French keen on learning from Saudi experience in Islamic banking: Envoy

JEDDAH: French academics have shown their keenness to make use of Saudi expertise and experience in Islamic banking and finance, said Saudi Ambassador to Paris, Muhammad bin Ismail Al-Asheikh.

The ambassador made this comment while holding a reception in Paris on the occasion of the launch of an academic chair titled “Financial morals and principles: Islamic banking as a model.”

The chair is established in Sorbonne University as a joint research project of King Abdulaziz University (KAU) in Jeddah and the French university.

“Saudi Arabia is a good reference for Islamic banking and finance,” the ambassador said, expressing hope that the chair would support French economy with new researches in Islamic finance.

He commended the role of Saudi businessmen in supporting such research projects in Saudi and foreign universities. The new chair is financed by Muhammad Hussein Al-Amoudi, a prominent Saudi businessman.

A large number of Saudi and French academics, economists and Islamic banking experts attended the ceremony in Paris, including Osama Tayeb, president of KAU and Professor Christine Mengin, vice chancellor of Sorbonne University.

http://arabnews.com/economy/islamicfinance/article541319.ece

ISLAMIC FINANCE INDUSTRY GROWING AT 20 PER CENT

MANAMA: Islamic finance is growing at an average annual rate of 20 per cent and is one of the fastest growing sections of the finance industry. That was the claim by World Islamic Banking Conference managing director David McLean at the opening of the two-day Second Annual World Islamic Banking Conference: Asia Summit (WIBC Asia 2011) in Singapore yesterday.

“Today there are more than 600 financial institutions operating in more than 75 countries,” he said.

“The increasing presence of Islamic financial institutions in new jurisdictions and the increased international interest in Islamic financial markets represents a tremendous opportunity for cross-border flows that are Sharia-compliant. Continue reading

FEATURE-Islamic trade finance seen lifting growth of sector

* Islamic trade finance may grab 20 pct of OIC trade finance

* Islamic finance innovations aid growth in industry

* Asia-Middle East trade flows to lift Islamic trade finance

By Shaheen Pasha

DUBAI, June 9 (Reuters) – Islamic trade finance has benefitted from shifting preferences towards Sharia-compliant banking and could serve as one of the key growth drivers to help the nearly $1 trillion Islamic finance industry double in size.

The global Islamic finance industry, which has been growing between 15 to 20 percent a year, is widely expected to reach $2 trillion in the next three to five years.

While Islamic banking and Islamic bonds, or sukuk, are expected to lead growth, bankers say Islamic trade finance could serve as the dark horse emerging to propel the industry further. Continue reading

Enhance Nexus Between Islamic Finance And Real Economy, Says Raja Nazrin

KUALA LUMPUR, June 9 (Bernama) — There is a need to extend the focus of developmental efforts in Islamic finance beyond the legal form and towards the economic substance of financial transactions, said the Crown Prince of Perak, Raja Dr Nazrin Shah.

He said this meant moving beyond the path of adaptation and compliance, towards approaches that would strengthen the nexus between Islamic finance and the real economy.

“As the Islamic finance industry advances in emerging markets, it’s imperative that its developmental perspective be given greater emphasis, to fully embrace and reflect the link between Islamic finance and societal needs,” he said in his keynote address at the World Islamic Economic Forum (WIEF) 2011 in Astana, Kazakhstan.

It was delivered on Wednesday at the WIEF’s plenary session, themed “Islamic Banking and Finance in Emerging Markets – Seizing Opportunities, Overcoming Challenges”.

Raja Nazrin told his audience that Islamic finance, which had as its core pillars, social justice and equity, could and should do more to meet the needs of the poor and the marginalised. Continue reading

Gulf States Plan to Have United Shariah Council by 2021

Gulf Arab states may have a single Shariah board for the region’s Islamic financial institutions in five to 10 years, a Shariah scholar said in Dubai today.

A “supreme Shariah council” will help reduce the cost of issuing sukuk and boost Islamic services offered by financial institutions that comply with the religion’s ban on interest, said Hussain Hamed Hassan, head of Dubai Islamic Bank PJSC (DIB)’s Shariah committee.

Hassan, who is also chairman of the Shariah Coordination Committee of the Islamic Financial Institutions in the United Arab Emirates, told Bloomberg in June last year that the single Shariah council may be established by 2013.

The scholar criticized central banks for treating Shariah- compliant financial institutions as if they were non-Islamic companies. Only a “few” central banks were exceptions, including those in Bahrain and Sudan, he said.

Hassan also said auditing practices used for Islamic financial industry after the sale of sukuk were “dishonest” because the assets sold during the sale of Islamic bonds remain on companies’ balance sheets even after the issuer receives the funds raised. Most sukuk are based on ijarah, a sale and lease agreement as in real estate.

“If I sold assets and I took the money in my pocket, why is the asset still in my balance sheet?” Hassan asked.

The scholar serves on the Shariah boards of more than 20 Islamic financial institutions, according to data compiled by Bloomberg.

 

http://www.bloomberg.com/news/2011-06-08/gulf-states-plan-to-have-united-shariah-council-by-2021-1-.html

 

Shari`ah Council for Gulf Sukuk Market

DUBAI – Seeking to boost a flourishing Islamic finance sector in their states, leaders of the Gulf Arab nations are planning to have a united Shari`ah board overseeing the region’s Islamic financial institutions.

The “supreme Shari`ah council” will help reduce the cost of issuing sukuk (Islamic bonds), Hussain Hamed Hassan, head of Dubai Islamic Bank PJSC (DIB)’s Shari’ah committee, told Bloomberg on Wednesday, June 8.

Projected in five to ten years, the planned council aims to boost Islamic services offered by Shari`ah-compliant financial institutions, added Hassan who is also the chairman of the Shari’ah Coordination Committee of the Islamic Financial Institutions in the United Arab Emirate.

Like other forms of Islamic financing tools, sukuk do not receive or pay interest.

It typically operates through actual transactions such as profit-sharing or leasing. Continue reading

Dubai’s Hawkamah Says It May Issue Sukuk Template This Year

Hawkamah Institute for Corporate Governance will issue a template for sukuk ijarah, to cut the cost of issuing the debt and strengthen the Islamic finance business, according to Nasser Saidi, the executive director.

The Dubai-based institute, which is working with the Bahrain-based International Islamic Financial Market, or IIFM, expects to release the document this year, Saidi told reporters in Dubai today. Hawkamah plans more Islamic bond templates after that, he said. Most sukuk are based on ijarah, a sale and lease agreement, as in real estate.

The IIFM, an agency seeking to set standards for Islamic securities, told Bloomberg in November that it plans to issue global guidelines to facilitate the sale of sukuk in 12 to 18 months. It and Hawkamah have joined forces and are releasing the sukuk ijarah template together, Saidi said.

He was speaking at a press conference on the release of a report setting out 55 recommendations to strengthen corporate governance in Islamic financial institutions.

 

http://www.bloomberg.com/news/2011-06-08/dubai-s-hawkamah-says-it-may-issue-sukuk-template-this-year.html

 

Hawkamah plans uniform standards for Islamic bonds

DUBAI – Hawkamah, the Institute for Corporate Governance, is expected to issue a ‘standardised template’ for restructuring Islamic bonds this year, executive director Dr Nasser Saidi said.

Hawkamah was created for the region, by the region, and of the region to bridge the governance gap by assisting the region’s countries and businesses in developing and implementing sound, well integrated corporate governance frameworks.

The Islamic finance industry seeks more uniformity and the new template for Sukuk Ijarah will ease the cost of issuing the debt and also strengthen the Islamic finance business, Dr Saidi said.

“The market needs for standardised instruments,” said Dr Saidi, who is also chief economist at the Dubai International Financial Centre, or DIFC. “If you have a standardised document, it will encourage more issuers to start issuing sukuk,” he told reporters at a news conference on Wednesday. It will also lower the cost of issuance, he added.

The Dubai-based institute, which is working with the Bahrain-based International Islamic Financial Market, or IIFM, is planning more Islamic bond templates after that, he said. Continue reading

India to be third largest domestic banking sector by 2050: PwC

According to a PriceWaterhouseCoopers report titled Banking In 2050, India could become the third largest banking sector by 2050 after China and US, leaving Japan, UK and Germany behind.

According to the report, “India has particularly strong long-term growth potential.”

Indian banking sector in general and the Reserve Bank of India were applauded post financial crisis for fiscal prudence.

 

Harsh Bisht, leader (Banking and Capital Markets), PwC India said, “Post downturn, Indian banks have become more efficient due to tighter credit assessment and disbursals, cost efficient model, weeded out non profitable and highly risky portfolios and increased the CASA substantially resulting in lower cost of funds for the bank.”

 

Indian banks have improved their cost to income ratio by 6 per cent on an average, he added.

 

India’s largest private sector bank, ICICI Bank improved its cost to income ratio from 53 per cent in 2007 to 38 per cent in 2010, owing to shift in strategy from aggressive growth to cost rationalisation. Continue reading

4 lessons that western banks can learn from Islamic counterparts

Perhaps, Islamic banks can teach its western counterparts some basic principles very much linked to common sense which could enhance their financial stability three years after the credit crisis.

During 2008, UK accountants joked Dabout   the   balance   sheet   of   their banks:   “On   the   left   side   there   is nothing right; on the right side there is nothing left.” Languages in other countries did not offer the same potential when referring to the balance sheet of banks, yet the under- lying situation was more or less the same. However, it is remarkable the strength that Islamic banks (those subject to Islamic fi – nance) have shown over these years. Three years after the ignition of the crisis, several lessons can be learned from these banks, but the four most important are:

First: Islamic banks can stabilise credit growth. A major danger for an economy lies in excessive credit growth. Central banks can influence this inter alia through interest rates, but sometimes this tool is ineffective, banks lend too much in good years and too little in bad years, creating  Hyman Minsky’s credit cycles that can worsen economic cycles. In “good” years non performing loans come down, there is plenty of liquidity and it is very easy to obtain credit, which in turn further drives down NPLs (non-performing loans). The opposite occurs during “bad” years. We have learned from this crisis that (a) incentives drive human behavior, and (b) an incorrect incentive scheme can lead to exponential credit growth that creates the basis for future banking and economic damage. As Islamic finance only allows financing to happen as long as it is linked to the value-creating real transactions, ultimately “credit growth” (although under Islamic finance “credit” should be read as “coinvestment”) is very much restricted by growth in productivity and income, creating a natural brake for credit growth in “good” years. Structural reforms in the western banking system point towards creating similar “brakes” for credit growth normally linked to incentive schemes.

Second: One bank can lose most of its investment in a “complex” to value synthetic product, such as a CDO (Collateralized debt obligation), a CDO squared or a CLO (Collateralized loan obligation), yet if the investment is a physical asset (property, infrastructure, energy) the risk of losing 100% of the position is almost nil. As Islamic banks are only allowed to invest in physical assets generating free cash flow, valuation of these instruments is more transparent; as a consequence financial stability is intuitively reduced compared to that of an investment in a theoretically   risk-limited   AAA   rating CDO squared. Indeed, reforms in Basel II and III in general penalize in capital consumption the holding of positions without underlying physical assets.

Third: Systemic risk is reduced if risk-managing instruments are used in tandem with wealth creating activities rather than trading risk independent of economic productive transactions. Comparing the replacement value of global derivatives with global GDP shows how side-betting can grow to almost reach world production of goods and services mostly through over-the-counter (OTC) transactions which enhance systemic risk. Islamic finance allows risk-taking   only   if   it   is   integrated   with wealth creation, rather than pure zero-sum side-betting (betting would be forbidden under the principle of gharar). This has produced the fact that Islamic banks were much less affected by the OTC derivatives meltdown that followed the demise of Lehman Brothers. The recent US reforms of the financial system which seriously limit proprietary trading could illustrate this vision. Continue reading