Islamic Finance: Islamic Sukuk By Goldman Sachs Causes Debate

A controversial plan by Goldman Sachs to issue an Islamic bond has ignited a wider debate on whether conventional banks in the West should be allowed to engage in Islamic finance.

At a major conference of Islamic scholars and bankers in London this week, much of the public and private discussion was devoted to whether growing Western interest in Islamic finance could damage the industry by compromising its religious principles.

Some participants argued investment banks such as Goldman should be banned from issuing Islamic bonds, or sukuk, because the funds they raised could help to finance other parts of their business that did not comply with sharia or Islamic law.

“A conventional bank, with the exception of multilateral development banks like the World Bank and the Asian Development Bank, should not be allowed to issue sukuk,” said Badlisyah Abdul Ghani, chief executive of CIMB Islamic, the Islamic unit of CIMB Group, Malaysia’s second biggest bank.

“The basic principle of Islamic finance is that you should only finance activities that are consistent with sharia, and conventional rib (interest) is not,” he told Reuters on the sidelines of the Euromoney Islamic Finance Summit.

Other participants said the industry could not bar conventional banks and should focus instead on ensuring that each of their Islamic transactions complied with sharia law.

“The fact that these sukuk are issued by Goldman Sachs or by another Western bank really makes no difference whatsoever as far as judgement of sharia is concerned,” Mohamed Elgari, a prominent Islamic scholar, said during a panel discussion.

“An institution has no religion and therefore cannot be judged on religious grounds. Our judgement is always on the structure of the transaction, and whether it is permissible or not and had the necessary sharia requirements.”

The debate could affect Western access to a fast-growing area of the financial world. Estimated at over $100 billion, global sukuk issuance is still dwarfed by trillions of dollars worth of conventional bonds. But Western banks are becoming more involved in Islamic finance as its pool of wealthy, conservative investors from the Gulf and southeast Asia makes it a stable source of funds during the global financial crisis.

HSBC’s Middle East unit became the first Western bank to issue a sukuk last May with a $500 million, five-year Islamic bond. France’s Credit Agricole said last October it was considering whether to issue a sukuk.

Goldman’s sukuk became controversial partly because for many investors, the U.S. investment bank embodies aggressive, sophisticated Western financial engineering.

It announced in October that it planned to issue a sukuk worth as much as $2 billion based on murabaha, a structure that instead of interest, which is banned by Islamic principles, uses a cost-plus-profit arrangement to pay investors.

Some Islamic finance analysts questioned whether the underlying structure of the sukuk was really murabaha, and suggested Goldman might use the proceeds of its sukuk to fund interest-based banking activities.

They also said the sukuk might violate a ban against pure monetary speculation if it traded between investors on the Irish Stock Exchange, where it would be registered, at levels other than par value.

The controversy has put the top authorities of Islamic finance in a difficult position. Big Western banks such as Goldman could help the industry grow by providing trading liquidity, trained personnel and access to Western investors. But the credibility of the industry could suffer if it is perceived to be manipulated by Western institutions.

Asked about the participation of Western banks, a top official of one of the international bodies which sets standards for the industry replied: “That’s a tough question — there is a sharia-compliant issue.

“It requires a seriousness of purpose and respect of Islamic finance, and if those two are not there, I am not sure how they would participate,” said the official, declining to be named because of the sensitivity of the issue.

He noted that Malaysia’s central bank, for example, stipulated Islamic banking activities could only be transacted by a licensed Islamic bank. But he added that this should not exclude Western banks from all involvement in the industry.

“Western banks can certainly participate in terms of underwriting and helping in structuring the products.

Most participants at the conference said there was unlikely to be any sustained, concerted push within the industry to exclude conventional or Western banks from areas of Islamic finance. Some big Western banks, such as HSBC, already operate well-established Islamic arms offering a range of services.

Any attempt to exclude conventional banks could also be thwarted by the industry’s decentralised structure.

Bodies such as the Malaysia-based Islamic Financial Services Board and the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) set standards which they hope banks will follow, but they cannot impose rules; that is up to national regulators in each country.

Ultimately, therefore, the success of Islamic financial products offered by Western banks is likely to come down to whether investors choose to buy them. The Goldman case suggests they will.

Banking sources in the Gulf told Reuters this week that Goldman, which insists its planned sukuk obeys Islamic principles and will not be used to raise money for interest-based activities, was talking to potential Saudi Arabian buyers and was likely to have no problem in attracting enough demand.

A copy of the fatwa or Islamic ruling behind the Goldman sukuk, which was seen by Reuters, showed five sharia scholars had signed it. The AAOIFI’s guidelines stipulate that at least three scholars advising on a bond programme should approve it in writing before issuance.

However, the Goldman controversy could cause conventional banks to take more steps in future to allay potential concerns over whether they are following Islamic principles.

Aznan Hasan, one of the scholars who signed the Goldman fatwa, said there were no sharia-related problems with the sukuk. The intention to list on the Irish exchange is purely for tax purposes, he said. But he added that Goldman should consider more measures to address doubts.

“I personally think the issue now is what is the mechanism to ensure that it is not traded, and even if it is traded, that it’s traded at par, and they have to come up to us with a mechanism for that,” he told Reuters.

He said Goldman might issue an additional or complementary prospectus to address this aspect and describe how it would ensure proceeds of the sukuk were only used for sharia-compliant purposes. Goldman might also agree to issue a letter to its board of sharia scholars whenever it used the proceeds, or agree to quarterly audits, he added.

“If they can put all the mechanisms in there, then there shouldn’t be any problem,” said Hasan. “The murabaha is not a new one — there is nothing new in the structure.”

Another scholar, Sheikh Edam M. Ishaq, said the Goldman case might lead to institutional reforms in the industry and closer scrutiny of sukuk issues in general.

“There must be some regulatory body to monitor and ensure the compliance of these issues, otherwise sooner rather than later the attraction of sukuk as Islamic liquidity management instruments will lose a lot,” he said.

http://www.huffingtonpost.com/2012/02/23/refile-debate-rages-over-_n_1296351.html?ref=religion

Economy: Morocco, first Muslim banks soon

 

 

Morocco might soon create its first Islamic banks. The issue is indeed one of Benkirane government’s priorities: the Parliamentary group of PJD, the moderate Islamic party having won November’s elections, has already finished writing the draft bill to be presented at the Chamber of Deputies, drafted by a team of Party’s experts led by the General Affair and Governance Minister Mohamed Najiib Boulif. On the financial instruments’ market, the so-called “Islamic” instruments were already partially available, but the institutes managing them had never expressed their interest in the creation of specialized banks. However, PJD’s victory changed many things, since the model has proved to resist the crisis and showed a large potential for growth. The draft bill begins with classification of the general principles underlying products currently traded by banks, grouping them into halal (allowed) and haram (forbidden) by Sharia and specifies that lending must not be the source of profit. Imposing interests is therefore prohibited and lending is not considered a form of trading anymore: “Funding agreement with banks imply participation of the bank itself in both profits and losses”. Actually, Islamic banks do not merely propose financial brokering services as in traditional banking regimes; they play an active role in wealth generation, transformation and trade processes. The draft bill proceeds to determine which financing models are allowed. In general, they are “contracts compliant to Sharia regarding the use of funds aimed at generating profits”.

The institutes allowed to work within this system are grouped in three categories: Islamic banks, financial institutions similar to Islamic banks and Islamic financial institutions.

Today, any moral entity allowed to collect funds, manage and invest them according to the Islamic law might be labelled as Islamic bank. These institutes would be subject to Sharija, not to current laws regulating the credit institutions and similar bodies, except the provisions that are already compliant with the Sharia. This would not prevent Islamic financial institutes from entering today’s bank system: they would act under protection of Bank Al-Maghrib, the Moroccan Central Bank and by the National Council of Money and Savings, according to provisions of the Central bank, both as far as monitoring and prudential principles are concerned. The PJD project would also allow traditional banks to convert into Islamic banks, either totally or partially, creating branch offices, local cash desks or investment funds specialized in this kind of activity.

According to La Vie Eco, the total amount of funds currently circulating in the world’s Islamic finance is estimated at more than USD 1000 bln in 2011, that is, a growth by 50% over 2008 and by 21% over 2010. About one fourth of the world’s population is Muslim, so the system has significant potential for growth; experts estimate that Islamic finance might absorb between 40 and 50% of savings in this group.

http://www.ansamed.info/ansamed/en/news/sections/economics/2012/02/15/visualizza_new.html_98777833.html

Islamic banking draft moots five-member Sharia board

MUSCAT: A five-member Sharia board, exclusive branches for window operation, clear cut segregation of conventional and Islamic banking with separate teams of people and accounts and a 12 per cent capital adequacy ratio are the main highlights of the Islamic Banking Draft Framework (IBRF) presented by the Central Bank of Oman before chief executives of banks in Oman.

CBO has organised a consultative meeting for top officials of banks on January 25 for presenting the draft Islamic banking rules, which the apex bank’s consultants Ernst & Young termed as a ‘unique model.’ The banking regulator is still working on the regulation, and may incorporate changes on the basis of feedbacks from banks, before announcing it. Ernst & Young has advised the CBO on fixing of lending limits, single borrower limit, writing of rule books, procedures for reporting structure for Islamic banks and formation of Sharia board.

Of the five-member Sharia board, three should be experienced Islamic scholars and two should be from relevant field, either a professional in Islamic law or Islamic accounting, chief executive officers of two leading banks, who attended the consultative meeting, told Times of Oman. CBO’s draft regulation also stipulates on separate branches for Islamic banking window operation of conventional banks.

“There needs to be a separate team of people for accounts, information technology, marketing and compliance for Islamic banking line of business. There is also a separate head for Islamic banking. However, the back office support can be common for conventional and Islamic banking.

The whole idea is to create a perception among general public that these are two distinctly different lines of business,” said a chief executive of a bank, who does not want to be named. The draft regulation also insists on a 12 per cent capital adequacy, with a minimum paid up capital of RO10 million for starting window operation.

Another major suggestion for window operation is that funds can be pumped into Islamic line of business by a conventional parent bank, but Islamic banking operation can not transfer money for using it in conventional banking. “This could create problems at the macro-level, at least initially.

For instance, if all banks put together transfer RO1 billion into Islamic banking initially and in case half of the total funds can not be deployed due to lack of demand for credit, then the money can not be transferred back to conventional line of business for effectively deploying in the financial system,” noted another CEO of a bank, who viewed it on a macro economic level.

Another major concern expressed by bankers is the lack of availability of Sharia scholars to become board members of Islamic banking. “Everybody is getting into Islamic banking now. We are talking about 30 Sharia scholars. It is difficult to get people with relevant experience and it is going to be a challenge.

Even the region does not have that many people. This is what we are discussing with the Central Bank of Oman,” noted the official. It is also not clear whether a Sharia scholar can be a member of two boards.

Bankers also expressed their concerns on segregating risk management for Islamic banking line of business from conventional banking. “At the end of the day, risk is the same whether it is Islamic banking line of business or conventional line of business. And therefore, it should be on the parent bank and not separate it for Islamic banking,” noted the banker.

Sources also noted that there will be severe competition, with the imminent entry of two Islamic banks.

http://www.timesofoman.com/innercat.asp?cat=&detail=54388&sec=news

Islamic banking aims at meeting needs of faithful: Abu Ghuda

Zainab Al Ansariah

MUSCAT The Islamic banking system is an attempt to return to the Islamic civilisation, which still has its impact in all fields in the western and eastern countries, according to Sheikh Dr Abdulsatar Abu Ghuda, who is specialised in the field of jurisprudence as the chairman of legitimacy monitoring in a number of financial Islamic authorities.

Abu Ghuda, who works at Makased Company for Islamic Financial consultations, said in an Oman Tribue interview that money is not the goal but it is a means to a better life. “The Islamic banking system is a national product that comes from the civilisation of Muslims and meets the requirements of people,” he said.

Islamic banking is not replacing the expression ‘interest’ with another expression but it has its own rules and principles according to the Sharia and everyone should understand that it is not a matter of expression or title but a matter of content and rules. The Islamic bank is not a bank, which raises the title of Islamic bank, but a bank, which follows the legal regulations, he said.

The traditional banks charge ‘interest’ when a customer takes a loan, but in that loan the bank does not take a risk while the person who takes the loan has to pay additional amount in case of delay in making payments. Therefore, in this case, the bank takes more than what is worth, he said.

In the Islamic banking system, the profit is known before sanctioning a loan, and no additional payments will be added once the loan deal is signed. Thus, it is clear to everyone that the traditional bank charges progressive interest for the loan, while in the Islamic system the relation between the bank and the customer is a partnership, which follows the system of ‘profitability’.

Sheikh Abdulsatar Al Qatan, director-general of Shura Company for legitimated consultations in Kuwait and a member of Fatwa and legal supervision in number of Islamic financial companies and institutions, gave another example for the Islamic banking system to clear people’s doubt on the issue.

“When a person applies for a loan from a bank to buy or rent a house, the bank has an option to buy the house and sell it to that person and ask him to pay in instalments as per the profitability system.”

Al Qatan added that in this transaction the customer knows all the financial details and knows the interest figure. Also the bank can sell the house through ‘renting system’ in which it rents the house to the customer for a certain period of time, which will be ended by transferring the ownership to the customer.

In the above example of Islamic banking deals, there is a commodity, the house. Its price is known and so are the instalments for the two parties, thus making it a profitable deal.

The Islamic bank also offers many services, for example, if a company requires finance to meet its capital, the bank enters into a partnership deal with the company in which the bank finances the company with known amount of money, and gains a portion of profit from the company while the additional profits will go to the company itself.

http://www.omantribune.com/index.php?page=news&id=111281&heading=Oman

Islamic banking conference set

MUSCAT — The Sultanate’s first conference on Islamic banking and finance will be held next week in co-operation with the Central Bank of Oman (CBO).

The two-day conference, due to be held at Al Bustan Palace Hotel on January 23 and 24, will be organised by Al Iktissad Wal-Aamal Group.

The opening ceremony of the conference will be presided over by Darwish bin Isma’eel al Balushy, Minister Responsible for Financial Affairs.

The conference will tackle key issues on the Islamic financial industry, including policies and regulatory perspectives of Islamic finance, the growth of Islamic banking and its international propagation, Islamic finance and capital market activities, the supervisory and regulatory role of the Sharia code and socio-economic accountability.

Conference is also to consist of sessions revealing the latest research and studies accomplished by a group of prominent specialists, academics and senior staff in the financial and Islamic banking sectors, from diverse regional and international leading organisations and corporations in the industry.

The conference will bring together around 400 participants from various Arab and Islamic countries, including representatives of foreign banks and investment firms and commercial and consulting firms and a number of Sharia panels in the Arab and Asian countries.

Speakers include Hamoud bin Sangour al Zadjali, CBO Executive President, Sultan bin Nasser al Souwaidi, Governor of the Central Bank of the UAE, Ra’ed Charaf Eddine, First Vice-Governor of the Central Bank of Lebanon, Adnan Ahmed Youssef and Chairman of the Union of Arab Banks. — ONA

http://main.omanobserver.om/node/79822

Morocco to promote Islamic finance

The issue of Islamic finance has taken centre stage in Morocco after the Justice and Development Party’s (PJD) electoral triumph.

Supporters of sharia-compliant banking pin hopes on the new government to create the first Islamic bank in the kingdom.

The PJD has talked of promoting Islamic finance on a number of occasions. Just a few days after his appointment as prime minister, Abdelilah Benkirane received a visit from Sheikh Khalid Bin Thani Al Thani, president of the Qatar International Islamic Bank (QIIB), who set out plans for establishing an Islamic investment bank and insurance company in Morocco.

Bank Al-Maghrib Governor Abdellatif Jouahri said last month that Morocco was interested in Islamic finance and viewed the idea of creating Islamic banks as part of the new financial platform in Casablanca.

A chapter on finance to meet the demands of sharia law will be included in the new banking law, he said.Meanwhile, economic analysts are critical of Morocco’s delay in enforcing Islamic banking.

According to economist Slimi Noureddine, the political will to promote Islamic finance is lacking. He insisted that Morocco should take the matter in hand to benefit from Arab investment, particularly from the Gulf states.

According to Bank Al-Maghrib, the worldwide market in Islamic finance will double in 2015, with a predicted value of $2.8 trillion (2.19 trillion euros). In Morocco, transactions coming under the umbrella of Islamic finance barely accounted for 800 million dirhams (72 million euros) in the third quarter of last year, which is a drop of 100 million dirhams (9 million euros) from 2010.

Officials blame this reduction on the reluctance of Moroccan banks to set up institutions which specialise in alternative finance, Noureddine said. He added that the expenses of alternative products can also be prohibitive, in addition to the slow-down in the housing market in recent months.

The analyst commented that Morocco should draw inspiration from successful experiences in other countries, so that this sector can be developed to meet public aspirations.

The African Development Bank, he said, has just published a report on the current situation of Islamic finance in North Africa.

“The report underlines that Islamic banking services in these countries, including Morocco, are struggling to develop, and looks at their future prospects and the extent to which they could contribute to economic development,” Noureddine said.

According to PJD Assistant Secretary-General Lahcen Daoudi, there has been much talk about the theory of Islamic finance in Morocco, but now the time has come to explore this channel which could bring considerable amounts of capital into Morocco.

He added that the sector is calculated to be worth more than a trillion euros worldwide.”Morocco needs to bring in regulations dedicated to this sector to attract a large part of it,” Daoudi said.

http://www.zawya.com/story.cfm/sidZAWYA20120118051821/Morocco_to_promote_Islamic_finance

KPMG holds training on Islamic finance

MUSCAT — KPMG, a leading international firm offering audit, tax, and advisory services recently organised a training at Crowne Plaza Hotel, Muscat on Islamic finance products and their accounting treatment under IFRS.

This training was organised by KPMG for its clients and members of professional staff. The objective of the training was to educate participants about the characteristics of various Sharia compliant financial products and how to deal with their accounting issues under IFRS and under standards issued by association of auditing and accounting standards of Islamic financial institutions.

As part of the introduction Khalid Ansari, partner, KPMG Oman mentioned that the training is part of KPMG’s endeavour to equip its professional staff and clients with the best of professional knowledge so that they are prepared in advance to deal with the developments that are taking place in the field of Islamic Finance.

The training was conducted by Mohammed Tariq, partner responsible for Islamic finance in the Lower Gulf practice of KPMG and he was supported by a Senior Manager, Samiuddin Siddiqui of Islamic Finance unit based at the KPMG unit in UAE.

The full day training course included topics on ‘introduction to Islamic banking and business model’, ‘challenges faced by the Islamic banking’, nature and salient features of Sharia compliant products like ‘Murabaha’, ‘Modaraba,’ ‘Musharika’, ‘Wakala’, ‘Tawarruq’ and ‘Sukuk’. There was a separate session dedicated to Sharia compliant insurance product ‘Takaful’.

Shakaib Mahmood, Director responsible for Islamic finance at KPMG, Oman stated that as the regulatory authorities are now getting closer to issuance of regulations and framework for the Islamic financial industry, the clients and professionals need to make advance preparations to be fully ready to deal with Islamic finance products in Oman.

Overall, I think the training was well received by the clients and staff of KPMG, said Shakaib Mahmood, and I look forward to an increasing number of participation from our clients in our forthcoming Islamic finance seminars and training sessions.

After the formal presentation there were plenty of opportunities for questions and answers. A number of participants shared their own experiences and perspectives.

KPMG is a global network of professional firms providing audit, tax and advisory services. We operate in 146 countries and have 138,000 people working in member firms around the world.

In the Lower Gulf, comprising Oman and UAE, KPMG employs more than 700 professionals and operates from five offices in Muscat, Dubai, Abu Dhabi, Sharjah and Jebel Ali.

http://www.zawya.com/story.cfm/sidZAWYA20111227031508

Ghana positive on starting Islamic banking

The central bank of Ghana says it will consider giing a license for the regime of Islamic banking in the country if a formal request is made.

According to the governor of the Bank of Ghana (BoG), Mr Kwesi Amissah-Arthur, the Bank will consider such a regime if a “formal request is made”.

“For now there has been no request for us to consider Islamic banking from any group,” Amissah-Arthur told journalists in Accra December 21, 2011.

“I think when a request is made – we should be able to consider it,” he adds.

Mr Amissah-Arthur noted that his fellow governor in Nigeria, Lamido Sanusi, is trying to get him to attend one of the country’s Islamic Banking association conferences.

But governor Amissah–Arthur said he doesn’t know that as a fact  but some of the wealthiest persons in Northern Nigeria are objecting to the system.

Islamic banking (or participant banking) is banking or banking activity that is consistent with the principles of Islamic law (Sharia) and its practical application through the development of Islamic economics, according to Wikipedia.

Sharia prohibits the fixed or floating payment or acceptance of specific interest or fees (known as Riba or usury) for loans of money. Investing in businesses that provide goods or services considered contrary to Islamic principles is also Haraam (forbidden). While these principles may have been applied to historical Islamic economies, it is only in the late 20th century that a number of Islamic banks were formed to apply these principles to private or semi-private commercial institutions within the Muslim community, added the user-generated content site.

In neighbouring Nigeria with a population of over a 150 million the central bank had granted approval in principle to Jaiz Bank International Plc to operate as the country’s first Islamic bank, news publication ThisDay reports June 21, 2011 citing Elombah News.

It is expected that the regime will bring about 70 million muslims to particpate in the banking industry in Nigeria.

In line with its plans to entrench Islamic Banking culture in the country, the apex bank had early this year rolled out its guidelines on Sharia governance for Islamic Banking, according to ThisDay.

Sanusi Lamido Sanusi – Nigeria Central Bank governor

But the introduction of Islamic banking in Nigeria is bringing some divide within the country’s religious (both Christians and Muslims) leaders.

A Voice of America (VOA) report July 15, 2011 indicates some sects, especially Christians are saying the move violates the country’s secular constitution.

The Christian Association of Nigeria says the move violates the country’s secular constitution and comes at a dangerous time when security forces are battling Islamic fundamentalists who are fighting for an independent nation ruled by Islamic law, reports the VOA.

A Catholic priest named Father Paul Anyansi of the the St. Peter Claver Catholic church told the VOA that he recognizes the potential economic benefits of Islamic banking but believes its dangers are far greater.

The Standard Chartered Bank has also hinted of starting Islamic banking services in Oman and Nigeria with talks with regulators ongoing, the BusinessDay news publication reports December 12, 2011 citing Wasim Saifi, StanChart’s global head of Islamic banking as telling reporters.

http://www.ghanabusinessnews.com/2011/12/23/ghana-positive-on-starting-islamic-banking/

Benchmark a major step for Islamic finance

Last month, the world’s first Islamic interbank benchmark rate (IIBR) was launched. It was the result of a collaborative approach taken by many Islamic financial institutions, industry associations and Sharia scholars over the course of 24 months to address a decades-old industry challenge:

how to decouple Islamic finance from a conventional western pricing benchmark (Libor) when an “Islamic” alternative was not available. The objective was to support and preserve Islamic finance authenticity.

The IIBR is an interbank benchmark that offers a reliable and realistic standard to better measure the cost of funding for Islamic financial institutions. As contributed pricing for Sharia-compliant funding, it represents the DNA of an Islamic banking industry that is today focused on commercial banking over investment banking.

IIBR brought together more than 20 Islamic finance institutions to create a proprietary Islamic pricing benchmark. It is a major indication to the world that Islamic finance has come of age and can be seen as a sustainable and rapidly developing feature of global financial markets.

The benchmark is designed to be used to price a number of Islamic instruments including common overnight to short-term treasury investment and financing instruments such as murabaha, wakala and mudaraba, retail financing instruments such as property and car finance, and sukuk and other Sharia-compliant fixed-income instruments. It can also be used for the pricing and benchmarking of corporate finance and investment assets.

We expect the benchmark to grow organically as industry use and acceptance increase. As the industry gets used to the idea of its own proprietary benchmark and its scope becomes more global, we expect to see banks use the rate to price their interbank liquidity placements.

As that gains traction, banks will start to use it for their corporate and retail banking facilities. The rate has reached its full potential when we see investment banks providing syndicated Islamic financing (loans) and debt (sukuk) issuance using the rate.

Since the launch of IIBR, it has received much attention around the world for the positive step that it is.

Understandably though, the significance of IIBR and what it means for the Islamic finance industry, indeed the very position of Sharia-finance in Islam and the wider world, means that it provokes strong opinion and debate.

And we must address the critics if we are to achieve the full potential of this initiative. After all, these commentators are important additional stakeholders.

All collaborations start with open minds and transparent dialogue, and so here I hope to address some of the key points raised.

What is the difference between IIBR and Libor – the London interbank offered rate? Put simply, IIBR measures expected profit while conventional benchmarks such as Libor measure interest rates.

The IIBR question for contributors explicitly refers to the cost of raising Sharia-compliant funding and is therefore based on returns generated by Islamic assets.

The IIBR rates represent the aggregate risk profile of Islamic financial institutions, by way of their assets on the balance sheet, and the geographies in which they operate. This is important for two reasons.

 

On an economic level, now more than ever, conditions in Europe or the US do not necessarily reflect the conditions in the Middle East funding market, although there will inevitably be a connection as global financial markets are always intertwined.

How is IIBR representative and reflective of global Islamic finance treasury funding costs?

This is only a beginning. At present, we have a strong base in GCC countries, we have three major Malaysian banks and are in conversations with others, and we have started conversations with banks in Turkey, Pakistan and other jurisdictions.

How will IIBR address cross-border funding costs?

The precondition for cross-border funding is establishing local rates, and we are starting a dialogue with more countries with established Islamic banking industries. The more important point is that a transparent process or methodology is in place for price contributions, and its integrity is overseen by our benchmark committee with rules that will punish banks, including expulsion, that violate the agreement they have signed.

Why are only murabaha contribution rates used?

Murabaha is the predominant form of funding for Islamic banks. However, the IIBR is instrument-neutral as decided by the Islamic benchmark committee, and in the future, when other instruments such as wakala or mudaraba become more widespread, a higher proportion of contributions could be derived from other rates.

Is IIBR only for Islamic financial institutions?

IIBR, like Islamic finance, is for all people and institutions for all times. As an accurate and transparent measure of market activity, it is suitable for a variety of uses in the modern financial markets of the world. With IIBR, conventional banks will now have more confidence in their counterparty Islamic banks because their rates will be benchmarked and publicly available.

http://www.thenational.ae/thenationalconversation/industry-insights/finance/benchmark-a-major-step-for-islamic-finance

Oman's Bank Muscat to launch Islamic banking arm

Dec 19 (Reuters) – Bank Muscat, Oman’s largest bank by assets, will set up a sharia-compliant banking arm, it said in a statement, becoming the latest financial institution to announce plans to operate in the sultanate’s fledgling Islamic finance sector.

Operating under the Meethaq brand name, the bank will function independently from the conventional arm and has appointed a three-member sharia board.

No timeframe for the start of operations was given, with the new bank still subject to the Central Bank of Oman’s approval, the statement added.

Oman said in May it would allow Islamic banking in the country for the first time, in an attempt to keep investment funds in the Gulf state and grab a share of the rapidly growing industry.

Earlier this month, Standard Chartered said it was studying whether to offer Islamic banking in Oman.

So far, two new Islamic banks have been granted banking licences – Bank Nizwa and Al Izz International Bank – while conventional lenders are also allowed to establish Islamic banking windows, as Bank Muscat has done.

http://www.reuters.com/article/2011/12/19/muscat-islamic-idUSL6E7NJ3KX20111219