Principal looks toward Islamic finance

It’s an alternative investment market that’s bounded by religious guidelines and is growing rapidly.

Principal looks toward Islamic finance

Principal looks toward Islamic finance

One of the consequences of the global financial crisis has been the rapid growth of Islamic finance as an alternative to the kind of “savage capitalism” that Pope Francis and Jewish leaders have criticized.

The fast-growing alternative investment market is becoming a focal point for competition between international markets and financial services providers, said Larry Zimpleman, chief executive officer of the Principal Financial Group. It’s bounded by religious guidelines, is attracting interest from investors in many oil-rich nations, and is expected to reach $6.5 trillion in assets by 2020.

England took a step toward establishing the London Stock Exchange as a hub for Islamic finance last week with the announcement that it plans to be the first Western nation to issue an Islamic bond, called a “sukut.” It’s part of the race to tap into a financial services market that includes a Muslim population of 1.6 billion people.

“This is a 35-year-old industry now moving at light speed, and I suspect that 95 percent of the U.S. knows nothing about it,” Zimpleman said Thursday during a panel on Islamic finance at Drake University. “The global financial crisis has served to propel, or perhaps jet-propel, its growth and awareness.”

Principal has made a name for itself by pursuing global growth opportunities in emerging nations. The Des Moines-based insurance and investment management firm launched a joint venture in 1995 with CIMB Group Holdings Berhad, the world’s largest Islamic banking group. In 2002, it entered Malaysia, which has sought to establish itself as the financial center of the Muslim world for the past 35 years.

Principal is now exploring growth opportunities in an Islamic finance sector that had an estimated $1.6 trillion in assets at the end of last year, according to KFH Research. The sector, which has had a 19.5 percent compounded annual growth rate since 2008, is forecast to grow to $6.5 trillion by 2020.

Global financial markets in the Western world are also joining the race to lead in Islamic finance, said Noripah Kamso, former CEO of CIMB Principal Islamic and author of a new book, “Investing in Islamic Funds: A Practitioner’s Perspective.” One of the drivers is a global backlash against the idea that “all profit is moral.”

“When you’re talking about the United States, you’re talking about the global financial center in New York, which is in a neck-and-neck competition with London,” Kamso said. “The U.S. is going to lose its edge if it doesn’t embrace Islamic finance.”

The idea is not to supplant traditional Western-style finance, she said, but to present Islamic finance as an alternative, especially for investors who view certain mainstream practices as immoral.

Pope Francis criticized savage capitalism, which he described as “the logic of profit at any cost,” in May. Jewish leaders issued a call for ethical renewal in September 2009 in response to financial scandals involving Jewish financial leaders like Bernard Madoff.

Islamic finance aligns investments with religious prohibitions and obligations, Kamso said. It forbids the practice of charging interest for loans; the use of ambiguous or uncertain investment vehicles, such as derivatives; and investments in products Muslims are prohibited from consuming, such as pork, alcohol, pornography and gambling. Many of the same products are also anathema for ethical investment funds.

Under Islamic finance, Kamso said that contracts must be backed by tangible underlying assets, profits and losses must be equitably shared, and funds must avoid highly leveraged businesses, such as Enron and WorldCom.

A sukut differs from a traditional bond in that the investment return is not determined by an interest rate. Usury has been condemned by most of the world’s major religions. However, it’s widely practiced outside the Muslim world.

Daud Vicary Abdullah, president of the International Center for Education in Islamic Finance, said his organization has awarded 619 master’s and doctoral degrees in Islamic finance since 2007, when there were fewer than 60 professionals trained in the field.

“There’s no threat here — it’s not about taking over the world,” Abdullah said. “You are missing out on major business opportunities (in the U.S.) because you are not doing as much as could be done to capture this amazing growth in Islamic finance around the world.”

Talent gap overshadows Malaysia’s Islamic finance growth

Finding a job is often harder than expected for graduates hoping to enter Malaysia’s Islamic banking industry, the world’s second-largest with $124 billion (RM390 billion) in assets – employers are proving choosy about qualifications.

Talent gap overshadows Malaysia’s Islamic finance growth

Talent gap overshadows Malaysia’s Islamic finance growth

Thousands of students, a large number of them Muslims from across the globe, have flocked to the many Islamic finance courses offered in Malaysia, seeing them as springboards to a career.

Malaysia has an estimated 50 course providers and 18 universities which offer Islamic finance degrees, and it boasts the largest academic output globally.

The country has published 169 research papers on Islamic finance in the last three years, according to data from Thomson Reuters.

But while the Malaysian Islamic banking industry’s output in monetary terms is growing about 20% annually, employment in it is expanding at less than half that rate – even though an additional 22,400 jobs are needed to support the growth, according to a blueprint for the financial sector prepared by the central bank.

Malaysia is experiencing a problem faced by Islamic finance sectors around the world: training and qualifications often do not provide the levels of specialism and sophistication that employers need.

The problem is limiting growth of the industry and, some say, stifling innovation that is necessary to bring Islamic finance fully into line with religious principles, and prevent its products from merely being pale reflections of conventional financial instruments.

“A common misunderstanding of these young graduates is that they believe there is such a thing as a generic job in Islamic finance. In reality, the industry is looking to employ specialists,” said Raymond Madden, chief executive of the Asian Institute of Finance (AIF), set up by Malaysia’s central bank to develop human capital for the region’s financial industry.

This means graduates are often inadequately equipped, and few in the industry are actively trying to solve the problem, he said. “It’s a major issue – nobody wants to take ownership of training graduates in areas that are most needed by the industry,” added Sofiza Azmi, AIF’s head of strategy and development.

The Islamic finance sector’s need for specific skills in risk management as well as internal audit and governance, plus a basic grounding in sharia law, is not being communicated, she said. “Moving forward you need to understand where the banks are going, how they are going to expand, what their plans are.

Then you can map out their talent needs.” One reason for the skills mismatch in Islamic finance is the youth of the industry; it was born in its modern form in the 1970s, and in many countries has only become a mainstream industry in the past decade.

The industry has moved into relatively complex areas, such as Islamic money market instruments and hybrid Islamic bonds with equity-liked characteristics, only in the last few years.

The fragmentation of Islamic financial regulation, with sharia boards and national regulators in various countries taking different approaches to some core products and concepts, may also be an obstacle to effective training.

Employers could provide some of that specialised training, but banks in Malaysia have so far been reluctant to do so because of the time and cost involved. Instead they tend to poach skilled staff from rivals, a quicker and cheaper alternative.

“The banks will have to step up. If they need people specialising in areas, they will have to train internally,” Azmi added. Universities also need to revamp their curricula to suit industry needs, but it inevitably takes a long time to evaluate and implement changes, she said.

Malaysian authorities have responded by trying to intervene directly in the job market; the International Centre for Education in Islamic Finance (INCEIF) was set up by Malaysia’s central bank in 2009 to help with training.

But Syed Othman Alhabshi, INCEIF’s chief academic officer, said the centre’s signature Chartered Islamic Finance Professional qualification, a one-year postgraduate programme, had only attracted a handful of industry executives to its staff.

Only five of the centre’s full-time lecturers boast actual exposure to the sector and most have retired from active involvement in the corporate world, he said. The centre’s 12-member professional development panel, which meets quarterly, has only two Islamic bank heads, from Bank Islam and OCBC Al-Amin.

About 60% of INCEIF’s graduates find employment within six months, according to an internal survey, the centre said, declining to provide further details of the survey.

While the centre’s programmes have evolved over time, its graduates are not designed to be specialists, so the task of further training falls on banks, said Syed. “Our first job is to train them. If they can get a job here, its fine. But if not, we can’t do much. It’s up to the employer whether they want to take the extra mile.”

Syed added that job opportunities for Islamic finance graduates were limited partly because companies such as Maybank Islamic, the largest Islamic bank in Asia, did not need large workforces as they could leverage staff from their parent firms – in Maybank’s case, Malayan Banking. AIF hopes a new advisory panel comprising representatives from across the industry can close the gap.

A new Financial Services Talent Council, being planned by the central bank, is to include individuals from the education ministry, Islamic banks and universities, in the hope of setting a national agenda for the industry’s talent needs.

“If you’ve got this diversity of people to discuss a particular issue, you’ll be able to come up with a better solution,” Azmi said. Many foreign students expect easy access to Malaysia’s job market when they obtain local Islamic finance qualifications, but some are turned down because banks face costly, time-consuming visa requirements to hire foreign students.

“They waste one year here, and many of them are upset with this,” said Omar Alaeddin, an INCEIF graduate and current member of its student representative council. So many students return to their home countries with Malaysian Islamic finance qualifications.

This has the benefit of spreading knowledge globally, but the students can also have difficulty finding jobs back home.

“At the beginning they come here thinking there are hundreds of banks and employees,” said Alaeddin, who teaches risk management and sharia auditing at Universiti Kuala Lumpur. “Then some go back and work in their previous jobs, which have nothing to do with Islamic finance.” – Reuters, October 29, 2013.

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.

Islamic finance goes global: assets to top $2 trillion in 2014

TheCityUK’s UK Islamic Finance Secretariat (UKIFS) has launched a report which indicates that Islamic finance assets world-wide continued a long run of growth to reach an estimated $1.46 trillion in 2012. UKIFS’ findings demonstrate that Islamic finance has shown resilience despite the slowdown in the global economy and the pressure on conventional banking in Western countries. By contrast, global assets of Islamic finance have doubled since the start of the economic downturn.

Islamic finance goes global: assets to top $2 trillion in 2014

Islamic finance goes global: assets to top $2 trillion in 2014

The report, launched ahead of the World Islamic Economic Forum held in London on 29-30 October, also predicts that the industry is set to grow significantly in the years ahead. The Muslim population numbering some 1.6 billion, accounts for around a quarter of the global population, but Shari’ah-compliant assets make up only around one per cent of the world’s financial assets, showing a wide margin for growth. Islamic funds, for example, reached a new high of $74bn in 2012, with the available pool about seven times larger at over $500bn. Even so, competition is fierce, with average management fees worldwide for Sharia compliant assets down from 1.5 per cent to 1.0 per cent over the past six years. At the current rate of growth, the market could top $2 trillion in assets by the end of 2014.

London is the leading Western participant in this evolving global market with over twenty UK based banks providing Islamic finance services, of which six are fully Shari’ah compliant. This is more than in any other Western country. The UK benefited from a globally buoyant Sukuk market in recent years, with issuance up two thirds in 2012 to $139bn. This has remained strong with $59bn issued in the first half of 2013. This was reflected in 14 new Sukuk listings on the London Stock Exchange since 2012. There are now 49 Sukuk with a combined value of $34bn listed on the London Stock Exchange. Additionally, seven exchange traded funds and two exchange traded products are also listed on the London market.

Chris Cummings, Chief Executive of TheCityUK, said, “Institutions in the UK have been providing Islamic financial services for 30 years. Our report once again shows that the UK continues to maintain its position as the leading Western provider of Islamic finance. This has been acknowledged by the World Islamic Economic Forum hosting their 9th forum in London in 2013, the first time this major international conference has been held outside Asia.”

In the UK, banks providing Islamic finance, sukuk issuance and exchange traded products are supported by the wealth of professional advice for Islamic finance deals and transactions. This includes over 25 major law firms and the largest four professional services’ firms – an infrastructure that has yet to be seriously rivalled by any other European financial centre. The UK is also making an increasing contribution to the development of Islamic finance education and skills, with four professional institutions and over 16 universities and business schools offering qualifications.

Cummings said, “Considerable potential exists for expansion of the Islamic finance industry worldwide, although appropriate legal and regulatory structures are crucial for its development in individual countries. The work that is now being undertaken through UKIFS is looking to address these issues by creating more efficient structures and processes and applying greater innovation to drive market development. We look forward to continuing our work with Government to encourage inward investment via Islamic finance and to extend the UK’s advantage as the leading western hub for Islamic finance.”


First World Islamic Finance Summit on 21st

KARACHI: The first World Islamic Finance Summit 2011 will be held on September 21-22 in Pakistan, the organisers announced at the curtain raising ceremony on Thursday.

The theme of the two-day summit is “Islamic finance growth and opportunities”. Renowned speakers would deliberate on the subject at the summit.

“The objective of the summit is to bring together industry leaders, academicians, think-tanks, Shariah scholars, regulators and policymakers where participants would get an ideal platform to have fruitful discussions and knowledge sharing with delegates, participating from Pakistan and overseas,” said Syed Shahjahan Salahuddin, Managing Director, Conferences and New Initiatives.

Syed Shahjahan Salahuddin said that the summit is also aimed at providing a forum for the government and the private sector organisations to promote the opportunities for investment in Islamic financial instruments and gain greater understanding of the challenges faced by the two sectors.

The summit is organised in joint efforts of the industry players and the regulators with the State Bank of Pakistan (SBP) as supporter, Bank Alfalah as its lead partner, Albaraka Islamic Bank as the co-lead partner, besides IBM as the technology partner.

Pak Qatar Takaful Limited, Faysal Bank Limited and Askari Bank Limited as the partners, Meezan Bank Limited as the technical partner, Riphah International University as the technical affiliate, Khushhali Bank Limited, MCB Bank Limited, Bank of Khyber, First Women Bank Limited, National Bank of Pakistan and Pak-Kuwait Limited will the sponsors for the summit.

According to a statement, the summit will have seven panel discussions, including a CEO Power Table and a 60-minute Shariah dialogue that will be delivered by high industry experts.

UK Islamic finance sector 'booming'UK .

The Islamic finance industry in the UK has gone from famine to feast in the past six months, according to one of the country’s leading Islamic institutions.
‘We have seen more business transactions in the past six months than we achieved in the previous three years,’ said Gatehouse Bank chief executive officer, Richard Thomas. ‘Business is booming not only in the UK and Europe but in new markets in Africa and in republics of the former Soviet Union in Eastern Europe.
UK Islamic finance sector ‘booming’UK .

UK Islamic finance sector ‘booming’.

‘People have been talking about the potential for growth for some time but now it is happening and we are seeing the rhetoric turn into activity.
‘A year ago the market was stagnant, but not now and we are getting so much business that we are going to have to develop human resources to cope with the flow,’ he said.
‘We need to manage this and that will meant co-operating with other banks to meet the demand,’ added.
He said that while globally, the Islamic banking industry was believed to be worth around $1.3 trillion, and growing fast, he felt the industry was considerably larger than that.
‘That figure only really represents bank transactions and does not include Sharia-compliant business carried out by family businesses and corporates.
‘The potential for further growth is tremendous when you look at the size of the market because Islamic finance is still worth just about half a per cent of the conventional financial industry,’ he added.
Islamic finance is bouncing back in its traditional Muslim markets but is unlikely to experience the growth levels it achieved a few years ago, according to Ernst & Young partner Sameer Abdi.
‘There is no doubt that Islamic finance suffered in the economic downturn, with some areas hurting more than others,’ he said.
‘But there are no signs of a recovery but I do not believe it will be quick or that we will see a return to the levels of growth of before the crisis.
‘I would expect 2011 to remain a difficult year but we can look for growth particularly in retail and corporate banking.
‘The industry now has to look at consolidating to achieve scale but it remains a very young industry and that could prove difficult,’ he added.