Displaying items by tag: Islamic Banking
Islamic Finance Instruments Can Replace US Dollar in Trade
US weaponization of the US Dollar and the international payment system of SWIFT has led to a push to look for alternatives as trust wanes in the green-back and its payment systems.
In response, Turkish president Recep Tayyip Erdogan has pushed the use of islamic finance “trade in national currencies has gained urgency. We should first of all put the issue of Islamic finance on our agenda.”
The Turkish president has previously called on other countries to end the “monopoly” of the dollar in global trade. US treasury chief Steve Mnuchin acknowledged “if we’re not careful, people will look at using other currencies.”
Iranian Banks removed from SWIFT
Us sanctions have removed Iranian banks from the SWIFT payment system crippling Iran’s ability to conduct foreign trade. Similar sanctions have impacted German firms working on a Russian-German pipeline.
Russia and China have set-up their own payment system to trade directly with each other and avoid the use of the dollar.
Increased Use of Gold and Local Currencies
The eight-nation member Shanghai Cooperation Organization (SCO) includes China, Pakistan and Russia represents almost a quarter of global GDP. SCO members have been increasing their gold and foreign exchange reserves which now amount to nearly 4 trillion USD. At a finance ministers’ meeting in Moscow the SCO made a decision to conduct bilateral trade and investment in local currencies.
Use of Gold in Islamic Cultures
Gold is an attractive asset class and store of wealth passed through the generations in Asian cultures. Turkey and Malaysia have been at the forefront of Islamic financial gold banking and gold-based currency development.
The Malaysian states of Kelantan and Perak introduced gold dinar and silver dirham coins as a means of payment and for trade. Turkish Islamic bank, Kuveyt Türk (Kuwait Turkish Bank) began offering gold banking in 2007 and has collected over 26 tons of gold (worth around $1.2 billion – July 2019) and integrated it into the Turkish economy Current initiatives include an Islamic finance gold based crypto currency to better facilitate cross border trade.
Islamic Finance Gold Standard
In 2016 the World Gold Council and Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) approved the sharia standard for gold-based products with the objective of increasing the use of bullion in Islamic finance and the creation of new financial instruments. The standard addressed the use of collateral, and the exchange of gold in spot and deferred transactions.
Published in: Islamic Finance Foundation, 25 October 2020
Although Islamic banks emerged relatively unscathed from the 2008 global financial crisis, VIDOC-19 has a deeper impact. However, this disruption could provide opportunities to diversify the sector and accelerate its expansion once the pandemic is over. Compared to conventional institutions, Islamic banks are more exposed to small and medium-sized enterprises (SMEs), microfinance and retail lending, particularly in Asia. The economic performance of the major Islamic financial jurisdictions is expected to remain moderate for the rest of the year.
As a result, although the industry was previously on a strong growth trajectory in 2020, the rating agency Standard & Poor's predicted in June that it would record low to mid-digit growth in 2020-21, due to both the pandemic and the uncertainty of oil prices. In comparison, last year's growth of 11.4% was supported by a more dynamic sukuk (Islamic bonds) market and new growth opportunities. Nevertheless, Standard & Poor's believes that Covid-19 could unlock the long-term potential of the sector, arguing that the pandemic offers "an opportunity for more integrated and transformative growth with a greater degree of standardization, greater emphasis on the social role of the industry and significant adoption of financial technology".
Sukuk is a financial certificate similar to a bond in a conventional bank. It is a key element in the Islamic financial ecosystem. However, the sukuk market is more concentrated, smaller and less liquid than its conventional counterpart. In addition, the issuance process remains relatively complex and lengthy, and involves higher transaction costs.
In this context, the overall issuance volume is expected to decrease this year, although there will be a slight recovery after the sharp decline observed in recent months. Standard & Poor's expects issuance to reach $10 billion in 2020, compared to $162 billion in 2019. However, there are signs that the pandemic could lead to an expansion of the role of sukuk..
In June, for example, the Islamic Development Bank (IsDB) raised $1.5 billion with its first "Sukuk of Sustainability", designed to help the recovery of Covid-19 in its member countries. The proceeds will be used exclusively for social projects within the framework of the IsDB's sustainable financing, focusing on "access to essential services" and "SME financing and job creation".
Following the success of the sukuk, the President of the IsDB, Bandar Al Hajjar, then called on the Islamic financial industry to "promote sustainable and social sukuk as an alternative asset class that has the potential to counteract the multiple impact of the Covid-19 coronavirus.
Also in June, Indonesia issued a $2.5 billion global wakalah sukuk in three tranches, including a $759 million green sukuk dedicated to sustainable development.
The sukuk was oversubscribed by almost seven times the target amount. Its main objective was to support the government's coronavirus control programme, as well as to "strengthen Indonesia's position in the global Islamic financial market and support the development of Islamic finance in the Asian region," Dwi Irianti, director of Islamic finance at the ministry of finance, told local media.
Despite being home to the largest Muslim population in the world, Indonesia has not yet taken full advantage of Islamic finance. Therefore, sukuk is an encouraging sign that the potential of the sector is beginning to be tapped. Meanwhile, it was recently announced that Malaysia's Ministry of Finance will launch a RM500 million ($120 million) "Sukuk Prihatin" on 22 September. The revenue will be used to finance economic stimulus measures, as well as to help micro-enterprises, improve broadband coverage in schools and fund research into infectious diseases.
While the coronavirus has caused headwinds across the industry, these examples show how it has also led to a greater awareness of the potential of Islamic finance. How can this momentum be maintained and strengthened as we enter the post-pandemic world?Digitisation and the increased importance of financial technology (fintech) are essential.
"Covid-19 has led us to accelerate the digital transformation that was already underway before the pandemic," Ayman Sejiny, CEO of ICD, told OBG. This will help widen access and increase the sector's social transformation role. In addition, fintech can increase standardisation, streamline processes, reduce costs and increase transparency, making Islamic financial instruments more competitive with conventional forms.
As far as sukuk are concerned, standardisation is particularly important, both in terms of the theory behind the vehicle and the legal documentation associated with it. Further standardisation will also enable Islamic banks to make progress in new areas. "Islamic finance now needs to explore new sectors such as health and tourism, in line with Sharia law. We need to work hard to develop appropriate Islamic banking products for these sectors," Sejiny told OBG..
It is also possible that Islamic finance tools could play a greater role in promoting trade, which could help stimulate economic recovery in emerging markets. "The Covid-19 epidemic has opened up new opportunities for Islamic financial markets, such as the provision of Sharia-compliant trade finance products, as well as trade development programmes to promote greater attention to social impact, sustainability, innovation and digitisation," Hani Salem Sonbol, Managing Director of the International Islamic Trade Finance Corporation, told OBG. .
So while Islamic banking continues to face significant headwinds related to Covid-19, the crisis could be a major turning point in the global growth of the sector. The economic performance of the major Islamic financial jurisdictions is expected to remain moderate for the remainder of the year.
Published in: atalayar.com, 16 September 2020
The Organisation of Islamic Cooperation (OIC) has 57 member countries. The top 10 by GDP account for almost 73% of the OIC’s total GDP. Thus, the overall economic well-being of the Muslim world is dependent on the performance of these 10 countries.
Examining the performance of their currencies over the last 10 years for an indication of the relative well-being of the Muslim world paints a rather sombre picture. Two of the 10 countries, Saudi Arabia and the UAE, have their currencies pegged to the US dollar.
A peg effectively renders impossible independent domestic monetary policy. With their exports being little else but oil, a USD-denominated commodity, exchange rate competitiveness is immaterial, thus the hard peg.
Examining the performance of the remaining eight countries’ currencies shows a common feature. All eight have depreciated substantially against the dollar compared with 10 years ago. The Turkish lira is down by about 390%; the Iranian riyal, 300%; Egyptian pound, 176%; Nigerian naira, 147%; Pakistani rupee, 93%; Indonesian rupiah, 67%; Malaysian ringgit, 35%; and Bangladesh taka, 22%.
The depreciation of a currency automatically erodes a nation’s terms of trade. It has to produce and export much more to purchase the same level of imports. In the longer term, imported inflation, capital flight and a host of other ills can plague the nation. That all eight countries have suffered substantial depreciation points to a systemic problem within the Muslim world.
Two of them, Turkey and Indonesia, should really be doing much better. Both have tremendous natural resources, low labour costs, well-diversified economies, and, in Turkey’s case, a well-developed industrial sector.
Furthermore, political leadership is strong in both countries and has undertaken serious reforms, particularly in fighting corruption. Yet, both their currencies have not only depreciated sharply over the last 10 years but also experienced episodes of high volatility.
Perception and other extraneous factors, rather than economic fundamentals, may be at work here. The question that arises is why, despite their underlying economic strengths, have these countries suffered disproportionate setbacks to their currencies?
The answer, perhaps, lies in the way they have funded growth. Both countries have been plagued by the twin deficits — current account and fiscal deficits. The need to fund these shortfalls adds more debt and reduces policy flexibility.
A feedback loop from foreign-sourced debt financing of development to the budget and current account deficits, arising from the need to service such debt — resulting in currency depreciation, imported inflation, interest rate hikes, a slowdown and more borrowing — entraps these nations within a vicious circle. A history of currency volatility and crises only makes foreign exchange markets hypersensitive to even the smallest policy change.
What is surprising is the continued use of the same policies and the inertia of policymakers to try alternatives, especially with the financing alternatives available in Islamic finance.
The risk-sharing contract, Mudarabah, can be modified to be an effective alternative to debt. Being terminal and with minimal ownership dilution, it provides funding benefits without the disadvantages of debt. As a profit/loss sharing contract, the absence of leverage means that when used to fund infrastructure projects, it imposes no fixed obligations. This provides an automatic stabiliser to government fiscal balances, especially during downturns.
Fixed debt-servicing requirements, even during downturns, cause capital outflows that accentuate current account deficits, thereby putting more pressure on a country’s currency. A large depreciation of the currency would result in sharply higher debt obligation to domestic entities that have sourced debt overseas.
If some of these entities were banks, a banking crisis could ensue. To prevent a meltdown, the central bank has to intervene in foreign exchange markets — either through purchase of the home currency, thereby eroding reserves, or sharply raising interest rates, potentially throwing the economy into a recession.
When debt accumulation is substantial within the economy, the latter option of raising interest rates is not even feasible. Debt simply reduces the policy options available and forces governments into a corner.
The result, as is the case in these countries, is a never-ending roller coaster of currency devaluation, economic restructuring, new debt-funded growth and balance-of-payment problems yet again. The risk-sharing alternatives of Islamic finance can offer these countries a way out.
Dr Obiyathulla Ismath Bacha is professor of finance at INCEIF ( International Centre for Education in Islamic Finance)
Published in: Forum, The Edge Malaysia Weekly, on October 12, 2020 - October 18, 2020.
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
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
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