Islamic Finance News Portal – Bringing you the latest updates in global Shariah finance

Points of Essence:

• Hong Kong may face obstacles in its bid to become an Islamic financial center but there are certain traits it has which may lead it to success. Its role as a conduit for investment in mainland China, and its existing financial markets platform will certainly work in its favor.
  
• It has been all but the substantial developments to enable Hong Kong to emerge an Islamic financial center. However, lately there have been some progress.
  
• Mutual cooperation with international regulatory and supervisory authorities, sponsoring Islamic finance related events and tax laws revision  among others are notable efforts by the Hong Kong government.

By Christopher F Richardson

Hong Kong has long been considered one of the major financial hubs of Asia and indeed the world. Yet Hong Kong has never been considered an active player in the rapidly growing field of Islamic finance. This may soon change, however, if the financial authorities in Hong Kong are successful in implementing their plans to transform the city into a significant global center for Shariah compliant investments. Hong Kong will face a number of challenges in its quest to become an Islamic finance hub, but certain unique traits are in its favor. There have been a handful of notable successes so far but Hong Kong has not yet proven itself in this emerging field. There are nevertheless a number of reasons to be optimistic about Hong Kong’s (and, more broadly, China’s) future role in supporting the burgeoning global Islamic finance market. Most importantly, Hong Kong is well-positioned to serve as a conduit for Shariah compliant investment between the Middle East and the Far East, especially in promising areas such as Islamic capital markets (including Sukuk) and in infrastructure project finance.

First steps

Over the past year, the government of the Hong Kong special administrative region has repeatedly announced its commitment to establishing the city as a legitimate competitor in the Islamic finance arena. Since then, there has been a fair amount of media ‘buzz’ and industry gossip on the subject.

With a few notable exceptions, however, most of the media coverage to date has focused on the promise of Hong Kong as an Islamic financial center, not on substantive accomplishments. Nevertheless, the Hong Kong government should be commended for continuing to reaffirm its commitment to making Hong Kong a hospitable environment for Shariah compliant financial services. Although it remains too early to tell whether Hong Kong will ultimately reach its goal, it is certainly clear that the Hong Kong government is making a determined effort. It has sponsored a number of events both in Hong Kong and abroad to raise awareness of the potential for Hong Kong to play a role in global Islamic finance. Donald Tsang, the chief executive of Hong Kong, toured several leading Islamic finance centers, meeting with government leaders, executives, bankers and regulators in Kuala Lumpur, Dubai and other key Islamic finance marketplaces. The Hong Kong Monetary Authority (HKMA) has also toured the Gulf States to drum up support for Hong Kong’s ambitions in the Islamic finance fi eld, likening the city to the nexus of a ‘New Silk Road’ between the Far East and the Middle East.

Among the most important initiatives in recent months involves the memorandum of understanding between the HKMA and the Dubai International Financial Center Authority (DIFCA), signed in May 2008, to foster cooperation in the development of Shariah compliant financial products and the financial infrastructures. This will include cooperation on standardization and harmonization of financial regulations, the exchange of advice, the promotion of training and education programs (including the facilitation of dialogue between Shariah scholars and boards), the fostering of cross-border transactions and payment systems to support Shariah compliant investments between the two regions, and other related initiatives aimed at furthering the growth of Islamic finance in both cities. It has also been reported that Hong Kong is reviewing and revising its tax laws, including stamp duties and taxes on profits generated by Islamic structured products. Hong Kong does not tax interest – such as that generated by a conventional bond – as income, but it does currently tax profits as income, which creates a tax barrier for profit based Shariah compliant products like Sukuk. Changing such laws will be necessary to make the city competitive as an Islamic finance hub.

There have also been a few isolated but noteworthy developments in the financial products market in Hong Kong in the field of Shariah compliant investment. Foremost, in November 2007 the Hang Seng Bank introduced an equities index fund which complies with Shariah precepts.

The Hang Seng Islamic China Index Fund tracks certain large Hong Kong and mainland Chinese company stocks traded on the Hong Kong exchange that satisfy a Shariah compliance screen established by the bank in conjunction with Dow Jones Indexes. Another factor in Hong Kong’s incipient Islamic finance marketplace involves the proposed issuance by the Hong Kong Airport Authority of a global Sukuk.

Unique attributes

Two things stand out which may make Hong Kong an ideal Islamic finance hub: (1) its role as a conduit for investment in mainland China, and (2) its existing financial markets platform. The city is an established global financial market, a distinction that is shared with other major financial centers like Tokyo, New York and London.

Hong Kong’s connection with mainland China, however, is truly unique and presents special opportunities for expanding commerce between the Middle East and the Far East. It may prove to be the ideal place for Muslim investors and Shariah compliant institutions to look to in order to bridge the gap between the Islamic world and the rapidly growing economies of China and, more generally, the developing countries in East Asia.

Now that China has opened up somewhat to foreign investment and is looking to spend its foreign reserves, there is enormous opportunity to invest in the Chinese economy. Yet despite this new receptiveness to outside investment and mainland China’s willingness to engage in commerce abroad, doing business in mainland China can be challenging and complicated. Given this, Muslim investors from abroad will likely be encouraged to play the mainland China market by way of Hong Kong.

Hong Kong has long been the key access point for investment into mainland China. This may prove to be the key pillar to support Hong Kong as an Islamic finance center. Given its respected common law legal system, less restrictive immigration policies, laissez faire capital markets regulations, low taxation, English language proficiency and freely traded currency pegged to the US Dollar, Hong Kong remains the financial services hub for the region.

Hong Kong, which is governed as a semi-autonomous unit of China, benefits from its own commercial laws and capital market system. With a well-established stock market and a critical mass of international banking professionals, it is already a world leader in conventional finance.

Much of the infrastructure needed to promote an Islamic finance marketplace is already in place, including the presence of seasoned regulators, a stock market, major trading houses, investment banks and accounting and law firms.

Special opportunities

The combination of Hong Kong’s existing financial sophistication and its role as the traditional gateway to mainland China makes it uniquely qualified to serve as an Islamic finance hub in Asia. If it can overcome the obstacles it currently faces and charge ahead boldly without losing the momentum it has gained in the past year, Hong Kong may well be able to transform itself into a key Islamic finance center.

In particular, Hong Kong has the potential to excel in promoting Shariah compliant project finance for infrastructure and energy projects. Hong Kong can also play a useful role as a regional, or perhaps even global, Islamic capital markets center (especially with respect to Sukuk issuance and trading).

It is predicted that over the coming decades China will continue to develop its infrastructure on a colossal scale as it continues its march towards modernity. In particular, China will have to continue to greatly expand its energy industry.

This will likely include the large scale construction of power plants, refineries, transmission grids, pipelines, ports and liquefied natural gas (LNG) terminals. For instance, Qatar and China have entered into contracts for the long term delivery of potentially billions of dollars worth of LNG imports, and the country is planning to build up to a dozen LNG import terminals in coming years.

Many of these infrastructure and energy projects will be ripe for project financing – an area of expertise in which Hong Kong banks and professionals already excel. Financing for energy projects can be accomplished, in most instances, in a Shariah compliant manner and several significant energy projects in the Gulf (including the Dolphin gas project in the UAE) have already utilized Islamic finance structures.

Muslim investors could therefore play a pivotal role in energy project development and financing in mainland China. This is especially true given the fact that a significant portion of the energy investments will

likely be made in collaboration with Middle Eastern nations, sovereign wealth funds and corporations which likely would prefer to use Shariah compliant techniques.

Given the tendency in the energy industry for energy producers and consumers to cooperate on massive infrastructure development projects, ideal opportunities for Middle Eastern investment into Chinese projects may arise. LNG projects in particular require considerable investment in new facilities, ships and related infrastructure, and typically the sponsors of such projects include both the source of the natural gas (for example, countries such as Qatar, Algeria, Malaysia and Indonesia) and the users of the imported natural gas (for example, South Korea, Japan and, increasingly, China).

With interests aligned in this fashion, Shariah compliant investment from the Middle East into the Chinese LNG, oil and gas, electric power and related sectors could eventually be measured in the tens of billions of dollars. Hong Kong is perfectly positioned to coordinate, promote and benefit from such investment.

Hong Kong could also prosper as an Islamic capital market hub. A declared goal of the Hong Kong government is the establishment of an active Sukuk trading market to complement the city’s existing well-respected capital market system. Hong Kong has deeply liquid markets trading a variety of conventional financial products and serving investors throughout Asia and beyond.

Hong Kong is well positioned to take advantage of longstanding relationships with capital-hungry companies in mainland China and throughout the Asia-Pacific region which may look to Sukuk issuance as a means of raising capital. A Sukuk platform (the issuance, listing and secondary trading of Sukuk) would complement the city’s existing financial services portfolio.

While Hong Kong can generally be described as a lightly regulated, low tax environment with deep liquidity and substantial financial flexibility, special rules (such as the tax rules on profits as discussed above) will need to be reviewed in order to make Hong Kong competitive with major Sukuk players like Dubai and Kuala Lumpur, where laws have been specifically tailored to focus on Islamic products.

Hong Kong will benefit from the lessons learnt by – and may well seek to emulate some of the successful initiatives undertaken by – other Islamic markets. Because Hong Kong already has a well diversified and long established financial markets system, grafting Islamic finance products onto it will merely add another layer to an already robust and complex system.

Challenges and competition

Despite the promise of Hong Kong as an Islamic finance hub, the city faces a number of challenges. Islamic finance continues to be regarded as somewhat exotic in Hong Kong, where terms like Musharakah and Sukuk remain largely unknown.

Financial professionals in Hong Kong have nonetheless exhibited at least a curiosity (if not outright enthusiasm) for the subject, if one can adequately judge their interest from attendance at Islamic finance seminars and related events. Besides, Hong Kong has only a handful of experts in Islamic finance. This is likely due to the fact that Hong Kong, out of a population of about seven million, only has at most a few hundred thousand Muslims. This is in stark contrast to existing Islamic finance hubs in South East Asia and the Middle East. Although worldwide the Islamic finance marketplace is still a relatively new phenomenon, there are already a number of established competitors with quite a headstart over Hong Kong -most with large

Muslim populations and boasting of strong Islamic finance banks and exchanges (many backed by substantial government support). Nations in the Gulf (particularly the UAE, Saudi Arabia and Bahrain) already have decades of experience in Islamic markets. In East Asia, Hong Kong faces direct competition from a number of sources. Malaysia remains the traditional Islamic finance powerhouse in Asia and is still one of the world’s largest Sukuk markets. Its capital, Kuala Lumpur, is already home to a substantial number of respected Shariah scholars and Islamic finance experts.

Upstart Singapore is actively pursuing initiatives of its own and DBS Group Holdings, Singapore’s largest bank, recently established the Islamic Bank of Asia to focus on Shariah compliant investment activities. Islamic countries in South East Asia such as Indonesia and Brunei have large Muslim populations from which to develop a retail market in Islamic products. Even Tokyo recently announced its intention to support the growth of Islamic finance activities in its market. Hong Kong will no doubt face stiff competition from these other players, but there is also room for collaboration.

On closer inspection, however, many of these seemingly intractable obstacles are perhaps not as challenging as they initially appear. First, if the dramatic growth in global Islamic markets continues, the rising tide may lift all boats. In other words, there may be room for several regional Islamic finance hubs, even in East Asia (especially if each specializes in particular areas of expertise).

Second, a lack of experts and expertise can be remedied by education and immigration. Hong Kong has long been a magnet for mobile expatriate professionals and is already home to a well-educated population eager to learn more about new and novel opportunities for economic success.

It is also clear that the government is making a determined effort to educate itself and inform local commercial leaders on Islamic finance. Finally, Hong Kong enjoys certain unique advantages that may eventually ensure its long term success as an Islamic finance center.

Way forward

Hong Kong has made some progress in the Islamic finance arena but still has a long way to go. For it to become an Islamic finance hub, the government as well as private enterprises interested in Islamic finance should take bold action to establish an environment that is conducive to Shariah compliant finance and investment.

This includes revising existing capital markets and tax laws so that they are compatible with Sukuk and related products and competitive with the regulatory regimes in other Islamic finance markets. This will be necessary for a Hong Kong Sukuk market to succeed amid competition from other established exchanges like Dubai and Malaysia.

Hong Kong should continue to build relationships and strengthen business connections with the Middle East and South East Asia and learn from the successes and failures of other Islamic finance market players. Already an attractive location for both local and expatriate professionals, Hong Kong should also seek to educate its business leaders on Islamic finance matters and encourage Islamic finance professionals and institutions to establish a presence in the city.

With its unique attributes, if Hong Kong is able to nurture its nascent Islamic finance marketplace, it could in short order be transformed into the primary proponent of that ‘New Silk Road’ with responsibility for coordinating both massive Shariah compliant investment into Chinese infrastructure and developing a thriving East Asian Sukuk market.

Source: Islamic finance news.

Points of Essence:

• Iranians banks will be subjected to a new profit rate policy which decided the followings:

1. profit rate on financial facilities on exchanged agreements will be 12 per cent:
2. the profit on banking facilities for the priority projects of small, fast-response and agriculture firms will be 10 per cent – inclusive of government subsidy.
   
3. However, the latter will be conditional to the success of the projects’ objectives, otherwise the profit on them will be 12 per cent.

A policy-supervision package has been presented to the banks to be implemented from tomorrow after being signed by the president [Mahmud Ahmadinezhad].

The chancellor of the Central Bank of Iran, [Tahmasb] Mazaheri, said that following exchanges of views over decreasing banking interests, it was finally agreed to keep the interest rates unchanged until the discussion about inflation is finalized this year.

Mazaheri added that according to the new instruction, the profit [interest] on financial facilities on exchanged agreements [Oqud-e Mobadele'i] will be 12 per cent and the profit on banking facilities for the priority projects of small, fast-response and agriculture firms will be 10 per cent – inclusive of government subsidy. However, the latter will be conditional to the success of the projects’ objectives, otherwise the profit on them will be 12 per cent.

Originally published by Vision of the Islamic Republic of Iran Network 1, Tehran, in Persian 1630 25 Jul 08.

(c) 2008 BBC Monitoring Middle East. Provided by ProQuest Information and Learning. All rights Reserved.

Story Source: BBC Monitoring Middle East

Points of Essence:

• The global credit crisis had investors turned to Islamic finance.
• Islamic finance is an old-fashioned banking which is asset-backed and asset-based. It is not the infinitely leveraged model which is disaster-prone.

Stable and conservative Islamic finance is attracting investors scared off by the global credit crisis, the chief executive of new UK Islamic bank Gatehouse said.

Islamic finance, which bans the payment of interest and restricts the use of some derivative instruments, has been growing rapidly in the past few years.

Islamic assets total around $1 trillion, the Asian Development Bank estimates, with annual growth of 10 to 15 percent a year.

Islamic bonds, or sukuk, are structured as profit-sharing or rental agreements which are underpinned by physical assets.

The lack of exposure to some of the riskier markets of which investors have fallen foul in the past year makes Islamic finance attractive, and not just to those investors requiring Islamic sharia-compliant transactions, Gatehouse CEO David Testa told Reuters in an interview.

“It’s actually quite old-fashioned banking. It’s asset-backed and asset-based, it’s not the infinitely leveraged model. It’s a good story in these stricken times.”

Gatehouse, a subsidiary of the Securities House of Kuwait, started operating in April and says it is the fifth Islamic bank to open in the UK, which market participants say has taken the lead in Europe in welcoming Islamic banking.

Note: View related report here.

Points of Essence:

• AAOIFI is finalizing details of a proposed governance standard on corporate social responsibility (CSR) for Islamic financial institutions.
• Developed a part of the AAOIFI’s other 68 standards, the draft will ensure a standard application of social responsibility and to show the way forward to all new Islamic financial institutions, based on an Islamic perspective derived from divine sources.

MANAMA: Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) is developing a governance standard on corporate social responsibility (CSR) for Islamic financial institutions.

The Auditing and Governance Standards Committee consisting of high level executives from the international Islamic finance industry met at the Bahrain Institute of Banking and Finance (BIBF) to finalise the specific details of the standard.

The standard will highlight the importance of CSR from an Islamic perspective and give guidance to Islamic financial institutions in carrying out its CSR functions.

Given that the Islamic financial institutions can play a significant role in contributing towards economic as well as social development, the standard on CSR is a positive initiative for the international Islamic finance industry.

Development of the CSR standard is carried out by the Auditing and Governance Standards Committee, which is part of its Accounting and Auditing Standards Board.

The Centre for Islamic Finance at the BIBF assisted in drafting the specific provisions of the standard.

“With substantive provisions on CSR conduct and disclosure, this standard will open the way for Islamic financial institutions to be recognised for their positive ethical and social activities and further differentiate them from other financial organisations as direct contributors to society,” Centre for Islamic Finance R&D manager Sayd Farook said.

“Our research indicates that Islamic Financial Institutions all over the world are already engaged in numerous socially responsible activities.

“This standard is to ensure a standard application of social responsibility and to show the way forward to all new Islamic financial institutions, based on an Islamic perspective derived from divine sources.”

The CSR standard complements AAOIFI’s 68 existing international standards on Sharia, accounting, auditing, ethics, and governance.

AOIFI’s standards are adopted in leading Islamic financial centres across the world including Bahrain, Dubai Islamic Financial Centre, Qatar, Qatar Financial Centre, Sudan, and Syria as well as by the Islamic Development Bank Group.

Points of Essence:

• The India Government was urged to amend the Reserve Bank of India regulations to allow Islamic banking for the interest-free model of financial transactions to reach the lower segments of the society in India. This is to coincide with the global developments vis-á-vis Islamic finance.
• India would enjoy higher foreign direct investment in infrastructure and other vital areas, strong long-term macro investment and growth rate if it embarks on Islamic finance.

By: DR. M. IQBAL SIDDIQUI

“Islamic system of banking can surely be a boon for our country as it is for the whole mankind,” said Mr H. Abdul Raqeeb, Convener of Jamaat-e-Islami Hind’s Islamic Banking Committee and member of the organisation’s Central Advisory Council. He also called upon the Union Government to amend the Reserve Bank of India regulations to allow introduction of Islamic banking in the country, offering an option to consumers to try the interest-free model of financial transactions.

Addressing the media persons in Jaipur, he explained, “Islamic system of banking, contrary to the conventional one, is based on Islam’s interest-free economic system, in which the money flows from higher towards the lower segments of the society.”

He further said that the worldwide trends show that a change is taking place in the policies of prominent banks. A number of banks, including the HSBC and Standard Chartered banks, have opened Islamic outlets at their certain branches.

The Reserve Bank of India (RBI) has formed a special committee in July on direction of the Government of India, for the study of ‘instruments of Islamic Banking and its possibilities in India’, headed by Mr. Anand Sinha, Chief General Manager.

“Islamic Banking offers financial products and services that conform with the Islamic principles, hence it can lead to the unlocking of large financial capital that the Muslims are now unable to invest in the interest-based system,” added Mr. Abdul Raqeeb, who is also former president of the JIH Tamil Nadu Zone. According to him, the Jamaat, which has been campaigning for Islamic Banking for long, is optimistic about the RBI move.

The JIH leader affirmed that introduction of Islamic banking in India would ensure higher foreign direct investment in infrastructure and other vital areas, strengthening long-term macro investment and boosting the country’s growth rate.

“Interest-based banking can create havoc, and can lead to the AP like cases of the farmers committing suicide while Islamic banking is more compassionate as it is based more on sharing of responsibilities. Also Islamic banks will provide micro finance for the poor and the daily basis workers for their small wants,” said Mr. Abdul Raqeeb.

The concept of Islamic banning is moving across the world. The assets controlled by the Muslims in India are estimated up to $1.5 trillion that is growing at a rate of 15% a year. In the year 2004, Islamic Bonds (Sukook) collected $30 billion. The Malaysian headquarters of Islamic Financial Services Board (IFSB), has emerged as a hub of Islamic banking. At least 265 Islamic banks are in function across 40 countries with assets worth $262 billion. Services provided by Islamic banks are popular among non-Muslims also as, more than 50% business of the HSBC’s Islamic banking division is with non-Muslims.

Mr. Abdul Raqeeb also held the nuclear deal with America contrary to the benefit of India and its people. “This treaty is totally one-sided and will prove to be a burden on our economy; in addition our security and sovereignty are also in peril,” he said. He condemned American President George W. Bush on his indication to Israel to attack Iran in case the talks failed. He was sure that if Iran is attacked by the US, oil prices will hike up to double and accordingly all essential commodities will become dearer.

Prior to this deal America barred India from the pipeline treaty with Iran that resulted in a hike in the price of petroleum and also we were compelled to vote against Iran. Now one can easily conclude what happens and how far can US compel us for their benefits if we accept to become a US satellite country. Jamaat-e-Islami Hind has opposed the deal and deemed it to be disastrous for the country. Jamaat has appealed to all political parties and public to unanimously oppose and struggle against the deal.

Points of Essence:

• Kuwait Finance House’s product “Automall” proved to be a hit where sales chalked up beyond 50%. This is to provide Islamic financing for cars.
  
• Apart from providing a car purchase facility under one roof, customers will get to enjoy freebies in the form of car registration, rust proofing, thermal tinting and mobile phones as well as a discount on insurance.

The KFH Automall promotion, ‘Automall gets you moving faster’, received a greater than expected response from the public, rocketing sales by over 50%. It achieved its aim of allowing the customers to buy affordable cars both easier and faster.

KFH Automall customers benefited from free car registration free rust proofing and free thermal tinting. In addition, customers also benefited from a discount on insurance and a free mobile handset.

Commenting on this success, Mr. Khalid Rafeea, Head of Banking Group at KFH-Bahrain, stated that “KFH-Bahrain’s strategy in designing all of its products and services in a way that suits the needs and capabilities of customers was clearly demonstrated by the large customer response during the campaign”.

Throughout the promotion, KFH was offering competitive financing rates, no down payment, same day approval and up to 7 years repayment periods.

Mr. Mazen Sater Deputy Head, Consumer Banking Group, added “Customers purchasing any vehicle from KFH Automall are assured of a quick and easy documentation and approval procedure, without the need for a guarantee or salary transfer”.

Situated in Sitra, KFH Automall is the Kingdom’s largest car showroom. The KFH Automall is a unique concept in selling automobiles and Auto-finance in the Kingdom. It provides a one-stop solution, which means you choose the car you desire, get the finance of your choice and drive away. All the services that you need when purchasing a vehicle are under one roof. This innovative solution propelled KFH-Bahrain as pioneers in reshaping the way people shop for cars.

For the convenience of customers, the KFH Automall showroom is open from Saturday through Thursday, from 8 am until 8 pm, thus allowing customers the opportunity to visit at their own convenience.

***
About Kuwait Finance House, Bahrain
Kuwait Finance House, Bahrain is a leading provider of Islamic commercial and investment banking services. Established in 2002 as a wholly owned subsidiary of Kuwait Finance House (Kuwait) — an industry leader for more than 25 years — KFH-Bahrain specializes in developing and bringing to market the highest quality Islamically compliant banking and investment products, all of which are delivered by a staff of experienced and dedicated professionals with a deep understanding of the market and the customers we serve.

Source: www.albawaba.com

Points of Essence:

• The booming of Islamic finance has seen cities with substantial Muslim populations and connections such as Singapore and Hong Kong, London and Birmingham and even Paris are vying to act as its key centres of expertise.
  
• This is motivated by a race to tap the deep pockets of the middle easterners due to the recent oil booms as the liquidity elsewhere has dried up.

By Peter Apps LONDON, July 23 (Reuters) – From Africa to Paris to Britain’s former industrial heartland, Islamic law-compliant investment products are springing into existence as financial centres try to compete for a slice of the Middle East’s colossal new oil revenues. With conventional sources of cash depleted by the credit crunch and fears of recession around the developed world — and with high oil and food prices limiting growth — oil-rich Gulf markets are one of the few reliable sources of finance. With dollar crude prices soaring to almost double their level of a year ago — and Western financial woes seen deepening — a new intensity has gripped Islamic finance growth. Estimates of the total size of assets held under Islamic finance rules vary, but the Asian Development Bank estimates it at around $1 trillion, with growth of 10 to 15 percent a year. It is no surprise then that cities with substantial Muslim populations and connections as diverse as Singapore and Hong Kong, London and Birmingham and even Paris are vying to act as key centres of expertise in the new boom. “The French have lagged the British…but recently the French government signalled a change in attitude,” ratings agency Standard & Poor’s said this week. “By preparing the ground for Islamic finance, France can help financial innovation and benefit from the deep pockets of Middle Eastern investors as liquidity has dried up elsewhere in the global financial markets.” It is unclear to what extent, if at all, the vast sovereign wealth funds being built up by Gulf oil produces might be managed under the strictest principles of Islamic law, which prohibits the use of interest — and therefore investment in conventional banks, alcohol or pornography producers. But more and more takers have been coming forward with products to target those who demand sharia products. In June, investment bank Investec announced a partnership with a Saudi investment provider to produce the first sharia-compliant fund targeting Africa. Other funds are following. For now, two thirds of the worldwide Islamic sukuk bond market — an estimated $100 billion — is based in Malaysia where the industry first took off.

LONDON BOOMS

Singapore and Hong Kong are growing as are the emerging Gulf financial centres, where around a quarter of all banking is estimated to be managed according to sharia principles. Outside Asia and the Middle East, Britain — and London in particular — is seen as by far the leader, with the London secondary sukuk market — trading Islamic debt mainly issued by Asian and Middle Eastern firms — worth some $6.5 billion. “The UK government has done a far greater amount than any other Western government to aid Islamic finance,” David Testa, chief executive of new UK Islamic bank Gatehouse said. But other potential rivals are seen emerging. “London might be the world’s leading international financial centre — but there are plenty of other cities that would like to be, or at least would like to take some of our business,” said Britain’s Economic Secretary to the Treasury Kitty Usher at the World Islamic Banking Conference in London earlier in the month. “And that is as true in Islamic finance as it is in any other sector.” Partly as a result, Britain intends to issue its own sovereign sukuk debt in a rolling programme worth around 2 billion pounds — although it said legal barriers still remained and a final decision would be made later in the year.

“LIKE SILICON VALLEY”

Britain’s Treasury hopes that, if issued, a British sovereign sukuk would provide a benchmark to base other local products off. It has also moved to help standardise qualifications and training. But S&P says France looks to already be trying to close the gap with Britain, looking to reform its financial laws to allow easier issuance of Islamic financial instruments. Regulatory and legal hurdles have dogged several countries trying to move into Islamic finance. Thailand had planned to issue its first $500 million Islamic sovereign bond this year but scrapped the plan because more preparation was needed [ID:nBKK20836]. But it intends to push ahead with Islamic bonds from state enterprises such as the airline and power utility. Britain’s second largest city and one-time industrial centre Birmingham, home to a quarter of a million Muslims as well as the European Union’s first stand-alone Islamic retail bank, is eagerly rebranding itself as a key European Centre for retail Islamic finance, targeting mainly local Muslims. “It’s like in America’s Silicon Valley — you will get clusters of expertise in certain areas,” said Stephen Amos, spokesman for the Islamic Bank of Britain, which holds $256 million and is based on the outskirts of the city. “The two areas of expertise are always going to be London… and hopefully Birmingham.” [ID:nL09669160] Western interest in Islamic banking is going beyond simply trying to attract wealthy Islamic investors. In the Gulf itself, Western institutions are emerging as the main buyers of Islamic instruments, keen to access the growth of Gulf firms. Law firm Trowers and Hamlins said Islamic compliant sukuk bond issuance in the Gulf jumped 17 percent to a record $17 billion, increasing more than 20-fold over the last five years. Western investors made up 60 percent of the buyers.

Source: Reuters

Points of Essence:

• Dubai Islamic Bank adopted FLEXCUBE Islamic Bank for its branches and networks.
• It is a complete banking product suite covering all areas of banking needs, including retail, corporate and investment banking, and is in line with internationally recognised standards. Thus, providing comprehensive solutions for customers greater flexibility, faster processing and a more personalised service.

Dubai Islamic Bank (DIB) and i-flex solutions announced that it has adopted FLEXCUBE Islamic Banking across all its branches and Networks. Oracle’s FLEXCUBE, a revolutionary banking system, will provide more comprehensive solutions covering all areas of banking transactions. It will provide customers with greater flexibility, faster processing and a more personalised service.

As a result of the new system, bank customers can now perform a range of transactions from any of the bank branches irrespective of where their account is lodged. In addition, the bank will be able to provide more customised services, achieve a quicker and more cost-effective launch of future products and lower costs for future products.

“As the world’s first Islamic bank and a leader in the Islamic finance industry, we have strived to maintain our industry leadership through innovative and superior systems and offerings.” said Musabah Al Qaizi, Head of Electronic Banking Service Department. “Our new technical platform is in line with this commitment and will provide a much more personalised and versatile platform for our customers.”

Oracle’s FLEXCUBE is a complete banking product suite covering all areas of banking needs, including retail, corporate and investment banking, and is in line with internationally recognised standards.

Nadeem Bucheri, Head of Information Technology Department said, ‘We have been working on implementing FLEXCUBE for 20 months and we are now pleased to announce that this has been deployed across our entire network. This system empowers us with a comprehensive Islamic banking platform and enables us to offer leading edge Islamic products and services. In addition, it provides us with greater agility for future product development.”

S Sundarajan, Customer Fulfilment, Senior Vice-President, Banking Products, i-flex solutions said: “We are very happy that DIB has gone live on FLEXCUBE. Our association with DIB, one of the oldest and most respected Islamic banks, is an acknowledgement of FLEXCUBE’s ability to meet Sharia requirements. We are confident that this implementation will enable DIB to meet the expectations of its customers for Islamic banking products that compare in innovativeness and versatility with the best that conventional banking can offer.”

Source:Equity Bulls

Experts of Islamic finance are in demand in Malaysia, the GCC and London. Here are just some samplings of the demand at this very moment. All above jobs were advertised at efinancialcareers (http://www.efinancialcareers.co.uk).

Head of Private Banking for Start – Up Islamic bank in Kuwait
Location: UAE
A start-up bank, aiming to be the best Islamic bank in Kuwaity/GCC, is looking to expand into private banking by taking on a Head of Private Banking who could build the Platform from green field.

Head of Islamic Financial Services, Europe
Location: London
A leading GCC bank is looking for a senior banker to head up its Islamic Financial Services team based in London. Remuneration: Highly competitive.

Senior Islamic Banking candidates
Location: London
A leading Global Investment Bank is actively seeking a senior Islamic Banking candidate to add to its Shari’a product development and distribution team.

Islamic Banking Relationship Manager – SVP for Corporate Banking
Location: Singapore
The manager is the primary point of contact between corporate/institutional customers and the bank. He is to maximise the amount of profitable business the bank do with that customer whilst ensuring the bank is only exposed to an acceptable level of risk.

Associate Director, Islamic Banking
Company: Standard Chartered Bank UAE
Location: UAE-Abu Dhabi
Candidate will identify, develop and manage SCB’s Islamic Banking Business for wholesale bank. Achieve revenue target under Islamic banking, origination & client coverage (OCC).

Sr. Private Banker
Location: Bahrain
Company: A ‘large Islamic investment bank’ in Bahrain
With a focus on Islamic products, and most of the deals coming from Saudi Arabia, the bank is looking for one of the best in the business to cover the GCC region. Candidates must have at least 5 years private banking experience.

HR Director
Location: Bahrain
A ‘leading Islamic globally focussed investment bank’ is seeking a senior HR professional for a challenging HR Directorship based in the bank’s Head Office in Bahrain.

Source: harbajansingh.blogspot.com

Points of Essence:

• Dubai Islamic Bank (DIB) recently Dar Al Sharia Legal & Financial Consultancy – a one-stop solution centre for all Sharia, legal and financial consultancy for all types of Islamic financing and investment transactions.
• With the new set up originated from DIB’s Sharia Coordination department, DIB which has been the industry authority and trendsetter in Sharia best practices, looks poised to take advantage of this first-mover advantage for immense expertise and strength.

Dar Al Sharia will carry out research and development, Sharia training, audit and rating functions.

By Babu Das Augustine, Banking Editor

Dubai: Dubai Islamic Bank (DIB) on Sunday launched a subsidiary – Dar Al Sharia Legal & Financial Consultancy, a one-stop solution centre for all Sharia, legal and financial consultancy for all types of Islamic financing and investment transactions.

Dar Al Sharia has evolved from the bank’s Sharia Coordination department, which over the past four years has prepared structures and documents for more than 14,000 transactions valued at Dh400 billion, including many big ticket sukuk issues.

“Dar Al Sharia will take the success of the Sharia Coordination department forward in assisting the Islamic finance industry in preparing Sharia-compliant and legally viable financial structures,” said Mohammad Ebrahim Al Shaibani, chairman of the board of directors of Dubai Islamic Bank and Director-General of the Ruler’s Court.

Dar Al Sharia will carry out research and development, Sharia training, audit and rating functions.

The company will closely liaise with clients, lawyers, bankers and investors on an end-to-end basis, from the initial concept through to the completion of transaction structure and documentation.

“As the world’s first Islamic bank, DIB has established itself as the industry authority and trendsetter in Sharia best practices. DIB’s first-mover advantage has given us immense expertise and strength, which will now be available to the industry at large. We are pleased to transform our Sharia expertise into the new consultancy firm, which literally means the house of Sharia,” said Al Shaibani.

While Sohail Zubairi will be the new company’s chief executive, Dr Hussain Hamed Hassan, chairman of the Sharia Board of DIB, will serve as a director.

Points of Essence:

• Swiss banks are lagging behind other financial institutions in Islamic finance.
• They are obviously hesitated in embracing Islamic Finance in particular although there were some investments in the middle east region.
• This could hamper Switzerland’s aim to become one of the top three financial centres in the world within the next seven years. Increased investment in Islamic Finance could be one of the main drivers to achieving such.

Switzerland’s UBS recently announced the vast expansion of its presence in the Middle East, applying for banking licences in Saudi Arabia and Qatar. Despite this, however, when it comes to Islamic Finance the ‘treasury of the world’ lags far behind financial institutions in the UK.

Competition is fierce among global financial centres to become the ‘Mecca in Islamic Finance’.

With a growth rate of 15% – 20% Shariah banking is currently the most lucrative segment in today’s shattered financial world.

In the Far East, Kuala Lumpur and Singapore are leading the race.

In the GCC, Dubai is hard on the heels of Manama.

Istanbul tries to bridge the gap between East and West.

And in Europe, London became the first Islamic Finance beachhead outside the Middle East, amid strong political support from now-Prime Minister Gordon Brown.

Even Birmingham recently announced its claim in global Shariah finance.

Banks slow to pursue new markets

But where are Zurich and Geneva in all this? Since mid-2007, market leaders UBS and Credit Suisse have mostly been in the limelight because of their huge losses in the subprime meltdown.

UBS had to write down a total of CHF25bn during the last three quarters. Its main competitor, Credit Suisse, also lost CHF2bn in 2007, and suffered losses of an additional CHF2.1bn in the first quarter of 2008.

Share prices in both banks are down 60% and 41% respectively, on a YTD-basis.

What went wrong? Swiss banks obviously hesitated in embracing new markets – and Islamic Finance in particular, while banks in the UK still benefit from a first-mover advantage.

It was in 1998 that HSBC launched its Islamic Finance arm Amanah, convincing the Bank of England some years later to legalise Shariah-compliant home finance schemes.

Although Geneva-based private bank Pictet & Cie launched Islamic Finance services in the same year, Swiss Shariah-compliant services still remain an area of customised solutions for high net worth individuals, while standard products are still rare and Islamic retail banking non-existent Switzerland.

There are four regulated Islamic banks in the UK, but only one is Swiss, which is Geneva-based Feisal Private Bank (offering services since 2007).

No Sukuk and only one Shariah-compliant ETF is listed on the Zurich-based Swiss Exchange SWX, while the LSE became a major capital market for Sukuk, Islamic Mutual Funds and ETFs.

On top of this, not a single Swiss University offers an Islamic Finance curricula. English educational institutions, such as the University of Durham or Cass Business School even attract Arab professionals with their Shariah Finance-related Diplomas and MBA courses.

Growing Middle Eastern financial focus

However, well-known Helvetic names such as UBS, Credit Suisse, Julius Baer, Sarasin or Mirabaud all run subsidiaries in the DIFC.

‘Swiss banks have Middle Eastern assets under management in excess of $200bn, there is no doubt about that’, says John Sandwick, founder and CEO of Encore Management in Geneva.

‘The Swiss regulatory bodies have not dealt with Islamic Finance issues as yet, but they are working on it’, explains Sanjay Vig, Managing Director of Sarasin-Alpen in Dubai.

While the global volume in Islamic Finance is approaching $1bn, the Swiss share seem almost invisible.

With UBS AG, based in the DIFC since 2006, recent applying for bank licences for Saudi Arabia and the Qatar Financial Centre (QFC), there is a glimmer of hope that Islamic Finance might find its way to the ‘treasury of the world’.

Time is running out though: According to the ‘Vision 2015 study, issued in 2007 by the Swiss Bankers Association, Switzerland aims to become one of the top three financial centres in the world within the next seven years.

Increased investment in Islamic Finance could be one of the main drivers to achieving this.

Points of Essence:

The Central Bank of Bahrain cited three challenges for Islamic finance today:

1. Corporate Governance. While high standards of corporate governance is needed in all financial institutions, it is particularly required in Islamic financial institutions due to the specificities in their business model wherein attached the interest of different stakeholders. Balancing these different stakeholder interests requires the adoption of strong corporate governance practices, and the standards developed both by AAOIFI and by the Islamic Financial Services Board are vital components of the solution.
2. Liquidity Management. There is a continuing need for more depth and liquidity in Sharia-compliant money markets. The CBB is developing an Islamic Sukuk Liquidity Instrument enable financial institutions, both conventional and Islamic, to access short term liquidity against Government of Bahrain Ijara sukuk issued by the CBB.
   
3. Fighting against Complacency. The final challenge is to ensure that the industry’s success does not turn into complacency. Islamic banks are not working on funds or ideas. There is also a proliferation of cloned business models of existing established players.

Keynote address by His Excellency Rasheed Mohammed Al Maraj, Governor of the Central Bank of Bahrain, at the World Islamic Banking European Summit, London, 8 July 2008.
* * *
Your Excellencies, Ladies and Gentlemen: Good Morning.
It is a pleasure to be here at the inaugural World Islamic Banking European Summit in London. As His Excellency, Shaikh Mohammed, has already mentioned, Bahrain has been home to the World Islamic Banking Conference for the past fifteen years.

Throughout that time Central Bank of Bahrain has been – and remains – a strong supporter of the WIBC. We very much welcome this inaugural European summit, which we regard as yet a further indication that Islamic finance is rapidly moving into the financial mainstream. There is no need for me to repeat the facts and figures about the stunning growth of Islamic finance that Shaikh Mohammed has already referred to. Let me say, however, that I strongly endorse his view that the Islamic financial industry continues to offer enormous opportunities for both Muslims and non-Muslims alike. We at the CBB have a continuing commitment to facilitating the development of the Islamic financial services industry. We issued the first sovereign sukuk in 2001. We were the first regulator in the world to issue a comprehensive set of prudential regulations tailored to the needs of Islamic financial institutions. More recently, we have introduced an innovative approach to the application of Basel II, Pillar 1 requirements to our Islamic banks. We will continue to ensure that all financial institutions in Bahrain adhere to the very highest international standards. Where necessary we will play our part in adapting those standards to the needs of the Islamic financial services industry. In developing this framework we are assisted by the presence in Bahrain of a number of the leading standard setting bodies for the industry. These include AAOIFI, the Accounting and Auditing Organisation for Islamic Financial Institutions and the IIFM, the International Islamic Financial Market, which is doing sterling work in developing standard contracts and associated documentation. Building sound underpinnings, in the form of an appropriate framework of regulation, accounting and contract standardization, is a very important challenge. But it is by no means the only one that the industry must confront as the result of its success.
I would like to take this opportunity to look at some of the other challenges that the industry currently faces as it moves into the financial mainstream. A long-standing issue relates to the multiplicity of Shari’a boards and judgements. This has led to both a lack of homogeneity for some products, and a lack of certainty by clients about the cross-border acceptability of Shari’a rulings. Additionally, there is a continuing need for high quality human resources within the industry. It has been growing so fast that it has been difficult for institutions to find enough skilled or qualified staff. In recognition of this need the CBB established a special Waqf fund in 2006 to finance and publish research and to support training workshops and other educational initiatives. We have also been working with the Bahrain Institute of Banking and Finance to develop new courses on Islamic finance. Despite the importance we attach to each of these challenges, there are three in particular that I would like to highlight today.

The first concerns corporate governance. All financial institutions – whether conventional or Islamic – need high standards of corporate governance as they are entrusted with other people’s money. However, this need is particularly great in Islamic financial institutions due to several issues that are specific to their business model. Decisions on profit distribution, for example, require the careful balancing of the interests of multiple stakeholder groups – not just shareholders, as in conventional banks, but the interests of holders of investment accounts as well. Investment account holders are exposed to many of the same risks as shareholders, but lack the same control rights – such as the ability to vote for board members – that are attached to equity ownership. Balancing these different stakeholder interests requires the adoption of strong corporate governance practices, and the standards developed both by AAOIFI and by the Islamic Financial Services Board are vital components of the solution.

The second issue concerns Islamic banks’ ability to manage their liquidity. At the CBB we are in the process of developing an Islamic Sukuk Liquidity Instrument. This will be a repurchase agreement which will enable financial institutions, both conventional and Islamic, to access short term liquidity against Government of Bahrain Ijara sukuk issued by the CBB. We have also encouraged the IIFM to develop contracts and documents that can be used for conducting transactions through commodity murabahas. Even so, there is a continuing need for more depth and liquidity in Sharia-compliant money markets and the CBB intends to remain at the forefront of such initiatives. The final challenge is to ensure that the industry’s undoubted success does not turn into complacency. The sensational growth of the industry in recent years combined with high levels of liquidity has meant that Islamic banks have not needed to fight for funding or ideas. Newer entrants to the industry have merely tended to copy the strategies they see being successfully pursued by their more established rivals. If I may say so, there is a high degree of “cloning” of business models.

As a result, a very high percentage of Islamic banks have a strategy that is heavily weighted towards real estate and asset finance. They tend to be project-driven and do not have a steady source of “bread and butter” revenue to tide them over any downturns in economic activity. This contrasts with conventional banks with their extensive loan books, overdraft and credit card facilities which provide steady revenue to cover their overheads even in today’s challenging markets. The “cloning” of business models leads to financial institutions becoming exposed to the same economic and industrial sectors. The Islamic banking sector as a whole is highly exposed to the property sector – real estate, commercial property and construction – and as events in the advanced markets have recently reminded us, this sector can and does experience significant cycles of activity.

The asset-based business models favoured by many Islamic banks have not been tested in a downturn. We need to remember that a business model which looks robust in conditions of rising asset values and abundant liquidity may not be so when the economic environment changes. The industry needs to respond to these challenges by developing a greater diversity of business models, more diverse and stable income sources, and more rigorous risk management and stress testing techniques to assess its preparedness to deal with any downturn in economic activity. As a central banker I am inevitably preoccupied by risk, especially when it could potentially impact on a significant sector of the financial industry. However, the challenges that I have highlighted are very much the result of the industry’s recent success. We all share of the aim of ensuring that the industry remains successful, and this is why it is so important that we recognize and address these challenges.

Points of Essence:

• The Principal Financial Group(R) and CIMB Group have jointly set up CIMB-Principal Islamic Asset Management Sdn Bhd to offer total solutions and create value in Islamic asset management.
  
• CIMB Principal is a global Islamic asset management company that will operate from the Malaysia International Islamic Financial Centre (MIFC). It will manage and distribute Islamic institutional mandates and unit trust funds in Asia, Europe, the Americas and the Middle East.

Last update: 6:02 p.m. EDT July 16, 2008

DES MOINES, Iowa, Jul 16, 2008 (BUSINESS WIRE) — The Principal Financial Group(R) and CIMB Group today launched CIMB-Principal Islamic Asset Management Sdn Bhd, their signature global Islamic asset management company that will operate from the Malaysia International Islamic Financial Centre (MIFC). CIMB-Principal Islamic will offer total solutions and create value in Islamic asset management by combining CIMB Group’s leading knowledge and expertise in Islamic finance with the 129-year track record of The Principal(R) in a wide range of financial products and services, including global funds management and retirement services. The Principal has global assets under management of over $300 billion as of March 31, 2008. The company is jointly owned by CIMB Group and The Principal. It will manage and distribute Islamic institutional mandates and unit trust funds in Asia, Europe, the Americas and the Middle East. CIMB Group is the largest investment bank in Southeast Asia and the second largest retail bank in Malaysia. “This is very positive news for our shareholders and clients,” said Larry Zimpleman, president and CEO of the Principal Financial Group. “Our expanded mutual commitment augurs well for both our businesses as the Shariah-compliant market shows tremendous growth possibilities. CIMB Group is a recognized pioneer in the Islamic financial markets, with unrivalled Shariah-compliant advisory and capital markets experience. With the emergence of a rising middle class in developing markets and subsequent need for retirement planning, we believe our partnership with CIMB Group will enable us to address key markets for both conventional and Shariah-compliant products and services, particularly in Southeast Asia and the Middle East.” “We see this as a major opportunity to deepen our collaboration with our long-time partner in Malaysia to create the capacity to offer best-in-class Islamic investments to a worldwide base of customers with specific requirements,” said Jim McCaughan, president and CEO of Principal Global Investors. “CIMB Group has excellent Islamic finance credentials. Their unique insights on how to address the Islamic marketplace, combined with our expertise in international investments and global asset management, is a great partnership that will provide the finest in professional investment services to customers in a previously underserved market.” CIMB Group CEO Dato’ Sri Nazir said, “We are pleased that an international investment firm of the stature of The Principal has chosen to set up its singular global Islamic fund management arm with CIMB Group. The decision by The Principal to base its international Islamic asset management business in Malaysia also represents a strong endorsement of the country’s status as an international Islamic financial center.”

Source: marketwatch.com

Points of Essence:

• Unicorn International Islamic Bank Malaysia Bhd (Unicorn Malaysia) sets to begin operation in a month’s time.
  
• The first Islamic bank licensed under the Malaysia International Islamic Financial Centre (MIFC), the book will spend US$20 million (RM64.55 million) of its initial investment for its business in the country, which includes investment banking, corporate finance and treasury.
• Sukuk structuring is also in the pipeline for Asia and CIS (Commonwealth of Independent States) market.
  
• Under BNM’s licence, Unicorn will be allowed to create any Islamic banking product and take deposits as long as they are non-ringgit denominated transactions.

By Ishun P Ahmad & Habhajan Singh
Unicorn International Islamic Bank Malaysia Bhd (Unicorn Malaysia), the first Islamic bank licensed under the Malaysia International Islamic Financial Centre (MIFC) initiative, is set to begin operations in a month’s time and expects to rake in profits by year-end.
The wholly-owned subsidiary of Bahrain-based Unicorn Investment Bank is already eyeing a number of deals.
“We have several deals in the pipeline, including a couple of mandates already signed, which our teams are working on. We will be able to close this year with some maiden profit,” Unicorn Malaysia chairman Datuk Vaseehar Hassan told The Malaysian Reserve recently.
He said Unicorn Malaysia will utilise US$20 million (RM64.55 million) of its initial investment for its business in the country, which includes investment banking, corporate finance and treasury.
Elaborating on the deals, Vasheehar said Unicorn Malaysia is in talks with a number of banks from abroad on the possibility of structuring sukuk.
“These financial institutions are from non-Islamic countries. They do not yet have Islamic banking.
“We will work with them to develop Islamic sukuk in Asia and CIS (Commonwealth of Independent States),” he said. Unicorn Malaysia is the first foreign bank to have been licensed by the MIFC early this year.
The scope of the licence is wide, allowing the bank to create any Islamic banking product and take deposits as long as they are non-ringgit denominated transactions.
Unicorn Malaysia is the latest financial institution to step into the growing local Islamic finance sector, which includes foreign players such as Al Rajhi Banking & Investment Corp (Malaysia) Bhd, Asian Finance Bank Bhd and Kuwait Finance House (Malaysia) Bhd.
However, these players have been allowed to carry out ringgit-denomited transactions. Unicorn Investment Bank was founded in 2004 as an Islamic investment bank and has a presence in the United States, the United Arab Emirates, Turkey and Pakistan. Unicorn Malaysia’s management team is currently headed by its acting CEO Thameem Ghouse who hails from Bahrain.
Vaseehar, who was named Unicorn Malaysia’s chairman on Jan 1, this year, was previously the CEO and director of the Dallah Al Baraka Group in Malaysia for 16 years. He is responsible for building up Al Baraka’s Islamic banking activities in the country. He was also the former chairman of RHB Islamic Bank Bhd.
(The Malaysian Reserve, p1, July 17, 2008)

Points of Essence:

• The high penetration rate of mobile technology in the developing countries created opportunity for a changing pattern of banking transactions.
• Today there are 1.3 billion mobile phones around the world and together with PDAs are expected to be 4.1 billion by 2014 providing a potential market for mobile banking.
• Vodafone pioneered this innovate banking with its M-Pesa mobile-banking program in Kenya in February 2007 which successfully gathered 1.6 million subscribers. M-Pesa is an innovative system for sending both minutes and money via SMS . Airtime minutes automatically load onto the phone of their recipient. The cash is collected from one of the many M-PESA shops around the country.
• Grameen Mobile in Bangladesh, as the largest national mobile operator testifies that mobile growth opportunities extend in low cost activities with expertise transferable to other traditionally “small” industries with huge growth. Low-cost sharia finance based on no-interest risk sharing could become a growth engine specific to middle-and low income Muslim economy markets.
  

By Guest Contributor, Athar Mian Posted July 16, 2008

That there has been huge growth in the proliferation of telecommunications and information technologies (IT) in developing countries is plainly obvious.

From mobile phones and PDA’s (hand carried mini-computer /cellphone devices) to the availability of Internet access at home or cafes has changed the landscape for both consumers and businesses. To get an idea of its scale, consider this:

According to Telecom Trends International Inc., today there are 1.3 billion mobile phones around the world which have emerged in the past 20 years, compared to the more than the 2.5 billion landlines built over the last century. The numbers of cellphones and PDA’s is expected to be 4.1 billion by 2014. Compare this with the 1.5 billion TV sets in worldwide use today.

Illustration By DinarStandard.com

Another aspect of this trend is the role of the developing nations. According to The International Telecommunications Union, by the end of 2006, 68 percent of the world’s mobile subscriptions were in developing countries.

It is interesting to see that the #1 nation with Internet connectivity isn’t the US or some Euro nation: it is South Korea, with its high speed fiber and mobile networks all over. China too has made huge technological and market strides with its own version of third generation services, or 3G. The PDA was originally conceived by HTC, a Taiwan company. And WiFi, or urban wireless, is equally spreading in Asia and US.

Just think: Who would have predicted a few years ago that calling from a place like Lahore or Dubai to New York or London nowadays would be actually cheaper, more convenient and of higher quality than the other way around! Something is new and different here.

The emerging markets barely have had time to go through an industrial, or information revolution: they are now simultaneously facing the prospects of the later three developments while still stuck with a preponderant agricultural economy and cultural norms.

Many of these emerging markets are OIC (Organization of islamic Conference) member states and so in this article we look at unique mobile innovation opportunities for developing markets, its relevance to the Muslim world and the role of Islamic finance.

Mobile Banking and Developing Market Needs

Mobile banking seems the next big thing after micro-finance that has gathered 90 million customers in 30 years.

When Vodafone rolled out its M-Pesa mobile-banking program in Kenya in February 2007, it aimed to add 200,000 new customers in the first year but got them within a month. M-Pesa is an innovative system for sending both minutes and money via SMS. Airtime minutes automatically load onto the phone of their recipient. The cash is collected from one of the many M-PESA shops dotting the country. One year later, M-Pesa has 1.6 million subscribers, and Vodafone is now set to open mobile-banking enterprises in a number of other countries, including Tanzania and India.

Left: An M-Pesa service ad.

People have learned to use pre-paid cards to transfer money and engage in basic mobile banking, a trend that can quickly bring hundreds of millions of formally excluded folks into the general economic mainstream.

A 2005 London Business School study concludes that for every additional 10 mobile phones per 100 people, a country’s G.D.P. rises 0.5 percent. Many believe that pumping international aid money into poor countries is less effective than encouraging economic growth through commerce, also called “inclusive capitalism.”

Other Examples of Emerging Mobile Driven Innovations

Not only have telecommunications and IT become more ubiquitous in developing economies, they are creating surprising new economic models.

Not only has this unleashed astounding creativity without benefit of traditional infrastructure (clean water, healthcare, primary education, roads, hospitals,) the need for instant communications has created secondary growth industries. This is contrary to Western notions of infrastructure first (read foreign-aid based government programs) and services (and national growth) later.

According to a 2007 study by Washington, DC based World Resources Institute, as a developing nation’s family’s income grows – from $1 per day to $4, for example – their spending on communications devices increases faster than spending in any other category, including health, education and housing.

So Opportunity #1

Mobile growth opportunities extend in many other profitable industries where no red-tape exists. Most are low cost activities with expertise transferable to other traditionally “small” industries with huge growth.

A fantastic example is Grameen Mobile in Bangladesh, now the largest national mobile operator from Bangladesh with $1 billion annual revenue. The venture was originally conceived as a complement to the enormously successful Grameen bank micro-credit initiative (close to Islamic finance via its social enterprise objectives) by Muhammad Yunus, the 2007 Peace Nobel Laureate.

With micro-loans (several to dozens of dollars worth), poor and middle class folks not only started small cottage businesses but also bought cell phone kits worth $150 to become local phone operators, while expanding their networks of associates and customers to move up the wealth chain, in turn building more and bigger enterprises (the so-called network externality effect in economics.)

There are now many Islamic finance and poverty reduction programs all over the Islamic world run by both governments and private individuals and agencies. Like others, the Grameen-Jameel Islamic Finance initiative for Africa, includes a mobile technology component.

Mohammed Jameel, scion of the Abdel Latif Jameel merchant group in Saudi Arabia, and an MIT graduate, also runs MIT’s Poverty Center. Critically, sharia finance is starting to combine social enterprise with business development.

Opportunity #2

Low-cost sharia finance based on no-interest risk sharing could become a growth engine specific to middle-and low income Muslim economy markets. This would be a very entrepreneurial way to fill in the gaps where Government and big-think neglect have failed over decades.

While PDA’s are complements to the desktop PCs and laptops in the West, the market is different in Asia, Latin America and Africa.

People who had not owned a phone before and could not afford a PC/laptop in the 1990s are now simply using PDA’s as combination mobile phones/PCs/consumer devices, having jumped several technological revolutions.

The already great success of visual media here like video clips, mobile games and quotes/info has leapfrogged traditional markets, given Asia’s preference for characters over text.

Opportunity #3

In the East, mobile technology evolution has been faster and more diverse than in Western markets. It is thus bound to drive new forms of outsourcing of services and products from the high-income West to low-income but high-growth East.

Also expect a huge East-centric regional market for services outsourcing that will level the field and shift income and productivity to poorer nations by the common paradigm of the PDA as the all-in-one device, by necessity of new but economical infrastructure.

The rationale for labor mobility and migration, a politically huge global issue, will be mitigated by this virtual transformation.

Opportunity # 4:

Another insight: the “green” question. Clearly the world is burdened with deteriorating environment and climate change owing to huge economic growth without safeguards (much like the Industrial Revolution in the West; only on a grander, faster scale.) A 2008 Climate Group (www.theclimategroup.com ) estimate makes the unusual claim that the spread of PCs, mobile and other electronic devices could drive down environmental pollution by 15%. While this sounds a tall order, how many believed that the only products that will consistently come down in price 10-15% every year will be electronics and not autos?

The Mobile Revolution could be a partial antidote to increasing pollution in developing markets. Reducing product and infrastructure size and power from PC to PDA can create huge savings, with entrepreneurs taking advantage of environmental credits and redesigning offerings!

Opportunity #5

Inclusive capitalism (e.g. sharia finance in the Islamic world) and mobile technology is creating regional prosperity, with mobile commerce at its core.

OIC member countries and companies are rapidly taking advantage. According to a recent Economist article, Middle East telecom firms flush with oil wealth, and those from Malaysia and Turkey have invested $20 billion globally, mostly in developing markets over the last 6 years.

Mobile Market Penetration in the GCC (First Half 2007) Source: Arab Advisors Group; Booz Allen Hamilton

Kuwait’s Zain has been on a buying spree in recent years, spending $9.5 billion in Africa alone. It now has access to 36.5 million customers in 22 countries across the Middle East and Africa, including Nigeria, Kenya and Tanzania.

Specifically, according to a 2007 Booz, Allen & Hamilton report titled ‘Capturing the Benefit of Media and Telecom Convergence in the GCC’ (also see “Exhibit 1″), all GCC nations are now considered liberalized for telecoms.

With average per capita GDP at $18000, 1.75 times global average, and 1/3rd of the population under 18, the GCC alone represents a huge high growth market with ample room for innovation by new mobile and media companies.

The UK based research and consulting firm Analysys estimated that the Arab Middle East’s mobile sector generated revenues of $22bn in 2006, while the figure should grow at a rate of 10 per cent per annum over the next five years, reaching almost $40bn by the end of 2012.

And the Big Macro Opportunity

We are all witnessing an already considerable interplay between these markets given cross-border investments (see DinarStandard Intra-OIC Trade Report).

Here is a Vision for 2020: With mobile telecom and sharia finance innovation coupled with an economic vision, an ‘Islamic Crescent’ (including the Middle East, North Africa, Central Asia, Pakistan, Malaysia, Indonesia) trading bloc would emerge, much as the current China and Pacific Rim, India and South Asia, EU-Russia, Latin America, Africa, and the US blocs, with many overlaps and interlocking relationships.

Image source: www.etisalat.ae

This bloc will create new business models and services throughout North Africa, The Levant, Gulf , South Asia (India, Pakistan) and Southeast Asia (Malaysia, Indonesia, China) to deliver rising prosperity to their populations and those in the rest of the world.

The Crescent will have its own financial hubs, internet domain administrators, and a satellite consortium; with homegrown Googles, Vodafones, AstraZenecas, GEs and Toyotas. Member nations will produce energy, textile, commodity, technological (e.g. mobile communi-robots) and financial products (e.g. sharia structured derivatives.) GDPs will have doubled, and expected to double again by 2030.

Not a pipe dream anymore.

Key Learnings:

Mobile technology evolution in emerging, mostly Islamic, markets is cutting edge but distinct from traditional Western growth. The PDA trumps the computer, cellphone and the Internet as we know it! Islamic financial innovation (sharia investments) is giving rise to technological innovation blended with new business models. The Islamic markets and telecom firms are now big enough to create their own opportunities, either collaborating cross-border or servicing domestic populations.

Points of Essence:

• Bank of Kuwait and Middle East (BKME)’s planned conversion to Islamic banking will not change the Moody’s rating as it will tap a potential Islamic retail market in Kuwait as well as poise itself as the second largest Islamic bank.

By: Staff Writer

Moody’s believes that BKME could also reposition itself in its domestic market and potentially become the second-largest Islamic bank in Kuwait.

Moody’s Investors Service said that, having considered the pros and cons; it sees no grounds for changing the ratings of Bank of Kuwait and Middle East (BKME) solely as a result of the bank’s planned conversion from a conventional to an Islamic bank. BKME’s A1/Prime-1 long- and short-term local and foreign currency deposit ratings as well as its C- Bank Financial Strength Rating (BFSR) therefore remain unchanged.

Moody’s explains that BKME is one of a few conventional banks to have sought permission from the Central Bank of Kuwait (CBK) to fully convert its operations to become fully Shari’ah compliant. Permission was granted in June 2008 and Moody’s understands that the conversion process will be carried out in two stages.

During the first phase, which is expected to last approximately one year, the bank must put in place all necessary systems and processes to allow it to operate in accordance with Shari’ah. During the second stage, lasting around two years, the bank will fully convert its assets and liabilities. Moody’s noted that a conversion plan with milestones and timelines was recently submitted to the Central Bank of Kuwait. The bank has also established conversion working groups and appointed a lead consultant with sub-consultants either approved or short-listed.

“From a strategic perspective, this conversion would transform BKME into the Islamic banking conduit of its Bahraini domiciled parent, Ahli United Bank, with potentially significant benefits in light of the growing popularity of Islamic banking in the region,” says Stathis Kyriakides, an analyst at Moody’s Limassol office. Once the conversion is completed, Moody’s believes that BKME could also reposition itself in its domestic market and potentially become the second-largest Islamic bank in Kuwait.

As a large proportion of Kuwaitis are choosing Islamic banking, this conversion could also give BKME better access to the retail market segment, an area in which it has traditionally been weak, and support both its profitability and market share, both of which have been weakening in recent years.

“Nevertheless, the conversion plan means that the bank is entering a restructuring period and may face execution risk, including material conversion costs and elevated operational risks,” Kyriakides said. Moody’s said that BKME’s ability to address and manage this transition and the risks involved, while avoiding business disruption, will determine the need to make rating adjustments along the way.

Headquartered in Safat, Kuwait, the Bank of Kuwait and the Middle East reported total assets of $9.7 billion at the end of March 2008.

Source: cpifinancial.net