Debate over commodity murabahah

Points of Essence:

• It is not always rosy for Islamic financial products which  often become subjects of differing views from Islamic scholars on their Shariah compliance. The newest product adopting the concept of commodity murabahah is of no exception. Initially introduced as a money market instrument, it has expanded to other spectrum of financial products. The trade elements tied to the product structure with pre-determined profit rate completing the backbone, commodity murabahah is generally accepted, albeit with caution.
  
• Even with one edict banning it claiming its similarity with with interest bearing elements and the other to condition it upon the numbers of contracting parties, this looks like the best bet we have so far as conceptual wise, it is globally accepted. Thus, until we find a better alternative, this product is here to stay. The Star has the report.

Some Islamic scholars think commodity murabahah should be avoided as much as possible, saying it closely resembles an interest-bearing transaction. Is there a better alternative financing structure?

THE concept of commodity murabahah (or tawarruq in some jurisdictions) has only recently been widely applied in Islamic finance, along with other syariah contracts such as mudarabah, musharaka and bai murabahah.

The application of this trade-related structure with a pre-determined profit rate (or pre-agreed “margin” or “mark-up”) is possible in syariah-compliant financing and deposit products as well as in liquidity management/treasury instruments and other investment products/securities.

However, resistance still exists on the ground from some critics who say that commodity murabahah-based financial products bear a striking resemblance to interest-based products.

CIMB Islamic launches 1st Syariah-compliant product in Hong Kong

Points of Essence:

• CIMB Islamic recently launched its Commodity Murabahah Deposit via its Islamic window in Hong Kong. Using commodity products as underlying assets, the Islamic money market instruments will tap into the potential market of Hong Kong as a vibrant Islamic financial hub as well as providing a window for the mainland market.

HONG KONG: CIMB Islamic, the Islamic banking arm of Malaysia’s second largest bank CIMB Group, on Tuesday launched its first Syariah-compliant product in Hong Kong and signed the first transaction with Hong Leong Bank for its Commodity Murabahah Deposit.

The product will utilise commodities like crude palm oil, metal or any tradeable commodities as its underlying asset.

CIMB Islamic chief executive officer Badlisyah Abdul Ghani said the Hong Kong Monetary Authority (HKMA) gave its clearance last week for the launch of the interbank money product.

“It is important for CIMB Islamic to be here because Hong Kong has great potential as an Islamic financial market,” he said.

HKMA deputy chief Eddie Yue witnessed the the memorandum of understanding signed between the Hong Kong branches of CIMB and Hong Leong, the first institutions based here to offer Islamic banking.

Hong Kong is charging ahead into developing an Islamic banking centre to tap the huge global Islamic assets that are estimated to reach US$1 trillion by 2010.

Badlisyah said the launch marked the opening of CIMB’s Islamic banking window not only in Hong Kong but also to mainland China where the group had acquired a 20 percent state in the Bank of Ying Kou in north-eastern Liaoning province earlier this year.

CIMB Islamic plans to expand from wholesale Islamic banking business in Hong Kong to other activities, namely asset management, and if viable, consumer banking.

“But in the long term, the biggest opportunity and probability is to do wholesale business and asset management. We are looking at a timeline of three to five years. Consumer banking is still quite remote,” he told Bernama.

The Commodity Murabahah Deposit based on the Islamic principle of Murabahah gives fixed returns to investors and is widely used in the global Islamic market to facilitate deposit-taking. It works through the purchase and subsequent sale of a commodity at cost plus a specified profit.

CIMB obtained Bank Negara Malaysia’s approval last December to undertake Islamic banking operations in all its overseas branches.

Hong Kong is an important platform into mainland China to which all eyes are turned to remain a growth engine for the stuttering world economy in the wake of the global financial crisis.

“When the market is opened to us, through our Hong Kong branch as well as Bank of Ying Kou, we will see how to develop wholesale banking, asset management and consumer banking on the mainland,” Badlisyah said.

The viability of starting consumer banking would have to be closely evaluated because the Muslim population was distributed widely across China, raising the question of how to service the market, he said.

“What we are going to concentrate on is the easy part, bringing what we have from Malaysia into this market. I think as for the mainland, the proper timeline is one to two years rather than immediate,” he added.

CIMB Islamic is a global player in the industry and is the world’s largest sukuk or Islamic bond issue with a 20 percent share worldwide.-Bernama

Singapore Develops Sukuk Issuance Facility To Promote Islamic Finance

Points of Essence:

• Singapore is set to provide a sukuk issuance facility to promote Islamic finance in the city-state. Financial institutions have already expressed interest and the first issuance is expected to be out early next year.

SINGAPORE, Nov 24 (Bernama) – Singapore is in the final stages of setting up a sukuk issuance facility to provide Syariah-compliant regulatory assets to financial institutions as part of its efforts to promote the growth of Islamic finance in the city-state.

Salama Insurance joins forces with NCB Capital investment arm

Points of Essence:

• The world’s largest takaful and re-takaful group, Salam Insurance has recently sealed a partnership deal with NCB Capital, the investment banking arm of National Commercial Bank to extensively market the Islamic insurance products in the UAE . Gulf News reported.

Staff Report

Dubai: Salama Islamic Arab Insurance Company, the world’s largest Takaful and Re-Takaful group, announced its strategic alliance with NCB Capital, the investment banking arm of National Commercial Bank, in a bid to further promote the spread of Sharia compliant insurance solutions.

Gulfnews: Dubai Islamic Bank launches new business banking solution

Points of Essence:

• Dubai Islamic Bank recently rolled out its new business banking account known as Al Islami Banking Accounts. The product comes in 3 different packages, Al Islami Business Account, Al Islami Business Account Plus and Al Islami Business Account Premium, each designed to suit the requirements of different types of business customers and different growth plans. The account is now available at all the Bank’s branches which features may be seen here. Gulf News reported.

Staff Report
Published: November 08, 2008, 22:50

Dubai: Dubai Islamic Bank (DIB) has launched Al Islami Business Accounts, a new product in its business banking portfolio that offers banking convenience and competitive advantages to business customers.

Maybank Islamic Introduces Al-Sayf Structured Product in Malaysia

Points of Essence:

• Maybank Islamic Bhd recently introduced its Shariah compliant structured fund product for an investment opportunity to all Malaysians aged 18 and above. Known as Maybank Al-Sayf Structured Islamic Deposit (MAS-i), the product guarantees the principal investment amount until maturity and its annual payouts.
  
• To better protect potential investors,  the investment in Islamic Negotiable Instruments of Deposit (INID) will provide the capital guarantee and the payouts will be secured through investments in the Maybank Al-Sayf Index. The profit portion however will be subject to the performance of the index that is based on the commodity trading cycle. The fund offer opens until November 20.

KUALA LUMPUR, Nov 6 (Bernama) — Maybank Islamic Bhd has launched the Maybank Al-Sayf Structured Islamic Deposit (MAS-i), a unique proposition for investors in current times, providing 100 percent capital protection on principal investment at maturity as well a guaranteed payout at the end of each year.

Structured derivative products to cushion impact of credit crisis

Points of Essence:

• Options market is being developed in Kuwait to bring stability to the GCC equity markets in this period of uncertainty as it will address investors’ liquidity concerns and provide investors with the ability to maneuver the markets.
• Believed to be the cause for the current financial turmoil, structured derivatives products have since put under an intense scrutiny. However, products with solid credit origination and valuation standards like the Shariah-compliant financial instruments and structured products, will gain more credibility. This is in addition to stricter controls from regulators. Put options and ‘Arboun’ Contract were being developed to encompass all these features.

By Querubin J. Minas Saudi Gazette JEDDAH – Structured derivative products are currently in spotlight for their role in elevating the present global credit crisis, said Hussein Zeineddin, assistant vice president of the Equity Derivatives and Structured Products Department in Kuwait Financial Centre S.A.K. (Markaz), one of the leading investment banking and asset management companies in the Middle East, recently.

NatWest launches sharia commercial property service

Points of Essence:

• Natwest Business Banking is the latest institution in the  UK to engage in Shariah financing. It will roll out commercial property mortgage products under the Shariah principle of Murabahah.

NatWest Business Banking is entering the Islamic financial services market with the launch a shariah-compliant commercial property mortgage product.

Islamic bond market ‘wrecked’ by critical remarks

Points of Essence:

• The sudden fall of the Islamic bond market was attributed to a strong Shariah view from a prominent Shariah scholar questioning the compliance of the bonds with the Shariah requirements. Sheikh Muhammad Taqi Usmani has since been blamed for the rapid decline of the bond issuance from $50 billion to just S14 billion last year.

MAJOR UNCERTAINTY: File photo of a speaker at an Islamic Finance conference.

by Jason Benham

Debates over how sharia-compliant Islamic bonds really are have “wrecked” the sukuk market, causing issues to fall to $14 billion this year from up to $50 billion last year, a leading expert said on Tuesday.

“The statements that were made by our sharia chairman about the sharia compliance of sukuk wrecked the market,” said Mohamad Nedal Alchaar, secretary-general of the Accounting and Auditing Organization for Islamic Financial Institutions.

Sheikh Muhammad Taqi Usmani, chairman of the board of scholars

Ismail: ‘Time for banks to study BBA further’

Points of Essence:

• There have been concerns on the implication of the recent judicial pronouncements on the BBA financing facility in Malaysia, thusfar, two related seminars were organized by ZICO and Skrine, respectively. ZICO and Skrine are among the biggest legal firms in Malaysia. During the seminars, Islamic banking practitioners called for alternative financing methods such as musharakah mutanaqqisah and the ijarah muntahiyyah bit tamleek to avoid the repercussions of the current judgment against the BBA.

By Habhajan Singh
The recent High Court judgments on Al-Bai’ Bithaman Ajil (BBA) will have serious implications if it is held by the higher courts as representing the correct view in law of the BBA transaction, says a local lawyer familiar with Islamic finance transactions.

Malaysia sharia bank launches fund, sees opportunity

Points of Essence:

• Malaysian based Asian Finance Bank is appointed a distributor for RM 1 billion fund to to market the ASEAN Sharia Governance Fund in GCC countries. Gulf investors are expected to take up half of the fund and the rest by Malaysian investors.

KUALA LUMPUR, Oct 23 (Reuters) – Malaysian Islamic lender Asian Finance Bank launched a 1 billion ringgit ($282.2 million) Islamic fund on Thursday, saying the global downturn presented an opportunity for investors to buy assets on the cheap.

Securitization: Solution to ‘pervasive’ financial crisis

Points of Essence:

• Saudi Gazette found that not all is bad about securitization. Securitization is the process of turning cash producing assets into securities which has been an important part of the capital markets since the early 1970’s to provide lower rates to borrowers, better security for lenders, increased liquidity and alternative funding sources in the capital markets.  Blamed as one of the root cause of the current financial calamity, it is only the speculative, over-leveraged excesses that have crept into securitization during the last ten years (such as collateralized debt obligations, subprime mortgages, asset backed credit default swaps) that have contributed to the financial meltdown, not the securitization process itself.
• Shariah-compliant investors should not be wary of securitization as Shariah-compliant securitization strictly complies with the Shariah injunctions from the start.  Funding only productive activities, to finance the purchase and sale of real assets, and generally to produce socially useful financing opportunities, it is guided by the structural features of Shariah-compliant securitization which prohibits features of conventional securitization that have resulted in so many problems. Shariah-compliant securitizations are forbidden to engage in transactions involving Maysir, speculative risk, and Gharar, excessive uncertainty. Also in over-leveraged transactions as are unsecured, speculative lending. These are prevalent in conventional securitzation.

By Saudi Gazette Staff JEDDAH – Could the disaster that is overwhelming the US, European and other world financial markets have occurred under a Shariah-compliant financial system? We do not know but it is very unlikely.

CIMB Islamic Offers Syariah-Compliant Forex Product

Points of Essence:

• CIMB Islamic Bank has introduced an innovative Shariah compliant  FOREX investment product known as FXOP-i. The product will allow customers to cap the forex risk in advance to maximise returns on their investment in accordance with the Islamic principles of tawarruq, commodity murabahah, bai al inah, waad and bai al sarf.

KUALA LUMPUR, Oct 13 (Bernama) — CIMB Islamic Bank Bhd has launched FXOP-i, an Islamic foreign exchange instrument with Syariah-compliant option features which allows customers to hedge their foreign exchange (forex) risk.

“FXOP-i enables customers to lock in a forex rate in advance by engaging in a Shariah-compliant financial transaction with CIMB Islamic,” the bank said in a statement Monday.

Key agreement boost for global Islamic finance

Points of Essence:

• Advocating standardisation of Islamic finance legal documentations, the IIFM has issued the benchmark legal documents governing over-the-counter (OTC) Commodity Murabaha transactions. With a growing significance of commodity murabahah as an Islamic money market product for liquidity management purposes, the IIFM Master Agreement for Treasury Placement (MATP) is expected to be adopted by global financial institutions. This is a crucial step in promoting transparency, robustness and consistency in Islamic financial transactions.

Manama: The Bahrain-based International Islamic Financial Market (IIFM) has launched the world’s first-ever standardised Master Agreement in Islamic finance. The IIFM Master Agreement for Treasury Placement (MATP) can be used by financial institutions across the globe for their over-the-counter (OTC) Commodity Murabaha transactions.

The MATP comprises of standalone Master Murabaha Agreement, Master Agency Agreement and Letter of Understanding.

Tamweel plans $544m Sukuk despite crunch

Points of Essence:

• Tamweel plans to launch up to Dh2 billion ($544.5 million) in Islamic bonds for local market consumption in the first quarter of 2009, asserting that the global liquidity squeeze had only affected certain companies in the financial sector.

Dubai-based Islamic mortgage lender Tamweel said on Monday it was planning to launch up to Dh2 billion ($544.5 million) in Islamic bonds in the first quarter of 2009 despite the global liquidity crunch.

“There are ideas to sell sukuk to the local market. They would be in the range of Dh1-2 billion,” Tamweel chairman Sheikh Khaled Al-Nahayan told Reuters on the sidelines of a property fair.

“Already there is a desire (for sukuk),” he said, adding that the liquidity squeeze had only affected certain companies in the financial sector.

Sukuk offerings witness 39% slowdown this year

Points of Essence:

• The global credit crunch has caused the demands for Sukuk issuance in 2008  to dwindle as the liquidity dried up, with a decline rate of more than 39% this year to rest at only $14 billion compared with $23 billion last year. The recent exposure by AAIOFI on questionable Shariah compliance issues affecting some sukuk issuance has certainly no bearing on this downfall.

Tight liquidity in the global and regional markets is responsible for the slowdown in the issuance of sukuk in 2008, which has seen a decline of more than 39 per cent in the first eight months of this year to $14 billion (Dh51.42bn), as opposed to $23bn registered in the same period last year.