All posts related to KL Conference on Islamic Wealth Management & Financial Planning 2018 - KLC-IWM-2018

Saturday, 30 June 2012

Oman plans Islamic finance rules before year-end

SYDNEY (Reuters) - A regulatory framework for Islamic finance is taking shape in Oman as government bodies move towards meeting the country's stated aim of making sharia-compliant products available to the public this year. But logistical challenges and the limited size of the market may prevent entrants to the business from making quick profits.

Legislation covering takaful (Islamic insurance) and sukuk (Islamic fixed income securities) is expected to be finalized by the end of the third quarter of the year, Capital Market Authority officials told Reuters.



Approval of the country's first takaful license will follow soon afterwards, as three applications have already been received by the regulator, Ahmed Al Harrafi, takaful team leader at the CMA, said by telephone.

This complements efforts by the country's central bank to introduce a law that will supervise Islamic banks; the law is in its final stages of review, said Mohammed Al Abri, senior director at the CMA.

Last year, after insisting for years that its banking industry should be purely conventional, Oman reversed its stance and said it would introduce Islamic finance, partly to prevent outflows of funds to sharia-compliant institutions elsewhere in the Gulf.

But the introduction of the regulatory framework may not produce a rapid surge of activity. Many institutions are still grappling with the need to obtain product expertise, arrange oversight by boards of Islamic scholars, train staff and build computer systems.

"There is an expectations mismatch," Azmat Rafique, head of Islamic banking at Oman Arab Bank, told Reuters. "On the ground things haven't been finalized...and banks are still gathering teams and systems."

Last week newly formed Bank Nizwa, the country's first Islamic bank, failed at a shareholders meeting to appoint its board of directors, despite an initial public offer of shares that raised 60 million rials ($156 million) last month. This could potentially delay its schedule for launching products.

COMPETITION

Also, banking competition will be stiff. Bank Nizwa obtained its banking license last year along with Al Izz International Bank, another new Islamic institution; they will bring the total number of locally incorporated banks to nine.

Oman will thus have 19 commercial banks for a population of only about 2.8 million, with the three largest lenders initially accounting for about 60 percent of total banking assets, according to central bank data.

Competition will be increased by the fact that conventional banks will be allowed to use Islamic windows to offer sharia-compliant products through their existing branch networks. Bank Muscat, which has Oman's largest branch network of 130 offices, this week joined Bank Sohar and National Bank of Oman in saying it would deliver products this way.

Converting some existing conventional banks into Islamic banks could streamline the broad banking industry, but the central bank has not indicated whether this will be permitted, commercial bankers said. The industry may in any case not be advanced enough to handle such conversions, said Rafique.

Recent consolidation in the banking sector has been limited to a merger of HSBC's Omani business with Oman International Bank, the country's fifth largest lender, which obtained approval earlier this month.

Rafique predicted 10 percent of existing bank customers in Oman would eventually make the switch to Islamic banks, which would also attract a similar number of people who are currently outside the banking sector because of their religious belief in avoiding interest.

TAKAFUL

The takaful legislation, on the other hand, will not allow the use of Islamic windows but instead require stand-alone operations with paid-up capital of 10 million rials, Al Harrafi said.

But such capital requirements are difficult to justify in a sector eager to build scale, said Shyam Zankar, regional head at Bahrain-based Medgulf Allianz Takaful.

In addition, takaful companies will also have to be publicly floated on the country's stock exchange within five years of launch, Al Harrafi said, adding that this requirement might dampen the interest of at least one of the applicants.

Two firms have begun headhunting for senior positions in anticipation of entry into Oman's takaful market, said a Gulf-based chief executive of an insurance firm, who asked not to be named.

STANDARDS

In the area of monitoring Islamic product standards, Oman is opting for the decentralized approach which prevails in the Gulf, rather than the centralized Malaysian model. This could facilitate early growth of the industry, by permitting a wider range of competing products, but perhaps limit broad interest in Islamic finance across the population because of the lack of a single, commonly accepted sharia board overseeing the industry.

The CMA, which became a member of the Malaysia-based Islamic Financial Services Board in March, considered creating a centralized sharia supervisory body but this option was not chosen, Al Harrafi said. An Islamic banking circular from Oman's central bank urged each bank to establish its own sharia board.

The standards of the Accounting and Auditing Organization for Islamic Financial Institutions, a Bahrain-based industry body, will be used as guidelines by the central bank, Rafique said, adding that only the accounting standards are mandatory.


(Chicago Tribune News / 26 June 2012)


---
Alfalah Consulting - Kuala Lumpur:
www.alfalahconsulting.com
Islamic Investment Malaysia:
www.islamic-invest-malaysia.com

The prospect for sukuk in Indonesia

The yield premium for Indonesia’s dollar-denominated Islamic bonds over Malaysia’s dropped by the most in a year this month as falling oil prices eased the burden on the budget and made room for economic stimulus.     

The spread between Indonesia’s 8.8 percent Islamic debt due April 2014 and Malaysia’s 3.928 percent note due June 2015 narrowed 33 basis points in June to 56 basis points. The yield on the Indonesian securities fell 41 basis points, while the Malaysian rate declined five basis points. Five-year credit-default swaps on Indonesian debt dropped 40 basis points in June, the most since October, according to data provider CMA, even as the rupiah headed for a fifth monthly decline.     

The government will test investor appetite when it sells global Shariah-compliant securities following the Eid al-Fitr holiday that ends Aug. 22, Rahmat Waluyanto, the director- general at the debt management office, said June 11. A seven-year sukuk would probably yield 3.5 percent to 3.75 percent in the coming sale, down from 4 percent at the last offering in November, after two of the three major ratings companies returned the nation to investment grade, according to Mega Capital Indonesia and BNI Asset Management.     

“Investors are still very optimistic about Indonesia despite the weak rupiah,” Brustifian Domi, the head of fixed income at Lautandhana Securindo, said in an interview in Jakarta yesterday. “Our budget deficit is small so we have the capacity to roll out stimulus as needed, and growth is driven by domestic consumption, so it may be more resilient compared with its regional peers.”                      

‘Investor appetite’     

The five-year credit-default swap was at 204 yesterday from this year’s high of 254 reached on June 1, according to CMA, which compiles prices quoted by dealers in the privately negotiated market. The contracts insure debt against non-payment and traders use them to speculate on credit quality. A drop signals improving perceptions of creditworthiness, while an increase suggests the opposite.     

“The declining credit-default swaps level indicates investor appetite to enter the Indonesian market because of strong fundamentals,” Ariawan, a fixed-income analyst at Mega Capital who like many Indonesians goes by only one name, said in a June 27 interview in Jakarta. “The new sukuk will definitely yield less” than previous ones, he said.     

Worldwide sales of bonds that comply with Islam’s ban on interest reached $21 billion this year, compared with $14 billion in the same period of 2011, according to data compiled by Bloomberg. Offerings totaled a record $36.7 billion in the whole of last year.                         

Budget deficit     

The government is confident it can maintain its budget deficit at 2.3 percent of gross domestic product, below the legal limit of 3 percent, Deputy Finance Minister Anny Ratnawati said June 19. Oil prices fell 22 percent since March 30, a day before parliament decided to refrain from reducing fuel subsidies. Standard & Poor’s, the only major ratings company that doesn’t assign Indonesia an investment-grade ranking, said it was “disappointed at the setback.”     

“The rating upgrade from S&P is one of the catalysts we are waiting for after it was unfortunately delayed,” Sonny Afriansyah, a portfolio researcher at BNI Asset Management in Jakarta, which manages Rp 6.1 trillion ($646 million) of funds, said in a June 27 interview. “When we return to investment grade at S&P, we expect to see yields decline much further.”                        

Stimulus measures     

Shariah-compliant securities worldwide returned 5 percent in 2012, the HSBC/Nasdaq Dubai US Dollar Sukuk Index shows, while debt in developing markets rose 6.9 percent, according to JPMorgan Chase & Co.’s EMBI Global Composite Index.     

Average yields on global Islamic bonds were 3.45 percent yesterday, the lowest level since August, according to the HSBC/Nasdaq index. The difference between the average yield and the London interbank offered rate, or Libor, was at 243 basis points.     

Indonesia will implement stimulus measures by tapping last year’s 24 trillion rupiah budget surplus to fund building projects and raise the tax-free annual income level to boost consumption as the debt crisis in Europe threatens to derail global growth, Bambang Brodjonegoro, head of fiscal policy at the finance ministry, said on June 13.                         

‘Growth story’     

Bank Indonesia predicts the economy will grow at the lower end of its 6.3 percent to 6.7 percent forecast range this year, supported by strong domestic consumption and investment, it said in a June 12 statement. The nation’s population of 248 million, the world’s fourth-largest according to the US census bureau, means it is less reliant on exports than many other Asian economies. Malaysia’s gross domestic product will increase by 4 percent to 5 percent in 2012, central bank Governor Zeti Akhtar Aziz said last month.     

“Malaysia’s sukuk is relatively steady as the economy has been fairly stable,” Sheikh Faiz Mohamed, the fixed-income manager at the investment division of Syarikat Takaful Malaysia Bhd., which oversees about 5 billion ringgit ($1.6 billion) of assets, said in a phone interview from Kuala Lumpur yesterday. “The growth story is more with Indonesia because it has more potential considering the bigger population and rising incomes.


(Jakarta Globe / 29 June 2012)


---
Alfalah Consulting - Kuala Lumpur:
www.alfalahconsulting.com
Islamic Investment Malaysia:
www.islamic-invest-malaysia.com

Qualified Islamic bankers must for Islamic banking

KARACHI: There is need to change non-qualified personnel in Islamic banking besides staff from conventional banks into Islamic financial experts so that Islamic banking could be run by qualified Islamic bankers. Chief Executive Officer of AlHuda Centre of Islamic Banking and Economics, Muhammad Zubair Mughal said this while addressing the First International Forum of Islamic Banks and Financial Institutions, under the patronage of Prime Minister of Jordan Dr Fayez al-Tarawneh. He said Islamic banking and finance should not be only for well-off business personnel or middle class but its benefits should also be disseminated to poor through Islamic microfinance so that they could get rid of poverty and live their lives respectfully through proper employment. He said presently, Islamic banking is growing at a very rapid pace and the Central Asian countries, Kazakhstan, Afghanistan, Tajikistan, Uzbekistan, Kyrgyzstan, Azerbaijan and African countries-Nigeria, Tanzania, Kenya, Ghana, Tunisia, Senegal etc, are its new destinations. staff report


(Daily Times / 30 June 2012)


---
Alfalah Consulting - Kuala Lumpur:
www.alfalahconsulting.com
Islamic Investment Malaysia:
www.islamic-invest-malaysia.com

15% sukuk growth seen

KUALA LUMPUR: The Islamic finance industry will grow 15% annually in the next decade, after syariah- compliant banking assets surged in Asia in the past year, according to a global standards-setting body.
Holdings in Malaysia rose 27% to RM344bil in the 12 months to April 30, according to the central bank. In Indonesia, they climbed 43% to 144.3 trillion rupiah (US$15.2bil), official data show.
Rising consumer demand for banking services was helping drive the market, Jaseem Ahmed, secretary general of the Kuala Lumpur-based Islamic Financial Services Board (IFSB), said in a June 21 interview.
Government spending programmes in the key Islamic centres of Asia and the Middle East were bolstering economic growth and bringing in more funds for lenders, Rafe Haneef, chief executive officer at HSBC Amanah Malaysia Bhd, said on Tuesday. Industry assets may reach US$1.1 trillion in 2012, compared with US$826bil in 2010, according to a report from Ernst & Young LLP.
“Islamic banking assets worldwide have been growing at an average rate of 15% to 25% annually,” Rafe at the syariah-compliant unit of HSBC Bank Plc, said in an interview. “More and more countries, such as Egypt, are shifting to Islamic banking.”
Syariah banking in Indonesia accounted for 3.8% of the total in April, while the ratio was 24% in Malaysia, data from the monetary authorities show. Saudi Arabia’s US$94bil of financial assets that comply with religious tenets represent 26% of the market in the six-member Gulf Cooperation Council, according to a June 21 report from Deloitte Middle East Islamic Finance Centre in Manama, Bahrain.
Lenders’ assets have the potential to grow further as more countries adopt Islamic financing and sell sukuk, according to law firm Lee Hishammuddin Allen & Gledhill.
Oman and Hong Kong are in the process of drafting legislation, while Turkey, Afghanistan and South Africa are planning sukuk sales. Egypt was looking to introduce Islamic banking in a “big way,” HSBC’s Rafe said.
Issuance of bonds that comply with Islam’s ban on interest climbed to US$20.8bil in 2012 from US$14bil in the same period in 2011, led by the Middle East, according to data compiled by Bloomberg. HSBC Bank predicts full-year offerings will surpass 2011’s record of US$36.7bil.
“The outlook is positive for Islamic finance, with growth being primarily focused on consumer demand,” Megat Hizaini Hassan, a partner and head of the syariah-compliant finance practice at Hishammuddin Allen, said in an e-mail on Monday. “The emergence of new markets would be the main driver.”
The IFSB predicted in 2007 that the global Islamic finance industry would reach US$2.8 trillion by 2015. Jaseem declined to give a new forecast. “The industry is strong and growing and it’s expanding geographically,” he said.
Syariah-compliant notes have returned 5% this year, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index, while debt in developing markets gained 6.9%, JPMorgan Chase & Co’s EMBI Global Composite Index shows.
Average yields on global Islamic bonds dropped three basis points to 3.46% on Wednesday, the lowest level since August, according to HSBC. They declined 16 basis points, or 0.16 percentage point, this quarter.
The difference between the average and the London interbank offered rate narrowed three basis points to 242, the least since April 20, the HSBC index shows. The gap shrunk six basis points since March 30.
The International Monetary Fund predicts economic growth in Asia and the Middle East will outpace the United States this year as governments boost spending to shore up their economies from the euro-area debt crisis. – Bloomberg
Asset Projections
Gross domestic product in the Middle East and North Africa will increase 4.2 percent in 2012, compared with 2.1 percent in the U.S. and a contraction of 0.3 percent in Europe, the Washington-based fund forecast in its latest outlook report issued in April. Asia’s developing countries will see growth of 7.3 percent, it said.
Malaysia, the biggest market for sukuk, has implemented a 10-year $444 billion development program to build power plants, roads and railways. Indonesia, home to the world’s largest Muslim population, plans to tap last year’s $2.5 billion budget surplus to fund construction projects.
Malaysia is targeting Islamic banking assets to reach 40 percent of the total by 2020. In Indonesia, they will account for 15 percent to 20 percent within 10 years if growth is sustained, Halim Alamsyah, deputy governor of Bank Indonesia, said in a speech on May 7 in Bandung in western Java.
“Islamic finance has developed not only in traditional Muslim markets like Malaysia and the Middle East, but also in conventional markets,” Zainal Izlan Zainal Abidin, executive director for Islamic capital markets at the Securities Commission, said in an e-mailed statement yesterday. There are “a growing number of jurisdictions across the globe at various stages of developing their capabilities in Islamic finance,” the note said.
--With assistance from Yudith Ho in Jakarta. Editors: Simon Harvey, Sandy Hendry
To contact the reporter on this story: Liau Y-Sing in Kuala Lumpur at yliau@bloomberg.net

(The Star Online / 29 June 2012)


---
Alfalah Consulting - Kuala Lumpur:
www.alfalahconsulting.com
Islamic Investment Malaysia:
www.islamic-invest-malaysia.com

Malaysia: Overseas expansion key in future Islamic capital market

KUALA LUMPUR: The next phase of growth of the Islamic capital market would be characterised by greater internationalisation, which would see more product as well as service providers expanding beyond their home market
The Securities Commission’s executive director of Islamic capital market Zainal Izlan Zainal Abidin said more investors would seek products or instruments with international exposure.
Speaking at the 7th Islamic Markets Programme yesterday, he said there would also be greater diversity in terms of currencies used in issuingsyariah-compliant instruments.
Izlan said the Islamic finance industry was at a crucial stage where it needed to redefine and establish the enabling environment that would spur its next phase of growth. Islamic finance, he said, had developed into an industry with global appeal, marked by a 15% average annual growth rate over the past decade, to reach US$1.3 trillion today.
As for Malaysia’s Islamic capital market, the Capital Market Masterplan 2 is expected to grow at an average rate of 10.6% annually, over the 10-year period to 2020.
Izlan said Islamic finance had developed not only in traditional Muslim markets like Malaysia and the Middle East, but also in conventional markets and financial centres such as the United Kingdom, with a growing number of jurisdictions across the globe at various stages of developing their capabilities in Islamic finance.
Themed “Building the Environment for the Growth of Islamic Finance,” the IMP attracted 41 local and international participants including Islamic finance practitioners, members of academia and regulators.

(The Star Online / 28 June 2012)


---
Alfalah Consulting - Kuala Lumpur:
www.alfalahconsulting.com
Islamic Investment Malaysia:
www.islamic-invest-malaysia.com

Thursday, 28 June 2012

Oman plans Islamic finance rules before year-end

Legislation covering takaful (Islamic insurance) and sukuk (Islamic fixed income securities) is expected to be finalised by the end of the third quarter of the year, Capital Market Authority officials told Reuters.
Approval of the country's first takaful licence will follow soon afterwards, as three applications have already been received by the regulator, Ahmed Al Harrafi, takaful team leader at the CMA, said by telephone.
This complements efforts by the country's central bank to introduce a law that will supervise Islamic banks; the law is in its final stages of review, said Mohammed Al Abri, senior director at the CMA.
Last year, after insisting for years that its banking industry should be purely conventional, Oman reversed its stance and said it would introduce Islamic finance, partly to prevent outflows of funds to sharia-compliant institutions elsewhere in the Gulf.
But the introduction of the regulatory framework may not produce a rapid surge of activity. Many institutions are still grappling with the need to obtain product expertise, arrange oversight by boards of Islamic scholars, train staff and build computer systems.
"There is an expectations mismatch," Azmat Rafique, head of Islamic banking at Oman Arab Bank, told Reuters. "On the ground things haven't been finalised...and banks are still gathering teams and systems."
Last week newly formed Bank Nizwa, the country's first Islamic bank, failed at a shareholders meeting to appoint its board of directors, despite an initial public offer of shares that raised 60 million rials ($156 million) last month. This could potentially delay its schedule for launching products.
COMPETITION
Also, banking competition will be stiff. Bank Nizwa obtained its banking licence last year along with Al Izz International Bank, another new Islamic institution; they will bring the total number of locally incorporated banks to nine.
Oman will thus have 19 commercial banks for a population of only about 2.8 million, with the three largest lenders initially accounting for about 60 percent of total banking assets, according to central bank data.
Competition will be increased by the fact that conventional banks will be allowed to use Islamic windows to offer sharia-compliant products through their existing branch networks. Bank Muscat, which has Oman's largest branch network of 130 offices, this week joined Bank Sohar and National Bank of Oman in saying it would deliver products this way.
Converting some existing conventional banks into Islamic banks could streamline the broad banking industry, but the central bank has not indicated whether this will be permitted, commercial bankers said. The industry may in any case not be advanced enough to handle such conversions, said Rafique.
Recent consolidation in the banking sector has been limited to a merger of HSBC's Omani business with Oman International Bank, the country's fifth largest lender, which obtained approval earlier this month.
Rafique predicted 10 percent of existing bank customers in Oman would eventually make the switch to Islamic banks, which would also attract a similar number of people who are currently outside the banking sector because of their religious belief in avoiding interest.
TAKAFUL
The takaful legislation, on the other hand, will not allow the use of Islamic windows but instead require stand-alone operations with paid-up capital of 10 million rials, Al Harrafi said.
But such capital requirements are difficult to justify in a sector eager to build scale, said Shyam Zankar, regional head at Bahrain-based Medgulf Allianz Takaful.
In addition, takaful companies will also have to be publicly floated on the country's stock exchange within five years of launch, Al Harrafi said, adding that this requirement might dampen the interest of at least one of the applicants.
Two firms have begun headhunting for senior positions in anticipation of entry into Oman's takaful market, said a Gulf-based chief executive of an insurance firm, who asked not to be named.
STANDARDS
In the area of monitoring Islamic product standards, Oman is opting for the decentralised approach which prevails in the Gulf, rather than the centralised Malaysian model. This could facilitate early growth of the industry, by permitting a wider range of competing products, but perhaps limit broad interest in Islamic finance across the population because of the lack of a single, commonly accepted sharia board overseeing the industry.
The CMA, which became a member of the Malaysia-based Islamic Financial Services Board in March, considered creating a centralised sharia supervisory body but this option was not chosen, Al Harrafi said. An Islamic banking circular from Oman's central bank urged each bank to establish its own sharia board.
The standards of the Accounting and Auditing Organisation for Islamic Financial Institutions, a Bahrain-based industry body, will be used as guidelines in Oman, Rafique said, but will not be made compulsory. 

(Reuters / 27 June 2012)

---
Alfalah Consulting - Kuala Lumpur:
www.alfalahconsulting.com
Islamic Investment Malaysia:
www.islamic-invest-malaysia.com

Islamic Bank of Thailand (IBank) sets sights on halal export loans

The Islamic Bank of Thailand (IBank) plans to increase its focus on halal food exports, with a target of 3 billion baht in loans for the industry this year, says bank president Dheerasak Suwannayos.
The target is a 50% increase from last year, he said. IBank expects to extend 20 billion baht in credit to all sectors this year.
Mr Dheerasak said of Asean's 601 million people, Muslims account for 260 million.
The planned market integration called the Asean Economic Community in 2015 will result in new business opportunities for the Thai halal food industry across the region, he said.
Other markets also offer strong potential in the sector. Mr Dheerasak said while the US has only 8 million Muslims, the value of its halal food market is quite large at an estimated US$12 billion per year.
The global market is estimated at 700 billion baht per year. Thai halal food exports are worth only 10 billion baht, out of total Thai food exports of some 70 billion baht.
Mr Dheerasak said in IBank's 10th year of operations it will increasingly focus on retail customers, particularly those unable to access formal financial services. Retail customers account for 62% of the bank's total credit portfolio, with small and medium-sized enterprises representing the rest.
The bank hopes its "Family Member" referral programme will help support its marketing initiatives, with current customers receiving commission fees based on new business volume generated from referrals.
Over the next several months, the bank also will introduce a new credit card, with a target of 40,000 cards issued by the end of the year.
In contrast to ordinary bank credit cards, the IBank card can be used to purchase goods and services while remaining in compliance with Islamic laws.
Mr Dheerasak said the bank plans to increase capital, now 12.5 billion baht, by another 1.5 billion in the third quarter to support new business growth. The additional capital is projected to be sufficient to support business growth for the next two years.

(Bangkok Post business / 28 June 2012)
---
Alfalah Consulting - Kuala Lumpur:
www.alfalahconsulting.com
Islamic Investment Malaysia:
www.islamic-invest-malaysia.com

Nigeria: Challenges, Prospects of Takaful (Islamic Insurance)

The National Insurance Commission (NAICOM), recently announced its plan  to  release the guidelines on Takaful or Islamic Insurance by the end of next month. Nnamdi Duru writes on the peculiarities of this highly specialised branch of insurance practice and the benefits 
The insurance regulator, National Insurance Commission (NAICOM) said it would soon put in place the necessary framework for the take-off of takaful insurance, a platform for the protection of lives and properties based on risk sharing in line with the principles and practice of Islam as against risk transfer as in conventional insurance.

Confirming this, Commissioner for Insurance, Mr. Fola Daniel, said: “By July, our guidelines for takaful will be ready.  So,  anytime from August and September, we should have a platform to do takaful, we will be in a position to issue licences to people to do takaful insurance not as a window.  So before end of September, we should be in a position to issue out licenses for takaful.”
Speaking on takaful, the commissioner said: “Takaful is not a product, it is a concept.  It is not about religion really. It is about a way of sharing risks and not transferring risks.  Takaful is a kind of community risk sharing, it is fantastic, people will take it.  It does not matter whether they are Christians or Moslems.”
Contrary to the situation where a few operators get approval to sell a few takaful products, the commission is thinking of creating a separate platform for companies to do takaful insurance as it is practised in other markets and not as single product offerings.
About Takaful

Unlike conventional insurance, takaful complies with sharia principles of compensation and shared responsibilities in the community. It has been expanded to cover general risks, health and family (life) plans for Muslim communities.
Takaful is commonly referred to as Islamic insurance because of the similarities between the contract of kafalah (guarantee) and insurance.  It is founded on the principles of cooperation and separation between the funds and operations of shareholders, thus passing the ownership of the takaful insurance fund and operations to the policyholders.
Muslim faithful  believe that insurance should be based on principles of mutuality and cooperation and this means shared responsibility, joint indemnity, common interest and solidarity.
In takaful, the policyholders are joint investors with the insurer (takaful operator), who acts as manager for the policyholders. The policyholders share in the investment pool's profits as well as its losses. A positive return on policies is not legally guaranteed, because in Islam, any fixed profit guarantee is equivalent to paying interest.
How it Works

Policyholders or shareholders agree to guarantee each other and instead of paying premiums, they make contributions into a mutual pool, creating a takaful fund.
The amount of contribution that each participant makes is based on the type of cover they require and their personal circumstances. As in conventional insurance, the policy or takaful contract specifies the nature of the risk and period of cover.
The takaful fund is managed and administered on behalf of the participants by a takaful operator who charges an agreed fee to cover costs. These costs include the costs of sales, marketing, underwriting and claims’ management.
Claims made by policyholders are paid out of the takaful fund and any remaining surpluses, after making provisions for likely cost of future claims and other reserves, belong to the policyholders or shareholders of the fund and not the takaful operator and may be distributed to the participants in the form of cash dividends or distributions, alternatively in reduction in future contributions.
Peculiarities
Some of the peculiarities of takaful insurance are outlined below:
Contributory Premium
In conventional insurance, the customers pay premium in return for the insurance protection.  It is not so in takaful insurance.  In this case, policyholders make contributions equitable with the risks they are bringing into the pool.  This is different from the premium which is based on ratings calculated by underwriters in the case of conventional Insurance.
Investment
Investment of takaful funds is done in compliance with sharia law which prohibits gambling and profiteering and consumption of alcohol.  In addition, the funds should not be invested into economic activities that negate Islam and sharia,  including brewing alcohol, etc.
Profit/Loss Sharing
In takaful, policyholders are owners of the company and in that capacity they are entitled to share part of the profits or losses made by their company.  This is contrary to conventional insurance where policyholders are just customers who buy cover while shareholders share profit or loss as the case may be.
Claims
Claims in takaful are usually paid to those unfortunate policyholders/shareholders who suffer some insured losses within the period of cover.  They are compensated from the pool and reinstated accordingly. Claims experience is not disturbing as the volume is not such that would give any insurer sleepless nights but the problem lies in the frequency of usually small claims.

Retakaful or Reinsurance

Sharia principles apply to takaful as much as it applies to retakaful.  The reinsurance contract, for Islamic companies, must be contracted in conformity with the sharia.
There is need for strong and credible retakaful operators to assist the growth and expansion of takaful business globally.  The shortage of retakaful capacity and the lack of companies in the market currently present great challenge to operators.  The challenge is to have a large enough takaful market to justify retakaful business.
In response to this challenge, sharia scholars allow takaful operators to reinsure conventionally when no retakaful alternative is available, although retakaful is strongly preferred.
Takaful Risks
One of the greatest challenges that the takaful operators face worldwide is the rating system.  There is yet no scientific method or model for rating risks in takaful insurance.  In conventional insurance, there are standard rates for fire, motor, life and other lines of business prepared by actuaries. This is not available in takaful.
Also,  the high rate of default by beneficiaries of takaful and lack of efficient risk management tools to eliminate fraud and other risks are among the challenges.  There is also the  absence of an effective risk management tool which can effectively eliminate fraud and other risks in the system as well as  the absence of reinsurance capacity for takaful insurance.  In addition, there is   the absence of credit information in the market and moral hazards.
Prospects
Speaking on the prospects of takaful insurance, the Assistant Managing Director of Underwriting-Sherikan Insurance and Reinsurance Company, Sudan, Mr. Omer Elfarowg Ahmed said the economy would benefit from the attendant accumulation of huge micro-finance fund and expansion of the micro-finance infrastructure.
The market regulator’s job, according to him, would be simplified when takaful market grows,  while legislations on takaful and insurance generally would improve significantly.
Takaful as well serves as a guarantee to credit providers just as policyholders benefit from loss prevention services put in place by service providers and share in the surpluses recorded at the end of the accounting period.
The system is also likely to reduce insurance costs and economic waste and help to alleviate poverty and increase the level of corporate social responsibility of the insurance industry.
Takaful operators have expanded the scope of coverage to livestock insurance, fire and burglary, motor, agricultural and other products.  They encouraged beneficiaries to form industrial unions and cooperative societies to be eligible to participate.
The operators have also encouraged the respective Central Banks in African countries to maintain up-to-date information on beneficiaries of takaful and micro-finance credit.
If the necessary platform is put in place and if would be operators do their home-work well, takaful may hold the aces to deepening insurance penetration in the country.
(This Dyas Online / 27 June 2012)

---
Alfalah Consulting - Kuala Lumpur:
www.alfalahconsulting.com
Islamic Investment Malaysia:
www.islamic-invest-malaysia.com

Wednesday, 27 June 2012

Brunei: Investing in the future of Islamic finance



Brunei has long identified the Islamic finance as a sector that can be developed to its advantage, both to serve the banking needs of its domestic economy and as an avenue for economic development at the international level.

To achieve these objectives, however, it will need to step up investments in human resources.

Having first launched the Islamic finance option more than 20 years ago, sharia-compliant banking now accounts for around 40 per cent of the local market, a figure some experts believe will rise to 60 per cent by 2017.

Though Brunei Darussalam has made significant strides towards developing itself as a strong Islamic finance centre, experts identified a number of key areas the Sultanate needs to expand and improve upon if it is to achieve its goals.

One of the foremost requirements was for Brunei to produce more sharia experts, according to Mohamad Akram Laldin, the executive director of the Malaysia-based International Syariah Research Academy for Islamic Finance.

Speaking in Bandar Seri Begawan while attending the International Conference on Islamic Finance, held in mid- May, Akram said a major challenge for the industry was to integrate knowledge of syariah and of the market.
“We need to have more sharia graduates go into the area and understand the market,” he said.
“We need people who are able to run the business, who are capable, and can plan.

“I believe with the establishment of the Centre for Islamic Banking, Finance and Management (CIBFM), Brunei has taken a very good step.

“We have started seeing more and more people who are trained in Islamic finance coming up.This is a very good sign.”
he added. Brunei’s leading educational facilities will also seek to support the government’s policy of developing the Sultanate as a centre of Islamic fi nancial excellence.

The CIBFM, which was established by the Ministry of Finance to address key challenges in Islamic financial practice and to assist in the development of human resources for the sector, as well as other institutions, was also working to deepen the pool of qualified personnel in Brunei.

The Universiti Brunei Darussalam (UBD), along with the Sultan Sharif Ali Islamic University and other centres, offer a range of courses on various aspects of Islamic finance.

In mid-April, the UBD announced it would be reviewing its curriculum for its Islamic finance courses to ensure their content was relevant to the sector, a process that would also include seeking input from the industry itself.

According to Mohd Hairul Azrin Besar, a lecturer at the UBD’s Faculty of Business, Economics and Policy Studies (FBEPS), it was vital for educational institutions offering qualifications in Islamic finance to make sure their syllabus reflected the needs of – and the latest developments in – the industry.

“We can produce graduates but if they are not relevant to the industry, they would not be contributing much to it,” Mohd Hairul Azrin said.

“So for now we are looking at the university itself; the respective faculties will re-evaluate what the syllabus is and see how relevant it is. I think we will also be looking at what the industry players expect from the syllabus.”
Another development that should boost Islamic finance’s educational stocks was the announcement by Bank Islam Brunei Darussalam (BIBD) in mid-April that it would be sponsoring a chair of Islamic banking and finance, leadership and entrepreneurship at the FBEPS.

According to Javed Ahmad, the managing director at BIBD, the person appointed to the position would be a prominent international figure who would contribute to programme development, teaching methods and research in the areas of Islamic banking and finance, leadership and entrepreneurship.

“The chairperson will drive collaborative research on the development of Islamic financial products, as well as to provide solutions to overcome the industry’s challenges,” Javed said. “The chairperson will provide the faculty, and UBD as a whole, the platform to become a leading international academic centre in the fi eld of Islamic finance, leadership and entrepreneurship.” he said.

It will take sometime before all of Brunei’s human resource investments in Islamic finance begin to pay full dividends, though the sector is clearly already profiting from 20 years of experience and a generation of professionals that have grown up inside the industry.

(Berneo Post Online / 17 June 2012)


---
Alfalah Consulting - Kuala Lumpur:
www.alfalahconsulting.com
Islamic Investment Malaysia:
www.islamic-invest-malaysia.com

Monetary Authority of Singapore (MAS) underlines key challenges for Islamic finance to continue thriving





SINGAPORE: Monetary Authority of Singapore (MAS) managing director Ravi Menon has underlined key challenges for Islamic Finance to continue thriving.

“Islamic finance has come a long way.

“As it embarks on its next phase of growth, the industry must overcome the challenges posed by slower growth and global deleveraging, and build scale and reach critical mass.

“This requires financial institutions, regulators, and international standard setting agencies to work closely together,” he said in his address at the opening of 3rd Annual World Islamic Banking Conference: Asia Summit, here yesterday.
Ravi said Islamic finance has shown remarkable resilience during the last five years – perhaps the most challenging economic environment in the post-war era.

He said the industry has grown by an estimated 20 per cent annually in the last five years to reach US$1.3 trillion in total assets in 2011.

“Islamic banks have grown both in number and in scope. But the sustained growth of Islamic finance is in no way guaranteed. For Islamic finance to continue thriving, the industry has to overcome a few key challenges.
But in every challenge, there is also opportunity,” he stressed.

Ravi pointed out the clear and present danger to all financial activity, including Islamic finance, is the risk of contagion from an escalation of the eurozone crisis.
He said Islamic finance is closely intertwined with underlying economic activity and will be affected by the impact of slower global growth.

Contagion from the eurozone has already curtailed economic growth and capital inflows to many emerging economies where Islamic finance has taken root.

“Potential spillovers from an escalation of the Eurozone crisis could lower output in the Middle East and North Africa region by about 3.25 per cent relative to baseline, the largest spillover effect for any region outside Europe.

“But Islamic finance has a window of opportunity in the current climate of deleveraging in the global financial system.
With its strict prohibition on excessive leverage, Islamic finance has been spared the worst of the financial crisis,” he said.

Ravi pointed out that Islamic banks are well positioned to reach out to new customers who are in need of financing as many global institutions pull back on their lending due to the need to repair their balance sheets.

He said Islamic finance should diversify into growth areas such as trade and infrastructure financing, where demand is still strong, especially in emerging economies.

With a focus on supporting real productive activities, Ravi said Islamic finance is naturally compatible with trade and infrastructure development.

He said tapping these sectors also brings about greater diversification benefits, especially for Islamic institutions which have been hurt by their significant lending exposure to the real estate sector.

A second factor that Islamic finance will have to contend with, the central bank chief said, is the ongoing global regulatory reforms.

He noted the scale and scope of these reforms are probably unmatched in recent history.
“Islamic financial institutions will have to devote considerable resources to meet the new international standards.
But there are certain inherent characteristics of Islamic finance that will stand it in good stead in the emerging regulatory environment.

Ravi said Islamic finance is also well placed to meet the increased “return-to-basics” investor demand.
Following the global financial crisis, investors have become more averse to the unknown risks embedded in complex financial instruments.

Islamic finance, he said with its stronger emphasis on transparency, price certainty and risk-sharing, can benefit from this renewed demand for more basic investments, from Muslim and non-Muslim investors alike.

“The third, and perhaps most important, challenge that Islamic finance must overcome is its present fragmented state.
Islamic finance currently suffers from low economies of scale.

The overall size of Islamic assets is still less than one per cent of the global financial system.
“Being smaller and relatively young, Islamic finance currently offers fewer product choices for consumers and less comprehensive risk management options for institutions.

Cross-border investment flows are also constrained by differing interpretations of permissible transactions under Shariah principles,” he said.

He said the isolated pools of Islamic liquidity in each market restrict opportunities for more efficient allocation of capital across consumers, industries, and jurisdictions.
Ravi suggested that Islamic finance must become more integrated with the global financial system.
He pointed out the industry must expand beyond its traditional markets to include a wider range of financial institutions, investors and consumers.

This means Islamic finance must strike roots in key international financial centres of the world.
He said these centres can contribute to Islamic finance in several ways, including market liquidity, capabilities in global financial markets and opportunities for interaction and collaboration.
As Islamic finance gains prominence, he said conventional financial institutions increasingly want to be involved to tap these opportunities.

He said financial centres like Singapore serve as intersecting nodes where Islamic financial institutions collaborate with their conventional partners to jointly grow the industry.

“By applying the same regulatory framework to both conventional and Islamic financial institutions, Singapore aims to encourage financial institutions here to grow their suite of products and services for the Islamic finance industry,” he added.

(Berneo Post Online / 06 June 2012)


---
Alfalah Consulting - Kuala Lumpur:
www.alfalahconsulting.com
Islamic Investment Malaysia:
www.islamic-invest-malaysia.com