Displaying items by tag: Islamic Banking

Shariah-compliant investments are known to be resilient and even tend to perform better than their conventional peers in troubled times. This was proven during the first half of the year, when the average returns of global and Malaysian equity shariah funds were higher than those of their conventional counterparts.

According to data by Morningstar, Malaysian equity shariah funds in the large-cap and mid- and small-cap categories provided average returns of -3.47% and -5.03% respectively from January to June 30. In comparison, Malaysian equity funds in the same categories provided average returns of -5.58% and -8.3% respectively. Shariah funds that invest in the broader Asia-Pacific ex-Japan region returned -1.38% over the same period, compared with their conventional counterparts’ -7.60%.

Year to date (as at Aug 12), shariah funds are still outperforming their conventional peers. Malaysian equity shariah funds in the large-cap and mid- and small-cap categories provided average returns of 7% and 13.11% respectively. In comparison, Malaysian equity funds in both categories provided returns of 5.87% and 6.55% respectively. Islamic funds that invest in the Asia-Pacific ex-Japan region returned 10.85%, compared with their conventional counterparts’ 1.67%

Meanwhile, global Islamic equity funds outperformed their conventional peers, ­albeit marginally, according to Lipper’s data for the six months ended Aug 7.

The performance of most asset classes took a big hit in the first quarter of the year as there was almost zero economic activity owing to the lockdowns imposed by governments around the world to stem the spread of the Covid-19 pandemic. Akmal Hassan, managing director of AIIMAN Asset Management Sdn Bhd, says against this backdrop, few asset classes were spared from the volatility.

“Similarly, the performance of shariah funds was also impacted. However, the shariah space fared relatively better due to the exclusion of the conventional banking, gaming, tobacco and alcohol sectors, which took a big hit and are likely to see a delayed recovery,” says Akmal.

Ismitz Matthew De Alwis, executive director and CEO of Kenanga Investors Bhd, notes that shariah funds in general have outperformed due to their lack of exposure to the banking sector and a higher weighting in defensive sectors such as healthcare and telecommunications. “As such, shariah funds in general have outperformed. Going into a recovery, the shariah outperformance could reverse as cyclical sectors such as banks rebound faster,” he adds..............to read the full article please click on the Source link below

Published in: The Edge Markets on Monday, 24 August 2020

Source: https://www.theedgemarkets.com/article/cover-story-sustaining-performance-shariah-funds

The global Islamic finance industry will continue to grow at a comparably slow rate of around 5% in 2019 and 2020 in terms of assets, according to the newly issued “Islamic Finance Outlook 2020” by US-based business intelligence firm S&P Global Ratings. This follows a 10% growth rate in 2017 but only 2%-3% growth in 2018, which was mainly owing to flat sukuk issuances and generally weaker economic conditions in the industry’s core markets, with the notable exceptions of Malaysia, Indonesia and Turkey, as well as Qatar where a number of issuers have returned to the capital markets as of late.

The report says it does not expect a quick rebound in the market, but acknowledges that the sukuk sector has improved from a total issuance volume of close to $130bn in 2018 – which was only slightly more than around $125bn in 2017 – to $162bn in 2019, according to Mohamed Damak, global head of Islamic finance at S&P Global Ratings. For 2020, he expects an issuance volume of up to $170bn, with accelerators being environmental, social and governance (ESG) sukuk, including green sukuk, and more medium-sized companies and financial institutions issuing Islamic bonds due to better standardisation in legal documentation and Shariah interpretation, which makes it cheaper and less complex to issue sukuk.

More commitments to environmental standards and the green economy in general in Islamic jurisdictions are also driving ESG investments, which – in turn – will attract a new type of investors to Islamic bonds, particularly in segments where ESG-related concerns and Shariah-compliant financing overlap, Damak said.

Apart from regulatory improvements, legal standardisation and ESG investments, the report sees another main opportunity to unlock further potential of Islamic finance, which is – unsurprisingly – Islamic fintech, although the S&P analysts are reluctant to predict a quick adaption of technological innovations in the Islamic finance industry since banks will first have to deal with the disrupting effects of fintech. As an example, the report notes that new digital financial services can equally be a potential threat to some business lines such as money transfer, especially in the Gulf Co-operation Council (GCC) region where expatriates send more than $100bn back home every year.

However, over time, fintech is expected to spur growth of Islamic finance by enhancing the speed and ease of transactions, particularly through blockchain technology, which also helps increase transaction security and improves the traceability of transactions. It will also allow for a range of new digital banking solutions and will simplify and streamline regulatory and legal processes.

“We believe fintech will have only a marginal influence on our Islamic bank and sukuk ratings over the next two years,” the report says.

“[But] we consider that Islamic banks will be able to adapt to their changing operating environment through a combination of collaboration with fintech companies and cost-reduction measures. We also believe that regulators across the wider Islamic finance landscape will continue to protect the financial stability of their banking systems. Furthermore, we think that blockchain could help the operational management of sukuk, but will not induce any changes in the legal substance of the transactions.”

In money terms, the S&P forecast would translate into growth to $2.63tn in Islamic finance assets in 2019 and to $2.76tn in 2020. While the report is not providing a forecast beyond 2020, another study does: The “Islamic Finance Development Report 2019” compiled by Thomson Reuters and the Islamic Corp for the Development of the Private Sector forecasts that the Islamic finance industry will reach total assets of $3.47tn by 2024, based on a compound annual growth rate of 5.5% calculated from $2.52tn in assets in 2018.

Rating agency Moody’s in an earlier report also predicted stable growth in Islamic banking in most core Islamic markets, with an additional factor being mergers between Islamic and conventional banks in the GCC, where Islamic banks are the remaining entities, which could also drive one-off increases in Islamic banking assets in the years to come

Published in : Gulf Times, 20 January 2020.

Source : https://www.gulf-times.com/story/653816/Weaker-economic-conditions-take-toll-on-Islamic-finance-growth

Malaysia’s pioneering role in the development of Islamic banking and finance has gained worldwide recognition.

The public’s demand to have an Islamic commercial bank offering Islamic banking products and services continued until a commercial Islamic bank was set up in 1983, licensed as Bank Islam Malaysia Bhd (BIMB) under the Islamic Banking Act (IBA) 1983.

To allow BIMB to stabilise its standing in the banking environment, Bank Negara Malaysia (BNM) granted it a 10-year exclusivity to operate as the sole Islamic bank in the country.

In the same year, Government Investment Certificates were issued under the Government Funding Act 1983 to support liquidity management in BIMB’s operation.

A year later, the first Islamic insurance company was established under the name Syarikat Takaful Malaysia Bhd and regulated by the Takaful Act 1984.

In 1990, another historic development was that Malaysia became the first country to issue sukuk (Islamic bonds) with a modest issue size of RM125 million by Shell MDS Sdn Bhd.

As the 10-year exclusivity granted to BIMB expired in 1993, BNM offered the first three licences in an interest-free scheme, namely Skim Perbankan Tanpa Faedah (SPTF) to Maybank, UMBC and Bank Bumiputra Malaysia Bhd.

This scheme allowed the conventional banks to open Islamic banking windows, and the number of banks participating in SPTF grew tremendously.

When the number of players increased, liquidity management became the main hurdle.

To solve this issue, the Islamic Interbank Money Market was launched in 1994 by the Malay-sian government, the first of its kind in the world.

The main problems that faced the SPTF banking scheme were fund management and regulatory issues, since the conventional banks were governed under the Banking and Financial Institutions Act 1989 while full fledged Islamic banks were under the IBA 1983.

Consequently, starting from 2005, Bank Negara called upon the conventional banks to open Islamic windows as their Islamic subsidiaries, licensed under the IBA 1983.

Since then, almost all local banks set up their own Islamic subsidiaries except for a few international banks such as Citibank and United Overseas Bank.

In the same year, the central bank also issued licences to international Islamic banking institutions to compete with local Islamic financial institutions (IFIs).

The first bank having such a licence was Kuwait Finance House followed by Al-Rajhi Bank.

To create a holistic ecosystem for Islamic banking and finance in the country, the regulator also set up a few entities to cater for research and human capital development.

These include the International Centre for Education in Islamic Finance that was set up in 2005, the Islamic Banking and Finance Institute Malaysia in 2007, the International Shariah Research Academy and the Asian Institute of Finance in 2008.

Malaysia also hosted the Islamic Financial Services Board in 2002 to develop the Islamic finance agenda.

Another initiative was the introduction of Syariah Governance Framework in 2011 aimed at strengthening syariah supervision in the system in mainly four areas which are syariah advisory, syariah review, syariah audit, and syariah research.

This paved the way, in turn, for a more extensive revamp of Islamic banking institutions under the Islamic Financial Services Act (IFSA) 2013.

IFSA was designed to create a better governance structure and parallel playing field for both Islamic and conventional banking in the country.

In this journey, hiccups that arose along the growth path of Islamic banking and finance (IBF) were also addressed by remedial measures.

Indeed, even before the enactment of IFSA 2013, many amendments were made to existing laws and regulations to accommodate the needs of IBF operations in the country.

In 2017, Malaysia marked another milestone through the introduction of the strategic intermediation concept, namely Value-Based Intermediation (VBI).

According to BMM, statistics on the development of IBF in Malaysia showed unparalleled growth in the Islamic banking market share and its annual growth rate.

Islamic financial institutions are thus urged to explore new strategies to maintain growth and sustainability through active participation in the VBI agenda.

VBI requires the IFIs to develop innovative Islamic financial products and services that contribute to social well being, the environment and the economy since VBI focuses on the 3Ps, namely people, planet and profit.

Under this concept, the performance of IFIs as intermediaries in the financial system operation will be assessed not only from their financial performances but also non-financial aspects such as engagement and impact on the three areas just mentioned.

The Sadaqa House product that was launched by Bank Islam in January 2018 is a good example of this approach.

This concept actually reflects the higher goals (maqsad) of the Islamic economic system, which is social justice.

IAIS Malaysia played a key role in this initiative.

Malaysia has evidently succeeded in positioning itself a world leader in IBF, thanks to the active participation and support of the government and BNM.

Yet the journey is not over. Our next instalment looks at some of the IFIs products that have come under criticism.

The author is a research fellow at the International Institute of Advanced Islamic Studies (IAIS) Malaysia.

Published in: New Straits Times, Thursday 7 February 2019

Source : https://www.nst.com.my/opinion/columnists/2019/02/458228/malaysia-global-leader-islamic-banking

Financial inclusion or access to finance at an affordable cost has, since the early 2000s, been a focus of renewed concern for many governments and central banks.

The World Bank’s 2017 Global Findex Database discovered that about 1.7 billion people worldwide remain unbanked — without an account at a financial institution or a mobile money provider. The United Nations Development Programme’s Sustainable Development Goals (SDGs), therefore, seeks to improve financial access into its main development agenda.

A plethora of academic evidence confirms that financial inclusion can support the achievement of broader sustainable development goals.

As a business established within the ambit of Syariah principles, values and goals, Islamic finance aims to promote economic wellbeing and creates socio-economic justice; and serve as a catalyst for development, in line with the spirit of the UN sustainable development agenda.

The International Monetary Fund, in its press release on May 9, also acknowledged that “the growth of Islamic finance presents important opportunities to strengthen financial inclusion, deepen financial markets, and mobilise funding for development by offering new modes of finance and attracting unbanked populations that have not participated in the financial system.”

Islamic finance could contribute to the financial inclusion agenda through two main mechanisms: profit and loss sharing (PLS) or risk-sharing instruments, like musharakah and mudharabah, as an alternative to conventional debt-based financing and risk transfer; and Islamic social finance instruments, such as zakat, waqf (endowment fund), shadaqah, and qard hasan (benevolent loan), which complement PLS instruments.

PLS promotes the financial inclusion agenda because the concept can offer access to finance to low-income segments at an affordable and fair rate: the imposition of cost and the distribution of profit are based on the actual performance of the business.

As a result, the optimum application of PLS will create an equitable distribution of income and wealth among partners or between wealth owners and entrepreneurs, presenting the concept of justice and fairness in financial dealings.

Risk transfer underlying the conventional financial system, on the other hand, implies asymmetric exposures to economic risk, and does not, therefore, promote economic justice and financial inclusion.

Furthermore, social finance, mandated or otherwise, is an integral part of the Islamic financial system to offer equal opportunity to financial access to the low-income segments, that is, the underserved and poor, “so that it may not (merely) make a circuit between the wealthy among you” (QS 59:7).

Islamic social finance instruments help improve financial access via various initiatives, such as microfinance empowerment and poverty alleviation programmes.

Financial technology (fintech) is a perfect device to reinforce the role of Islamic finance in promoting the financial inclusion agenda. The use of digital finance, such as blockchain and crowdfunding, can lower transactional costs and minimise asymmetric information.

Santander FinTech issued a report in 2015 estimating that blockchain could reduce transactional costs attributable to cross-border payment, securities trading and regulatory compliance between US$15 billion (RM62 billion) and US$20 billion per annum by 2022.

Furthermore, the ability of blockchain to transmit and to record the ownership of the digital assets and immutably store information — where all blockchain participants have access to the same information — might significantly reduce information asymmetries.

Fintech can also open financial access to unbanked individuals. According to World Bank estimate, there are approximately 240 million to 334 million people in developing economies that could participate in crowdfunding.

It is also a powerful tool to widen access and outreach of Islamic social finance instruments such as zakah, waqf and sadaqah.

Bank Negara Malaysia Assistant Governor, Datuk Ahmad Hizzad Baharuddin, at the Association of Shariah Advisers’ Shariah Fintech Forum 2017, affirmed that fintech promises to revolutionise finance and bring a broader range of benefits to financial institutions and the public.

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The writer is a research fellow at the International Institute of Advanced Islamic Studies Malaysia

Published in: New Straits Times, Friday 19 October 2018

Source : https://www.nst.com.my/opinion/columnists/2018/10/422674/islamic-finance-promotes-inclusion

Over the last few years, environmental preservation has been the focus of renewed investor attention, as evidenced by growing interest in socially responsible investment (SRI) instruments. Green sukuk, a syariah-compliant SRI instrument for renewable energy and other environmental sustainability projects, is an important and commendable initiative.

Malaysia, being home to the world’s largest sukuk market, has pioneered the issuance of green sukuk. On July 27, the Securities Commission announced the debut of the world’s first green sukuk under its SRI sukuk framework. This milestone is the result of a joint effort between SC, Bank Negara Malaysia and the World Bank Group to facilitate the development of green financing and investor participation in SRI sukuk.

Issued by Tadau Energy Sdn Bhd, a Malaysian-based renewable energy and sustainable technology investment firm, and structured on the Syariah principles of istisna’ (manufacturing sale) and ijarah (leasing), the RM250 million Green SRI Sukuk Tadau is to finance the construction of large scale solar (LSS) photovoltaic power plants in Kudat, Sabah, with a tenure of two to 16 years.

Following the success of Green SRI Sukuk Tadau, Quantum Solar Park Malaysia Sdn Bhd launched the world’s largest green SRI sukuk — RM1 billion — in October to fund the construction of Southeast Asia’s largest solar photovoltaic plant project in three districts: Kedah, Melaka and Terengganu.

More green sukuk is expected to be issued in Malaysia to support environmentally sustainable infrastructure projects and to strengthen the country’s position as the main catalyst for Syariah-compliant green instruments.

Certainly, the future of green sukuk in Malaysia is promising for a number of reasons. Firstly, the government aspires, as envisioned in the 2014 Budget speech, to position Malaysia as the home for SRI as part of its ambition to make Malaysia a green technology hub by 2030.

In response, SC revised its sukuk guidelines in 2014, incorporating new requirements for the issuance of SRI sukuk. The new sukuk guidelines state that the proceeds of SRI sukuk can be used to preserve the environment and natural resources, conserve the use of energy, promote the use of renewable energy and reduce greenhouse gas emissions.

Also, a number of incentives have been offered to stimulate greater utilisation of SRI instruments as a fundraising channel. These include tax deductions on the issuance costs of SRI Sukuk approved or authorised by SC and tax incentives for green technology activities. The government also introduced a special financing scheme, Green Technology Financing Scheme, with a total fund allocation of RM5 billion until 2022 to support the development of green technology.

Secondly, a substantial increase in the demand for both energy supply and energy financing in Malaysia has opened up room in which green sukuk can grow. The government has put in place a renewable energy generation target of 7,200 megawatts by 2020. Malaysia’s Green Technology Master Plan also aims to boost the growth of its green technology sector, with a targeted revenue of RM180 billion alongside the creation of 200,000 green jobs by 2030.

Thirdly, there is a growing awareness of SRI among both conventional and Muslim investors. Green sukuk facilitates and increases the broader participation of conventional investors in the sukuk market, especially those looking for more ethical and socially responsible investment opportunities. It helps bridge the gap between sustainable investors and sukuk investors who aim to place their money in a scheme that complies with certain values.

Other positive factors include the design of sukuk, which is naturally supportive of green principles because it requires a specific pool of assets. Also, the progress of green sukuk is, and has evolved into, an indispensable part of the natural evolution of the global Islamic financial market.

Islam is fully supportive of the idea of green financing. The Quran and the prophetic traditions emphasise the importance of environmental conservation and sustainability. Islam commands mankind, as the vicegerents of God, to take care of the environment and nature, and to avoid any act that is detrimental to them. This corresponds to the principal purposes of syariah (maqasid al-Syariah) which are intended to realise public benefit (maslahah) and eliminate harm and destruction (mafsadah), outlined under five main headings: protection of life, preservation of religion, upholding the integrity of the human intellect, protecting the family and protection of lawfully-owned property.

Al-Qardhawi, however, added environmental conservation and preservation as another ultimate objective of syariah, having an equally important position as the five goals.

On the whole, green sukuk, like other SRI instruments, is a funding channel that plays an important role in the preservation of the environment and the sustainability of the earth. Islamic finance should, therefore, provide more avenues for the growth of green sukuk as a financial instrument for sustainable development.

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The writer is a research fellow at the International Institute of Advanced Islamic Studies Malaysia

Published in: New Straits Times, Saturday 17st March 2018

Source : https://www.nst.com.my/opinion/columnists/2018/03/346085/malaysias-green-sukuk

Islamic financial products have evolved from simple and straightforward structures to highly sophisticated and multifaceted instruments. During the 1980s and 1990s, Islamic financial products were dominated by deposits and savings, syndicated project financing, syariah-compliant stocks and mutual funds.........................Download the full article in pdf attachment (below)

 

 

 

 

Waqf (an Islamic endowment of property to be held in trust and used for a charitable, or religious purpose; or a Muslim religious or charitable foundation created by an endowed trust fund) has a long history in Islam. It has played — and, in many cases, continues to play — a pivotal role in the advancement of socio-economic well-being of the Muslim community..........................Download the full article in pdf attachment (below)

 

 

 

 

Islamic finance has witnessed, over the last few years, a remarkable growth at 15 to 20 per cent Compounded Annual Growth Rate (CAGR), emerging as one of the fastest growing financial sectors in the world. The total assets of the Islamic financial industry in 2015 was around US$2 trillion (RM8.3 trillion) and estimated to surpass US$4 trillion by 2020. This industry’s rapid growth undoubtedly creates a huge demand for new expertise.........................Download the full article in pdf attachment (below)