Contracting GDP

The Egyptian economy contracted by 0.3% in the fourth quarter ending a politically-momentous but economically-forgettable year for the country.

“Though private spending jumped 5.1%year-on-year in 3Q11 up from 3.5% a quarter earlier; the drastic fall in investments by 23%YoY kept GDP growth at a low level of 0.3% – below 2Q11 of 0.4%. Investments in 4Q11 is expected to see even higher year-on-year drop of 38% – triggered by the escalated tension during this quarter,” says CI Capital research in a note.

While the USD3.2 billion loan from the International Monetary Fund is going to boost sentiment, the country has a long way to go to reach stability.

“Egypt’s economic situation remains challenging. Growth has stalled and this is hurting the Egyptian economy and the Egyptian people,” said Gerry Rice, Director of External Relations at the Fund. “In addition, foreign exchange reserves have dropped substantially, reducing the authorities’ margin to maintain macroeconomic stability.”

The country’s foreign reserves have dropped 53% year-on-year in January to USD16.4-billion, as capital fled the economy last year.

In addition, foreign direct investment remains depressed.

“Social and political unrest in Egypt is still weighing on FDI inflows. In 3Q11, FDIs retreated to USD0.4bn vs. USD1.6bn a year earlier,” notes CI. “This came above our expectations of USD0.2bn. Moreover, huge foreign selling in equities and bonds shifted portfolio investments to a net outflow of USD1.7bn, vs. a net inflow of USD5.9bn in 3Q10.”

The Institute of International Finance (IIF) expects countries such as Egypt, Tunisia and Libya – all of whom saw the end of their dictators’ rules in 2011 – to continue to see weak growth over the next 12-18 months.

It is clear that in Egypt economic policymaking will remain subservient to political issues. There is definite lack of clarity surrounding the economic policy framework and great difficulty in forging political consensus due to the diversity and multiplicity of political parties in the new governing coalition.

As a result, the IIF expects the economy to perform only modestly in the coming 2-3 years.

“Egypt… could be heading towards an economic crisis if growth rates do not take off unemployment that does not begin to show meaningful declines,” the IIF said

Indeed, the political situation looks messy at the moment with many disgruntled stakeholders.

The Muslim Brotherhood’s Freedom and Justice Party won 47.2% of the parliament seats with the Salafist Al Nour party winning nearly 25%, leaving the liberals way behind.

This political turnaround has left many liberal Egyptians, who led the Tahrir Square revolution last year, feeling disillusioned as the country takes a more religious turn in its political and social life.

“Real and honest moderate Egyptian Islam has receded in the face of Wahhabi Islam coming from Saudi Arabia and the Gulf countries,” wrote Alaa Al Aswany, a best-selling Egyptian author and columnist in a recent blog.

“For thirty years masses of oil money has been used to drown Egypt in Wahhabi ideas. The purpose of this support for the Wahhabi school of thought is basically political, in that the Saudi system of government depends on an alliance between the ruling family and the Wahhabi sheikhs. Hence spreading the Wahhabi ideology reinforces the political system in that country,” Mr Al Aswany wrote in his blog.

Analysts have accused the majority Freedom & Justice Party for colluding with the Salafists and the army to ensure the ‘status quo’ of miltiary dominance remains; any changes, they feel, are merely cosmetic in nature.

The final piece of the political puzzle will be put in place in the next few months when nominations for presidential elections start on March 10 to April 8.

The spoardic clashes between the army and protestors and the football stadium tragedy which saw 70 people killed, shows the situation remains volatile in the country.

Meanwhile, Egypt’s relations with the United States and its client state Israel are also worrisome.

“The current US-Egypt military relationship could become a casualty of rising nationalism in Egypt, the prosecution of democracy workers in the country, and the likely marginalisation of the armed forces. A breaking point this spring could come amid economic crisis in Egypt, with destabilising results,” said a note from Oxford Analytica.

The Muslim Brotherhood has also warned that it could review relations with Israel if the U.S. reduced military aid to Egypt.

“U.S.-Egyptian ties have withstood serious tensions in the past. Yet in the present political context in both countries, a bilateral crisis is possible — with broader ramifications for Egypt’s stability,” noted Oxford Analytica.

This may be an exaggeration given that Egypt will likely forge closer ties with its Sunni neighbours the rich Gulf states, who could step in financially if the U.S. aid stops.

But the 80-odd million Egyptians are finding a way to keep the economy moving. CI Capital outlines some of the major economic deveopments over the past few weeks:

  • The Central Bank of Egypt set a 100bps raise in deposit rate and 50bps increase in lending rate – putting its support for the local currency ahead of backing investments.
  • The IMF USD3.2bn loan is to be signed in March 2012 bearing an interest of 1.2%. The loan will be received this loan over three phases; by which one third of the loan will be received upon signature, while the second tranche will be received after 3-month period; and the last tranche after six months from signing the loan.
  • Apache Corporation has agreed with the Government of Egypt (GoE) to invest USD1bn in oil and gas explorations in Egypt in 2013.
  • The World Bank approved an USD240mn loan to develop the Giza North power project as part of an USD600mn loan approved in 2011.
  • Egypt signed a soft loan with the World Bank worth USD200mn with an interest rate of 1.2%. The loan is to finance the second phase of the waste water project with an investment cost of USD310mn.
  • The government decided to offer PPP projects in the infrastructure and sewage projects worth EGP11bn.
  • The PM allocated EGP175mn for the development of slum areas throughout Egypt – scheduled to start immediately. The budget includes EGP100mn from the Slum Development Fund and EGP75 mn from the general budget.
  • Egypt signed gas export agreement with Jordan over the new prices to be applied retroactively as of January 2011and is due to be revised mid 2013 and every two years after.
  • Japan granted Egypt USD12mn to support the agriculture sector through applying maintenance to the irrigation and potable water networks.

Meanwhile, the Egyptian stock exchange which was rocked last year by the political unrest and saw a 47% decline, has surged 41% in the first six weeks of the New Year, making it the best performing market in the region.

Market data shows that emerging markets funds are taking another look at the Cairo market, given its low PE valuations and the long-term prospects of the country.

This growth is even more commendable given that Standard & Poor’s recent lowered the country’s credit rating to B with a negative outlook.

The Egyptian Central Bank interventions–to support the Egyptian pound in the face of significant capital outflows and double-digit annual inflation–have resulted in a sharp decline in net international reserves. These were USD16-billion at end-January 2012, down from USD36-billion at the start of 2011, the ratings agency said in its review.

“Historically, our assessment of Egypt’s external score has been a relative strength to the rating; this is now being eroded. We estimate that net international reserves, excluding gold, now cover less than three months of goods and services imports compared with more than six months at the start of 2011,” said the agency.

In addition, S&P warned that if the government fails to stem the decline in reserves, or an uncertain policy environment and weak institutions emerge from the ongoing political transition, the rating could be lowered further.

“The political transition process could be undermined over the coming year as the constitution is redrafted and a new president is elected–currently expected by June 2012–after which a new government would be formed,” said the agency.

“In our view, the transition to more-participatory political institutions in Egypt could falter, leading to weaker political institutions and rising domestic conflict.”

DRB-Hicom Bhd’s Islamic bonds rating changed to negative

The outlook recognises the potential weakening of DRB-Hicom’s near-to-intermediate term financial profile, caused by its debt-funded acquisition of Proton Holdings Bhd.

The rating agency said, “A key rating issue for DRB-Hicom in the context of the Proton acquisition is the more challenging debt maturity profile that would result from the acquisition-related interim financing decisions and the execution risk associated with plans to deleverage post-acquisition.”

DRB-Hicom is acquiring Khazanah Nasional Bhd’s 42.74% stake in Proton Holdings Bhd for a cash consideration of RM1.29 billion. The total purchase price of Proton has been estimated at RM3.02 billion which includes the earlier purchase of 7.27% equity in the open market and the cost of the remaining 49.99% which will be acquired via mandatory general offer (MGO).

DRB-Hicom is seeking approval from its sukuk holders to revise the proposed utilisation of the proceeds from the sukuk issued under the IMTN programme. Part of the proceeds will be used to partly fund the Proton acquisition instead of using the pay-down of its bridging loan for DRB-Hicom’s earlier acquisition of Pos Malaysia Bhd and other growth-related investments.

The repayment of the RM622.8 million bridging loan is to be extended by a year and DRB-Hicom will incur additional short-to-medium term debt to finance the MGO. According to MARC, the heavy concentration of debt maturities in financial year 2014/2015 as a result of the financing decision will diminish DRB-Hicom’s financial flexibility.

It is said that DRB-Hicom’s debt-to-equity ratio is expected to increase to 0.64 times following the completion of the transaction.

MARC said in a statement, “While MARC understands that the holding company plans to place its financial profile on a more sustainable footing by undertaking asset disposals, in particular the divestment of a 30% in Bank Muamalat Bhd and insurer Uni Asia Capital Sdn Bhd, execution risks are noted given the general uncertainty around the timing of the targeted asset disposals.

MARC is also concerned that Proton’s operating performance could cause a hold back on the group’s overall profitability. However, it expects to resolve the negative outlook within the next six months after the acquisition has been finalised.

Nigeria: Islamic Development Bank to Invest U.S.$6 Billion in the Country – Executive Director

The Islamic Development Bank (IDB) was formed in October 1975 to foster economic development and social progress of member countries in accordance with Islamic principles. It currently has 56 member countries, Nigeria being the most recent (in 2005) country to become a member. Gambo Shuaibu is an Executive Director at the bank as Nigeria’s representative. In this interview, he said the bank plans to make cumulative investments worth $6 billion in Nigeria in the next three years.

The bank assists member countries in accordance with Islamic principles. Does that mean you don’t give loans? If you do, don’t you charge interest? How does the bank get its investment back?

The bank supports its members in various forms, financially and through technical assistance. It could be grant. There is loan too. The loan is broken into two, ordinary loan and concessionary loan and also through consultancy. Now, when you say in accordance with Islamic principles, it has to do with the way its products are packaged. Interest is forbidden in Islam.

All IDB does is to ensure that its own financial products are packaged in compliance with Islamic laws and basically there is no interest element and they do not finance things that are forbidden Islamically like gambling, prostitution. That is why even hotel business has not been attracting the attention of IDB much due to sale of alcohol. But it does not discriminate against the beneficiary. Only that it has to be structured in a way that it will not contravene the Islamic principles.

There are a number of predominantly Christian countries who are members of the IDB. It doesn’t discriminate who benefit. It is the packaging that differs. In the conventional banks, when you go there to take loan to purchase a house maybe, the main component is interest that you have to pay.

Nigeria has increased its subscription in the bank. How much is that and what is Nigeria’s position in the bank in terms of ranking?

When we first joined, it was at a very insignificant level of 2.2 percent. The increase now is at the level of 7.6 percent of the ordinary shares capital. The figures I gave the other day was the authorized capital which is $30 billion. The shareholding fund of the bank is just about 6.3 billion Islamic dinar which is equivalent to about $10 billion. The shareholding fund includes reserve and profit. The paid up capital is $4.6 billion.

When you are calculating the capital of a multilateral development organization, you have to be very careful. Even that includes cash payment and callable shares. Callable share is the portion of the capital that is just there, that you have subscribed to in principles but there is no financial commitment. In the event, the bank is to raise money in the market, the shareholder supporters are called to provide the money.

That is a basic standard. If you were to do the calculation, it should be half of 7.5 percent of the paid up capital which is at present a little over $6 billion. When the last increase of the paid up capital was done in 2006, a substantial portion of it, 70 percent, is payable over a period of 10 years.

Basically, in the next 10 years, the investment of Nigeria in the bank will be in the region of $400 million. I can assure you, given the project that will be financed by the bank in Nigeria, in the next three years; IDB will have invested $2billion in different facilities in the country. This will be used in education, poverty alleviation and other human capital development related projects.

If IDB is investing $2 billion in Nigeria, it has the capacity to generate counterpart funding up to $4billion. That means, we are targeting $6billion investment in the next three years in Nigeria.

You had spoken about some key projects in certain states where IDB is playing some roles. Can you expatiate on them?

The focus of the bank is economic and social development of the member countries. But before you benefit as a member country, you have to apply. Just as any other bank will not come to you and say ‘come and take loan.’ It’s based on your need that you will apply. Since becoming member and the advocacy that has followed some of the 36 states (in Nigeria) have applied. IDB relates with countries on the basis of sovereignty.

Although, it has affiliates that takes care of private sector interest. IDB deals with the federal, state and local governments. A number of facilities were granted and prominent among them is the ones given to the federal government of Nigeria. At the time of president Obasanjo, there was this food crisis. One of the approaches agreed by the Nigerian government was to work with multilateral agencies; African Development Bank, World Bank, European Investment bank and similar ones that were interested in supporting Nigeria including the Islamic Development Bank. A project called food security was established. It is basically to support food production.

The states applied to get loan from the World Bank, some European banks and the Islamic Development Bank. The states that the federal government approved to access the IDB facilities are Gombe, Yobe, and Anambra states. It was mainly to do with food production; agro allied and anything that will improve the activities of the farmer such as access roads, research institutions, and development of small earth dams, irrigation facilities and warehousing.

These state governments came up with their own project concepts based on their needs and the initial estimate was $50 million for the first phase of the project for the three states. It was after thorough review that the project which takes about 5 years, was reduced to $38 million made available. The states and federal government will also contribute by way of counterpart funding. Then, the figure will become higher.

Kaduna state, when the Vice president was the governor, came up with the Zaria water works which is under construction. The African Development Bank and IDB have interest in it. And also science model schools in each of the three senatorial zones as well as comprehensive health centre are to be built in Kaduna. Facilities were approved for these projects.

The federal government had to come in and also the national assembly for a final clearance. At the moment, it is at the national assembly to get the final clearance for the loans.

We also have Jigawa rural integration project as it is one of the poorest states in Nigeria. IDB is all out to give assistance. Osun and Oyo states, last years, made submissions. That is being worked on now by the bank. There are a number of other states that are talking to IDB.

IDB is planning a business forum in Nigeria next month. What is the bank up to in this direction?

It is normal to inform the general public about the presence of the IDB and its activities. The forum is a form of enlightenment campaign, showcasing IDB as a group. Given the transformation agenda of the federal government there is a prominent role for the private sector. To that extent there is need to ensure that the private sector is adequately involved. The forum is to further enlighten Nigerians on the activities of the IDB and its affiliates especially on how to access its facilities.

Islamic banking recently took off in Nigeria. Given the opposition it is facing especially from the leadership of the Christian Association of Nigeria (CAN), do you think the bank has got prospects of survival?

I think more of an abandoned prospect for the project. If you can recall, the minister of finance and coordinating minister of the economy, Mrs. Ngozi Okonjo-Iweala, when she appeared before the senate committee, this question was asked. She said Islamic banking in Nigeria is another window of banking. That it is quite beneficial. It is not only in Nigeria but even in developed economies.

In the UK, there is the Islamic banking window, also in the United States, Germany, and France. Like the minister said, it is another window of banking allowing some unbanked people to be in cooperated into the sector. Many people because of their belief had refused to participate in banking in Nigeria. This is an opportunity to get them in. Any money that is in the bank is available for the development of the economy.

There is a CBN guideline that states there shall be no discrimination against a beneficiary on the basis of culture, race, religion, language and even in employment, it doesn’t discriminate. That is why there are Christians who are shareholders of the Islamic bank in Nigeria. It is on the basis of this that I feel there is good prospect for the bank.

Is Nigeria rated high at the bank?

Out of the 56 members of the IDB, 27 are from the African continent. Nigerian being a member of OPEC, other members in the gulf region and North Africa also members of the OPEC have been relating with Nigeria before we became member. The membership of Nigeria improved the bank’s assistance to Africa. It will be a voice that once heard will be taken seriously. It is like with Nigeria now, the influence of Africa has gone up at the bank and if you have that influence, then you can also channel the available resources to support the members. The bank has special fund for the development of Africa. It was started in 2008.

I remember the President of IDB, Dr Ahmed Muhammed when I had a meeting with him, what he told me. He said whatever we can do to improve on the position of Africa, in Africa, we will do so. In the course of my discussion with him, he told me that I reminded him of his encounter with the late Nigerian head of state, General Murtala Muhammed in Jedda (Saudi Arabia). They went to market the bank to him for Nigeria to become a member. He said Murtala told him that, ‘ yes, it is a good idea, good concept but Nigeria will only be ready to join if it is in a position to influence the activities of the bank in a way that will aid the development of Africa.’

The special fund for the development of Africa is to mainly focus on the development of the continent. Under the first phase, the Bank has a budget of $12billion; $4 billion directly from the bank and $8 billion from the development partners. Due to the rating of the IDB, any project it is identified in, it attracts the participation of other partners.

Banks drag Qatar to 3-mth low; UAE mkts end mixed

Financial stocks dragged down Qatar’s benchmark to its lowest close in nearly three months as investors sold-off on lower than expected cash dividends.

Shares in Qatar Islamic Bank (QIB) dipped 3.1 percent to their lowest since Nov 23. The lender posted a 32.6 percent drop in fourth-quarter net profit on Wednesday that missed analysts’ forecasts.The Gulf state’s second largest lender by market value proposed a 45 percent dividend distribution.

Doha Bank dropped 2.9 percent after its fourth-quarter profit jumped 49.4 percent but missed estimates. The board proposed a cash dividend of QR4.50 per share.

“Qatar has been losing ground because anticipations were high on dividend yield for the financial sector, which was proven to be the opposite,” said Marwan Shurrab, vice-president and chief trader at Gulfmena Investments.

“There is growth in the financial sector and hopefully the banking stocks will recover as people start looking forward to Q1 results which are still expected to be strong.”

Doha’s index ended 1.1 percent lower at 8,462 points, its lowest close since Oct. 25. The market extended losses to 3.6 percent so far this month, the worst performing Gulf market.Masraf Al Rayan fells 2.3 percent and Commercial Bank of Qatar declined 2.1 percent.

Elsewhere, UAE markets ended mixed with Dubai’s index halting two-days of gains, down 0.3 percent to 1,328 points.Dubai Financial Market, the only listed bourse in the Gulf, fell 3.4 percent. Bellwether Emaar Properties shed 0.4 percent and telecoms operator du dipped 1.4 percent.

The bourse hit an all-time low on Monday, extending a general downward trend since April 2011 as investors saw little improvement in performance of main representative sectors such as real estate and banking.

In Abu Dhabi, the index ticked up 0.2 percent to 2,337 points, up for a second session since Tuesday’s three-year low.Invest Bank climbed 6.3 percent, Abu Dhabi Islamic Bank gained 1.4 percent and Dana Gas advanced 2.7 percent.

In Oman, Renaissance Services tumbled to a three-year low as foreign investors sold on concerns over low freight spot rates.Shares in Renaissance, which has marine industry subsidiaries, were down 4.2 percent, slumping to their lowest since April 2009.The Baltic freight index was at $926, its lowest since early 2009.

“The negative sentiment is simply over-whelming on Renaissance,” said Vickneswaran Gowribalan, a Muscat-based fund manager. “The Baltic index may signal low freight spot rates for Renaissance in its short-term fleet.”

These concerns have spurred foreigners to dump Renaissance shares, he added.Oman’s index declined 0.3 percent to 5,581 points, its lowest level since Dec. 11.

Treasury considers Islamic bonds

The National Treasury has asked banks for proposals about a government Islamic bond — known as Sukuk — in the local and international markets.

“There is a great interest in the Sukuk market and this is the first step towards meeting the growing appetite for government-backed Shariah compliant investments,” Lungisa Fuzile, director-general of the National Treasury, said in a statement on Tuesday.

The Treasury invited banking institutions to submit proposals for providing advisory services for the structuring and issuing of Sukuk.

This was in line with its intention to diversify its funding and investor base.Sukuk refers to a financial certificate that conforms to Muslim strictures on the charging or paying of interest.

Interested service providers should submit proposals by the close of business on December 21 2011.Shortlisted bidders would be informed by January 20 2012, the Treasury said.

Islamic finance resists equity shift – may stunt growth


By Liau Y-Sing

KUALA LUMPUR (Reuters) – When Kuwait Finance House Malaysia helped develop a $1.3 billion real estate project in the country in 2005 as a partner in the deal, Islamic equity property ventures were a rarity.

Five years on, the bank is embarking on its fourth building project using a similar equity concept but few others in the industry want to follow the same path, reflecting Islamic finance’s slow and difficult shift away from debt instruments.

Debt funding’s dominance of sharia finance has earned the $1 trillion industry the tag of “copycat” and limited its growth as critics question its ability to offer a fairer way of sharing risks and rewards that truly distinguishes it from conventional banking.

“Profit-sharing or equity structures are the true way of doing Islamic financing,” said Siti Mariam Mohd Desa, Kuwait Finance Malaysia’s real estate advisory director.

“It is a different concept because if you were to give out straight loans, you may as well go to a conventional bank.”

As the global financial system emerges from the debt crisis and banks shy away from assuming added risks, practitioners want Islamic finance to rely more on partnership structures and less on straight financing which they say has created a brand of finance which is sharia compliant in form, but not in spirit.

They say equity financing such as musharaka and mudaraba are closer to the sharia’s aim of ensuring gains and losses are shared equitably and a shift back to it would help banks win new business beyond its traditional markets.

While Islamic finance has flourished in Muslim markets such as the Middle East and Malaysia, many non-Muslims are unconvinced, saying the industry differs from conventional banking only in name.

“We cannot add value in markets which are mimics of conventional markets. At the moment, it’s difficult to see the value-added,” said Safdar Alam, head of Islamic structuring at JP Morgan in Bahrain.

“It’s a real opportunity, with the increased awareness globally of Islamic finance, to demonstrate this value and the difference and benefits. This is a chance that we might miss if we don’t do this well quite quickly.”

But banks’ reluctance to bear the risk of projects funded, companies’ unwillingness to share profits and scarcity of banking capital make equity financing an unappealing proposition.

The recent property slump in the Gulf, where equity financing is more common, badly hit Islamic firms such as Bahrain’s Gulf Finance House and could compound banks’ fears of becoming project partners.

Kuwait Finance Malaysia, which uses the musharaka equity structure to develop real estate, had a non-performing financing level of 6.73 percent in September, more than thrice the industry average.

Its parent Kuwait Finance House, the Gulf state’s top Islamic bank, posted a 24 percent drop in net profit in 2009 to 118.74 million dinars.


Equity financing models were born out of a belief in Islam that the financier must share the risks if he wants the rewards and that profits should be earned through enterprise.

While equity funding is commonly associated with higher returns, bankers say it may not necessarily be more profitable than debt as the latter allows for higher leverage.

Traditionally, popular Islamic debt-based instruments such as istisna and murabaha have been likened to interest-based loans where banks take limited risks and are guaranteed a return.

But as Islamic finance grew beyond traditional roles such as agriculture financing to funding government budgets and billion dollar real estate projects, some banks began leaning more towards debt instruments to limit their risks.

As banks’ capital grows scarce, they will be wary of parting with large sums to back equity ventures, said Mohammad Faiz Azmi, PriceWaterhouseCoopers’s global Islamic finance leader.

“On the demand side, the issue is are there enough corporates who are essentially willing to give up the upside?” Faiz said, referring to profit-sharing structures.

“The reality is that the people that would want to have equity forms of financing are usually the ones that you want to avoid lending money to anyway.”

Some practitioners say the push for more Islamic equity financing is ill-conceived.

“From the sharia’s perspective, there is no such evidence to support (the view) that Islamic banks or whoever wants to do business should do profit-sharing more than debt-based,” said sharia scholar Aznan Hasan, who advises Barclays Capital London and Malaysia’s stock exchange operator Bursa Malaysia.

“Whether it is debt or equity that suits you better, it depends on commercial and business decisions, not sharia matters.” ($1=3.205 Malaysian Ringgit)

(Editing by Kim Coghill)

(For more business news on Reuters Money visit

Is Islamic banking the boiled ice-cream?

By Dr. Shariq Nisar

On January 5, 2010, in response to a PIL filed by Dr. Subramanium Swamy, the High Court of Kerala put a stay on the activities of the proposed Islamic Non-Banking Finance Company, Albarakah Financial Services Ltd. The Non-Banking Financial Company (NBFC) in question has been co-promoted by the state owned business entity Kerala State Industrial Corporation (KSIDC) and some business men belonging to different religious communities including Hindus and Christians.

The entity was aimed at bringing much needed financial resources to the state of Kerala, which is poor in mineral and other resources required to develop the state into an industrial one. The feasibility study was conducted by one of the reputed consulting firms, which while conducting the feasibility study from legal aspects, also mentioned about the existence of RBI approved several Islamic NBFCs in India including the one in Kerala. The only novel aspect about the present venture was participation of a state owned economic entity (KSIDC) in the company with 11% stake. Remaining 89% or 89 crore was to be brought in by private businessmen, all Indian.

Where is the money to sustain this growth? A street in Patna [TCN Photo]

The presumptions made by the litigant are that the organization was (1) to be a banking organization, (2) to exclude the non-Muslims, (3) to abuse the provisions of the Indian Constitution granting right to practice religion of one’s choice and (4) function under an extra-constitutional Sharia authority with supra regulatory powers.

It is very clear that Islamic banking is not possible in India at the moment, unless certain changes are made in the regulations. This is also the crux of the Anand Sinha Committee of RBI, which was formulated to look at Islamic banking products in the Indian milieu.

It is understood that the proposed company itself never sought to project itself as a banking organization. Whatever reports that appeared in certain sections of the media describing it as an Islamic bank can hence be put down to either poor awareness of the technical differences between an NBFC and a bank, or the common tendency to hype any news item relating to “Islamic” aspects on the part of sections of the media.

The allegations made by the plaintiff are:

1. Order of State of Kerala allowing setting up of the financial company by KSIDC is a clear instance of the state favoring a particular religion.
2. KSIDC identifies with Islam to the exclusion of all other religions.
3. The actions mentioned above amount to the State promoting a particular religion.
4. The company is going against the Constitution by adhering to Sharia rules prohibiting certain activities such as charging of interest and trading in alcohol, pork, and entertainment including cinema and music, which are legally permissible in India.

The Honorable High Court of Kerala is seized of the matter with regard to the above. Further, the Court in its stay order (dated January 5, 2010) opined that the matter needs deeper deliberations; and therefore, it (the Court) decided to include the Union of India and the Reserve Bank of India as additional respondents in the matter. The matter is subjudice; and therefore, any comment on the above would not be appropriate at the moment. Dr. Swamy has also written critically on the same subject in a recent issue of Organiser (Vol. LXI, No. 28, New Delhi, January 17, 2010). While refraining from commenting on any aspects of the order of the Court, one can certainly analyze in a dispassionate and objective manner the issues raised by Dr. Subramanium Swamy in his usual strident fashion in the article. The author writes:

An Islamic bank cannot charge interest, but then what does it do to survive? By giving by one hand, and taking away twice as much or more by the other hand!

It is well understood now that the essence of Islamic finance is relating returns from a business to its results. It is in this respect that Islamic finance differs fundamentally from conventional finance, wherein the operations are basically debt-driven and returns fixed in advance, as too the RBI committee report acknowledges. So Islamic finance does not need any creative accounting or duplicity to survive, as Dr. Swamy insinuates. In fact a large number of non-Muslims participate (even in India) in Sharia-compliant schemes. Surprisingly, some of these schemes have also been found to be among the best performing schemes in the market.

“… an Islamic bank is like a boiled ice-cream; it cannot exist in real life without tricking our confidence.”

It is amazing that he can make such a claim when one finds Islamic finance in operation in 75 countries across the globe, including many non-Islamic and secular countries. In secular countries with small Muslim minorities, such as UK, USA, France, Germany, South Africa, and India, or Muslim countries with large non-Muslim minorities, such as Malaysia, one finds substantial non-Muslim participation in Islamic finance institutions and schemes. Aren’t the authorities in all these countries willing participants in a giant cooperation being perpetrated on their gullible Muslim and non-Muslim citizens in the name of an alien religion? Dr. Swamy needs to answer that.

“It is clear that Islamic bank or NBFC cannot be started in India without violating numerous laws and regulations.”

As we have noted, Islamic banking is not possible in the current Indian regulation and this is why there is no Islamic bank functioning in India as yet. This does not; however, mean that the present scenario needs to continue necessarily for all time in future, or that there is something in Islamic finance that is fundamentally against the Indian Constitution. It is really a question of pragmatic economic policy of a country at a point of time. Till less than two decades ago, private banks, private mutual funds, and private insurance companies were all prohibited. However, today these, in addition to many Islamic NBFCs, are already functioning in India with the approval of RBI.

“Islamic banks will not be permitted by Sharia to give loans for liquor manufacturing, cinema, hotel, entertainment industry, etc. These; however, are under current laws of India legitimate and legal activities.”

When one refers to an Islamic NBFC (whether in the Indian context or anywhere else), it should be understood that the primary mandate the institution operates under is derived from the law of the land. Further, it is “Islamic” in the sense that it voluntarily binds itself to adhere to certain additional restrictions in its business operations, which Islam prescribes. Nor are the doors of such “Islamic finance” institutions closed to adherents of religions other than Islam or to atheists too, for that matter. It can be no one’s case that a business has to necessarily enter all the spheres of business to be in compliance with the Constitution. Similarly, we need to make a distinction between permissible and compulsory. Certain activities are no doubt permissible in the Indian legal system, but it is not compulsory that everyone must be engaged in these to adhere to the Constitution. There are many states in India where alcohol is banned; it does not mean they are violating the Constitution. Secondly, many of the activities that the Sharia prohibits are accepted as harmful to society by a fairly sizeable segment of the civil society too.

Then we have Dr. Swamy spewing the usual BJP vitriol against the government for “appeasing” Muslims. “Dr. Manmohan Singh believes that Muslims must get first charge on our resources, they are keeping silence, much as Bhisma and Drona kept quiet when Draupadi was disrobed. …now patriots in Kerala must rise and protest to save Kerala from fast-creeping Islamisation. And the rest of India must help.”

Arguments like the above put forth by the maverick politician are motivated and highly instigating in nature. The less said about them the better. It may perhaps be in the interest of KSIDC to adduce some of these writings of Dr. Swamy before the Honorable Court to put in perspective his motivations for filing the case.

It is unfortunate that an imaginative measure designed to draw funds into productive investment for the common good, from adherents of an excluded section of society (while keeping the measure equally accessible to other sections as well) is sought to be subtly and insidiously transformed and falsely portrayed by the Plaintiff as a question of favoritism to a faith.

Dr. Shariq Nisar works as a Director at Taqwaa Advisory & Shariah Investment Solutions (TASIS) Pvt. Ltd., based at Bangaluru.

This article has been published by Finance Islamicus [Vol. I No. 1 :: January-February, 2010], a Bi-Monthly newsletter on Islamic Finance published by the Finance Islamicus Group – . For any comments/suggestions/feedback, please contact the editor of the newsletter at [email protected] or [email protected]

Bajaj Allianz’s Shariah pension fund pays rich dividends

Kolkata: Bajaj Allianz Life Insurance has quietly gave a 97% return on its lesser-known pure stock pension plan or Shariah fund in just eight months of its inception.

The pure stock pension plan, which is a niche fund, saw a return of 97% as against a 72% return by the Nifty Index, as on December 31, 2009.

Interestingly, this is one of the three ‘ethical funds’ among the many other regular funds of the insurer offers. Sashi Krishnan, chief investment officer, Bajaj Allianz told DNA Money, “We’ve got three ethical funds, which adhere to the Shariah fund and our pure stock pension fund happens to be Shariah-compliant.

The certification was received from an organisation called Taqwaa Advisory and Shariah Investment Solutions (TASIS) a few months back.”

The other two ethical funds that Bajaj Allianz has are a pure stock fund and a pure equity fund. Very few life insurance companies offer Shariah-compliant funds.

Tata AIG Life incidentally offers ‘select equity fund’ and ‘future select equity fund’ options, which are shariah-compliant. These funds are offered in nine of Tata AIG Life’s products.

Analysts said that the global size of the market for Shariah funds is estimated at $1 trillion (Rs 50 lakh crore approximately) and this segment is expected to grow at 10-15% annually.

Experts are optimistic about the scope of this segment in the country and expect more fund houses to develop their own Shariah-compliant funds over the short and medium term.
To get a Shariah certification, certain norms have to be strictly followed.

An ethical fund which is a Shariah-compliant fund can invest in equity and equity-linked instruments and excludes investing in companies predominantly dealing in gambling, lotteries/contests, animal produce, tobacco, entertainment, hotels, banks and financial institutions, which are said to be “haram” by the Shariah law.

Meanwhile, Bajaj Allianz, which launched a new unit-linked plan Bajaj Allianz Shield Plus, has guaranteed a minimum 170% return at maturity under Shield Plus fund 1 in a 10-year policy term.

Krishnan said, “Investments to guarantee the amount will be in high yielding bonds and equity. Bonds carry a low credit risk and the surplus generated here will go to the equity funds.”

Speaking on the company’s performance he said that it suffered a knock in new business premiums in the first half of the year, but has generated a 10% and 30% growth in new business premium in November and December respectively.

“Our persistency ratio is high over 70% and gross written premium which includes renewal premiums is high,” he said.

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India is fertile ground for Islamic investments

Now, it’s India Inc’s turn to play a religious card but mercifully, for all the right reasons. The nation has emerged as a key ground for Islamic investments, under which speciality funds pump in money only into those activities or firms that are compliant with the principles and ethics of Islam.

With billions of dollars being deployed by devout investors only in those entities that are in conformity with Shariah laws, the opportunity is huge. Since about 12 per cent of India’s citizens are Muslims, Islamic finance is a domestic fund opportunity as well.

As many as 2,730 listed companies in India are Shariah compliant, says Talha Sareshwala, chief finance officer at Ahmedbad-based Parsoli Corporation Ltd, a BSE-listed non-banking finance company that specializes in channeling funds from domestic and non-resident Muslims into the Indian market.

According to industry sources, Islamic investments amounting to about $750 million have already been made in the country’s capital market and infrastructure sector over the past few months.

Shariah prohibits Muslims from receiving interest payments and from investing in companies involved in the production or sale of pork, alcohol, tobacco, pornography, gambling and non-Islamically structured finance. Islamic finance works on these principles and encourages Muslim community to invest their money as their religion allows.

Ashraf Mohamdey, chief executive officer, Idafa Investments Private Limited, Mumbai says, “Globally, Islamic finance (including Islamic banking, Islamic insurance and Islamic investments) is growing at the rate of 20 per cent per year. If given a chance to prove itself, Islamic finance will give similar growth numbers in India.”

“Almost 80 per cent of the companies are Shariah compliant as far as the business of the companies is concerned. The culture and ethos of the Indian community is such that except banks and financial institutions which are non compliant there are only a handful of non-compliant companies such as those involved in gaming and casinos or alcohol manufacturing,” Sareshwala said.

Sareshwala dismissed criticism that Islamic laws work against investment.

“Shariah is totally in favour of investment. Any investment, which is in line with Islamic principles, is not only allowed but also propagated in Islam,” he said. Islamic or Shariah Finance is not a new concept. It has been there for nearly two decades now and has caught in places including Britain, France, Indonesia, Malaysia and Middle East countries.

Apart from stock market, equity mutual funds may be a happening sector for Islamic Finance to flourish. Mohamdey says, “Equity mutual funds can play an important role to fill the void of Shariah compliant products here. An ethical fund like ‘Tata Select Equity Fund’ tries to fill that gap, in a limited way.

If Shariah-compliant funds are offered, following all the criteria of investments prescribed by Islam and Shariah boards certifying the products, it will give a lot of assurance to investors about the authenticity of claims made by any asset management company.”

Contact     for Shariah Compliant Investments[email protected]     –    +91 9566192266