Shariah

English: Islamic jurisprudence
Alternate spelling: Sharia, Shari'a, Shari'ah, Syariah, Syaria, Syari'ah, Syari'a

Definition: Islamic cannon law derived from three sources: the Quran, the Hadith and the Sunnah

A “Shariah compliant” product meets the requirements of Islamic law.

A “Shariah board” is the committee of Islamic scholars available to an Islamic financial institution for guidance and supervision in the development of Shariah compliant products.

A “Shariah advisor is an independent Islamic trained scholar that advises Islamic institutions on the compliance of the products and services with the Islamic law.

IFN weekly market roundup: 14th – 20th January 2017

The week has seen a flurry of activities in the Islamic finance world with sovereign Sukuk finding solid grounds and their corporate counterparts promising potential for 2017. The industry is taking regulations seriously with new and revamped legislation underway. Institutions and firms are announcing their fiscal results for 2016, with an analysis of last year and expectations for the new year. Europe brings in good news in the fintech sector as Fitch announces Takaful prospects for two Southeast Asian Islamic powerhouses.

SOVEREIGN SUKUK
From Asia, the government of Indonesia auctioned sovereign Sukuk (SPN-S 11072017 and four project-based Sukuk series), with an indicative target of IDR6 trillion (US$449.4 million) on the 24th January. Brunei issued its 141st series of short-term Sukuk Ijarah for BN$100 million (US$69.77 million). Maturing on the 13th April 2017, the 91-day facility was priced at 0.63%.

Qatar’s central bank sold QAR8 billion (US$2.2 billion)-worth of Sukuk on the 16th January. The  while the Central Bank of Bahrain’s monthly Sukuk Salam Islamic securities has been 100% fully subscribed. 
In Africa, Egypt made headlines this week. The country could be issuing a US dollar Sukuk facility in 2017, after the investor meetings for its conventional bond that are scheduled to end on the 23rd January.

NON-SOVEREIGN SUKUK
The week saw potential Sukuk announcements for 2017 with Bahrain’s Nogaholding engaging banks for either an Islamic or conventional facility, reported Reuters; and Saudi’s Jabal Omar looking into the Sukuk market this year, according to its CEO, Yasser Al Sharif in an interview with Bloomberg. 

From Southeast Asia, Fitch Ratings said that Malaysian firms continue to be the most active corporate Sukuk issuers. Fitch expects Sukuk issuance to maintain growth momentum in 2017 and in turn bring in more Sukuk alongside conventional bonds to the market. Sunway Treasury Sukuk of Malaysia has issued RM100 million (US$22.43 million)-worth of Islamic commercial papers on the 19th January 2017. 

The Investment Corporation of Dubai is preparing to launch its US$700 million US dollar Sukuk by next week, after a five-day roadshow in Asia, the Middle East and Europe, according to GlobalCapital. 

In Bahrain, the bourse has listed a six-month Sukuk Ijarah facility worth BHD26 million (US$68.47 million) and three other treasury bills, amounting to BHD201 million (US$529.34 million), according to a statement. 

REGULATIONS
The Chartered Institute of Islamic Finance Professionals issued the CIIF Code of Ethics and CIIF Standards of Professional Conduct which set out principles on par with other codes of ethics by its peers, both foreign and local.

Over in the Middle East, the government of Azerbaijan signed a grant agreement with the IDB for the provision of technical assistance in drafting an Islamic financing legislative base, according to Trend. Iran’s Banking Reform Bill, a law outlining reforms in the country’s banking sector, will reportedly be finalized in the parliament’s spring session.

BANKING & FINANCE
The National Transmission and Despatch Company of Pakistan secured Islamic and conventional financing facilities worth PKR18 billion (US$171.43 million) to finance the installation of a 250 km 500 kV transmission line from Thar Desert to Matiari district, according to The News. The country’s quarterly housing finance review by the central bank also reported that Islamic banks led in terms of home financings compared to conventional banks in the third quarter of 2016. The total amount of financings by Islamic banks was PKR25.8 billion (US$245.94 million) during the period.

Abu Dhabi Islamic Bank has introduced its first Islamic equity investment structured note of 2017 to aid investors’ exposure to undervalued blue chip companies from a range of sectors. 

The International Center for Education in Islamic Finance has signed an MoU with the International Federation of Red Cross and Red Crescent Societies to research financial instruments to increase humanitarian initiatives, including the development of Sukuk social impact bonds, Waqf and Zakat endowment funds among others. 

NEW ENTITIES
Herbert Smith Freehills announced that it has received a Qualified Foreign Law Firm license from Bar Council Malaysia. Its new Malaysian office will open in May 2017.

ASSET MANAGEMENT
In Malaysia, the takeup of the Employees Provident Fund’s Simpanan Shariah reached RM59.03 billion (US$13.22 billion) of the initial RM100 billion (US$22.43 billion). The fund also allocated RM50 billion (US$11.22 billion) as further injection for Simpanan Shariah 2018.

Securities & Investment Company entered into a strategic partnership with Trucial Investment Partners for the Shariah compliant SICO Trucial US Real Estate Income Fund estimated to be worth US$50 million, possibly launching in the second quarter of 2017. 

FINTECH
EETHIQ Advisors from Luxembourg and the French asset manager 570 AM are partnering on two fintech initiatives, EETHIQ founder and managing director Rachid Ouaich told IFN. The first project is to increase 570 AM’s Shariah compliant digital mortgage offering to European countries other than France; while the second is to create a personal finance management platform with the capability to link to banking accounts that would incorporate Shariah compliant financial products and automated Zakat calculations.

TAKAFUL
Fitch Ratings opined that Takaful products demand is low in Indonesia caused by a lack of awareness and a robust Islamic finance system. As for Malaysia, the country’s Takaful industry continues to achieve higher growth than the conventional sector, contributed by a firm presence and consumer awareness.

Agrobank, a Shariah compliant institution, established Agro Nurani, the country’s first Takaful coverage for persons with disabilities. The scheme offers benefits including cash allowance for disabilities caused by accidents. 

MOVES 
Norashikin Mohd Kassim has left CIMB-Principal Islamic Asset Management (CIMB-Principal IAM) to join an Islamic bank; Chief Investment Officer Mohd Fadzil Mohamed has stepped up as acting CEO.

Dubai International Financial Center Authority welcomed its new CFO, Yazan Mohamad Nasser. Yazan was previously the CFO for Emaar Malls with 30 years of experience in finance and audit. 

Tawarruq platform taps SME market with Islamic factoring instrument; eyeing regional expansion

MALAYSIA: A Malaysian commodity Murabahah platform has expanded its product suite to include Islamic trade receivables, opening itself for the first time to the SME segment as the company undergoes a major overhaul in strategic direction with an eye on regional expansion.

Sedania As Salam Capital, a Tawarruq solutions provider, has partnered with Zikay Factoring allowing the latter’s Shariah compliant Bai Dayn product to be available on its platform. Enabling SMEs to improve their cash flow in a Shariah compliant manner, Islamic factoring is uncommon in the Gulf but more prevalent in Malaysia; it is worth some RM1.2 billion (US$268.97 million) in the Southeast Asian nation, according to Azrin Mohd Noor, the founder and group CEO of Sedania Group. On a yearly basis, Zikay Factoring is involved in RM100 million (US$22.41 million)-worth of transactions, hitting RM145 million (US$32.5 million) last year.

Traditionally catering to the retail market through its As-Sidq platform used by Islamic banks and cooperatives, Sedania As Salam Capital is, however, broadening its ambit to small and medium businesses and is also looking to bring the Tawarruq solution beyond its Malaysian remit to include other regional markets.

“Today is another major landmark –we have tapped the banking and cooperative segments, and for us to have Zikay Factoring to join us in creating a community where we are concerned about our funding source being Halal is a significant achievement,” said Azrin, who also revealed that the group has plans to replicate this business model in other countries such as Indonesia, Bangladesh and Pakistan this year.

The company, which was the first Halal commodity trading platform to utilize telecommunication airtime instead of the commonly used crude palm oil as its underlying asset, is also repositioning itself as a fintech firm – focusing its resources and efforts on product development this year onward with a clear aim of creating other financial technology solutions beyond its current Tawarruq platform. Since 2012, As-Sidq has processed over 300,000 transactions worth over RM25 billion (US$5.6 billion).

Update on the growth of Shariah compliant equities in Indonesia

The growth of market capitalization of Shariah compliant stocks up until November 2016 was very favorable. The market capitalization of two Islamic indices in the country, the Jakarta Islamic Index (JII) and the Indonesian Shariah Equity Index (ISSI in its Indonesian abbreviation), both grew twice as fast as the market capitalization of all stocks traded on the Indonesian Stock Exchange (IDX) whose index is known in its Indonesian abbreviation as IHSG. 

Between January and November 2016, the market capitalization of JII and ISSI grew 26% and 28.7% respectively, compared to 14.4% recorded by the IHSG (Table 1). The market capitalization of the ISSI stood at IDR3.29 quadrillion (US$230.3 billion), and it accounted for 59% of the total IDX composite which is also known as the Jakarta Composite Index. Currently, there are 345 companies listed on the ISSI out of 535 listed on the IDX. The ISSI is a stock index that reflects the overall Islamic stocks listed on the IDX. It constitutes a whole constituency of Islamic stocks listed on the stock exchange and registered in the list of Islamic securities. 

 
Table 1: Selected market capitalization of Indonesian indices (2013-November 2016) (IDR trillion)
 
Index 2013 2014 2015 November 2016
JII 1,672.1 1,944.5 1,737.3 2,188.8
ISSI 2,557.8 2,946.9 2,600.8 3,291.5
IHSG 4,219.0 5,228 4,872.7 5,575.4
Source: Financial Services Authority and the Indonesian Stock Exchange

If the ISSI includes all Shariah compliant stocks listed on the IDX, the JII only includes 30 Shariah compliant stocks considered to have the largest market capitalization and the most liquid transaction. Both the ISSI and the JII are reviewed every six months, in the months of May and November for the ISSI, and January and July for the JII. As shown in Table 1, the market capitalization of the JII accounted for 66.5% of the ISSI. 
Of 345 listed Islamic equities, the largest sector is the trade, services and investment sector which has 87 shares accounting for 25.2% of the total number of listed Islamic equities. The second-largest sector in terms of the number of shares is the real estate, property and construction sector with 58 shares (16.8%), followed by the basic industry and chemistry sector with 52 shares (15.1%). 

The year 2016 showed marked improvement in terms of the growth of Islamic equities compared with 2015 when both the ISSI and the JII suffered a decline. In fact, although the economy has not reached its full potential yet, 2016 showed a general improvement in the economy compared with 2015 which showed a decline overall in the IHSG. Other than this, some calls in the last two to three years to strengthen the role of Islamic finance in the country may finally deliver some results through more awareness of, and increased investing in, Shariah compliant shares. 

Farouk Abdullah Alwyni is CEO of Alwyni International Capital and the chairman of the Center for Islamic Studies in Finance, Economics, and Development. He can be contacted at faalwyni@alwynicapital.co.id.

SICO and Trucial enters into strategic partnership

BAHRAIN: Securities & Investment Company (SICO) has entered into a strategic partnership with Trucial Investment Partners for the Shariah compliant SICO Trucial US Real Estate Income Fund with a target size of US$50 million, according to a statement. The two institutions will co-seed and co-manage the planned fund which is due to be launched during the second quarter of 2017, and will focus on income-generating residential multi-family and single-family properties in conurbations outside major US ‘gateway’ cities. The fund marks SICO’s maiden foray into the US real estate sector.

New year, new legal framework?

The Central Bank of the UAE published the Regulatory Framework For Stored Values and Electronics Payment Systems (the Regulation) on the 1st January 2017. While it is not Islamic finance regulation per se, the provisions are applicable to the industry, namely the payment service provider (PSP), agents and/or approved third-party providers and outsourcing entities that operate within the Shariah compliant mandate. The Regulation covers 14 areas across the digital payments value chain including, among others, the licensing process, licensing requirements, customer registration, requirements for the use of agents, funding, transactions and spending limits, the authorization of payment transactions and such.

In addition to specifying the common regulatory requirements for all PSPs, the Regulation also provides for specific requirements applicable to each category of PSPs, namely, retail PSPs, micropayment PSPs, government PSPs and non-issuing PSPs (including the KYC and CDD requirements for the respective category). The Regulation also specifies the governance requirements of the PSP and while Regulation D.2.10(b) does not specify the requirement to have Shariah-qualified personnel at any level of management, it is assumed that the Central Bank of the UAE retains the power to require for such personnel for Shariah compliant PSPs using the general provision of Regulation D.2.10(a) that dictates the duty of the PSP to have effective governance to the satisfaction of the central bank.

Well done to the Financial Services Authority of Indonesia for approving a bank’s new product proposal which is new in the Indonesian market, and deemed and seen as a step closer to a true Shariah approach for Islamic finance. Even though it is still a pilot project, it is hoped that if the project goes well, the regulator will issue guidelines or regulations allowing Islamic banks (including Islamic windows) to enter into true sale transactions.

Dr Hurriyah El Islamy is the IMF expert in Islamic finance, an FAA assessor and an AAOIFI CSB Working Group member. She can be contacted at hurriyah@gmail.com.

Takaful operators pioneering in Oman

Takaful insurance is often seen as one of the major global developments in the sphere of finance and banking. It opens doors to insurance-savvy customers who require insurance but are skeptical about its concept due to religious beliefs. With the advent of Islamic finance and banking as well as Takaful, AJAY SRIVASTAVA opines that customers can now ‘choose’ what they feel is best for them without having to compromise on their beliefs. 

Takaful was launched in Oman in 2014, when Takaful policies were issued with the objective of attracting people who may have shied away from financial protection products for religious reasons. With a second Takaful operator following soon, the sector has had an impressive start. According to estimates, Takaful constitutes about 8-9% of direct insurance premium in Oman and 5-6% of total paid claims. Oman’s launch into the Takaful world almost coincided with the fall in global oil prices and the consequent economic slowdown witnessed in recent times. The growth of Islamic finance therefore is all the more impressive.

The introduction of Takaful in the Sultanate is also unique in some sense. In most markets, Takaful has been a greenfield venture so it had to go through the pains of a start-up whereas in Oman it was the unique experience of converting existing conventional insurance companies into fully-fledged Takaful operations. Therefore, developing market share, a distribution platform and customer experience were leveraged on existing market share – a reason why Takaful has been able to grow its share of the market so quickly. A Takaful operator’s ability to get people’s trust through affordable pricing and superior customer service is one of the other key contributors to the growth of Takaful in the Sultanate.

Creating awareness among the public on the importance of Shariah compliant insurance protection via partnerships among large Islamic banks is significant. With Takaful operators collaborating with local Islamic banks to promote Islamic finance as a whole, a paradigm shift is happening in the local insurance market. Such initiatives act as a catalyst in spreading awareness about Takaful rapidly across the country.

Takaful, however, is still a relatively new concept in Oman where there is a huge opportunity for insurance penetration. The awareness is low and customers are bound to ask pertinent questions: What is Takaful? How much do I have to pay? Will there be a surplus and will I get a share in it? Takaful operators risk building expectations without clearly informing about the caveats. There is a danger of creating perceptions of false promises. Claims will be paid, documents will be issued and services will be provided but unless there is an emphasis on the Takaful brand value, a Takaful operator and its product would look, feel and be like conventional insurance.

The Takaful brand value is about protecting communities. The operators need to work on the theme of social consciousness which is inclusive in nature and based on equity, justice, cooperation and fair play. Takaful is built on the concept of cooperation within a community of people who bring their money together to help each other. For the Takaful industry to grow in Oman and elsewhere, it is important that the holder of the Takaful policy gets a sense of community belonging.

There are some challenges on the technical side for Takaful growth. An important element is the gestation period of five to six years for an insurance company to break even. During this time, investment returns from the share capital covers any operational deficit for a conventional company. However, in the absence of share capital in the policyholders’ fund under the Takaful model, the policyholders’ fund is deprived of the advantage of a sizeable investment income to its account. This, very often, could mean the early onset of Qard Hasan requirements than would normally be the case.

The Takaful law was promulgated in Oman in 2015 and the regulations are expected soon. The regulator in Oman has played a pivotal role in the development of Takaful and it is expected that the regulations will address some of these vital issues which will provide further impetus to growth.

In Oman, the growth of Takaful is driven by those who are increasingly finding it to be the optimum solution for financial security and wellbeing. This is just the start and with regulations setting in and new products and services made available by Takaful operators, an increased insurance penetration in Oman will eventually lead to an overall increase in the Takaful market share.

Ajay Srivastava is COO of Al Madina Takaful. He can be contacted at ajay.srivastava@almadinatakaful.com

Trade matters

We know the story: economic growth has slowed down, global demand has weakened and markets remain volatile; but how have these affected international (Islamic) trade? We find out in this week’s cover story.

Reports from the IFN Editorial Team explore latest developments in blockchain technology for Islamic financial institutions; Turkey’s Shariah banking landscape; and the feasibility of a mandatory Islamic finance component for the Halal industry among others. We also analyze the markets of the UK and Ireland and pension funds in our in-house analytical pieces as well as take a closer look at the IDB’s most recent dollar Sukuk issuance in our case study.

It is a bumper issue this week with updates from our global correspondents and special reports by Franklin Templeton Investments on the international Sukuk market this year as well as an insightful piece on contracts from the International Institute of Advanced Islamic Studies. This week’s features are contributed by Amana Canada Holdings, UK-based Minarah MultiConsulting and Al Madina Takaful.

As usual, we wish our readers an insightful and informative read.

OIC trade finance in 2017: Where do we stand?

Trade finance is a golden opportunity for the Islamic industry — underpinned by sound credentials and supported by real economic transactions, it should be the perfect match. So why has intra-OIC trade fallen by 7.8% over the past year — and what role can Islamic finance play in putting trade flows back on the map for 2017? 

The growth of the world economy is forecasted to drop to 3.1% in 2016, according to the latest figures from the IMF — before rebounding to 3.4% the following year. However, emerging markets will provide the lion’s share of this growth — advanced economies are expected to see just 1.6% compared to 4.2% in the developing world. 

“The growth of world trade remains low [not only] because of the decline in domestic demand and related investment but also [due] to the resurgence of protectionism, the withdrawal of global value chains, the risk of the drop in commodity prices and the appreciation of the US dollar,” warned the Islamic Center for the Development of Trade (ICDT) in its November 2016 report on economic and commercial cooperation within the OIC to the Standing Committee for Economic and Commercial of the OIC (COMCEC). 

At the same time, according to the latest available 2016 data from the World Trade Organization, the volume of world trade decreased by 13% in 2015 compared with 2014 — falling from US$38.1 trillion to US$33.2 trillion, mainly due to the high fluctuation of commodities prices and exchange rates, caused by the slowdown of the economic growth in China, the recession in Brazil, the sustained production of fuels in the US and the divergence in monetary policies of major economies.

“The volatility of financial markets has also affected businesses and consumers’ trust and has contributed to the decrease of global demand for certain durable goods particularly in Asia,” added ICDT. Between June 2014 and December 2015, the prices of basic commodities declined by 63% due to the increase of the production of OPEC countries, while metals fell by 35%; and food products and agricultural raw materials by 22%. With the latest uncertainties caused by the recent US elections, a rising dollar, wildly fluctuating currencies across Asia and a bond outflow across emerging markets, the situation looks less than promising. 

A steady improvement
Having said that, OIC trade still marks a bright spot on a gloomy horizon. Over the past decade the foreign trade of OIC member states has increased by 93% — from US$1.77 billion in 2005 to US$3.43 trillion in 2015. This is to a large part due to the tireless work from organizations such as the IDB, International Islamic Trade Finance Corporation (ITFC), the Islamic Corporation for the Development of the Private Sector and COMCEC in promoting and supporting intra and external OIC trade. For example, between February 2009 and December 2015, the Consultative Group for enhancing intra-OIC trade generated approximately 1,125 projects and activities, 75% of which were achieved in the fields of capacity-building, trade facilitation, trade promotion, trade financing and export credit insurance and guarantee and the development of strategic products. Between 2010-16, many Islamic countries have seen their trade growth exceed 10% — including the UAE, Malaysia, Turkey, Iran, Egypt, Brunei, Kuwait, Senegal, Sierra Leone, the Maldives, Burkina Faso, Algeria, Saudi Arabia, Lebanon, Morocco, Chad, Tajikistan, Indonesia and Cameroon. And according to data from the United Nations Conference on Trade and Development, other OIC nations achieved a maritime connectivity rate of over 25% between 2005-16: including the Maldives, Bahrain, Togo, Sudan, Bangladesh, Jordan, Benin, Somalia, Djibouti, Guinea, Turkey, Cameroon, Egypt, Sierra Leone, Morocco and Côte d’Ivoire. In fact, overall, the average maritime connectivity rate of OIC member states has improved by 18.6% over the last decade.

An Islamic opportunity
But despite these activities and projects, trade between OIC member states represented just 10.33% of world trade in 2015 — compared to 11.2% in 2014, the equivalent of a 7.8% decline over the past year. 

Official Shariah compliant trade finance data is hard to come by; however, if the league of OIC world trade leaders is any indication of the utilization of Islamic facilities in cross-border commerce, it is encouraging to note that major Shariah finance markets top the list: the UAE (US$478.4 billion, or 14% of overall trade of OIC countries), followed by Saudi Arabia (US$379.2 billion; 11.1%), Malaysia (US$376.4 billion; 11%), Turkey (US$351 billion; 10.3%), Indonesia (US$293.1 billion, 8.6%) and Iran (US$153.3 billion, 4.5%).

In fact, the UAE is leveraging its trade prowess to reach its global Islamic economy ambitions: in October 2016, the Dubai Islamic Economy Development Center (DIEDC) revealed plans to launch a fully-fledged Islamic bank exclusively offering integrated trade and international commodity financing solutions — believed to be the first of its kind worldwide. Already in advanced discussions with the Central Bank of the UAE with regards to securing provisional approval for a Shariah compliant wholesale banking license, DIEDC is branding the new outfit as Emirates Trade Bank and positioning it as an integral component toward doubling UAE trade flows (which stood at an estimated AED1.4 trillion (US$381.06 billion) in 2014) by 2020.

Table 1: ITFC trade approvals by region (in US$ million)

Region

2014

%

2015

%

Asia/CIS

2,464

47

3,229

53

MENA

2,291

44

2,228

37

Sub-Saharan Africa

448

9

590

10

Total

5,204

100

6,047

100

Source: ITFC 2015 Annual Report

“The UAE in general and Dubai in particular are privileged to have a diversified, open and flexible economy capable of addressing international and regional challenges. Emirates Trade Bank is set to reap synergies from the strategic positioning and advanced technical and logistics infrastructure of Dubai, in its efforts to finance international trade and commodity flows, particularly through the UAE,” explained Sami Al Qamzi, the director-general of Dubai Department of Economic Development and vice-chairman of the DIEDC, when the bank was announced.

Notwithstanding that trade volume of OIC nations may have declined due to the volatility of commodity prices (by at least US$50 billion over 2014-15, according to latest figures by COMCEC), it is worth noting that the ITFC recorded one of its best years ever in 2015 in terms of trade financing approvals, increasing them by 16% year-on-year to US$6.05 billion. The ITFC also revved up its support for the Asia-CIS region and MENA countries as well as expanded its geographical footprint in Africa and South America.

The ITFC has not slowed down either: In 2016, the IDB unit has been actively forging new partnerships to enhance trade among member countries, this includes alliances with Eastern and Southern African Trade and Development Bank as well Saudi’s Catalyst Group among others; and it is expected for the ITFC to continue actively promoting, encouraging and utilizing Islamic financial instruments for cross-border trade purposes. 

Where now?
Fluctuating commodity prices and currency exchange rates are still a concern in 2017; after all, these elements factor into the economies of OIC nations during international commercial transactions as well as on foreign direct investments’ intra-zone flows. However, history shows that despite weak global economic conditions, member states tend to ramp up their intra-OIC trade driven by bilateral and regional agreements as well as the similarity of consumption patterns, complementarity and regional efforts in promoting trade and trade financing. In the decade leading to 2015, intra-OIC trade accounted for a larger share in the total trade of member states, from 15.5% in 2005 to 20.33% in 2015 — an increase of 31.5%.

New opportunities
As such, new opportunities are abound. Egypt, for example, is very keen to collaborate with the ITFC to prepare a strategy to develop its export sector. Iraq’s Ministry of Electricity will secure a US$366 million trade finance deal to fund power and infrastructure projects in the country by the end of 2016. Standard Chartered is leading the financing. Motasim Iqbal, the head of transaction banking for the MENA region at Standard Chartered, confirmed a financing MoU signed between General Electric, Trade Bank of Iraq and Standard Chartered to fund power and infrastructure projects in Iraq. 

In Africa, the African Export-Import Bank is putting together a Fund for Africa Export Development — a combination of both debt and equity options — to assist African nations better navigate regional economic shocks. The African region is another lucrative trade finance pool due to the fact that there is huge unmet demand for, and a gap in, trade financing: African Development Bank in 2014 posited that US$120 billion in bank trade financing requests were rejected, about one-third of the US$350 billion extended by commercial banks for trade deals in 2012.

Trade finance funds
And this risk averseness displayed by African banks also extends to other regions including Asia, where banks — already constrained by their limited financing options — are shedding trade finance risks from their balance sheet. This chasm in return translates into opportunities for trade finance funds which are able to fill a vital niche in the higher-risk end of trade finance usually avoided by banks. 

Already we are seeing players filling this gap — both Islamic and conventional. Last month, Bahrain-based Ibdar Bank rolled out the Barak Ibdar Shariah Trade Finance Fund, a parallel fund of its successful Barak Trade Finance Fund. Acting CEO Ahmed Al Rayes shared that the fund was in response to clients’ request for a high-yielding liquid investment product (the Barak Trade Finance Fund had a straight seven-year positive record with a 168% total return and an average of a 13% return to investors annually). Assets under management of the global trade finance industry is anticipated to double in size in five years to US$20 billion, estimated New York-based Octagon Asset Management.

More work needs to be done
Yet, despite massive potential and positive developments in some quarters, the trade finance landscape is still dominated by conventional actors — the Shariah compliant trade finance instrument stable is still very limited although several market participants remain optimistic the attractive trading margins and returns characterized by this asset class would lead to further product development to meet growing investor demand for Shariah compliant products.

It goes without saying that continuous action and support is needed to not only ensure the growth momentum is sustained but also increased. Concerted efforts at the governmental level is imperative as evidenced by the 156% surge in trade volume to US$694.23 billion in 2015 among OIC member states since the implementation of the OIC 10-Year Program of Action. Country leaders need to focus on capacity-building and being more involved in the international trade community by participating in fairs, particularly those organized by the IDB and the ICDT. These need to be complemented by an optimization in foreign trade and intra-OIC investment procedures in order to boost trade among member states as well as an expansion and diversification of exportable supply.

Astana seeks cross-border collaboration to boost Islamic finance capabilities

Kazakhstan is moving closer toward integrating Islamic finance into its wider economy after the Astana International Financial Center (AIFC) signed an MoU with the Dubai Islamic Economy Development Center (DIEDC) to exchange expertise in the field of Islamic economy and finance, the Halal industry and human capital development. DANIAL IDRAKI reports.

The cross-border collaboration between the two entities aims to bring about financial stability and sustainable growth in vital sectors as well as assist in diversifying Kazakhstan’s sources of income, and the Central Asian nation will benefit from the experience of Dubai and the UAE in developing an integrated Islamic economy strategy and implementing Shariah compliant financial mechanisms. Both parties will exchange knowledge and information relating to the Islamic economy and provide documentation as part of shared know-how on Islamic finance transactions, as Kazakhstan — one of the most sophisticated Islamic financial markets in the CIS region — gears up toward creating a more stable and sustainable economy.

Sultan Saeed Al Mansouri, the minister of economy and chairman of the DIEDC, noted in a statement that the MoU demonstrates its commitment to supporting the AIFC in encouraging investors to adopt responsible investment mechanisms that mitigate financial risks and boost social development. He also reiterated that the Islamic finance sector has the potential to achieve tangible growth in line with global efforts to realize the development goals of the third millennium, and pointed to the keenness of Islamic and non-Islamic economy stakeholders to contribute to eradicating poverty, unemployment and diseases. “As part of this priority, we need to observe the principle of solidarity, justice and equality in the distribution of assets. Furthermore, public and private entities alike must enhance governance practices and adopt corporate social responsibility,” he added.

The governor of the AIFC, Kairat Kelimbetov, said that Islamic finance, along with the wider Islamic economy, is increasingly becoming an important contributor to the global economy, and that the UAE and Dubai have become role models in the implementation and regulatory frameworks for Shariah compliant industries. “[The] AIFC attaches great importance to the principles of Islamic finance that have proven efficient in protecting local economies in turbulent times, [and] this MoU is in line with the Kazakhstan 2050 Strategy and the steps we have taken to enhance our country’s economic diversification efforts toward building a sustainable, competitive and smart economy and to attract investments that will shape Kazakhstan into one of the 30 most developed nations in the world,” Kelimbetov noted.

Kelimbetov further added that the country harbors an ambition to become a pioneer in sectors that are able to comply with the rules and ethics of the Islamic economy, such as commerce, industrial development, finance, education, health, tourism and food production.

Kazakhstan’s drive in these sectors is well reflected in the MoU with the DIEDC, which will see the Dubai-based organization assist the country in setting up the Kazakh Halal Accreditation Body in collaboration with its strategic partners, and the new organization will eventually join the International Halal Accreditation Forum, as the country steps up its commitment to the Halal ecosystem and certification. “The country’s endeavor complements our efforts to promote the Halal industries and increase standards across the board toward facilitating trade exchange and achieving food security at a global level,” Sultan affirmed.

The AIFC have in recent times increased its collaboration momentum with Islamic financial institutions around the world, as exemplified by the MoU it penned with the Islamic Corporation for the Development of the Private Sector in October 2016, to explore private sector collaboration in the Islamic financial services industry. Prior to that, the AIFC had also signed an MoU with Qatar Financial Center in September 2016, which provides for the exchange of experience and information on the regulation of markets for Islamic finance.

Making Islamic finance mandatory for the Halal industry: Is it feasible?

As Malaysia’s Halal industry reaches its targets for 2016, the nation’s Halal Industry Development Corporation (HDC) eyes bigger achievements with a steadier international presence this year. But will these bring a promising future for mandatory Shariah compliant finance requirements for Halal-certified services and products? DURGAHYENI MOHGANA SELVAM explores.

In its 10th anniversary editorial briefing, HDC unveiled a bright forecast for the country as it continues to spearhead the industry development with a target to contribute 8.7% of the country’s total GDP by 2020. Though it was an economically unrelenting testing period for the nation and the world, the Halal market of the Southeast Asian country braced ahead to meet its targets and goals for the year. In 2016, the Halal industry contributed 7.5% of the total GDP, with its exports valued at RM36.3 billion (US$8.13 billion). 

However, more pertinent to us is what does HDC have in store for the Islamic finance industry, domestic and global alike? Jamil Bidin, CEO of HDC, previously revealed to IFN that Malaysia was considering making it mandatory for the Halal industry to only use Shariah compliant finance; but Jamil now explains that it is easier said than done.

Jabatan Kemajuan Islam Malaysia (JAKIM), which is responsible for Islamic-related certifications in Malaysia, unfortunately does not take into account the nature of the transactions involved in building a Halal business. In other words, a product could be built using conventional banking and finance, and still be certified Halal

There are reasons for this, according to Jamil. Malaysia’s Halal industry, developed to the extent of advising and aiding other countries’ markets, does not have mandatory Shariah financial compliance for its products and businesses. Jamil opines that Malaysia’s Islamic finance industry is well established in the global arena. As Malaysia’s Halal industry development model is being employed by other nations, compulsory compliance legislation could bring a huge gap in practice, especially in countries that lack Islamic finance resources and funds. 

Many developing nations, such as Cambodia which is still lagging behind in Islamic finance, are slowly tapping into the Halal market, with the assistance of Malaysia. If Islamic finance is made a mandatory requirement for Halal development, countries that are not ready for a lasting commitment may not be able to follow, he said. Even in Malaysia, for a Halal organization to be able to tap into Islamic finance, it first needs to be well equipped and adequately resourced. If these are not achieved and mandatory compliance is employed, it would cause a fallback in both industries.

But all is not lost. With about three years left toward realizing Malaysia’s Vision 2020, HDC introduced the Halal Malaysia Program with six pillars: policy and legislation; international footprint; Halal enterprise development; Bumiputera development; brand and promotion; and human capital development. On the international front, HDC is targeting Japan, China and ASEAN, particularly Indonesia and Cambodia. Japan is one of the major players in the Malaysian Halal investments market especially in the Halal ingredients industry. HDC plans to generate US$10.3 billion from the East Asian country, particularly through Olympics 2020. Japan, on the other hand, is currently seeking Malaysia’s assistance in Halal management and Islamic finance. Work is underway to have all relevant parties such as HDC and Bank Negara Malaysia among others to come together to be able to assist Japan, Jamil said. 

If this collaboration is successful, will it pave the way for compulsory compliance to become a reality? A universal mandatory Shariah compliant financial standard for the Halal market can only be achieved if all the participating nations and parties are able and ready, Jamil stated. For this reason, a feasible bridge between the Halal industry and Islamic finance is far along the road.

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