Volume13.Issue27

What next?

Ramadan is coming to a close and we’ve wrapped up the first half of 2016 – and what an eventful first six months it has been, to say the least. Follow IFN as we review the performance of the Islamic finance industry year-to-date and ask experts what to anticipate in the second half of 2016.

The IFN Editorial Team continues this line of questioning by asking what will become of Islamic finance in India since one of its most ardent supporters (RBI Governor Rajan) will step down this year. We take a look at a worrying side-effect of Islamic investment into Europe, the landscape in Turkey and take a global perspective of the Shariah banking industry in light of current macroeconomic conditions and also question if corporate Waqf is the way forward for the segment. We shine the spotlight on an exciting new company: Falconvest, and zooms in on Syria and equity capital markets in our analyses. Our IFN Correspondents bring you updates from Egypt and Saudi Arabia. Maybank Singapore’s head of Islamic banking Lim Say Cheong provides us with expert insights into the Singaporean Shariah banking environment and we have a special report on Islamic banking technology by Temenos.

The past six months have been challenging for the financial markets, but many are keeping their heads up and staying optimistic as we enter the final half of the year. We wish our readers a fruitful read and Eid Mubarak.

Sovereign Sukuk: Busy week in the Middle East and Africa

The sovereign Sukuk space witnessed a relatively busy week with strong announcements coming out of Kuwait, Oman and Senegal, while Indonesia made the rounds with its usual sovereign issuance. DANIAL IDRAKI brings you the usual updates.

Kuwait
The government of Kuwait is seeking to raise, via conventional bonds and Sukuk, up to KWD2 billion (US$6.61 billion) from the domestic market and up to KWD3 billion (US$9.92 billion) from international markets in a bid to finance a budget deficit resulting from the decline in oil prices, with the remaining part of the deficit to be financed from the state reserve fund, according to Kuwait Times quoting Minister of Finance Anas Al-Salah

Oman
The government of Oman has issued, via a private placement, a US$500 million six-year Sukuk Ijarah facility carrying a profit rate of 3.5% and the instrument is to be repaid in three equal installments after four, five and six years, according to Reuters based on a document from lead arranger, Standard Chartered.

Senegal
Senegal has launched its second Sukuk worth XOF150 billion (US$249.88 million), offering a profit margin of 6% to be paid semi-annually over a period of 10 years with two years deferred, according to a filing with the CGF bourse. The transaction is backed by an asset represented by part of the terminal of the Leopold Sedar Senghor Senegal International Airport. The subscription period for the instrument will run until the 19th July 2016, with the possibility of early closing.

Indonesia
In its usual issuance, the government of Indonesia managed to raise IDR5.01 trillion (US$369.74 million) from the sale of five sovereign Sukuk securities (SPNS 29122016 and four others), after receiving total incoming bids of IDR7.8 trillion (US$575.64 million), according to an announcement on the Ministry of Finance’s website.

Upcoming sovereign Sukuk

Country

Amount

Expected date

Oman

US$2 billion

TBA

Hong Kong

TBA

TBA

Egypt

TBA

TBA

Iran

IRR60 trillion

2016

Nigeria

TBA

TBA

Jordan

JOD175 million

TBA

Pakistan

PKR79.1 billion

TBA

Egypt

TBA

2016

Kazakhstan

TBA

2016

Kenya

TBA

2016

South Africa

TBA

2016

Bangladesh

TBA

TBA

Hong Kong

US$500 million to US$1 billion

TBA

Ningxia Hui Autonomous Region

US$1.5 billion

TBA

Niger

XOF150 billion

TBA

Luxembourg

TBA

TBA

Tunisia

US$500 million

TBA

UAE

TBA

TBA

Shandong Province

CNY30 billion

TBA

Sindh Province

US$200 million

TBA

Kuwait

KWD5 billion

2016

Maldives

TBA

TBA

Sri Lanka

US$1 billion

TBA

Germany

US$1 billion

TBA

Lower oil prices not a boon to Sukuk issuance, S&P says

Despite expectations of sovereigns issuing Sukuk to cover shortages in government revenues from plummeting oil prices, Sukuk issuance has not been on the uptrend due to several limiting factors, according to S&P. DANIAL IDRAKI reports on S&P’s latest findings.

Government efforts to reduce financing needs in response to weak oil prices, the complexity of Sukuk issuance and the uncertainty regarding the US Federal Reserve’s policy revisions have and will continue to weigh on Sukuk market activity, according to Mohamed Damak, the global head of Islamic finance at S&P Global Ratings.

When oil prices began to fall, several market commentators predicted a boom in Sukuk issuance in 2015 and thereafter, arguing that governments in oil-exporting countries would tap the Islamic capital markets to attract funding and maintain their current and capital spending. However, the total issuance actually dropped compared with last year, with issuance declining by 12.5% year-on-year in the first half of 2016, S&P noted in a recent report. The rating agency reckons that issuance will remain muted over the next six to 18 months, with total issuance reaching around US$50-55 billion for the full year 2016, compared with US$63.5 billion achieved in 2015.

Issuance in the second half of 2016 will continue to depend on monetary policy developments and volatility in developed markets as well as the policy actions of sovereigns in core markets, namely GCC countries and Malaysia, in response to lower oil prices. While governments affected by the price drop are looking to spending cuts, taxation and the privatization of state companies to adjust to the new reality, their financing needs remain significant. “Part of these needs will be met by conventional debt markets and, to a much lesser extent, the Sukuk market, with the complexity of Sukuk issuance remaining a key deterrent to tapping the market, in our view,” Damak affirmed. 

S&P explained that one of the principal reasons for the lack of linkages between oil prices and Sukuk issuance is the large stocks of fiscal assets that many GCC countries have built up through years of fiscal and current account surpluses. Along with conventional debt issuance, governments are now using these assets as a source of public sector deficit financing, or for infrastructure projects.

“We also think that sovereigns will rely more heavily on conventional issuance. In the first half of 2016, total conventional debt issuance in the GCC increased by 148.2% compared with the same period in 2015, while Sukuk issuance dropped by 15.2% over the same period. Most of the growth in conventional issuance is explained by Saudi Arabian and Abu Dhabi bond issuance,” S&P noted.

The difficulties inherent to Sukuk issuance remain one of the key reasons why it is losing out to the booming conventional issuance. While S&P acknowledged that the time and cost gaps have reduced, it remains more time-consuming and complex to tap the Sukuk market than to issue a conventional bond. Not all is lost, however. The move by several industry heavyweights toward standardization will restore the attractiveness of Sukuk for new and existing players, as well as free up the capacity of market participants to develop new Islamic financing products that cater to the opportunities created by the regulatory changes in the global financial system and the sustainable development agenda. 

Some of the recent examples include the IMF advising GCC governments to integrate Sukuk issuance in their debt management strategies, and the IDB and AAOIFI working separately on introducing more standardization to legal documentation.

S&P further noted that the future direction of monetary policies and the recent episodes of volatility in advanced markets will also play a role in shaping future Sukuk market activity. Rate increases by the US Federal Reserve will result in a drop in global liquidity that will inevitably reduce global investor appetite for Sukuk and push up prices. Significant volatility in the international capital markets, such as the one over Brexit, could similarly cause further delays in issuances, be it Islamic or conventional.

Company Focus: Falconvest upbeat on Islamic appetite for private equity and real estate

While the markets have been distracted by the noise surrounding Brexit, one particular investment management firm remains steadfast in its commitment to Islamic opportunities in developed markets. Falconvest, a new venture from a quartet of some of the industry’s most experienced bankers, will focus on Middle Eastern wealth seeking investment opportunities in the UK and US markets, and recently launched services in alternative investments, including structuring private equity and real estate deals in a Shariah compliant manner. DANIAL IDRAKI brings you the story.

Falconvest was founded by four individuals who had been instrumental in developing the UK’s Gatehouse Bank, as well as working with an illustrious list of industry names including Bahrain-based Arcapita Bank. This year, those four former Gatehouse executives: Christopher Combs (former executive vice-president and the head of product development and distribution), Henry Thompson (former CEO), Arthur Rogers (former executive vice-president and general counsel) and David Swan (former executive vice-president and the head of real estate investment) decided to strike out on their own, to leverage the knowledge, expertise and networks that they have accumulated over the years. 

“Having been with a number of firms over the years and looking at what investors were demanding and where the market was going, we took the view that the best way forward was to be a pure plain investment manager that is small and nimble with a low cost base, and that focuses purely on investments and delivering returns for investors,” Combs told IFN. 

What gives Falconvest’s services a unique value proposition is a focus on low-risk, high-yield investments both in the real estate and private equity markets across the UK, Europe and the US. Despite the sharp drop in energy prices and the overall slowdown in the Middle East, demand from investors in the region is expected to be solid, with a number of deals already in the pipeline.

According to Thompson, although there are several players offering US and European private equity deals to Middle Eastern investors, few if any are doing this on a Shariah compliant basis. “The feedback that we get from clients is that there is appetite for Shariah compliant private equity in these markets. We certainly understand the space well, and the objective would be to focus on the kinds of deals where we can add value,” he confirmed. On the investments that the firm will make in the private equity sector, Falconvest will be looking at companies that are fundamentally Shariah compliant, such as branded consumers, energy and infrastructure, with the objective of being able to cater to both Islamic and conventional investor categories. 

Aside from private equity, both Combs and Thompson noted that the firm will also pursue Shariah compliant real estate investments in asset classes that they are familiar with, such as senior living and retail parks. The real estate sector is a crowded and competitive arena, acknowledged Combs who believes that the firm’s unique proposition is their long experience in the market and excellent client contacts. “The key difference to note is that our overarching theme is to be responsive to the desires of our clients. For example, if a client wants to buy a property in the City of London with financial tenants, we can advise them on that. However in our experience, there are also many clients who prefer Shariah compliant investments,” Combs explained. 

Falconvest will be looking primarily at equity investments in the range of 10-50 million, either in the pound sterling, the euro or the US dollar. “However, because of our networks and contacts, we are actively engaged with clients who are looking for properties that would be larger than that amount. In a bespoke situation, we can go outside of our sweet spot,” Combs added.

The firm, however, is not about to take undue risks when it comes to matters such as leverage or underwriting unrealistic return expectations. “The fundamental point is to find the right risk and reward balance, which is crucial. Also, if you move up the risk and reward spectrum, the objective is to create deals that are well structured and well underwritten, that seek to preserve capital and in many cases create an attractive yield. By creating an investment which is more value-added for the client, you aren’t just buying a building, but rather putting together a portfolio of assets or creating a joint venture with [a] well-respected partner. In some cases, you may in fact be taking some initial but limited construction risks, which will then translate into higher yields for the investment horizon, with [a] decent ROI,” Thompson explained.

With their first transaction expected to close by the end of summer, we can hope for great things for a firm that might be new, but has a very distinguished pedigree.

Turkey’s Islamic banking efforts bearing fruit

Islamic banks in Turkey have been steadily strengthening their foothold — accounting for 5.1% of the overall banking sector in 2015, and the government has an even bigger ambition for this sector: to increase its penetration rate to 15% by 2025. NURUL ABD HALIM looks at the progress set forth by the government in supporting this burgeoning sector.

S&P in a recent report said that the market share of Turkish Islamic banks (or participation banks)’s market share is estimated to double to more than 10% by the end of 2025 and this projection will be motivated by the government’s efforts in shoring up this sector. The sector has witnessed an impressive cumulative annual growth rate of 28% since the passing of legislation enabling the operation of Islamic finance in 2005.

“Turkish authorities have now made tangible steps to support the growth of Islamic finance in the country,” noted S&P Global Ratings credit analyst Timucin Engin.

With the entrance of two state-owned participation banks: Ziraat Participation Bank in 2015 and recently Vakifbank, the government has pushed up the number of Turkish participation banks to five with a collective 5.1% market share. And that is not all; with plans to host an Islamic megabank on its shore, and Islamic bankers sitting at the top spots in the banking regulatory bodies, Turkey looks set to capture a bigger portion of the overall banking sector pie.

“Islamic banks in Turkey has over the years grown at a faster rate comparable to its conventional peers, and this growth is driven by the increasing actual demand, support from the government and an enabling operating environment,” shared Bashar Al-Natoor, the global head of Islamic finance at Fitch Ratings, to IFN in a recent interview. Fitch in its January 2016 report foresaw that Turkish Islamic banks’ financing growth will continue to remain above the overall banking sector’s average, attributing it to the increase in new entrants to the market and penetration.

Bashar, however, said that Turkey’s Islamic banking is still at an early stage where Islamic finance is not yet systemically important as compared with its peers in other Islamic finance core markets: “The actual performance of the participation banking sector is still a long way to go and the potential remains to be seen. Whether or not the 15% target will be achieved depends on the steps [taken by the government as well as market players] during the coming period.

Corporate Waqf — the way forward?

Corporate Waqf is often believed to embody the best of both terms ‘corporate’ and ‘Waqf’. As an entity that legally operates as a corporation but which, unlike most corporations, uses the usufruct of invested Waqf funds to perpetually provide for the welfare of society, Waqf corporations may have the potential of becoming one of the most effective mediums for a system of more equitable redistribution of wealth in societies. ANAM TARIQ studies the potential of corporate Waqf as a concept as well as its real world application in Malaysia.

The condition of limited liability is one of the defining features of Waqf corporations as it allows for a clear separation of roles between the founders and trustees appointed to manage Waqf assets. However in a country like Malaysia, it is the government and every state’s individual Islamic Religious Council (IRC) that has sole authority over all Waqf assets and their management. According to the Department of Waqf, Zakat and Haj, as of 2010, Malaysia has 11,511 hectares of Waqf land worth RM116.44 million (US$29 million), but only 0.72% of it is developed and being utilized.

According to studies conducted by scholars like Murat Cizakca, a professor of Islamic finance and financial history, there is an existing agency problem within the Waqf system in Malaysia and this is reflected in the disengagement of Muslim Malaysians who often refuse the notion of endowing properties as Waqf. Murat goes on to explain that since a majority of Waqf is cash Waqf, it is more vulnerable to mismanagement and corruption compared to real assets. Another study shows that different states in Malaysia adopt different methods to manage Waqf property and this takes away from the quality of Waqf management due to a lack of standardized measures being followed. An example of this is the land tax which all Waqf lands, with the exception of cemeteries, are subject to and which tend to vary between states adding to a process already lacking in transparency and efficiency.

One Malaysian entity that seems to be defying the odds is Awqaf Holdings, a Waqf corporation founded by Muhammad Ali Hashim, after his departure from his first successful project, Waqaf An-Nur Corporation (WANCorp). Awqaf Holdings has acquired its own Mutawali status which gives it the right to manage Waqf assets on its own–- a tremendous feat that Muhammad said required interacting with a number of high-level government officials before they too acknowledged the value of his vision. For his past venture WANCorp, which is part of the government-linked company (GLC) Johor Corp (JCorp), the value of assets more than tripled from RM250 million (US$61.1 million) to RM786 million (US$192.13 million) between 2006 and 2015. 

By investing cash endowments given by JCorp’s subsidiaries as well as those from individual contributors, the WANCorp modus operandi requires that 70% of the revenues generated be reinvested into the corporation while the remaining 30% is allocated for charitable purposes including the provision of medical services to those in need. Muhammad saw such a model as an opportunity to build human capital where aid is given to budding entrepreneurs to build and manage their own businesses and eventually become eligible to buy stakes in WANCorp’s assets.

Awqaf Holdings has a similar modus operandi with the exception that it does not rely on any GLC but rather is supported by the community and members’ fees. In order to raise awareness within society, Muhammad relies on crowdfunding platforms such as EthisCrowd to reach out to individuals from all socioeconomic classes and to give them an opportunity to partake in large scale projects such as the current Awqaf Corporate Park in Putrajaya valued at RM373 million (US$93.34 million). Umar Munshi, the founder of EthisCrowd, tells IFN that: “The fact that Awqaf Holdings’s board of directors have been given the authority of managing Waqf assets by the IRC makes all the difference in the world. It allows for Waqf assets to be managed by those who have the needed expertise to do this.”

So does this mean that a change in Waqf legislation is the way forward where having a Mutawali status becomes a norm and is not restricted to the government? One study cites that unlike most states in the country, Malacca might be the friendliest in terms of Waqf regulations as state legislation allows for specialized committees to be appointed for Waqf management. This exception, however, may still fall short of being truly beneficial as laws such as the Rent Control Act 1948 have applied for years until recently, where IRCs were subject to the same rental incomes that they charged tenants years ago. One may almost infer from all this that for a country with a majority of Muslims, Malaysia is no more progressive in making legal provisions for effective Waqf utilization than a country like India, where Muslims are still a minority but which houses the largest number of Waqf assets in the world. Changes in Waqf legislation may be vital for taking a step forward in this regard and perhaps Waqf corporations could be the trigger in achieving such changes.

A worrying side-effect of Islamic investment into Europe

Islamic real estate investment into Europe is a popular choice, and the region has courted and encouraged Islamic investors. According to property firm JLL, around 60% of all Gulf investment into Germany and the UK is now done on a Shariah compliant basis. But what happens when the welcome turns sour? LAUREN MCAUGHTRY explores a court case that suggests property investment may not be all plain sailing. 

Chelsea Barracks, one of the most iconic sites in London, made headlines in 2008 with a GBP1.3 billion (US$1.71 billion) Shariah compliant Ijarah structure — the largest-ever Islamic financing on a property in the UK. Yet a legal challenge from the UK tax authorities (HMRC) claiming up to GBP50 million (US$66.22 million) in alleged stamp duty from the deal has raised concerns over the treatment of Islamic transactions in the UK. 

A syndicated financing from a consortium including the Qatari investment fund, the original transaction was underwritten by a variety of western and Middle Eastern banks, and heralded as a groundbreaking new step for the property market. “The financial structure developed here has allowed us to deliver a truly innovative financing solution for the global real estate sector,” said Patrick Chenel, CFO for Qatari Diar, the property arm of the Qatar Investment Authority, speaking at the time of purchase. “We have broken new ground with our advisors by creating and setting up Islamic financing of a scale not seen before in a major real estate acquisition in the UK.”

However, in 2014 HMRC won a tribunal against Project Blue (the investment vehicle owned by Qatar) for the repayment of GBP38 million (US$50.33 million) in stamp duty land tax (SDLT) based on a GBP959 million (US$1.27 billion) purchase price for the site, or around 4% of the total value. This decision was taken to the Court of Appeal, after which the tax authority then sought a revised GBP50 million against a new figure of GBP1.25 billion (US$1.66 billion )(the total subsequently paid by Qatari bank Masraf Al Rayan to Project Blue, which included tax and additional development costs, as part of an Ijarah structure which involved selling the asset and then leasing it back). 

The case raises questions over both the complexity of Islamic finance transactions and the tax treatment they receive in the UK. Although there is a section of the 2003 Finance Act (71A) that applies relief for Islamic finance structures, there is some doubt over the way this was applied to the Chelsea Barracks acquisition. This is because the purpose of the clause is to limit SDLT to a single charge on the acquisition of property (thus avoiding double taxation) — not to remove the tax altogether. However, because the Qatari deal involved a sub-sale to a financial institution, HMRC claims that although the purchasers owed at least one payment of SDLT, they instead avoided paying the charge at all. 

Project Blue claims that it has complied with all legal requirements. ““In good faith, Project Blue paid the full original sum demanded in advance of the First Tier Tribunal hearing in 2013. We welcome the important clarifications provided by the Court of Appeal. Project Blue has always fully complied with all UK taxation matters and will continue to do so,” it said in a statement. 

And because the Ijarah structure means that the bank (Masraf Al-Rayan) in fact owns the property rather than the purchaser (Project Blue), the Court of Appeal last month ruled that HMRC had pursued the wrong party for the tax payment — effectively handing victory to the defendant and reassuring Islamic investors. However, it may be somewhat of a pyrrhic victory. Although the ruling found that the wrong party was pursued, it did not find that the tax claim was invalid — suggesting that similar claims could be pursued. Although Project Blue claims that HMRC is now out of time to pursue Masraf Al Rayan for the tax, this may not be the end of the game. 

“The Court of Appeal ruling supports our view that SDLT is payable. We are disappointed that the decision makes that tax much harder to collect so we are considering an appeal,” said HMRC.

Islamic investors into Europe may want to watch their backs — this could be the start of a worrying trend. 

Islamic banks: Sustaining the theme of resilience?

Global Islamic banking assets may be growing but an expansion in volume does not necessarily mean an increase in quality. VINEETA TAN takes a look at the hard macro data for the Shariah banking industry to assess the situation.

Asset growth
Islamic banks have continued their upward trajectory as far as assets are concerned but the pace of expansion has slowed down as global macroeconomic pressures weigh on the financial industry. Shariah compliant banking assets were up by a mere 2.38% year-on-year in the third quarter to US$1.25 trillion, according to the latest Prudential and Structural Islamic Financial Indicators (PSIFIs) data released by the IFSB.

Using data collated from 17 different markets worldwide, the PSIFIs revealed that financing by Islamic banks hit US$710 billion in the period ending September 2015 from US$681 billion the year before while total funding or liabilities dropped to US$946 billion from US$1.01 trillion.

Weakening asset quality
Operating conditions of 2015 were almost unforgiving, and this has persisted this year which has been marked by great volatility and turbulence. From plunging oil prices to feeble global growth, exchange rate depreciation in emerging markets and generally shaky market confidence, borrowers were struggling to meet their financial obligations and the balance sheets of Islamic banks were not immune to the tough economic reality.

In the third quarter of 2015, the gross non-performing ratio of Islamic banks deteriorated, edging up 0.2 percentage points to 5.6% on average. There is also a worrying trend of the net non-performing financing to capital ratio which accrued to 13.6% in the third quarter in 2015 from 10% in the corresponding period in 2014.

“The deterioration in asset quality naturally means that in the stated period, Islamic banks were having higher non-performing financing than the previous periods. Similarly, difficult market conditions also started impacting the capital adequacy of Islamic banks in the mentioned period,” explained the IFSB to IFN.

The capital adequacy ratio and average Tier 1 ratio of the Shariah banking industry took a dive to 18.9% and 17.1% from 21.5% and 19.9% respectively, although it must be emphasized that despite this decline, Islamic banks however still fared well by global standards as the figures still put them way above regulatory requirements (8% and 6% respectively). 

Resilience
“In general, the challenging developments that paved the way for a slowdown in the growth rate of Islamic banking since 2013 are likely to last, and even to intensify in 2015 and 2016,” noted the IFSB in its 2016 stability report. But growth is still possible – just smaller. The industry is still profitable as indicated by the 1.3% return on assets and 13.2% return on equities realized by Shariah banks for the third quarter of 2015, an improvement from 2014 figures. The segment can also expect to grow in terms of absolute numbers: The PSIFIs show that the number of fully-fledged Islamic banks and Shariah windows increased to 169 and 86 in the period from 165 and 85 before, and with players continuing to focus on expanding their presence, this number is expected to continue to multiply this year.

Rajan’s exit from RBI — what will become of Islamic finance in India?

The shocking announcement by Raghuram Rajan, the governor of the Reserve Bank of India (RBI), earlier in June that he will be stepping down from his post when his term ends in September after a three-year stint shocked market observers and was a negative surprise for India, given his central role in reforming the country’s monetary policy. DANIAL IDRAKI asks what this means for the future growth of Islamic finance in India, given that Rajan has played such an instrumental role in introducing interest-free banking in the country, as well as being a strong proponent of Islamic finance.

Rajan, a former chief economist at the IMF, has made some notable strides during his tenure and took office when the rupee was at a record low and India was battling double-digit inflation. According to data by the World Bank, the economy is now growing at an average of 7%. Inflation, meanwhile, is down to 5.9%, with the RBI having a target to further lower the figure to 4% over the medium term.

“A new inflation-focused framework is in place that has helped halve inflation and allowed savers to earn positive real interest rates on deposits after a long time,” Rajan noted in his letter to fellow colleagues at the RBI. He further highlighted that the currency stabilized as a result of the RBI’s actions, and its foreign exchange reserves stood at a record high of US$363 billion as at the end of the first week of June 2016, according to the RBI’s data. It is also under his watchful eye and skilled maneuvering of monetary policy reforms that Islamic finance took off in India, with RBI officials paying closer attention to the need of interest-free banking to ensure the financial inclusion of approximately 200 million Muslims in the country.

In the ‘Report of the Committee on Medium-term Path on Financial Inclusion’ released by the RBI in December 2015, it was recommended that commercial banks in India be enabled to operate interest-free windows with simple products. This follows the findings by the Financial Sector Reforms Committee chaired by Rajan in 2008, which stated that the non-availability of interest-free banking products results in some Indians, including those in the economically disadvantaged strata of society, not being able to access banking products and services due to reasons of faith. This also denies India access to substantial sources of savings from other countries in the region.

Saif Ahmed, the managing director of Zayd Chit Funds, explained to IFN that Rajan’s decision to not seek a second term is a negative development for Islamic finance in India, as he was a central banker who had an international outlook and appreciated the potential and scope of Islamic banking. “In terms of continuity of [the] RBI’s internal processes on the topic [interest-free banking], yes there will be continuity in my view, but the push could be lacking unless the next RBI governor is also a visionary such as Rajan and possesses a global outlook with a familiarity and appreciation for the potential of Islamic banking,” said Saif.

Although Saif reckons that there will be continuity of Rajan’s policies and recommendations on interest-free banking by the next candidate to fill his shoes, his departure will nevertheless be a setback for the future growth of Islamic finance in India. His resignation comes on the back of a member of Narendra Modi’s ruling party, Subramanian Swamy, calling for Rajan’s dismissal, accusing him for keeping interest rates unnecessarily high and stifling growth. Swamy has also been against the introduction of Islamic banking in the country, deeming it “normal banking in disguise, and using Islamic terms to camouflage interest as profit or profit-sharing”.

“Previously, not all governors were keen on Islamic finance, but now, the system can accommodate interest-free banking window[s] within the country’s current regulations,” Abdur Raqeeb, the general secretary of the Indian Center for Islamic Finance, commented to IFN. Abdur Raqeeb further noted that Rajan’s presence at the RBI was a great time for Islamic finance in the country, as the topic was never at the top of the government’s agenda.

The recent agreement signed between the Modi administration and the Islamic Corporation for the Development of the Private Sector to set up India’s second Islamic non-banking financial company (NBFC) in the state of Gujarat remains a highlight under Rajan’s tenure. The first such Islamic NBFC in India, Cheraman Financial Serivces, started operations in Kerala in 2013. “Though opening an Islamic bank appears challenging given the political ground realities and regulatory roadblocks, several Islamic NBFCs are already in operation and more are springing up as the demand and awareness for Islamic finance and investments grows in India,” Saif noted.

The markets will be highly anticipating the Modi administration’s appointment of the next RBI governor to replace Rajan, and the Islamic finance industry will be hoping that the candidate will be a strong proponent of interest-free banking in India, as his or her predecessor was..

Iranian banks

IRAN: IRNA has reported that Economy Minister Ali Tayebnia, who is also the head of the general assembly of public banks in Iran, has removed the heads of Mehr Iran Bank, Mellat Bank, Refah Bank and Saderat Bank from their positions for receiving unconventional salaries and loans. 

According to the state news agency, the government launched an investigation into public pay earlier this month following reports that executives at the state insurance regulator were earning more than 50 times the base government salary.

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