Shariah products see significant growth

Islamic financial products represent a class of investment which appeals to those looking for socially responsible or ethical investments and are a fast-growing asset class globally.

It is estimated that investors globally hold more than $1.5 trillion in Sharia-compliant assets and currently there are more than 500 funds globally that comply with Islamic principles, Central Bank of Bahrain executive director of financial institutions supervision Abdul Rahman Al Baker said at the opening session of the World Islamic Funds and Financial Markets Conference (WIFFMC2012) at the Gulf Hotel yesterday.

“One-third of these funds were launched during the past seven years, while sukuk is another Islamic financial instrument that shows a significant growth during the past five years.

“It was estimated that the global sukuk market exceed $200 billion by the end of the first quarter of this year. Actually, the year 2012 saw a revival in the global sukuk markets due mainly to gradual recovery of global economy and investors’ sentiment which drives the demand for sukuk.

“It is clear that sukuk issuance in the first quarter of 2012 exceeded all expectations reaching a record $43bn globally. This is almost double the average amount of sukuk issued in any given quarter in the past year, and represents half the total amounts of sukuk issued throughout 2011.

“In spite of the recent credit crunch and widespread global economic slowdown, the prospects for growth in Islamic securities markets are likely to be positive,” he said.

Shariah products see significant growth


“This positive trend can be attributed to the rapid expansion and increasing sophistication of the GCC financial markets, as well as the geographical spread of Islamic securities products and services that record remarkable growth in Europe, Asia Pacific countries, North Africa and the energy rich Central Asian states.

“In Bahrain, the mutual funds industry is one of the fastest growing segments of the overall financial sector. With around $9bn in assets under management, through more than 2,700 funds, the industry has been growing at an annual average of about 15pc in recent years. Overall, there are 100 Islamic funds incorporated and registered in Bahrain with total assets of $1.7bn as of March.

“The CBB, through its enabling legislation, promotes the development of new products for investors in both Islamic and traditional finance, while at the same time providing credible regulation in both areas.

“The CBB, having pioneered the development of sukuk, remains active in the sovereign sukuk market, with a total of $1.2bn medium to long-term sukuk issued, complemented by a regular programme of short term issuance,” he added.

“Furthermore, the CBB had successfully issued a five-year maturity Islamic Leasing Sukuk in the local market with a value of BD200m.

“It is the CBB’s hope that such initiatives will go a long way in harmonising market practices and creating a deep and vibrant Islamic capital market.

“Generally, the potential size of Islamic finance market is vast, and the accelerated establishment of Islamic finance hinges on attracting the flow of these potential funds into Islamic investment.

“However, it is important to ensure that Islamic funds and have solid and strong foundations for future development and growth.”


CIMB wins top industry award

The achievements, innovations and excellence in the global Islamic funds and investments industry were recognised yesterday at the WIFFMC 2012.

The annual WIFFMC Islamic Investment Institution of the Year Award, which is one of the most prestigious in the industry, is designed to recognise institutions that have made a significant contribution to the global Islamic funds and investments industry.


The award recognises a leading institution that has demonstrated outstanding achievements and institutional excellence in major performance areas. CIMB Principal Islamic Asset Management was voted as the 2012 WIFFMC Islamic Investment Institution of the Year from a shortlist of nominees through an industry based voting process.

CIMB wins top industry award

CIMB’s nomination for the award was based on their superior and consistent performance of their funds, based on a disciplined investment process.

“We are extremely delighted to have been voted the WIFFMC Islamic Investment Institution of the Year 2012,” said CIMB Principal Islamic Asset Management chief executive Datuk Noripah Kamso.

“CIMB Principal Islamic is committed to offering Islamic investment solutions that best meet institutional global investors’ needs and objectives,” said Ms Kamso.


KSE Meezan Index (KMI-30) – Stellar Performance

The previous decade saw tremendous rise in the acceptability and growth of Islamic financial products in Pakistan.

Deposits of Islamic Banks grew from an insignificant amount in 2002 to over Rs 400 billion in mid 2011, representing 8% market share of the entire deposits in banks.

With the development of the financial markets in the country, there was a need felt for new investment products to facilitate the growth and promotion of savings.

Mutual Funds industry has played an active role in providing new investment alternatives.

Presently, the stands at Rs 333 billion, in which the size of Islamic Funds is Rs 45 billion.

The market share of Islamic mutual funds has shown incredible growth over the period and has increased to 14% from 7.54% in mid 2008, also illustrated in the Figure below:

Need for an Islamic benchmark The index helps Shari’ah conscious investors to identify the Halal equity investments.

With the rapid growth and acceptance of Islaamic products in the market, a void was created for a benchmark that can accurately compare the performance of Islamic equity funds.

KSE Meezan Index (KMI-30) - Stellar Performance

As a result, KSE-Meezan Index (KMI-30) was established by the collaboration between Al Meezan Investment Management Ltd (Al Meezan) and the Karachi Stock Exchange (KSE) in 2008.

Al Meezan, in consultation with Shari’ah Department of Meezan Bank, provides Shari’ah expertise, guidelines, skills and stocks screening towards the activities pertaining the re-composition of the Index; whereas, KSE provides maintenance and dissemination support for the index.

The index helps Shari’ah conscious investors to identify the Halal equity investments.

It also provides them with a suitable benchmark to compare the performance of their investments.

Besides tracking the performance of Shari’ah compliant equities, its construction aimed to increase trust of Shari’ah conscious investors and enhance their participation.

The following table lists the Islamic Equity Funds in Pakistan, all of which use the KMI-30 Index as a benchmark.

In addition, it is also used by five Islamic Balanced Funds and Islamic Asset Allocation Funds for benchmarking.

— We attempt to evaluate the performance of the KMI-30 Index against the other indices on Karachi Stock Exchange since its launch in 2008.

Some interesting facts emerge through this exercise:

Since inception, the KMI-30 index has provided a return of 41% to its investors.

During the same period, KSE-100 (which tracks the performance of the top 100 market capitalised companies) and KSE-30 (which tracks the performance of the top 30 most liquid stocks based on free float methodology) both underperformed considerably; and, in fact, provided negative returns.

The time when KMI-30 Index was launched concurred with a financial crisis that swept the global markets, which also affected Pakistan’s Capital Market.

Despite these setbacks, the KMI-30 has been able to outperform KSE-100 and KSE-30 by 42% and 60% respectively.

Let us illustrate this with an example.

We take three hypothetical passive investors, each of whom invested a capital of Rs 1,000 in the stock market at the start of the FY’08.

They chose to invest differently however.

Investor A invested in the KMI-30 index, while B and C invested in KSE-100 and KSE-30 respectively.

Investor A’s investment has grown to Rs 1,413.57 yielding 41%.

Investor B’s portfolio was worth Rs 991.97 (a loss of 1%) and investor C lost 19% of his investment, which was worth Rs 806.93.

It can be inferred from the same example that once recovery began in the market, KMI-30 index outperformed the KSE-100 and KSE-30 indices over the entire period.

At times, the gap widened substantially.


Qatar Islamic banking directive to set example for other markets

The deadline of Dec. 31, 2011, as per the directive issued by the Central Bank of Qatar (CBQ) in January 2011 requiring the country’s conventional banks which have opened Islamic banking windows to close them down, has passed almost unnoticed.

Despite the initial outcry at the time of the announcement of the directive stressing that it was too arbitrary and the grace period was too tight, there has been no upheaval of the Islamic finance industry in the emirate. Some Islamic bankers are now arguing that the move was required to stem the alleged rampant co-mingling of conventional and Islamic funds at some of the Islamic banking windows, and that the Qatari Islamic banking sector has been successfully re-aligned and consolidated.

The successful implementation of the directive in Qatar could well have implications for other markets in the region and beyond where Islamic banking windows are prevalent. The clear message of the directive is that dedicated standalone Islamic banks are preferable to half-way houses where co-mingling and all sorts of compromises are possible if not the norm. They also give greater legal, regulatory and Shariah compliance clarity and comfort to those depositors and investors interested in Islamic finance.

The affected banks included the Al-Islami window of Qatar National Bank (QNB), the largest bank in the emirate; Commercial Bank of Qatar; Doha Bank; HSBC Amanah; Ahli Bank; Al-Khaliji Bank and International Bank of Qatar (IBQ), which between them had 16 Islamic banking branches in Qatar.

On Jan. 1, 2012 it became clear that only one such window, Al-Yusr of International Bank of Qatar, was acquired by two local Islamic banks — the retail banking assets and business was acquired by Barwa Bank, the newest of the Qatari Islamic banks, while the corporate banking assets and portfolio was acquired by Qatar Islamic Bank (QIB), the largest Islamic bank in the emirate.

The other banks had wound down their Islamic banking window operations complete with removing all signage and of course not opening any new accounts or businesses. Existing Islamic banking customers were in some cases given the option of switching to the banks’ conventional banking business or in other cases to continue payments until affected Islamic financing facilities matured.

An unrepentant CBQ Gov. Sheikh Abdullah bin Saud Al-Thani as late as mid December 2011 warned the affected banks that the directive was “irreversible” and that they must comply with its provisions. In his keynote speech to the 8th International Conference on Islamic Economics and Finance (ICIEF) which was held in Doha in December 2011, Al-Thani articulated the reasons behind the central bank’s directive, which he confirmed is irreversible.

The Islamic Banking Windows, according to Gov. Al-Thani, made it difficult for the banking regulator to effectively implement its monitoring and supervision of these windows.

This issue could not have been highlighted more aptly during the acquisition of Al-Yusr’s Islamic Retail Banking business. As the first such transaction to be closed in the region, albeit under Qatari law, there were some legal and other regulatory challenges which UK law firm, Eversheds, which acted for Barwa Bank, successfully navigated through within the provisions of existing Qatari legislation.

“The IBQ window was not a separate legal entity. As such, its assets and liabilities were a part of the conventional bank. We therefore had to consider how best to separate and then package and transfer these assets and liabilities. There were also challenges concerning transition services that were required post completion to serve the transferring customers,” explained Amjad Hussain, partner and head of Islamic Finance at Eversheds, in a recent interview.

The central bank also found that the coupling of conventional and Islamic banking activities at the same institution, undermined competition and transparency in the affected banks. At the same time, there is much confusion over the balance sheet treatment of the assets and liabilities of the Islamic banking windows in the financial reports of the conventional banks, which are not separated. As such this has implications for the risk management process of the institution.

Al-Thani gave the thumbs up to the Qatari Islamic banking industry which boasts four Islamic banks — Qatar Islamic Bank, Qatar International Islamic Bank, Masraf Al-Rayan and Barwa Bank. These banks, he added, have a crucial role in the country’s banking sector and economy, in compliance with the objectives of the Qatar Vision 2030 and its first application through the First Strategic National Development Project 2011-2016.

He reminded Qatari Islamic banks of their partnership role in financing economic development and projects in the country, and stressed that he was confident that the Qatari Islamic banks will rise to and are capable of taking up this challenge together with their conventional counterparts. The Islamic banking sector has a 20 percent market share of the total banking industry in Qatar, which has four dedicated standalone Islamic banks.

It was way back in 2005 that the CBQ allowed conventional banks to launch Islamic Banking Units (IBUs), which have contributed to the growth of the sector and to the profitability of the banks, and which have attracted an estimated customer base of just under 100,000.

Eversheds’ Hussain rejects any notion of arbitrariness in the action of the CBQ in issuing the directive. The action, he contended, is “part of a wider process of supporting and shoring up the banking industry in Qatar. You have to look at it in the context of the proactive approach of the central bank during the recession when it helped a number of local banks to remove some of the toxic debts that they had exposure to. The CBQ is also making sure that there are enough opportunities for all the market players.”

Previously, the Islamic banking windows were barely competing because of co-mingling issues and because they were able to offset overheads through the conventional banks. There was a feeling that the market was not as transparent as it could be. In addition to regulatory issues, the central bank had to deal with two separate businesses dealing with different banking activities – Islamic and conventional.

“I believe competition was an issue, because the pure Islamic banks were seen to be at a disadvantage. The Islamic banking windows at the conventional banks were able to use backroom services in their banks. There were also regulatory and corporate governance concerning how manage different banking platforms under one roof which is what the conventional banks were trying to do. This resulted in a culmination of issues which the CBQ is trying to address in its efforts to improve out the banking sector,” explained Hussain.

HSBC’s Islamic unit says funds to exceed $10bn

HSBC Amanah Securities Services, part of HSBC Holdings, will more than double the value of the Islamic funds it services to exceed $10bn after it helps to set up funds in the next 12 to 18 months.

Demand for Islamic funds has risen in the past three to six months as the global economic slowdown prompted investors to seek alternative investments to help manage risk, according to Germain Birgen, Luxembourg-based global head of HSBC Amanah Securities. The unit will help set up more than 30 Sharia-compliant funds globally.

About $10 trillion was wiped from the value of global equities in the third quarter amid concern a worsening European debt crisis will derail global growth. Sharia law forbids gambling, investments in alcohol and receipt of interest, so fund managers have to select investments deemed halal, or permissible.

“Islamic funds are not exposed to the same level of derivative techniques as conventional funds,” he said in a telephone interview from Luxembourg today. “Conventional institutional managers, targeting institutional investors such as pension funds or insurance companies, are investing in socially responsible investments, which in most markets, Islamic funds fall under that category,” he said.–426036.html

‘Sukuk market proved resilient in the face of the crisis’

JEDDAH: NCB Capital, Saudi Arabia’s largest investment bank and leading GCC wealth manager, discussed the future of Islamic funds industry at the 7th World Islamic Funds Conference held recently in Bahrain under the theme “Global and Regional Economic Outlook: Assessing the Impact on the Performance of Islamic Funds.”

Addressing the conference, NCB Chief Economist Jarmo Kotilaine said: “Strong growth in Islamic banking continues apace,” noting that global Islamic banks’ assets have increased considerably from $145 billion in 2002 to $1,033 billion in 2010.

He added: “While the global economic crisis negatively impacted the Islamic banking sector after growing at double-digit pace for a number of years, resulting in Islamic banking assets slowing down to 9.8 percent in 2009, growth accelerated again to 26 percent in 2010 and the interest for Islamic finance continues to grow even in non-Islamic countries as reflected by the fact that there are over 300 Islamic financial institutions worldwide across 75 countries.”

Discussing sukuk, Kotilaine reported that the sukuk market proved resilient in the face of the crisis, stating that globally, funds raised through sukuk issues grew from $2.8 billion in 2001 to $53.2 billion in 2010 and even during the tumultuous period of 2008-2009 funds raised from sukuk increased significantly.

“Sukuk are also emerging as a new asset class for investors, since asset-backed/based instruments provide relative capital protection and predictable returns to investors, while In addition, a near-absence of long term financing tools and a growing importance of long term capital projects launched in the region have also increased the attractiveness of sukuk.

“After a brief setback in 2010, increasing private sector activity is driving the revival in the GCC sukuk market. Funds raised through sukuk in the GCC in 2011 reached 38 percent ($17 billion) of global issuance up to September 2011, compared to only 28 percent ($7.6 billion) and 22 percent ($6.1 billion) in 2009 and 2010 respectively. Corporate issuance of sukuk in 2011 accounted for around 87 percent ($14.6 billion) of total issuance compared to 77 percent ($4.6 billion) of total issue in 2010.”

According to NCB Capital, Islamic finance is gaining prominence in non-Islamic countries. In the UK, the government has set an objective to make London the hub for Islamic finance and there are plans to issue sovereign sukuk and amend tax laws on IF. France, Germany, Japan, Singapore and South Korea are other countries where the governments are taking active steps to promote Islamic banking and finance, while Hong Kong aims to become the Islamic finance gateway to China.

Looking at the prospects of global economic recovery, Kotilaine commented that economic slowdown in the US, inflationary shocks in Asia and sovereign debt in the EU all remain a core risk to the global recovery.

“After growing by a dismal 0.4 percent in Q1, the US economy grew by 1 percent in Q2, 2011 while the unemployment rate remained over 9 percent during this period. Also, the ratings downgrade by S&P hit the country’s credibility in the international markets. Furthermore, the IMF in its June 2011 report revised the US economic growth forecast downward to 2.2 percent from its previous projection of 2.4 percent for 2011. Over the long term, with US public debt close to 100 percent of GDP mark, substantial increase in the rate of fiscal tightening in coming years is more likely.

“Sovereign debt concerns along with faltering recovery clouds the EU economic outlook,” said Kotilaine. “Germany, the largest economy in the EU region slowed down during Q2 to only 0.1 percent QoQ largely due to a decline in household spending and higher imports. In France, economic activity stagnated with real output witnessing no growth during 2Q, while the Spanish economy contracted by 0.2 percent in the same period. Overall, lack of confidence in the Euro zone’s ability to effectively manage the sovereign debt concerns continues to hurt investor sentiments.”

Moving on to the subject of emerging economies, Kotilaine reported that although their growth rate is nearly twice the pace of their industrialized world counterparts, they are facing increasing inflationary pressure.

“While emerging market central banks continue to raise interest rates, inflation remains at elevated levels – the CPI interest rate in China was 6.2 percent in August while the WPI inflation in India continues to hover near the 10 percent mark. Money tightening along with sluggish recovery in the West will likely have a negative impact on the emerging markets’ economic growth.

“Even though the IMF revised its growth projection for the emerging economies to 6.6 percent from the earlier 6.5 percent for 2011, growth will likely slow down on account of emerging global pressure.”

Islamic investments industry on growth path

MANAMA: The Islamic funds and investments industry has gained substantial momentum at an international level as more and more international issuers and investors are continuing to seek Sharia-compliant instruments as an attractive alternative for raising capital.

With the intensification of the globalisation process in the Islamic funds and investments industry, it is essential that the exciting opportunities in new jurisdictions are tapped into in order to sustain global growth for the Islamic investments industry.


The Seventh Annual World Islamic Funds and Financial Markets Conference (WIFFMC 2011) will feature critical discussions that will focus on strengthening the Islamic funds and investments industry and building international growth by tapping into exciting new jurisdictions.


Convened under the official support of the Central Bank of Bahrain (CBB), WIFFMC 2011 will gather more than 400 key players, regulators and thought leaders in the global Islamic funds and investments industry at the Gulf Hotel from September 26 to 27.


“Amidst increasing international integration of Islamic finance, cross-border Sharia-compliant investment flows are increasingly contributing to more efficient mobilisation and allocation of funds across regions and also strengthening the financial and economic linkages across various jurisdictions,” said conference organiser David McLean.

“These trends have undoubtedly supported and reinforced the recovery and growth of the global Islamic funds and investments market.


“It is essential that the recent momentum that the Islamic funds and investments industry has gained in the post-crisis landscape is further intensified in order to get the industry back on the high-growth track.”


“There are tremendous opportunities for the industry as investors are in search of new investment avenues and asset-classes for greater risk diversification and improved returns,” said CBB executive director financial institutions supervision Abdul Rahman Mohammed Al Baker, who will make the opening keynote address.


“It is essential that the industry undergoes innovation in terms of introduction of new asset-classes, improvements in global Sharia standardisation, and development of new products and structures. It is also vital to facilitate greater sharing of technical expertise and experiences on Islamic financial markets and infrastructure development including the harmonisation of regulatory arrangements. WIFFMC 2011 will be an ideal platform for the industry to tackle these critical challenges.”

Mideast gears up for Islamic Finance 2.0

Although operating on a lower risk profile due to restrictions on hedge funds, short-selling and high yield products, Islamic banks still faced challenges last year in manufacturing, distribution and IT governance. However, recent developments have helped boost optimism that the Islamic finance boom in the last decade was not a one-off.

Although the Islamic finance industry amounted to $1tr globally in 2010, it has too often been measured in relation to volumes of Islamic bonds outstanding, the number of standalone banks worldwide, or the size of the Islamic funds industry. Indeed, one of the many fallouts of the global financial crisis is that investors have grown more cautious when analyzing the performance of this fast-growing industry.

Like the aviation sector, Islamic finance has always been complex and costly. Islamic financial solutions have to abide to the guidelines of Sharia law and must be monitored for life by auditors and the boards of Sharia scholars.

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Malaysia should be ready for challenges in Islamic finance

KUALA LUMPUR: Malaysia has all the ingredients to be a success story in Islamic finance but it will not come by itself, according to Prof Volker Nienhaus.

He advised the country to prepare itself for the second phase of competition with the new entrant of Islamic finance markets such as South Korea and Thailand.

“One has to identify and take it as a challenge and not to compete with the first phase of South Korean or Thai initiative but prepare for the second phase. Let them prepare the market but be prepared for the second phase,” Nienhaus told StarBiz in an interview. Nienhaus is a visiting scholar under the Securities Commission (SC)-Universiti Malaya (UM) Visiting Scholar Programme. Continue reading

Ulema announce Shariah standards for investment in stock market

Mumbai: Ulema and clerics have given their nod, with some conditions, to investment in stock market, saying share trading is closer to Shariah than the present banking and insurance system. The Islamic Investment and Finance Board (IIFB), which has Maulana Wali Rahmani and Maulana Khalid Saifullah Rahmani as Members among others, have come up with Shariah standards for investment in stock market.

IIFB members met in Mumbai recently and discussed in details the share trading and investment in stock market in the light of Shariah. The meeting was attended by Maulana Wali Rahmani, Sajjada Nasheen, Khanqah Munger, Maulana Khalid Saifullah Rahmani, General Secretary, Islamic Fiqh Academy, Mufti Fuzailur Rahman Usmani, Mufti Shoaibullah Khan, Mufti Mohd Yahya Qasmi, Mufti Anwarul Haq Qasmi and Maulana Obaidullah Neyaz Qasmi.

Giving details about the Shariah standards formulated by the Ulema and members of IIFB, Imtiaz Merchant, Founder of Pragmatic Wealth Management Pvt. Ltd., told media in Mumbai on 18th Jan. 2011 that the Ulema while admitting there are some unpleasant aspects of stock market in the eye of Shariah, they concluded it is closer to Shariah than banking and insurance industry.

IIFB, according to Imtiaz Merchant, felt purchase and sale of shares is the modern form of Shirkat which is allowed by Shariah, so compared to banking system and insurance system, share trading is closer to Shariah. With some conditions, therefore, investment in stock market can be done, though it can’t be said that even following the conditions, share trading will be completely Shariah compliant. But compared to other forms of investment, this is better and has less evils, said Merchant adding that as Muslims are not in position to run their own economic system, this can be adopted. Continue reading