Some unlikely players are getting into Islamic finance

By Shaheen Pasha October 2, 2013

Shaheen Pasha teaches international journalism at the University of Massachusetts-Amherst. She has reported from Dubai and Cairo, covered Islamic finance for Reuters, and guest edited the Islamic finance supplement for the Times of London.

The UK is home to 2.7 million Muslims and three Islamic banks. Reuters/Toby Melville

Some unlikely players are getting into Islamic finance

Some unlikely players are getting into Islamic finance

Global markets are vying to get a piece of the action in Islamic finance. With an emphasis on ethical investing and prohibitions against interest and excess risk, the relatively nascent industry has struck a chord with investors burned by conventional finance in recent years. According to Ernst & Young’s World Islamic Banking Competitiveness Report 2013, Islamic banking assets held by commercial banks globally are expected to exceed $1.8 trillion this year, a 38% increase since 2011. The vast oil wealth present in the Middle East and an aggressive push by Malaysia to serve as an Islamic finance hub in Asia have helped drive the growth. But the industry is also getting a boost from markets outside the Muslim world. Here are four markets to watch:

UNITED KINGDOM

With 2.7 million Muslims, the UK is ramping up ambitions to be the Western capital of Islamic finance. The country launched an Islamic finance task force in March, aimed at bolstering business compliant with sharia, or Islamic law. London is hosting the World Islamic Economic Forum this month, a conference of Islamic financiers that attracted more than $8.6 billion in financial deals last year. London’s involvement marks the first time the event has been held outside of a Muslim country. Currently, 22 British financial institutions offer Islamic products and there are three standalone Islamic banks, including the Bank of London and the Middle East, which plans to list its shares on Nasdaq Dubai this month in a clear bid to participate in the growing Islamic economy in the Gulf. The country revised its tax legislation to accommodate Islamic bond, or sukuk, issuance but plans to offer its first sovereign sukuk were abandoned in 2009 as the global economic crisis sapped enthusiasm. Even so, London remains a major player in the sukuk market with the London Stock Exchange reporting that over £22.3 billion has been raised through 49 issues of sukuk on the LSE.

INDIA

By all measures, India should be a natural player within the Islamic finance industry. The world’s largest democracy boasts one of the largest populations of Muslims in the world at 177 million; only Indonesia has more. But a long history of religious strife and political power struggles between the dominant Hindu population and Muslims has made India reluctant to embrace Islamic finance. Under the country’s current laws, the financial sector requires banking to be pegged on the concept of interest, forbidden in Islam. But a recent decision by the country’s central bank, the Reserve Bank of India (RBI), to allow a firm in the Kerala to operate as a non-banking financial company that follows Islamic principles is raising hopes that India will soon allow sharia-compliant business to develop further.

It is an uphill battle, to be sure, based on precedent. Last year, the RBI pulled Kerala-based financial firm Alternative Investments and Credits Ltd.’s (AICL) license after 10 years, saying it violated India’s laws on charging interest, through its Islamic model. But experts say there is a change in the air, with India seeing Islamic finance as one method of helping to attract more investment from cash-rich Gulf states to help finance proposed infrastructure projects. If the political and economic will is present, there may be enough momentum to overcome pressure from right-wing critics, such as the Bharatiya Janata Party (BJP).

LUXEMBOURG

This tiny country is playing a big role in the development of Islamic finance. It has grown into the leading non-Muslim domicile for sharia-compliant investment. Luxembourg already is a hub for internationally distributed investment funds but its emphasis on developing Islamic finance helped it attract Middle Eastern capital. It became the first country in Europe to host an Islamic finance institution in 1978, and with its reputation as one of the best tax regimes in Europe, Luxembourg has been a magnet for Islamic finance deals. As of 2012, the country has 41 sharia-compliant funds with €4 billion in assets under management. It is the main destination for listing sukuk in Europe, according to a report by Ernst & Young.

While Islamic finance is certainty gaining in popularity, the industry has struggled to expand due to a shortage of highly liquid, investment-grade financial instruments that Islamic institutions can trade to manage their short-term funding needs. To help with that, Luxembourg’s central bank co-founded the International Islamic Liquidity Management Corp (IILM) in 2010 with other central banks from Asia, the Middle East and Africa. The IILM issued its first dollar-denominated $490 million Islamic bond August, a move that is being seen as a first step toward create a cross-border market for Islamic financial instruments.

TURKEY

At first glance, Turkey seems to be a no-brainer when it comes to embracing Islamic finance. As the eighth most populous Muslim country in the world and Europe’s only Muslim country, there’s a natural market for sharia-compliant business. But Turkey long prided itself on a secular stance toward finance and politics, even referring to its four Islamic banks as so-called participation banks to imply the profit-and-loss-sharing model of Islamic finance. As the global financial crisis weakened Western markets, however, Turkey made the strategic decision to put aside its reluctance and strengthen ties with its oil-rich Middle Eastern brethren.

That decision is expected to make Turkey a major player in Islamic finance going forward. Ernst & Young estimates that the Islamic banking sector will triple in 10 years reaching $100 billion by 2023. Sukuk will play a major part in this growth. Turkey revamped its tax laws to allow for the issuance of one type of sukuk without double taxation and the country’s Capital Markets Board said in April that it is looking to expand its offerings to encompass other forms of Islamic bonds. Turkey issued its first sovereign sukuk in 2012 and said it will issue lira-denominated sukuk twice a year. Given Turkey’s secular legal environment, the success of its offerings has been hailed as a benchmark for Western markets seeking to enter the Islamic finance market.

We welcome your comments at [email protected]

http://qz.com/130391/some-unlikely-players-are-getting-into-islamic-finance/

What are the reasons India should legalize and encourage Islamic Banking and Finance?

Apart from all the ethical and theoretical reasons one may cite, the top three reasons are, according to me:

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  • It will enable India to bring in much needed investment from middle-eastern countries at very reasonable terms
  •   A large portion of the unbanked Muslim population will hopefully be successfully targeted by banks who focus on Islamic banking. Hopefully the RBI will manage to make the banks look into the banking and finance needs of small retail customers in India
  •  If what happened in non-Muslim countries like UK or Sri Lanka is any indication, this can flourish into a significant economy, which means creation of a lot of new jobs – most of them well paid skilled jobs

According to some sources, with 150 million Muslim population, and a rapidly growing economy despite economic slow-down everywhere else, India will be a hot destination for Islamic investments and finance companies. These sources say that the potential of the Indian market is no less than 1 trillion in Islamic banking and finance. Continue reading

It is time to finance big ventures – Islamic Finance – Rushdi Siddiqui

Entrepreneurs must think beyond simple returns to depositors and shareholders

  • By Rushdi Siddiqui, Special to Gulf News
  • Published: 00:00 May 9, 2010
  • Gulf News

Dubai : The Islamic world profiled modalities of capitalism in the 8th and 9th centuries, but today’s Muslim countries’ Islamic financial hubs are missing something vital — addressing ‘have nots’ (micro-finance), and deploying the funds of ‘haves’ into Islamic venture capital (VC) funds.

Our focus is on the latter: interplay between risk capital and innovative ideas for strategic localised benefit. The Chairman of Malaysia’s Securities Commission, Zarinah Anwar, stated in a keynote speech in 2007, “…how can Malaysia distinguish itself in the emerging market venture capital pool? Our belief is that Islamic VC provides that distinguishing factor.’

Yes, VC is labour intensive requiring specialised skills, entails active risk capital as part of portfolio, and a long term play, much like Sukuk in held-to-maturity portfolio.

Islamic finance should now take a page from US President Barack Obama’s recent successful summit on entrepreneurship for Muslim countries and ‘walk the talk’ of venture capital beyond the present informal and infrequent ‘angel investing!’

Innovation

Patents are an indicator for innovation and knowledge-based economy. A 2006 article in DinarStandard titled “Intellectual Property Gaining Protection in the Muslim World” shows how Malaysia heads the list of Organisation of Islamic Conference (OIC) countries with 547 patents (granted in the US) during the 27 year period.

Putting it in perspective, Japan had 547,865 patents granted out of a total of 3,101,719 during the same period.

What can Islamic finance do to start closing the gap?

Where is Islamic VC in the Muslim world? There are some Islamic VC associations, but they have not really achieved much.

According to the Gulf Venture Capital Association website, its last event was held in March 2008, and even the weekly Islamic finance events have very little or no exposure dedicated to Islamic VC.

How many high profile funds and investments have been announced in information, technology and communication or bio-technology in the region?

The latest newsletter from VCBank (December, 2009), has more coverage on private equity in bank building to ease car-park congestion, hospital, etc., and less pure-play VC investments.

How many articles on Islamic VC on the internet?

Not many. Finally, there are more than 22 technology parks in the Middle East and North Africa (MENA) region, either operational or at building stage, but just real estate plays?

An opportunity exists for Islamic banks to deploy part of excessive proprietary risk capital to venture capital in financing some of the major concerns of the region: health care, desert farming with minimal water, alternative energy, carbon emissions, etc.

The challenge is finding and financing tomorrow’s technology which will have direct implication and application today.

The Western PE industry knows addresses of Gulf Cooperation Council (GCC) funding sources, sovereign wealth funds or high net worth individuals, but their venture captial counter-parts and early stage companies do not.

Now, if a meaningful public/private initiative is established, including the Islamic Development Bank (IDB) and Awqafs, and its size is $3-$5 billion Islamic venture capital fund, managed professionally for the above sectors, it should awaken VC stakeholders’ run to the region.

India Islamic finance

India, a country with 150 million Muslims, but encountering many political challenges in adopting retail Islamic finance, may be the ripest country in Middle East-North Africa-South Asia for Islamic venture capital. It has the right mixture of higher educational institutions, technology parks/culture, entrepreneurship, mature capital markets, regulations, etc. As Islamic finance looks for new markets and ideas, i.e, diversification, in the post credit crisis environment, Bangaluru may be a better opportunity than Sandhill Road in Silicon Valley.

To address the criticism of exporting capital and importing returns, the Islamic VC must have enabling preconditions to access the funds, including establishing operations locally, linking with local universities for research, government encouraging trials and the preferred exit should be a local stock exchange listing. Thus, a strategic infrastructure plan aligned with availability of funds.

As Islamic finance moves beyond the predominantly risk averse Murabaha, it must think about financing ventures beyond simple returns to depositors and shareholders.

In this manner, Islamic finance can actually lead conventional finance in the region for invention and innovation.

The writer is the Global Head of Islamic Finance, Thomson Reuters. Views expressed in this column are of the writer and cannot be attributed to his organisation.

http://gulfnews.com/business/markets/it-is-time-to-finance-big-ventures-1.624179

Islamic finance likely to advance on firm growth

Chennai: Just when many of the world’s financial systems have been fighting to weather the capital market turmoil, Islamic finance growth has stayed strong and will likely be brisk during the next year, said Standard & Poor’s Ratings Services in a report ‘Islamic finance is likely to advance In 2010 on firm growth and widening geographic reach’.

“We believe Islamic finance has become a recognized and a specific segment of finance on its own with still-bright growth prospects,” said Standard & Poor’s credit analyst Mohamed Damak. “We think Islamic finance is set to make further inroads in developed Western markets while Southeast Asian countries will likely fuel Islamic finance advance in Asia in 2010.”

At the same time, though S&P believes there are a number of important questions for which the answers are not necessarily clear, they may play a part in shaping the sector’s future growth. Specifically in non-Muslim countries, and especially in Europe, we consider they include the size of demand for Sharia compliant products, regulatory and tax environments, support of the political and financial communities, sovereign sukuk issuance, and the possibility of a common strategy for extending Islamic finance across EU countries.

Assets of the top 500 Islamic banks expanded 28.6% to total $822 billion at year-end 2009, compared with $639 billion at the end of 2008, according to publicly available information.

http://www.financialexpress.com/news/islamic-finance-likely-to-advance-on-firm-growth/574586/

Islamic Finance to Reduce Fiscal Deficit in India

At a time when economic recovery needs more stimuli by the Government of India (GoI), there is also an urgent need to safeguard the economy from the debt trap because the GDP growth rate fell to 6.7% in 2008-09 from 9% in 2007-08; the debt servicing reached 58.83% of the total expenditure for the year 2008-09. It means maximum receipts are now spent for debt servicing which accounted for 15.87% of the Gross Domestic Product (GDP), while the debt receipts were 9.78% of the GDP in 2008-09. Even the interest payments were 21.39% of the total expenditures by GoI and 5.77% of the GDP in 2008-09. Notably the revenue deficit in 2008-09 is already 30% due to high debt serving ratio to total revenue expenditure.

In an attempt to find the actual reasons behind the high fiscal deficit, it is observed that the increased debt receipts by GoI to finance revenue expenditures (especially high debt servicing); increased subsidies on food, fuel and fertilizer; and rural development through schemes like NREGS, farmer’s loan waiving scheme and Sarva Shiksha Abhiyan are the three most important factors of high fiscal deficit. Since there is a need for more stimuli to counter recession in the economy, it is expected that the plan expenditures may further increase whereas due to recession, the revenue receipts may decline. This decrease in revenue receipts and increase in plan expenditure may increase the fiscal deficit to an unwanted high level. Working upon different options to reduce the fiscal deficit, it is found that Islamic finance can reduce the fiscal deficit even if revenue receipts decline and plan expenditures increase.

Islamic financial products have a great role to play in reducing the fiscal deficit in emerging economies by replacing the debt based investments for infrastructure with funds mobilized through equity based Government Securities for infrastructure projects. Let’s see how Islamic finance may help us reduce our present fiscal deficit.

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Notably the total revenue expenditure is 142.92% of total revenue receipts reflecting 30.03% revenue deficits. The major cause of this high revenue deficit is high debt service ratio to total revenue expenditures. For a developing economy like India, in the proposed plan we project increasing capital expenditures, but in the revised estimates of 2008-09 budget, the revenue expenditure is 89% and the capital expenditure is just 11% of total expenditure; all due to high debt servicing ratio (66%) to total revenue expenditure. Notably the interest payment alone is 24% of total revenue expenditures. So, with capital expenditure being as low as just 11% of total expenditure and debt serving being as high as 59% of total expenditure, how can we go about planning to foster inclusive growth?

Debt Finances crossed the Planned Estimates:

The debt based finances for investments under 11th five year plan document was proposed to be 48.42% of total receipts for 2008-09, whereas the revised budget estimates reveal that the debt receipts were 96.38% of total capital receipts in 2008-09. This reflects our inability to mobilize targeted amount of non debt receipts, causing high fiscal deficit due to interest payments over borrowed debt receipts.

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According to 11th plan documents, projected investments in 2008-09 should be of Rs. 321,579 crores while total plan capital expenditure in the revised budget observed just Rs. 41,301 crores. So the plan capital expenditure is just 12.84% of targeted investment in 2008-09. This shows our inefficiency to make budget development pro inclusive growth and to foster growth. So, it is better that GoI reduce debt borrowings which ultimately increases revenue deficits; and shift the focus on infrastructure investments to stimulate the economy at a time when GDP growth rates and employment growth rates are falling.

Actual Debt Receipts are 210% of the planned Estimates:

Since the revised estimates on debt receipts (Rs. 326,515 Crores) is already 210% of estimated requirements of debts (Rs. 1,55,704 Crores) by year 2008-09 as projected in 11th five year plan documents, the GoI should seriously think about this increased debt receipts. The funds utilized for debt servicing (Rs. 530,010 Crores) are already 162% of debt receipts to finance fiscal deficit (Rs. 3.26.515 Crores), the GoI should revisit its budgeting. How good is it to increase the debt receipts at a time when Indian industries are looking for more affordable credits from banks to meet the challenges after the global meltdown?

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In year 2008-09 the deficit budget cost an amount of Rs. 192,694 crores to GoI which was paid as interest over the debt receipts borrowed to finance the deficit budget. This may be called as loss to GoI because had there been equity based receipts against debt receipts, GoI would have saved this amount.

Financing Fiscal Deficit through subsidized bank loans is not good

Continue reading

Don’t let the name scare you. Islamic banking is beneficial for all

Maulana Abdul Hadi Madani – Editor Sirat-e-Mustaqeem, Birmingham and Member Islamic Shariah Council, Britain

“People should know that the name Islamic Banking is used just to give an impression that it works on the Islamic principles. Otherwise, it is an open option and everyone whether Muslim or not can take the benefit”, says Maulana Abdul Hadi Madani, Editor Sirat-e-Mustaqeem, Birmingham and Member Islamic Shariah Council, Britain. Maulana Abdul Hadi Madani was speaking to ummid.com while he was in Malegaon to inaugurate the new building of Kulliyah Aisha Siddiqua for girls at Mansoora. In this exclusive interview for ummid.com readers, he described in details about Islamic Banking, potential the system has today and its possibilities in India and other parts of the world. Excerpts:

How do you think Islamic Banking is capable of combating the economic slowdown?

We can never have a better rule or way of life than the one framed by the Almighty Allah. For, He is the Creator who created everything. He knows what is good for us and what is not. Through His messengers, hence, He sent guidelines for a better life. Islamic finance is also one of them. This is why people who adopted Islamic Banking System are not only safe from recession but they are also flourishing and earning profits. That too in a very high volume!

Encouraged by the results, other international banks like HSBC and Barclay have also introduced special windows. These windows have facilities for the people interested in dealing on the principles of Islamic Shariah. Likewise is the Islamic Bank of Britain. The very concept of these banks is that they are following the Islamic principles, solely and in total, which is continuously monitored by the boards of Ulema that keep an eye on each and every thing.

However, the system is working to the perfection. British Prime Minister Gordon Brown, who was the Finance Minister when Islamic Banking was introduced in UK, was so confident of the system that he predicted, London would prove a gateway for Islamic Banking. The results today are proving his predictions right. This is why at the time when other banks are facing closure, the Islamic Bank of Britain is opening branches at different places in UK and also receiving similar requests from Europe that has never believed the system.

Do you think Islamic Bank is suitable for India also?

Certainly! I believe this is the best available option not only to fight the economic slowdown but also for goof earning. The records at different places where Islamic Banking is operational justify my belief.

India has its own problems. Like, it cannot adopt the system unless some amendments are brought in its rules. How can you suggest India to have Islamic banks under this situation?

This is not the case only with India. Everywhere, whether it is UK or Sudan or any other country, the respective governments had to bring changes in their rules to accommodate the Islamic Banking System. If the British Government can make changes in its rules for a better available option, why can’t the Indian Government? That too, when India says it is a democratic country and it has in its constitution provisions that guarantee everyone’s rights. If the Muslim community wants to have a banking system suiting their religious principles, the Indian government should not have any problem.

Then why the Indian Government is reluctant?

The fact is that the Islamic Banking System has the potential to overpower the existing banking institutions. This is what exactly happened in Sudan. Before the introduction of Islamic Banking in Sudan, it was thought it would not work in the country. However, very soon Islamic banks in Sudan overshadowed the high-street banks. I think, some people in the Indian Government who might be having some stakes in the existing banks are going through the same dilemma.

Is this because of the name ‘Islamic Banking’ also that the government is reluctant?

I cannot say exactly. But people should know that the name Islamic Banking is used just to give an impression that it works on the Islamic principles. Otherwise, it is an open option and everyone whether Muslim or not can take the benefit. Islamic Bank of Britain and HSBC Al Amanah Products are the best examples. These banks do not look at the religious identity of the customers. Whoever follow their regular norms, the banks are ready to offer them their services.

Does it mean India needs an awareness campaign to make people realise these facts?

Yes, not only among non-Muslims but also among Muslims. For, there are many Muslims who consider Islamic Banks as charity like organizations to exploit in whatever form they would intend to. Such people should be taught that this is a banking system and the basic difference with other banks is that its fundamentals are based on Islamic principles. People should be explained about the advantages of the Islamic Banking and the potential it has to fight any economic challenges. Once people become aware, I don’t see any reason why they would not adopt it. The Gulf countries and the countries like UK, Indonesia, Malaysia and Sudan are live examples.

If the system has so much potential, why it is taking time to become common?

Islamic Banking is still emerging and it needs some more time before it becomes common. Moreover, since its basis is totally free from interest, the existing bankers who completely depend on interest for their survival are afraid. For them, removing interest means endangering their entire setup. Hence, they are creating hurdles for Islamic banking. Although it is a better option.

But, the biggest challenge to the Islamic banking is the attitude of some of the Islamic countries. They are averse to adopting Islamic Banking merely because it does not suite their selfish goals. The manner with which educated and financially strong Muslims are treating Islamic Banking is equally strange. Islamic Banking at this stage needs active participation of such people. However, despite having resources in plenty they are not ready to realise the importance of interest-free banking.

It is also said that there is a dearth of manpower and trained personnel in India to handle Islamic Banking?

It is a fact that we are short of people who are masters simultaneously in Islamic and modern economic systems. But this problem exists everywhere, whether it is Britain or any other country. It is because, the system is new and has not become common so far. Hence people are reluctant to choose it as a career. But, in countries like Britain where the system is running successfully, universities are offering specialization and research opportunities in the subject. Ironically, contrary to a very large number of non-Muslims in UK who are doing Masters and Research in Islamic Banking, number of Muslims are very low.

http://www.ummid.com/news/2010/February/03.02.2010/islamic_banking_good_for_everyone.htm

Growing Interest: Islamic Banking Expands from the Gulf to India

Growing Interest: Islamic Banking Expands from the Gulf to India

Published: March 25, 2010 in India [email protected]

On February 11, when Dubai Islamic Bank, the UAE’s largest Islamic bank, posted a profit of $327 million for 2009, it was a shot in the arm for those who have been preaching against the “greed” of the Western financial world and the advantages of Islamic banking. Profits were lower than the previous year’s $471 million, but that was almost entirely because of provisions for doubtful debts. At a time when many institutions in Dubai seem to be drowning in debt, the bank’s balance sheet has shown surprising resilience.

The bank has been spreading its wings. In early February, its subsidiary – the Jordan Dubai Islamic Bank – opened its first branch in Amman, the first of 10 branches planned this year. In December last year, it had opened 10 new branches in Pakistan. Its rapid pace of expansion has not been slowed by the global financial crisis.

Dubai Islamic Bank has not yet entered India, though Islamic banking is already making waves across the sub-continent. Last month an India-Arab conference in Delhi, organized by the Indo-Arab Economic Cooperation Forum and the Institute of Objective Studies, spent a day discussing Islamic finance. The subject was “Beyond the Meltdown: Search for Options”. A delegation later called on Union corporate and minority affairs minister Salman Khurshid to urge the introduction of instruments that are compliant with the Shariah (Islamic law).

Support for Islamic banking is still minuscule in India. In 2006, a Reserve Bank of India (RBI) committee came to the conclusion that Islamic banking did not fit into the country’s banking laws. In 2008, a Planning Commission panel on financial sector reforms headed by Raghuram Rajan, a finance professor at the University of Chicago and former chief economist at the International Monetary Fund, recommended the introduction of interest-free banking. The final report included this paragraph: “Another area that falls broadly in the ambit of financial infrastructure for inclusion is the provision of interest-free banking. Certain faiths prohibit the use of financial instruments that pay interest. The non-availability of interest-free banking products (where the return to the investor is tied to the bearing of risk, in accordance with the principles of that faith) results in some Indians, including those in the economically disadvantaged strata of society, not being able to access banking products and services due to reasons of faith. This non-availability also denies India access to substantial sources of savings from other countries in the region.”

Interest-free Banking

Islamic finance has been around in India since at least 1961, with the setting up of a Muslim fund in Deoband in Uttar Pradesh. The closest it came to becoming mainstream was through the Bait-un-Nasr Urban Co-operative Credit Society, set up in Mumbai in 1980. This firm ran on the Islamic principle of interest-free banking for 25 years through 19 branches in the city. But in March 2005, amid mounting losses, Bait-un-Nasr had to close down.

More recently, in October 2009, in the southern state of Kerala, a state development corporation received commitments of up to $214 million from non-resident Indians working in the Gulf region to set up an Islamic finance company, Al Baraka Financial Services, which would run on the principles of Shariah. Advised by Ernst & Young and Taqwaa Advisory and Shariah Investment Solutions (TASIS, which has a tie-up with Dubai Islamic Bank), this firm plans to invest in India’s infrastructure — in ports, airports and expressways. Through a product called Ijara, or leasing, Al Baraka will buy capital equipment and receive rent in return for leasing them out.

The success of Al Baraka could lead to the setting up of India’s first Islamic bank, says T. Balakrishnan, principal secretary of industry and commerce in the Kerala government. Bait-un-Nasr was a cooperative, and an exception to the rule. But to introduce a full-fledged Islamic bank, amendments are required in the Banking Regulation Act, which states that Indian banks can accept deposits from the public only for further lending. Also, no bank in India can directly or indirectly deal in buying or selling or bartering of goods. While India’s private-sector players like ICICI Bank and Kotak Mahindra Bank have Islamic products, these are sold exclusively to clients overseas.

Al Baraka was ready for launch in January this year when it got caught up in a snag. Subramanian Swamy, a pro-Hindu politician and Harvard-educated economist, filed a petition against the Kerala State Development Corporation in the state’s High Court arguing that the firm would report to a Shariah body, and not to a constitutional authority. Investing public money in the firm – where the state government will own 11% – would be unconstitutional, he says.

The next High Court hearing is in April when presentations will be made by the Central government and the RBI. “We are confident of the removal of the stay order by then,” says Balakrishnan. “India is in need of funds for development, and there is a lot of investor interest from the Gulf region,” he adds. “There is no point in holding this money back.”

Success with Sukuk

Islamic finance has gained in popularity since the 1970s, and even more in recent times. (See Islamic Banking Comes of Age — But What’s Next?) According to a Standard & Poor’s report, assets of the top 500 Islamic banks expanded 28.6% to a total $822 billion at the end of 2009, compared with $639 billion at the end of 2008. “Only recently, the Indonesian government sold more than $850 million worth of sukuk bonds to domestic retail investors,” says Samir Nair, partner (business advisory services), at Ernst & Young. (Sukuk is an Islamic bond that represents proportionate beneficial ownership in the underlying asset. The issuer provides collateral security over the assets to sukuk holders to secure payment of the sukuk. In Malaysia, sukuk bonds account for nearly a third of the corporate bond market.)

But Islamic banking is really a variant of everyday banking. On the balance sheet, short-term trade finance, medium-term investments, long-term partnerships and fee-based services are listed as assets. Instead of charging interest, Islamic banks have a practice called Murabahah where the bank buys the item and sells it to the customer. The sale price includes a profit margin agreed upon by both parties and is repaid on a deferred basis. There is also Takaful, or Islamic insurance, which offers joint risk-sharing in the event of a loss by one of the participants.

Another product, named Mudarabah, is an investment partnership, where the investor provides capital to the entrepreneur to undertake a business or investment activity. Profits are shared on a pre-agreed ratio, while losses are borne by the investor alone. The banker is a passive partner with no right to interfere in management, but specifies conditions that ensure better management of money. Loans are permitted in Islamic finance, too, as long as the fee relates to service-related expenses.

As the market continues to develop, Islamic banking products have started to get more sophisticated. In a book titled, Islamic Finance: The Regulatory Challenge, by Simon Archer and Rifaat Karim, the authors argue that already the Malaysian procedure for securitization of the al bai bithaman ajil contract, which results in bai al dayn securities (sometimes referred to as debt securities) has proven contentious in the Arab world. Outside of Malaysia, a majority of Shariah scholars argue that any further trading in the income stream will be trading in debt, because the receivables are not directly attributable to the asset on which the investor has a beneficial title.

Emerging Hubs

Today the largest markets for Islamic products are Indonesia and Malaysia, but centers like London, New York and Hong Kong have emerged as hubs for Islamic finance. “There are (only) about three million Muslims in the UK,” says Parsoli Corporation’s managing director Zafar Sareshwala, “and yet London is a hub for Islamic finance. We have 160 million Muslims in India. Given our growth rate, this has potential to be the biggest market for Islamic finance.”

Muslims account for about 13% of India’s population, according to the Forum on Religion and Public Life. This is smaller than the Muslim population of Pakistan and Indonesia, but still accounts for 10% of the world’s Muslims. Yet Islamic finance in India has been marginal, provided by charitable trusts and loan societies. Among the few established Islamic finance companies is Al Idafa, with 750 clients and offices in Mumbai and Surat. More exist, but are under constant RBI scrutiny.

Take Parsoli Corporation, for instance, which has an office in Mumbai along a row of shops in the bustling Crawford market area. This is the only listed non-banking financial entity in India that sells Shariah-compliant Islamic investment products. Sareshwala has on his team a group of English-speaking, laptop-carrying Maulanas and Maulvis – educated at the Markazul Maarif Education and Research Center in Mumbai, which picks its students from 30 Islamic seminaries across India. They have devised the Parsoli Islamic Equity (PIE) Index, he says, where companies selected are compliant with the Shariah, the Muslim way of life.

Parsoli has interests in stock broking and offers depository services. It has an institutional equity sales and trading team, and offers portfolio management services. The firm has today about 15,000 clients spread across 70 locations in India, and it advises its clients to invest in companies that belong to the PIE Index.

The basis of selection of these companies, he says, are plenty. “Our scholars disqualify companies directly engaged in gambling, alcohol and sale of cigarettes.” What about taking loans and earning or paying interest; doesn’t every company take recourse to credit? “There is a concept of debt to market capitalization – where the former cannot exceed 33% of market capitalization,” he says. But what if a hotel company sells alcohol, and an aviation company serves pork? “In such areas we have introduced the term impure income, which cannot exceed 10% of the net worth or 8% of profit. So an equivalent of that impure income is passed on to charity,” he adds. Parsoli’s calculations allow nearly 58% of the Bombay Stock Exchange as eligible for Islamic investment.

Next on Sareshwala’s list is a unit-linked insurance product, developed by insurance company Tata-AIG that will be distributed through Parsoli’s outlets. “There is such a large segment of the Muslim community out of the financial net, and even fewer have access to insurance,” he says. “No matter how aggressive we are there is still a large market to capture.”

Unlike neighboring countries Muslims in India remain a minority community, and there are large sections in need of social upliftment. Rajesh Chakrabarti, assistant professor of finance at the Hyderabad-based Indian School of Business (ISB), notes: “These are devout people who do not go to the banking sector. Islamic products will help bring this community into the financial mainstream.”

A similar view is echoed in the Raghuram Rajan Committee report. Interestingly, the report does not name any faith in its analysis, simply referring to Islamic banking as interest-free banking. “This product doesn’t have to be attached to a faith,” says Sareshwala. “It can easily be sold as just another form of finance. If it has a captive customer base, that’s only the icing on the cake.”

http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4462

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Scope of Islamic Finance in India

Scope of Islamic Finance in India

Islamic Finance News
9th January 2009

Islamic Banking or Shariah Finance although a 15-20 year old legacy, has caught up only recently in the past 3 – 4 years. Currently estimated to be worth approximately USD $ 750 billion; this industry is growing at a remarkable pace of approximately 15% – 20% per annum and represents a vast global practice which has developed a worldwide presence (Source – The Banker, UK).

Shariah compliant products in the Retail and Investment Banking space are helping to unlock trillions of dollars of funds lying dead with high net worth individuals and corporates globally, who follow Shariah principles as their day to day business and investment philosophies and thus do not participate in usual financial transactions.

Despite having one of the largest Muslim populations in the world (estimated to be around 160 million, second only to Indonesia) and a strong demand for Shariah – compliant products from the community as well as the business sector, India currently offers limited options for investors looking at Shariah compliant investing. However, this should not go to undermine the scope for Shariah compliant investment opportunities in India.

Indian Economy – An Overview

The global financial system has undergone a period of dramatic turbulence, which has caused a widespread reassessment of risk in both developed and emerging economies.

However, despite the global nature of these events, emerging markets – and particularly Asian banks – have managed to avoid the very worst of the crisis. Growth has slowed down but at the same time, remained steady and at a level which some Western economies can only dream of. We believe India’s financial sector continues to be relatively insulated from the global meltdown and that the domestic economy still provides an opportunity for investors looking for sustainable returns in the medium to long term.

The Indian economy is amongst the largest emerging market economies (US$ 1 trillion) and believed to be amongst the most attractive growth opportunities globally. In fact, according to a Goldman Sachs report – BRICs and Beyond, January 2007, India’s GDP (in USD terms) is expected to surpass that of the US before 2050, making it the world’s second largest economy.

Also, the Indian capital market is well regulated, the stock markets in India, we believe, are amongst the most developed and organized markets in the world and the National Stock Exchange and the Bombay Stock Exchange are at par with the best in the world.

To gauge the scope of Islamic investments in the Indian stock market, it is imperative to examine the underlying opportunity in this sector. Below are findings from a thorough study conducted by Dr. Shariq Nisar, an eminent personality in the field of Islamic Finance in India.

Islamic Finance Opportunity in India

The world’s economic centre of gravity is gradually shifting from the established, wealthy economies of Europe, Japan and North America to the emerging economies like China, India and South East Asia, with China and India projected to be the largest economies of the world in the next 50 years.

Improving macroeconomic fundamentals, higher disposable incomes, emerging middle class, low cost and highly competitive workforce, investment friendly policies and progressive reform processes are all likely to combine to make a strong case for India to have a larger share in the overall investment pie.

With this sound economic base and with hundreds of companies complying to the Shariah laws, India offers a large economic opportunity for Islamic investors, who follow Shariah investment and therefore can’t invest in interest-based ventures or in Islamically unethical ventures like tobacco, alcohol, fashion, gambling, vulgar entertainment and conventional finances like banks and non-banking financial institutions.

Realizing the growing need of Islamic investments in India, the Indian government has recently taken a number of steps in this direction. First, a high-level committee appointed by the government to prepare India’s future financial structure recommended interest-free banking for inclusion of Muslims in the financial sector. The Report draws its significance from the fact that this is first time an Indian finance committee has said something on the issue, which hitherto was considered quite sensitive in political circles. This is a good sign for Islamic finance in India.

Recently the financial crisis in the West and the drought of liquidity in this region has made Indian policy makers look for other alternatives of financing. The recent visit of the Indian Prime Minister, although at the fag end of the tenure of the present government, to a couple of GCC countries assumes more significance in this regard. The Indian Prime Minister visited the region along with his Chief Economic Advisor Professor Raghuram Rajan who had earlier recommended Islamic banking in his report to the government.

Taking a cue from these gestures, Indian corporates have also started placing themselves to capitalise on this big opportunity.

To measure in detail the scope of Islamic investment opportunities in the Indian stock market, it is imperative to examine stocks which conform to the norms stipulated by the Islamic Shariah principles.

A study on Shariah Compliant stocks

According to the Dr. Shariq Nisar, “the number of Shariah-compliant stocks in India is much higher than in Islamic countries put together, thus providing immense scope of parking money by Islamic investors”.

Out of the 1269 stocks listed in the NSE on which relevant data is available, 265 are Shariah compliant and out of the 491stocks listed in the BSE on which relevant data is available, 125 are Shariah compliant. The table below gives the number of Shariah compliant companies in India and their contribution to the total market capitalization for the last five years.

Year 2004 2005 2006 2007 2008
BOMBAY STOCK EXCHANGE (BSE)
Data available for BSE 500 listed companies 465 474 484 494 491
BSE 500 Shariah Compliant companies 116 132 138 123 125
BSE 500 Shariah Compliant companies 116 132 138 123 125
% Shariah compliant market cap of total 31.61 44.01 41.37 28.46 20.14
NATIONAL STOCK EXCHANGE (NSE)
Data available for NSE listed companies 1238 1272 1301 1310 1269
NSE Shariah Compliant companies 297 329 331 312 265
% Shariah compliant market cap of total 33.53 45.60 42.92 31.84 20.41

Source: TASIS Research

While examining the Shariah investment opportunity in India, it may also be interesting to understand the top sectors that contribute to the Shariah market capitalization in India. Below is a table giving details on the top Shariah compliant sectors, the number of companies in each sector and their contribution to the total Shariah Compliant market cap –

BOMBAY STOCK EXCHANGE (BSE)
Top Sectors Number of Companies
Computer Software 45
Drugs & Pharmaceuticals 12
Automobile Ancillaries 11
Industrial Construction 8
Contribution of these top 4 sectors to total Shariah compliant market cap 34.69%
NATIONALSTOCK EXCHANGE (NSE)
Computer Software 19
Drugs & Pharmaceuticals 6
Cosmetics, Toiletries, Soaps & Detergents 5
Industrial Construction 4
Contribution of these top 4 sectors to total Shariah compliant market cap 40.07%

Source: TASIS Research (As on November 30, 2008)

The above study on Shariah compliant stocks and sectors in India is screened by TASIS (an Indian Shariah advisory firm, which has tied-up with Dar al Shariah of Dubai). Dr. Shariq Nisar added that TASIS norms are very conservative in comparison with other screening norms.

Conclusion

Dr. Nisar’s research suggests that with hundreds of Indian companies complying with the economic laws of Shariah, India has now become an attractive destination for Islamic investments. Islamic financial institutions and Shariah conscious domestic investors are finding the Indian stock market a good place to invest. The research further suggests that the Islamic options available in India are wider than those in many Islamic countries. This shows the vast potential that India can tap in the field of Islamic Banking and Finance.

http://www.investindia.kotak.com/media/islamic-finance.html

India's first Islamic bank to start in Kerala by 2010

India’s first Islamic bank to start in Kerala by 2010 – Business Standard

http://www.business-standard.com/india/news/india%5Cs-first-islamic-bank-to-start-in-kerala-by-2010/368672/

India’s first Islamic bank to start in Kerala by 2010
George Joseph / Kochi September 1, 2009, 0:56 IST

The first Islamic bank in the country with active involvement of the Kerala government is likely to start operations in Kochi by next year as the bank’s registration formalities are currently being fulfilled on a war footing. The Kerala industries department is actively involved in the new initiative and a high level meeting held at Kozhikode on August 12 had approved a project report prepared by Ernst & Young.

Kerala State Industrial Development Corporation (KSIDC), which is the designated agency for the formation of the bank, will have 11 per cent stake in the proposed banking company.

According to government officials in the know, it will be registered as a non-banking finance company (NBFC) in the beginning and later get transformed into a full-fledged Shari’ah-compliant bank. It is likely that the registration formalities will be completed in the current year itself and the NBFC will become operational in 2010.

The project proposes to raise an initial capital of Rs 500 crore from leading non-resident Indians (NRIs) and Indian business houses. According to sources close to the development, leading NRI businessmen such as Mohammed Ali, MA Yusuf Ali, CK Menon and other Kerala-based industrialists such as Azad Mooppan have shown keen interest in the venture.

Though an RBI study group had eariler rejected the concept of Islamic banking, it got the backing of the Raghuram Rajan Committee on banking reforms. Purely based on Shari’ah principles, the bank will avoid interest-based business activities. The proposed Kerala-based bank plans to invest funds in infrastructure projects, and two areas, Bai al Salam and Instinsa, under Shari’ah have been identified for such investments. The bank will invest all its funds in wealth generating investment avenues and will distribute profit to its shareholders. The proposed Islamic bank will also set apart a social fund, compulsory under Shri’ah principles and the Islamic banking concept, and will provide interest-free loans to the Gulf returnees to set up business or small scale ventures.

The concept is getting widespread support among the Muslim community of the state as a large number of rich Muslims are strictly practicing Shari’ah principles in business.

A major chunk of such persons do not have a bank account. A lot of discussion is also going on whether investment in capital market is against Shari’ah principles. A section of the community believes that share trading is against the fundamentals of Islam. So the formation of an Islamic bank will be a relief to them.

This concept is very popular in West Asia and in predominantly Muslim nations such as Malaysia and Indonesia. Leading international banks such as HSBC and Standard & Charted have exclusive Islamic banking windows.

According to sources, the biggest challenge before the Kerala-based bank will be the formation of a Shai’ah Supervisory Board in order to monitor the activities of the bank. The board should include independent scholars on Shari’ah and banking business.

http://www.business-standard.com/india/news/india%5Cs-first-islamic-bank-to-start-in-kerala-by-2010/368672/

A Call to the Faithful – Forbes India

A Call to the Faithful – Forbes India

For Muslims hesitating to invest for the fear of breaking Islamic principles on money, the Kerala government offers a way out.

Funds for infrastructure projects, and Shariah-compliant investment opportunities for  Keralite Muslims — with one stroke, the Kerala government has come up with a solution for these two problems.

The state government is in the process of setting up a Rs. 1,000 crore investment company that will offer equipment leasing and home loans, and invest in Islamic compliant ways. This will be India’s first government-controlled Islamic company.

The Kerala government’s decision is intelligent. Of the Rs. 43,288 crore that were remitted into the state in 2008, Rs. 18,998 crore came from non-resident Muslims, says a report by the Thiruvananthapuram-based Centre for Development Studies. This money may not be invested in a way that gets the best returns because Muslims fear that the investment may run foul of Islamic investment principles.

Muslims are not allowed to invest in pork, alcohol or  gaming companies.
Image: Anwar Mirza/Reuters
Muslims are not allowed to invest in pork, alcohol or gaming companies.

The Shariah, which stipulates dos and don’ts for observant Muslims, prohibits earning or living off interest. Muslims are not allowed to invest in pork, alcohol or gaming companies. They are not allowed to invest in banks and other companies whose debt is more than a third of their market capitalisation and receivables are less than 5 percent. Most non-resident Keralite Muslims therefore let their money generate sub-optimal returns.

Shariq Nisar, director at Mumbai-based Shariah investment consulting firm, Taqwaa Advisory and Shariah Investment Solutions, says, “A survey found the Malayalee Muslims use their remittances to buy jewelry, real estate or open bank accounts offering no interest. Now the government wants to use it for infrastructure development and to give better returns to these non-resident Keralites.” Nisar’s firm is advising the Kerala government on setting up the Islamic investment company.

The company will ensure that investors’ funds are deployed in Shariah-compliant ways. So, initially it will provide finance for cranes, trucks, wagons or other equipment to infrastructure companies, through a lease-to-own system known as Ijara. Here, the company would buy the capital equipment and the user would pay an instalment that consists of rental for use and part-payment.

The Kerala government’s step is significant. While some small companies have provided some Islamic products, the first government-backed company could provide much needed stimulus to the floundering Islamic investment sector in India. Islamic Funds in Saudi Arabia and Malaysia, two major markets for such investing, have more than $23.86 billion under management, according to a report by  professional services company, Ernst and Young.

The report lists India as one of the countries with high potential because of its large Muslim population and large untapped market thanks to a lack of Islamic financial products including bonds, insurance or mutual funds.

“This allergy the central government had [to religion-specific financial products], meant that Shariah-compliant investments from the Middle East and South East Asia went to European or US companies rather than here,” says Syed Beary, whose construction company has Shariah-compliant funding for his 1.2 million square foot office development project near Bangalore.

Hasib Ahmed, principal investment officer, who manages Asian Development Bank’s Islamic Investment Fund among others, says, “Just because India does not have a banking law for Islamic banking, does not mean that it would be losing out on remittance inflows, as these funds go to support families living at home and are absolutely essential. However, Islamic investment flows might and possibly do not come to India as banking laws do not provide Islamic structures for investments.”

Will Muslims from Kerala invest? Kerala’s industries minister, Elemaram Kareem says, “We want to honour Malayalee Muslims. They invest in Europe or with small religious groups here. Why not us?”

While there are few precedents for this in India, elsewhere for Ijara and Murabaha (home loans where the financing company buys the property, adds a mark-up, and sells it to the user on instalment), the rental or mark-up (rate of return) is often linked to the interest rate in the market. In India, the expected return should be around 9 to 12 percent, Nisar says. Foreign investors who had made Shariah-compliant equity investments, are likely to get returns of around 20 percent, he says. Beary, whose office development project is built with Shariah-compliant funding, says returns could be between 20 and 25 percent.

“Right now we are looking at an NBFC [non banking financial company]. When regulations change we will look at creating an Islamic Bank,” Kareem says. If this happens, it could be India’s first Islamic Bank.

It could go a long way in attracting Islamic investments from non-resident Keralite Muslims. Already, these prefer investing in India’s nationalised banks to banks in the Middle East, some of which went down during the global economic meltdown, says Irudaya Rajan, writer of the study on remittances to Kerala.

The Kerala government says its company, in which it holds 11 percent equity while the rest is held by non-resident Keralite investors, will work to change regulations at a local and national level to allow growth. “The state government’s involvement will bring a comfort level to the central government,” Beary says.

All things considered, answers to some vexing regulatory questions would have to be found before the company can scale up. For instance Murabaha has been hard to introduce in India because it would mean an added cost of getting registration and stamp duty done twice, Nisar says. But it is an area where the state government could amend regulation to allow this.

Making projects Shariah-compliant on a sustained basis is a challenge too. ADB’s Ahmed says he once invested Shariah-compliant money into buying aircraft but the airline had to ensure that alcohol would not be served on it.

To address this, the Kerala government will form a board of Shariah experts to review investments on a quarterly basis. “There is a huge opportunity of channelling Middle Eastern money for such investments,” says Luis Miranda, chief executive of IDFC Private Equity.

The regulatory dimension and difficulty in implementing this, makes involvement of the government, though unusual, a logical decision. “Since this is a first of a kind, we want to assure investors of government involvement and support,” says T. Balakrishnan, principal secretary, Kerala State Industrial Development Corporation, through which the state government is investing in the company. “But it will be professionally run.” ADB’s Ahmed says India’s banking acts will have to be amended as investors would like protection for such investments in the law.

The How

Ijarah
A finance company buys an asset and leases it out to users for a fee. The asset must be used by Shariah compliant companies and both parties should know what it is being used for.

Musharaka
A finance company and the customer buy an asset in joint ownership. The periodical payment from the customer goes towards increasing his equity in the asset until he gains complete ownership. The company makes money from the profits as long is it owns part of the asset.

Murabha
A finance company buys an asset and sells it to a user at a profit. The ownership is transferred to the user who pays back the amount in installments. The rate of return is fixed in advance and is for the time value of the money.

Takaful
Takaful is a communal insurance where liabilities are shared by the community.

Find this article in Forbes India Magazine of 09 October, 2009

http://www.business.in.com/article/breakpoint/a-call-to-the-faithful/4432/0

http://ibnlive.in.com/news/bank-on-us-kerala-makes-investment-offer-to-muslims/102857-7.html