Ontario – Celebrating a growing market of Shari`ah-compliant funds, Canadian Muslims are resorting to products that comply with Islamic principles for their retirement income and investments.
"The way I actually look at Shari`ah-compliant products is mainly as a subset of ethical, or socially responsible investing [such as avoiding the adult entertainment industry or any company that may negatively impact the environment]," Mohammad Khalid, a retired economist living in Oakville, Ontario, told CBC News on Monday, February 27.
Khalid, a devout Muslim, said Muslims must be careful about their investments, such as securities and equities.
Managing his own portfolio, he invests in sectors such as mining, forestry and technology as well as helping his older children save for their retirement.
"The whole market is essentially available, excluding some of the major ones [such as insurance companies and banks]. ...There are so many different companies which will keep giving you dividends year after year," Khalid said.
Shari`ah-compliant funds in Canada are focused on mining, forestry and technology.
"We've assisted in getting the Shari`ah-compliant certification for a couple of the mutual funds that are in Canada right now," said Rehan Huda, a director with Amana Canada Holdings, a niche financial firm that sells Shari`ah-compliant investment funds.
"There’s one fund – a bullion fund – that’s a fairly large fund that has gold, silver, platinum stored here, and it’s a purely Shari`ah-compliant fund.
"Since we're heavily in resource and technology-weighted [funds] ... when those do well, the Shari`ah funds generally do well."
Islam forbids Muslims from usury, receiving or paying interest on loans.
Islamic banks and finance institutions cannot receive or provide funds for anything involving alcohol, gambling, pornography, tobacco, weapons or pork.
Shari`ah-compliant financing deals resemble lease-to-own arrangements, layaway plans, joint purchase and sale agreements, or partnerships.
Investors have a right to know how their funds are being used, and the sector is overseen by dedicated supervisory boards as well as the usual national regulatory authorities.
The Shari`ah-compliant system is now being practiced in 50 countries worldwide, making it one of the fastest growing sectors in the global financial industry.
With the growing Muslim population in Canada, the demand for Shari`ah-compliant investments was increasing.
"An inordinate amount of cash is found among Muslim investors that I know ... and they are waiting for Shari`ah-compliant products," Huda, from the director with Amana Canada Holdings, told CBC News.
"In the future, there’s going to be a lot more products because the population is increasing here."
Muslims make around 2.8 percent of Canada's 32.8 million population, and Islam is the number one non-Christian faith in the Roman Catholic country.
A recent report from the Washington-based Pew Forum on Religion & Public Life said that Muslims are expected to make up 6.6% of Canada’s total population in 2030.
A testament to the growing interest in Shariah-compliant investing is Standard & Poor’s introduction of its Shari`ah stock index (S&P/TSX 60 Shariah Index) into the Canadian market in 2009.
The index recategorizes equities on the S&P/TSX 60 and excludes all equities that do not comply with Islamic law, which is based on the Muslim holy book, the Qur'an.
Though many Canadians think the Shari`ah-compliant funds are not profitable, Khalid says there are many "wonderful companies" that can help investors reap big dividends, including technology companies.
"Absolutely nothing is holding them back," he said.
"If they don’t [invest], obviously they’re losing something big time. You can reduce your taxes big time."
Starting almost three decades ago, the Islamic banking industry has made substantial growth and attracted the attention of investors and bankers across the world.
A long list of international institutions, including Citigroup, HSBC and Deutsche Bank, are going into the Islamic banking business.
Currently, there are nearly 300 Islamic banks and financial institutions worldwide whose assets are predicted to grow to $1 trillion by 2013.
State Bank of Pakistan (SBP) Governor Yaseen Anwar on Tuesday said Islamic banks need to offer agriculture financing to tap the huge productive potential of the sector.
Speaking as chief guest at the inaugural session of the two-day 2nd International Conference on Islamic Business (ICIB- 2012) organised by Riphah International University at National Institute of Banking & Finance (Nibaf), Governor SBP regretted that Islamic banks have not been able to come out of the conventional shadow and lack better risk management and due diligence.
Islamic banks have been working both in international and domestic market in the conventional shadow.
He said the agriculture sector and SMEs are of paramount importance for the growth but these were highly ignored, urging Islamic banks to tap huge opportunities available in the agriculture sector.
The agriculture sector is contributing 21 percent to the Gross Domestic Products (GDP) and provides 40 per cent of the employment whereas Pakistan is fifth milk producer in the world.
He said Nestle and other international companies have realised the opportunity and making investment in the dairy sector.
He said huge opportunities exist for Islamic banks in agriculture sector and they must make efforts to tap these through agriculture financing.
He said inclusive growth is beneficial only and Islamic banks are required to be more aggressive and increase their outreach beyond major cities and deplored that 70 percent of their branch network was confined to 12 major cities of the country.
He said the SBP is working to provide Islamic interbank market to Islamic banks and regulator has been taking measures to help Islamic banking in Pakistan.
He said the Islamic banking system has to come out of the conventional shadow and overcome the lack of understanding about risk management and training and capacity obstacles.
Yaseen said that Islamic banking has been growing at a very robust rate of around 30 percent for the last six years and constitutes 8.5 percent of the total deposits of banking sector.
Yaseen said over 886 branches of Islamic banks have been working in the country but the industry is still facing challenges that are required to be addressed.
The debate, he said has now started how the Islamic banking system should move towards stability.
He said Islamic finance is a profitable economic opportunity and the country is required to learn a lesson from the global financial crisis.
Yaseen said despite financial crisis, the fundamental of the economics of Western countries are very deep and it would be a misconception that their system has collapsed.
He said financial institutions have to be cautious and prepare themselves to show resilience against any sort of crisis.
Yaseen said the Islamic financing has been lacking in better risk management and due diligence and key challenge for them was their working both in international and domestic markets in conventional shadow.
He said despite all this, he was optimistic about global and domestic role of the Islamic banking and considers it most dynamic area of financial services today.
Financial and economic devastation caused by the recent financial crisis has provided further impetus to the healthy growth momentum, as the Islamic financial system is increasingly being looked at as a prudent, stable and viable alternative against the conventional system.
He said despite all the positive developments during the last decades there exist many critical issues, which needs to be addressed to sustain the growth momentum on long-term basis.
The Governor State Bank said it is very encouraging to see that Riphah International University has arranged the second International Conference to discuss the critically important issues pertaining to Islamic finance product, monetary policy in an Islamic economic system and liquidity management.
He said the State Bank, being the regulator as well as the promoter and facilitator of the industry, will look into the recommendations of the Conference for possible adoption and implementation.
He congratulated Riphah International University for organising such an important event at international level on regular basis.
The country’s pioneer in Shariah-based family and general insurance Syarikat Takaful Malaysia Bhd recorded another year of strong growth in 2011, with profits exceeding the RM100 million mark for the first time in its three decades of establishment.
Takaful Malaysia attributed the improvement in profit largely to the improved investment and underwriting results along with strong business growth.
“We aim to continue outpacing the market to grow our market share. The task ahead of us is to capture a sizable portion of the expanding market as the takaful industry is expected to grow between 20% to 30%,” said the company’s group managing director Datuk Mohamed Hassan Kamil in a statement.
“Our competitors are not only the other takaful operators since many are quite recently established. We believe the real competitors are the conventional insurance companies and we need to rise to the challenge of these multinational giants,” said Mohamed Hassan.
“At Takaful Malaysia, our internal research and development (R&D) team will be constantly creating new products to ensure that we remain competitive,” he added, highlighting that the company has recently launched a new comprehensive investment- linked product, Takaful myGenLife — which was expected to achieve RM20 million first-year contributions in 2012.
In Malaysia, Mohamed Hassan said the bancatakaful and group employee benefit business have achieved substantial growth of more than 75% last year.
“This success can be attributed to strong support from our corporate clients, bank partners and loyal customers, as well as initiatives to streamline our systems and operational efficiency which enable us to serve our customers better.”
Meanwhile, he said, takaful subsidiaries in Indonesia are also beginning to show some recovery after a change in management during 2011.
“In the long term, we believe the potential for growth in Indonesia is significant and we are well positioned to capture this majority Muslim market.”
For the financial period ended Dec 31, 2011, net profit soared 204% to RM78.5 million.
The company’s profit before taxation and zakat grew 55% to RM101.4 million from RM65.3 million for the annualised 12 months in financial year 2010 (FY10) — the actual financial period for FY10 was 18 months, while its operating revenue increased by 17% to RM1.4 billion.
“The company’s return on equity continued to improve — up to 19% compared to 10.2% last year; while earnings per share rose to 48.5 sen compared to 23.1 sen for the annualised 12 months in FY10,” said Mohamed Hassan. “Total assets size has risen by about 20% to RM5.9 billion from RM4.9 billion in the period of 12 months.”
Last year, Takaful Malaysia declared an interim dividend of 7%, comprising 5% less 25% income tax and 2% single tier, which was paid on Dec 2, 2011.
Takaful Malaysia was incorporated on Nov 29, 1984, and commenced operations in July 1985. It has an authorised capital of RM500 million and a paid up capital of RM162 million.
The company provides two types of takaful business — family and general — and has over 40 outlets nationwide with total assets of RM5.9 billion at group level.
As new market participants enter the scene, Shariah banking continues to grow despite the threat of a global recession. But is the industry also progressing in terms of unity and transparency?
When bankers from East and West gathered in Manama at the 18th Annual World Islamic Banking Conference in November 2011, one topic was prevalent at nearly all discussion rounds: standardization.
But while Islamic Finance is expanding to new frontiers such as Uganda, France, Egypt, South Korea and Oman, the objective to make Shariah-compliant financial products more standardized appears more and more like a far-fetched daydream.
Let's take France, with its legal environment based on the Napoleonic Code civil. The French jurisdiction differs greatly from British Common law or Case law, the predominant legal framework in England, the centre of Islamic finance in Europe. How shall a financial solution, let's say an Islamic trade financing based on Murabaha, be used by a London-residing bank if it was legalized in France? Calls for more standardization overlook the individual nature of national jurisdictions, which still exist even in the 27-member states European Union.
The Common law is also used in the Dubai International Financial Center (DIFC), one of the major Islamic banking hubs in the Middle East, while the jurisdiction in the UAEis based on a mix of the French Code Civil and Islamic law. "Both legal environments differ too much from each other," says Houram Houssani, Partner at the GCC's largest law firm Al Tamimi & Co. in Dubai. "This is why we think the DIFC will, legally, continue to exist as a state in the state within the UAE."
At the same time, Qatar has implemented a strict separation between Islamic and conventional banking, banning Islamic windows at all conventional lenders in the country, a first in the industry.
Divergent views on Islamic Finance's future
Anecdotal evidence also shows that the leading market participants do not agree at all in the direction Islamic Finance shall take, as AMEinfo.com has learned when from interviewing experts at conferences. One Islamic Finance consultant based in Dubai blames some banks for not operating in an Islamic way at all but "running a Shariah-bank with a conventional window". Other professionals are outraged that some financial firms try to develop Islamic derivatives or even Islamic hedge funds despite the fact that Shariah bans interest, short-selling and speculation.
In some cases, rules set by the Islamic Financial Services Board (IFSB), one of the most accepted international standard setting organizations, are even stricter than the guidelines for the conventional world. According to Rohit Verma, product management director at Oracle Financial Services, the IFSB "has stricter capital requirements than those proposed in Basel III, with tier 1 and total capital requirements currently standing at 8% and 12% respectively. The minimum common equity requirements for Basel III are set at 4.5% and total capital requirements have been set at 8% with a 2.5% buffer," Verma writes in an article published in New Horizon (Issue October - December 2012). Although Basel III does not distinguish between conventional and Islamic banks, the rules are primarily set for the conventional world, as the Shariah finance universe stands for 1% of the global economy.
"Focus on a few things, not many things," is a favourite piece of advice from legendary investor Warren Buffet. Maybe it is time for Islamic finance to focus on its strengths, namely to provide a non-conventional, non-interest ethical way of banking and investing rather than trying to put the whole industry under one hat, labelled "standardization", a task which seems to be "Mission: Impossible" as more participants enter the scene.
Islamic banks to subscribe $600mn while $400mn will be publicly raised
A long-awaited mega Islamic bank to be headquartered in Bahrain may be launched this year and $600 million of its $one billion capital will be contributed by Islamic banks in the Arab region, a senior banker has said.
The remaining capital will be subscribed by local sovereign wealth funds and other financial institutions and investors, said Adnan Youssef, chairman of the Beirut-based Union of Arab Banks (UAB).
Touted to be the world's largest Shariah-compliant unit, the bank idea was first floated in 2009 but was delayed many times because of the repercussions of the 2008 global fiscal distress, Gulf debt default problems, the European Union debt crisis and the political unrest sweeping the Middle East.
Youssef, also CEO of the Manama-based Al Baraka Banking Group, had first said the bank would have a capital of $10 billion and would be a joint venture between regional Islamic banks and other investors.
"This bank will have a paid up capital of $one billion, of which $600 million will be subscribed by Islamic banks in the region and the rest by other financial institutions, including SWFs," he told the UAB's magazine.
"In order for us to enter the market with this project, we must first get the $600 subscription, which we expect before the end of 2012.....the remaining shares will also be floated before the end of the year."
Demand for Islamic banking soared after the 2008 crisis and default problems and this has prompted several banks to set up Shariah-compliant units. Some banks have expanded existing units while others plan to launch such services.
Islam bans interest, investing in prohibited sectors and stipulates that risk and reward be shared among all those in the business venture.
Saudi Arabian businessman Sheikh Saleh Kamel, who owns Al Baraka, is behind the plan to create a giant Islamic bank to be owned by many Shariah-compliant.
Saudi Arabia's Al-Rajhi group was the world's largest Islamic bank at the end of 2010, controlled $49.2 billion in assets, nearly a fifth of the combined assets of the Arab region's Islamic banks, according to UAB.
The Kuwait Finance House (KFH) came second by assets, which stood at $43.7 billion at the end of 2010 compared with $39 billion at the end of 2009.
Dubai Islamic Bank (DIB) was ranked third, with assets of about $24.5 billion, followed by Abu Dhabi Islamic Bank (ADIB), with around $20.5 billion.
Al-Baraka Group came fifth, with nearly $15.8 billion while Qatar Islamic Bank (QIB) controlled the sixth largest assets of $14.2 billion.
The report showed Al-Rajhi also had the largest capital of around $8.08 billion at the end of 2010. KFH came second with around $4.3 billion, followed by DIB with nearly $2.6 billion, QIB with $2.5 billion and ADIB with $2.2 billion.