allow some NBFCs to start Shariah finance in the country, and depending upon the experience, it may extend the practice through formal banking channels,” says Hiresh Wadhwani, partner and national director, banking and capital markets, at Ernst & Young. But he adds the central bank will have to formulate regulations that safeguard the interest of customers.

The RBI has been considering the matter for quite some time now. The 2008 Raghu Ram Rajan Committee report on financial sector reforms had advocated introduction of Shariah banking in the country. Muslims constitute close to 13 percent of the country’s total population, but their share in overall deposit and credit stands at 7.5 percent and 0.5 percent, respectively. Shariah banking maybe able to attract much of these untapped resources.

Already, market regulator SEBI has allowed entry of Shariah-compliant mutual fund schemes in the country. Two companies — Taurus Mutual Fund and Benchmark Mutual Fund — have launched such schemes, providing substantial returns to investors.

“We have managed to provide a hefty return of 120 percent to customers in the last 15 months,” says an upbeat Waqar Naqvi, chief executive officer of Taurus Mutual Fund. During the economic downturn in March 2009, the fund was able to raise Rs 4 crore. But now, says Naqvi, the average assets under management stand at a respectable Rs 25 crore. And the consensus is that things can only get better.

The Kerala government too has allowed Shariah compliant investment companies to channelise the considerable remittances they get from the Gulf. According to the KPMG report, Kerala receives remittances worth nearly $2.4 billion annually from West Asia. But a major portion of it is either lying in bank accounts or is used for investments in real estate and jewellery.