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Published On:13 January 2012
Posted by Indian Muslim Observer

Islamic Finance: Highs and lows of 2011 and a wish list for 2012

By Rushdi Siddiqui

“GOD gave you a gift of 86,400 seconds today. Have you used one to say ‘thank you’?” — Author unknown

I want to thank NST. Islamic Finance 2.0 is one year old. In reflecting back and looking forward, there were exciting highs and disappointing lows.

The lows included:

# Early death of deputy governor Datuk Mohd Razif Abdul Kadir

# EIIB, one of five FSA approved banks in the UK, significantly downsizing operations, following the heels of Islamic Bank of Britain (IBB) parental rescue capital injection.

# Gulf Finance House — once high flying Islamic investment bank (or was it a real estate bank) from Bahrain — ongoing restructuring, recapitalisation and reorganisation. Should they be returning all the awards?

# Unicorn Investment bank’s founder, Majid Al-Rafi, accused of financial improprieties and bank’s new identity, Bank Alkhair. Should he return all the awards?

# Emirates NBD (conventional bank) takeover (rescue?) of Dubai bank (Islamic bank).

The highs included:

# The appointment of Tan Sri Dr Zeti Akhtar Aziz for another term as governor of Bank Negara Malaysia, the launch of IILM (International Islamic Liquidity Management Corp) at GIFF (Global Islamic Finance Forum) in October 2010 and a smooth handover of IFSB (Islamic Financial Services Board) from Rifaat Abdul Karim to Jaseem Ahmad as secretary general.

# Securities Commission (SC) and Oxford Centre for Islamic Studies (OCIS) seminar on “Islamic Finance and the Public Good.”

The SC-OCIS has captured the imagination of Islamic finance and supplementing the Harvard Islamic finance programme.

# Halal Industry, positioned as an asset class, at a major Islamic finance conference in Malaysia, KLIFF 2011.

# Islamic VC session at the International Venture Capital Symposium in Malaysia.
After the polite applause finished, where is the follow-up?

# Personal note: the launch of the TR-BPAM (108 bond/Sukuk indexes) with guest of honour, Tan Sri Zarinah Anwar, chairman of the SC; the launch of the SAMI Halal Food index at the World Halal Forum with former prime minister Tun Abdullah Badawi; the launch of the TR-IR Islamic indexes with the president of AIBIM, Datuk Redza Mohammad.

Looking forward

I hope the next 12 months will be a period of follow-ups, follow-throughs and new initiatives. Here is my wish list and lets review them around this time next year.

Industry body for iECM

Today’s Islamic capital markets has bias towards debt contracts and instruments, hence, the build-out of the Islamic Equity Capital Market (iECM) is the need of the hour.
For a jurisdiction to have the title of an Islamic wealth management hub, there needs to be a commitment to:

(1) Syariah screening for many of the asset classes, and

(2) An industry body that acts a central depository of information on iECM combined with lobbying and educating/awareness, and puts forth suggestions (white papers for public comment) much like AAOIFI (Accounting and Auditing Organisation for Islamic Financial Institutions), IFSB, IIFM (International Islamic Financial Market), IIRA (Islamic International Rating Agency), etc.

These industry organisations have, at best, a sprinkling of coverage on the iECM (AAOIFI’s screening for compliant companies), however, much more is required.

Additionally, they have resource and man-power constraints as the Islamic equity capital market story needs its own personal, platform and (rightful) place.

Some of the areas requiring screen include publicly listed equity REITS (issue on tenant revenue for commercial/office REITS and excessive debt use because of tax benefits), commodities index (use of future pricing), screening syariah-compliant companies in Muslim countries (debt culture resulting in debt bias), etc.

Syariah-based indexes are about authenticity and spinning-off and listing of Malaysian Islamic bank subsidiaries could be the needed spark for global implications. Chairman of CIMB Group and MayBank Group, ball is in your court, please lead the way.

As asset classes expand, where “conventional” diversification becomes possible, there may be more interest by sovereign wealth funds from Muslim countries. For example, Kazanah can actually contribute to iECM without deviating from its mandate.

Pricing benchmark

The delinking from conventional performance benchmarks started more than a dozen years ago, Islamic equity indexes, Sukuk indexes, etc., and now we need to look at an Islamic pricing (alternative to LIBOR) benchmark. If the objective of Islamic finance is authenticity, as enough time as passed and with often used ‘law of necessity’ expiring, we need to intelligently think through on de-linking.

Yes, there will be criticism (arbitrage opportunities, will not be different than LIBOR, etc), but we encountered similar criticism when the Islamic equity and Sukuk indexes were launched.
Ironically, the loudest voices against change (or delinking) comes from those who come across as committed to authenticity, yet do not want change (to the systems) as content in the present comfort zone.

The philosophy of “… it ain’t broken, what you gonna fix,” is not what Islamic Finance 2.0 is about.

Muslim BRIC: SAMI

The OIC story does not sell to investors, even to the Muslims, and subset aggregation of Muslim countries may just be the locomotive that drives interest in the OIC. The country grouping must be conveniently manageable with high recall and recognition, yet convey growth stories by way of economic data, complimented by a functioning capital markets and supported by a regulatory infrastructure.

Furthermore, the selected countries must score respectable marks on corruption, productivity, political freedom, intellectual property (patents) and so on, hence, providing a more complete and complimenting picture.

The SAMI countries — Saudi Arabia, Ankara (Turkey), Malaysia and Indonesia — convey size (three of four countries are G20), including the largest Muslim population (Indonesia), economic clout (the largest oil producer — Saudi Arabia), gateways to regions (Turkey), leadership in the Islamic finance and halal industry of US$2 trillion, or RM6.24 trillion, (Malaysia) and so on.

Thus, SAMI presents a better and more focused opportunity to link Malaysia to Saudi Arabia (gateway to GCC and possible two of Jordan and Morocco) and Turkey (gateway to eastern Europe and CIS) than OIC.

Furthermore, from January 2009 to October 2011, the SAMI equity index was up 76 per cent versus 55 per cent for the DJ BRIC 50.

Consolidation

Today, there are too many small sized (paid-up capital) Islamic banks and Takaful operators. Some countries, like the UAE and Malaysia, are simply over Islamic bankeded and over-Takaful, compared to population size, resulting margin reducing (destructive) competition.

If an Islamic bank or Takaful operator, compared to conventional counterparts, declares bankruptcy it may actually result in a confidence crisis and systemic risk for the embryonic Islamic finance industry. Thus, the unique situation of “too small to fail” risk exists in the Islamic finance.

The rescue of Dubai Bank by Emirates NBD may will be the poster child for consolidation in Islamic overbanked markets to avoid/prevent confidence crisis-cum-run on deposits.
As natural consolidation is few and far, a possible suggestion to encourage consolidation is the central bank requires an increase in paid-up capital in the post credit crisis market environment.

Seeding IF Hubs

A number of countries have embarked on being an Islamic finance hub, however, a level regulatory/tax playing field for issuance of Sukuk may not be enough.

It would beneficial to have seed moneys allocated for training of local personal and scholars and some Muslim or enlightened non-Muslim countries, need to examine merits of seed funds for Islamic ETFs (local country exposure) as a matter of commitment.

Obviously, issues of promoting religion (separation of state and “church”) or one religion over another must be examined, as the intended consequences may have more negative impact that the intentions of financial “inclusion.”

Conclusion

Islamic finance needs to be forward looking and it needs to make bold (not brash) statements on the terrain ahead. Yes, we will hit speed bumps and pot-holes, the vehicle is “D” mode and road will be winding, uphill, accidents with flashing hazards, etc., but we proceed with caution optimism.

Nothing ventured, nothing gained!

[Rushdi Siddiqui is the global head of Islamic Finance at Thomson Reuters. He welcomes feedback and he can be reached at Rushdi.Siddiqui@thomsonreuters.com]

(Courtesy: Business Times, Malaysia)

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Posted by Indian Muslim Observer on January 13, 2012. Filed under , , , . You can follow any responses to this entry through the RSS 2.0. Feel free to leave a response

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