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Archive for July 2008

Far Eastern Promise: Can Hong Kong Become an Islamic Finance Hub?

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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.

Written by Suapi Shaffaii

July 31, 2008 at 2:20 am

Posted in Financial Centres

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Iran Government Introduces New Banking Policies

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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.tracking

Story Source: BBC Monitoring Middle East

Written by Suapi Shaffaii

July 30, 2008 at 3:19 am

Posted in General Issue

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Shariah Banking in UK: more investors thanks to crisis

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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.

Written by Suapi Shaffaii

July 30, 2008 at 3:07 am

Posted in General Issue

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Watchdog is developing governance standards

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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.

Written by Suapi Shaffaii

July 30, 2008 at 2:57 am

ISLAMIC BANKING: A boon for the country

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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.

Written by Suapi Shaffaii

July 30, 2008 at 2:52 am

Posted in Articles, General Issue

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KFH Automall promotion Drives Sales Beyond Expectation

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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: http://www.albawaba.com

Written by Suapi Shaffaii

July 25, 2008 at 1:57 am

Centres fight for Islamic finance as oil booms

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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

Written by Suapi Shaffaii

July 24, 2008 at 2:05 am

Posted in Financial Centres

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