Displaying items by tag: Islamic Finance

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

Monday 04th November 2019 10:30am - 1:00pm
Venue: IAIS Malaysia, Jalan Elmu, Off Jalan Universiti, Kuala Lumpur, Malaysia.
Jointly Organised by
IAIS Malaysia & MES Malaysia
Published in Past Events
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Syariah is the backbone of Islamic financial institutions (IFIs).Ensuring syariah compliance is essential for maintaining the confidence of stakeholders and the public at large.

Inadequate attention to the whole process of syariah compliance inevitably triggers negative repercussions for IFIs, such as financial loss and massive withdrawals.

Over the last two decades, many cases have been brought to the courts challenging the syariah compliance aspects of some Islamic banking products.

The decision by some judges to annul the underlying contracts of several Islamic banking products has posed the threat of financial losses for the banks.

As a case in point, in the Arab Malaysian Finance Bhd versus Taman Ihsan Jaya Sdn Bhd case, the court declared that bay’ bi thaman ajil (BBA) was invalid on the basis that the BBA facility was a bona fide sale transaction.

Therefore, when the bank recalled the facility at a higher total price, the sale no longer represented a bona fide sale transaction but was merely a financing facility similar to a loan under the conventional system.

Nevertheless, the Court of Appeal in the case of Bank Islam Malaysia Bhd versus Lim Kok Hoe reversed this decision, upholding the validity of the BBA as an enforceable contract.

Against the above backdrop, on Oct 26, 2010, Bank Negara Malaysia (BNM) introduced the Syariah Governance Framework (SGF) for IFIs operating under its purview (notably Islamic banks, conventional banks offering Islamic financial services and takaful companies).

The SGF aimed to strengthen the syariah governance structures, processes and arrangements of IFIs to ensure syariah compliance. The SGF required IFIs to institute clear internal control and remedial rectification measures to address Syariah non-compliant incidents holistically.

In response to emerging IFI business complexity and market maturity, on Sept 20, 2019, BNM issued a new, revised version of the SGF, namely Syariah Governance Policy (SGP), which supersedes the exiting SGF.

This new framework set out to enhance board oversight and the responsibilities of syariah governance, increase the requirements for syariah committees providing objective and sound advice to IFIs, raise the expectation that board and senior management promote a syariah compliance culture, and improve the quality of internal control functions.

This article highlights some of the new, enhanced features of the 2019 SGP in comparison with the 2010 SGF.

FIRST, the new SGP restricts the tenure of syariah committee members to a maximum of nine years in a single IFI, in comparison to the 2010 SGF, which had no limit.

This limit addresses concerns regarding complacency, which may affect the professional
objectivity of syariah committees.

A fresh and new composition of syariah committee members is expected to deepen syariah deliberation and the overall competence of syariah committees.

This particular requirement, however, will only be effective from April 1, 2023, to allow for transitional arrangements and sufficient time for IFIs to reconstitute their syariah committee compositions.

SECOND, the previous SGF allowed syariah committees to adopt more stringent syariah decisions than the published rulings of the Syariah Advisory Council (SAC).

The new SGP, however, mandates that banks notify the BNM about any additional restrictions that go beyond the SAC rulings, together with any documented deliberation and justification by their syariah committees (para 10.7).

THIRD, the preceding SGF was silent about the status of a politically-exposed person acting as a member of a syariah committee. The 2019 SGP, on the other hand, explicitly prohibits active politicians from becoming syariah committee members.

FOURTH, the new SGP mandates that boards establish effective communication with their syariah committees on all matters relating to syariah requirements, syariah governance, or syariah non-compliance risks.

The boards must also regularly review the quality and frequency of their engagement with their syariah committees. This is to enable both the board and syariah committee to discharge their respective responsibilities effectively. The 2010 SGF was, however, silent on this requirement.

FIFTH, the former SGF required that the syariah review function be conducted by a qualified syariah officer, holding at least a bachelor’s degree in syariah, including in ushul fiqh and fiqh muamalat.

The new SGP removes such requirements and situates itself as part of the overall compliance responsibility under the control function.

In this regard, the syariah review function is required to have a sound understanding of those syariah requirements applicable to Islamic financial businesses and operations.

Finally, while the 2010 SGF required the establishment of a dedicated syariah research function by a qualified syariah officer, the 2019 SGP removes this requirement by consolidating its role under the syariah secretariat function.

The approach taken by the new policy places more emphasis on ensuring effective management of syariah non-compliance risks through control function.

From a broader perspective, we can conclude that the new SGP demonstrates BNM’s heightened expectations towards effective syariah governance and culture.

This is yet another step in the impressive development profile of Islamic banking and finance in Malaysia, which it is is hoped will see an increase in public confidence in the often questioned syariah compliance credibility of Islamic banks and financial institutions in this country.

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

Published in: The New Straits Times, Saturday 05 October 2019

Source : https://www.nst.com.my/opinion/columnists/2019/10/527150/better-governance-new-islamic-finance-framework

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Thursday, 18 April 2019 09:29

A child trust lifeline with corporate Zakat

Issues of child abuse, neglect, malnutrition and exploitation are the focus of renewed attention from governments, policymakers and multilateral institutions.

For instance, the United Nations Millennium Declaration 2005 and the Sustainable Development Goals (SDG) 2017 have listed children’s rights to survival, health, and education into their main agendas.

Research has shown that children are the most vulnerable segment of a society and are exposed to abuse and violence. Each year, an estimated 0.5 to 1.5 billion children are involved in physical violence, 150 million girls and 73 million boys are raped or subjected to sexual abuse, 115 million children engaged in dangerous work and 264 million children have no access to school.

In Malaysia, 17.7 per cent of children below the age of 5 are stunted (Health Ministry 2017 records), 22 per cent are underweight and 23 per cent are either overweight or obese (United Nations Children’s Fund [Unicef] 2018).

The Malaysian government and policymakers, therefore, have shifted their attention towards strengthening the social protection system. For example, the Bantuan Sara Hidup (BSH) programme launched in 2018 offers unconditional cash transfers to B40 households to assist with rising costs of living. However, the existing protection schemes are not specifically designed to address the welfare of children during their first 1,000 days — the most vulnerable phase in their life, in which nutrition and beneficial healthcare are paramount.

This article, therefore, proposes the utilisation of corporate zakat — an annual religious obligation paid by business entities under the purview of zakat on wealth — to develop a child grant that seeks to complement existing government programmes.

An ongoing study by the International Institute of Advanced Islamic Studies (IAIS) Malaysia, in collaboration with Unicef and Iman Research, discovered that corporate zakat has the potential to address the required needs of children in Malaysia in terms of survival, nutrition, healthcare and education.

There are 693 Syariah-compliant listed companies under the Securities Commission and 16 Islamic commercial banks in Malaysia that are supposed to pay zakat. However, as of October last year, only 21 companies and 12 Islamic banks disclosed their zakat payment with an average payment of RM4 million accumulating a total collection of RM130 million. This is a far cry from its true potential, which is estimated to reach RM2.9 billion in 2019 and more than RM3.4 billion by 2031. This projection, however, does not include non-public Syariah-compliant firms, sole-proprietorships, Islamic cooperatives and small, medium enterprises in Malaysia.

On the other hand, the total budget of the child grant only amounted to RM1.9 billion, to cater approximately for 832,940 children under the age of 2 in 2019, with each child to be allocated RM150.

In Islam, zakat can be used for various socio-economic purposes such as education, healthcare and humanitarian causes as long as they fulfil the criteria of zakat beneficiaries (asnaf).

The Quranic verse (9:60) listed eight categories deserving of zakat: the poor (al-fuqara’); the needy (al-masakin); zakat collectors; those whose hearts are being reconciled (with Islam); freeing war captives; persons in debt; those who are in the path of Allah; and the wayfarers.

In this regard, the overwhelming majority of jurists from four established schools (Hanafites, Malikites, Syafi’ites and Hambalites) are of the view that children are also eligible to receive zakat if their guardians fall among the above eight categories.

A hadith narrated by al-Daruquthni from Abu Juhaufah reported that the Prophet Muhammad (PBUH) once sent a zakat collector who collected zakat from the rich people and distributed the collection among the poor. At that time, Abu Juhaifah was a young orphan who did not possess any wealth, so the zakat collector gave him a middle-aged camel. Thus, according to the Hanafi school, children of wealthy parents could not receive zakat because they are considered rich if their parents are rich.

In a report attributed to Caliph Umar al-Khattab, it is stated that the first poor (fuqara’) refer to Muslims and the second needy (masakin) to non-Muslims. Difference of religion is thus not a bar to zakat.

In a nutshell, corporate zakat is a high potential source of funding for a child grant programme in Malaysia, particularly for children of households belonging to the B40 category. Other potential avenues such as corporate social responsibility (CSR), sadaqah and waqf, can also be explored as complementary funding sources for the proposed grant.

From an Islamic viewpoint, the use of corporate zakat and other Islamic social finance instruments for a child protection system correspond to the higher objectives of Syariah (maqasid) on the protection of life and mind, and is supportive of the government’s new motto to promote Islam as rahmatan lil ‘alamin (a mercy to all creation).

To achieve corporate zakat’s fullest collection potential, this article proposes that relevant authorities, such as the Securities Commission (SC), Bank Negara Malaysia (BNM), and the Companies Commission of Malaysia (SSM), increase the promotion of zakat among Malaysian companies.

The corporate zakat payment needs to be emphasised as a tax obligation. This is particularly so since the National Fatwa Council of Malaysia (2001) and Selangor Fatwa Council (2003) have resolved that Islamic banks and Syariah-compliant firms are obligated to pay zakat.

It is also recommended that zakat payment becomes one of the determining criteria in achieving Syariah-compliant status for public-listed securities under the SC.

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

Published in: New Straits Times, Thursday 18 April 2019

Source : https://www.nst.com.my/opinion/columnists/2019/04/480447/child-trust-lifeline-corporate-zakat

Friday, 19 October 2018 11:45

Islamic finance promotes inclusion

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 zakatwaqf (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 zakahwaqf 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.

This email address is being protected from spambots. You need JavaScript enabled to view it.

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

Sunday, 02 April 2017 10:02

What exactly is crowdfunding

Although still in its infancy, there are already six crowdfunding companies operating in Malaysia. One of them was co-founded by Elain Lockman, an actuarial science graduate with a Masters in operational research who was one of the early employees at MDEC. She also had stints at iPerintis [now called Petronas ICT) and Malaysia Debt Ventures before venturing on her own as a consultant for tech clients such as DiGi Telecommunications, Packet One Networks, Green Science and MSC Management Services. Last year, she helped found Ata Plus with two other business partners. Elain talks to SAVVY about what crowd-funding is all about and its prospects in Malaysia..............................Download the full article in pdf attachment (below)

THE International Monetary Fund (IMF), especially under its current managing director, Christine Lagarde, has been a proactive supporter of Islamic banking, and, together with the World Bank, has declared it a priority for its operations in countries with Islamic banking. In a recent report titled “Ensuring Financial Stability in Countries with Islamic Banking”, IMF economists have thrown down the gauntlet to its board with a plan of action that, if approved, would have game-changing implications for the regulation and development of the industry, thus further promoting its stability and soundness............................Download the full article in pdf attachment (below)






Tuesday, 10 May 2016 11:21

Islamic finance's strong position

When first conceptualised in the 1950s and 1960s, it was envisioned that Islamic banks would take the form of a publically-owned social service, similar to that of education and health. Islamic banks would offer current accounts that would not earn interest and saving accounts that paid dividends on the basis of partnership. The capital made available from the saving accounts is considered as investment, thus, would be used by businessmen through partnership agreements where profits and losses would be shared......................Download the full article in pdf attachment (below)



Monday, 18 April 2016 11:30

Islamic banking's challenges and goals

Strong views were recently expressed by the Muslim Consumers Association of Malaysia that the Islamic banking and finance industry follows the letter but not the spirit of Islam. “Perbankan Islam tiad ‘roh Islam, zalim” (Utusan, Oct 23, 2015) raises some serious concerns of society. This is despite the fact that “Islamic banking assets grew at an annual rate of 17.6 per cent between 2009 and 2013, and will grow by an average of 19.7 per cent a year in 2018 (The Economist, Sept 13, 2014); Khalid Howladar of Moody’s rating agency, calls this “a landmark year” for Islamic finance, in that it is moving from “a very esoteric asset class to one that’s more… global”......................Download the full article in pdf attachment (below)



Question: How do you see the capital market for the rest of the year and next year for Malaysia and the region?
Answer: For Malaysia and the region it is similar. In Indonesia and Singapore we have had a few capital market exercises. We have seen IPOs postponed. I think the market is not conducive until the end of the year (or) first quarter next year. We don’t think it is conducive to raise funds in equity and debt markets because the pricing will be affected. For companies that are very strong, it’s still a good time to raise bonds, because people will take good credit. Good credit is no issue. We are still number one in terms of sukuk and the bond market. ................Download the full article in pdf attachment (below)



Question: How do you see the capital market for the rest of the year and next year for Malaysia and the region?


Answer: For Malaysia and the region it is similar. In Indonesia and Singapore we have had a few capital market exercises. We have seen IPOs postponed. I think the market is not conducive until the end of the year (or) first quarter next year. We don’t think it is conducive to raise funds in equity and debt markets because the pricing will be affected.


For companies that are very strong, it’s still a good time to raise bonds, because people will take good credit. Good credit is no issue.


We are still number one in terms of sukuk and the bond market.
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