kuwait inside islamic finance...

News Briefs…………………………………. 1 • Full redemption of Redmax bon ds • MARC rates Islamic debt securities • IDB approves US$455 million in aid • Largest ever share Murabaha for Etisalat • Innovative Islamic financial products • Market cap for LFX • Islamic notes issuance by Top Glove • SESCO keeps AA1 rating • New RHB Islamic fund by year-end • Dubai Bank sees opportunities • Musyarakah One gains AAAID rating • Venture capital: missing link in Islamic

finance • Kulim secures financing for QSR acquisition • RAM rating for My-InfoTech’s Islamic

securities • Islamic finance needs uniform standards • Islamic stock index urged • National Heart Institute issues Sukuk • Saudi British Bank unveils first Islamic

product • IDB’s vision 2020 Statement ..…………………………………. 12 Money Laundering and Terror Financing issues in the Middle East Doctoral Work ……………………………..17 Sector Report………………………...…… 19 Socially responsible banking the Islamic banking way Islamic Finance Forum ..……………… 20 Takaful News………..…………………….. 22 Interview ……………...……………...……. 24 Rob King, General Manager of Family Takaful, Solidarity talks to Islamic Finance News Moves ………………..………………..……. 26 Islamic League Tables…………..………27 Malaysian Islamic Bond Update ……30 Subscription Form……………….……… 32

Vol. 2, Issue 16 15th August 2005

Inside Islamic Finance News: KUWAIT

In the year ending on the 30th June 2005, BKME, which holds a 10% market share in Kuwait, achieved a net profit of US$52.7 million (KD15.3 million), an increase of 34.4% on the same period last year. BKME’s assets total US$5,317 million (KD1,542 million). Fahad Al-Rajaan, Chairman of AUB, com-mented that this acquisition is ‘an impor-tant milestone in Ahli United Bank’s strat-egy to become a major regional bank in the Gulf by securing a significant presence in Kuwait.’

Ahli United Bank BSC (AUB) has completed the latest part of a US$427.9 million (KD124.1 million) transaction, increasing its effective holding in the Bank of Kuwait & the Middle East KSC (BKME) to 75%. This recent acquisition was of 138.2 mil-lion shares, or 19.6% of the issued capital of BKME. The remainder of the transaction involves the exchange of 208.2 million shares (29.6% of BKME’s issued capital). BKME’s treasury purchased 70 million shares (9.9% of the issued capital), with AUB acquiring the balance.

MALAYSIA Germany’s f irst Islamic securit ization TMW Lion GmbH (TMWL), a German closed-end property fund, has issued Is-lamic securities to raise US$50.77 million (RM190 million) for the acquisition of three shopping malls. The issuance represents the first domestic fund-raising exercise for the fund’s invest-ments in Malaysian real estate and was undertaken for the purpose of refinancing some of TMWL’s initial investment of US$90.6 million (RM340 million). The se-curitization was completed via TMWL’s wholly owned subsidiary Focal Quality Sdn Bhd, a limited purpose company incorpo-rated for the purpose of acquiring the shopping malls. OCBC Bank (Malaysia) Bhd is the lead ar-ranger and principal adviser for this trans-

action. OCBC Director and Chief Executive Officer Datuk Albert Yeoh commented: ‘This transaction marks the first Islamic securities issuance by an international property fund, which sets a credible bench-mark for other international funds that in-tend to tap into the Malaysian capital mar-ket for Shariah compliant funding.’ The fund is managed by Prudential Real Estate Investors Inc through its property fund management units in Singapore and Germany. Rating Agency Malaysia Bhd has awarded preliminary ratings from AAA to A to the Islamic securitization programme structure.

AUB’s stake in BKME rises to 75%

www.islamicfinancenews.com

15th August 2005 ©

Ms. Baljeet Kaur Grewal Chief Economist - Aseambankers Berhad Kuala Lumpur, Malaysia Mr. David Vicary (Daud Abdullah) Managing Director Hong Leong Islamic Bank Kuala Lumpur, Malaysia Mr. Hussain Najadi Chairman & CEO AIAK Malaysia Sdn. Bhd. Kuala Lumpur, Malaysia

ISLAMIC FINANCE News Advisory Board: Mr. Mohd Ridza bin Mohammed Abdullah Managing Partner - Mohamed Ridza & Co Kuala Lumpur, Malaysia Mr. Muhammad Nejatullah Siddiqi Author, Scholar, Speaker, Trainer Pennsylvania, USA Dr. Nordin Mohd Zain Executive Director - Malaysia Accounting Standards Board Kuala Lumpur, Malaysia

Dr. Mohd Daud Bakar CEO - International Institute of Islamic Finance Kuala Lumpur, Malaysia Prof. Bala Shamugam Director of Banking & Finance Monash University Malaysia Selangor, Malaysia Prof. Dr. Mohd Ma’sum Billah Associate Professor - International Islamic University of Malaysia Kuala Lumpur, Malaysia Dr. Monzer Kahf Consultant/Trainer/Lecturer – Private Practice California, USA

FOR FULL BIOGRAPHIES OF THESE INDIVIDUALS, PLEASE REFER TO www.IslamicFinanceNews.com

MALAYSIA

MALAYSIA Full redemption of Redmax bonds Outstanding US$26.65 million (RM100 million) Al-Bai Bithaman Ajil Islamic Fixed Rate Secured Bonds (2004/2008) were fully redeemed by Redmax Sdn Bhd on the 1st August 2005. Rating Agency Malaysia Bhd stated that in light of this early re-demption, the A1 rating would cease to apply, as it no longer has any rating obligation on the debt issue.

NEWS BRIEFS

MARC rates Islamic debt securities Malaysian Rating Corp Bhd (MARC) has assigned Bayu Padu Sdn Bhd’s Istisna’ Medium-Term Notes and Murabahah Commercial Papers/Medium-Term Notes facilities the ratings of A+ID and MARC-1ID/A+ID. Bayu Padu Sdn Bhd is wholly owned by SapuraCrest Petroleum Berhad (SapuraCrest), a Malaysian-owned integrated services provider for the oil and gas multinationals. Factors influencing the rating included SapuraCrest’s strong position in the industry; an-ticipated future improvement in its financial profile, due to sub-stantial contracts-in-hand; and manageable collection risk. On the other hand, the company has a higher debt leverage relative to competitors, a factor which moderated the rating. SapuraCrest provides integrated services including offshore drill-ing, installation of pipelines and facilities and marine services. Demand for these services is expected to grow as the active off-shore oil and gas exploration, development and production activi-ties in the waters of Malaysia increases. SapuraCrest’s revenue for the financial year ending in January 2005 was over US$266.46 million (RM1 billion), with an operating margin of 8.9%. Revenue in the first quarter of 2005 reached US$97.23 million (RM364.9 million), with an operating margin of 11.4%.

UAE SIB anticipates early closure on Amyal

The well-received launch of Sharjah Islamic Bank (SIB)’s Islamic Leasing Fund, Amyal, may result in its closure well before schedule. SIB expects to reach its target size of US$20 million within the offer-ing period, which runs from the 2nd August to the 1st September 2005. In the fund’s expected investment period of four years, annual re-turns are estimated to be between 7% and 8%, which will be distrib-uted to investors on a quarterly basis. Subscriptions are open to expatriate residents of the UAE, institu-tions based in the UAE, as well as UAE nationals. Amyal is a feeder investment scheme into the Millennium Aircraft Leasing Company (MALC), a limited liability company incorporated by Kuwait Finance House (KFH) in the Bahamas. MALC buys new and used aircraft to lease to airline companies. SIB’s Chief Executive Officer Hussain Al Qemzi commented that the fund is consistent with the bank’s commitment to offering value-added investment products. He added that the fund also furthered the bank’s intention of enhancing its relationship with KFH as an important strategic partner.

GULF REGION Islamic bonds in Gulf leap in value

Growing interest from non-Muslim investors, in addition to the oil boom, have led to a 25% increase in the value of non-sovereign Islamic bonds issued within the Gulf region. US$1.7 billion worth of Islamic bonds were issued by Gulf-based non-sovereign borrowers in 2004, and in the first half of this year already US$2.1 billion worth of Islamic bonds have been issued.


15th August 2005 ©

UEM’s takeover plan has no impact on Pharmaniaga ratings

MALAYSIA

Rating Agency Malaysia Bhd (RAM)’s assigned ratings of Pharmani-aga Bhd’s US$16.03 million (RM60 million) Islamic Medium-Term Notes (IMTNs) Programme at AA2(s) and US$10.67 million (RM40 million) Islamic Commercial Papers Programme at P1 will remain unaffected by the possible takeover of the company by UEM World. From the 29th July 2005 UEM World’s stake in Pharmaniaga rose from 30.3% to 46.2%, owing to the acquisition of a 15.9% interest in the company by one of UEM World’s subsidiaries. UEM World’s Mandatory General Offer (MGO) on the balance of Pharmaniaga shares, at an offer price of US$1.47 (RM5.50) each, is currently pending approval. Whether this is obtained or not, UEM World will remain the controlling shareholder of Pharmaniaga. The change in Pharmaniaga’s shareholding structure will have no immediate impact on its ratings, which reflect the stability of its cashflow. Pharmaniaga holds the exclusive right to distribute phar-maceutical and medical products until the 1st December 2009, under a 15-year Concession Agreement with Malaysia’s Ministry of Health. This concession-driven income accounts for over 70% of the group’s income.

NEWS BRIEFS The projects approved by the IDB include US$12.5 million towards participation in the share capital to establish a Takaful company in the UAE. Two special approvals were given for Niger and Mali of US$14 million to mitigate the effect of drought there. In addition, over US$124 million was approved for trade financing operations.

MALAYSIA MARC downgrade for ABIM

ABI Malaysia Sdn Bhd’s (ABIM) US$21.3 million (RM80 million) Al-Bai Bithaman Ajil Islamic Debt Securities (BaIDS) have had their A ID rating changed to A- ID by the Malaysian Rating Corp Bhd (MARC). The rating agency also placed the BaIDS facility on MARC Watch with a Negative Outlook. ABIM’s holding company, Polymate Holdings Bhd, has been placed under Practice Note 1/2001 of Bursa Securities of Listing Require-ments, which prompted the lower rating. Polymate Holdings is experiencing cash flow problems, which it attributes to accumulated losses, price increases for raw materials and lending banks withdrawing some banking facilities. The com-pany is presently holding discussions with lending banks in an attempt to regularize the group’s financial position. MARC will monitor any progress and the consequent impact on the rating.

SAUDI ARABIA IDB approves US$455 mill ion in aid

Saudi Arabia’s Islamic Development Bank (IDB) has approved the financing of several projects, for both member countries and Mus-lim communities in non-member countries, amounting to over US$455 million. Approval was given for more than US$330 million to be allocated to project financing and technical assistance, and over US$1 mil-lion for assistance to communities in non-member countries for educational projects.

UAE Insurance industry to double Huge growth in the UAE’s logistics industry, one of the insurance sector’s biggest revenue providers, will play a major part in the insurance industry doubling by 2010. This growth will also contrib-ute significantly to the market’s annual 15% to 20% increase, said the President of the Government of Dubai’s Department of Civil Aviation, His Highness Sheikh Ahmed bin Saeed Al Maktoum. Sheikh Ahmed addressed UAE insurance industry representatives on the development plans of Jebel Ali Airport City, which incorpo-rates Dubai Logistics City (DLC). Insurance companies have al-ready begun to express interest in operating at DLC, which is not due to open until the end of 2007. Islamic insurance specialists are likely to be in demand at DLC, in order to meet the Takaful and re-Takaful requirements of the freight forwarding companies which will select DLC as their base.

UAE Largest ever share Murabaha for Etisalat

As part of a landmark deal in the Islamic finance world, the invest-ment arm of Emirates Telecommunications Corporation, Etisalat International (Etisalat), has now appointed mandated lead arrang-ers for its US$2.114 billion transaction to finance 90% of its share in a bid to acquire a 26% stake in Pakistan Telecommunications Company Limited (PTCL). The group of seven banks acting as mandated lead arrangers includes Barclays Capital, Calyon, Citigroup, Deutsche Bank, Na-tional Bank of Abu Dhabi and the National Bank of Dubai, man-aged by HSBC Amanah. Interest in the deal from the international banking community, in addition to competitive pricing, is thought to provide a good indica-tor of an acceptance of Islamic finance structures. HSBC Amanah has structured an 18-month Islamic bridge facility, using the underlying shares of PTCL for the trade transactions to finance Etisalat’s share of the final payment of the US$2.6 billion bid.

MALAYSIA Innovative Islamic financial products Shariah compliant Islamic financial instruments should be part of a widening range of innovative financial products used by financial intermediaries, commented Second Finance Minister of Malaysia Tan Sri Nor Mohamed Yakcop. In his keynote address at The Asset Forum in Kuala Lumpur on the 9th August, Nor Mohamed said that product diversity would help to ‘promote our investment products abroad and attract po-tential Islamic investors, particularly those from the Middle East,’ thus accelerating development in the market.


15th August 2005 ©

Market cap for LFX MALAYSIA

The primary listing of US$600 million guaranteed notes, issued by Sarawak International Incorporated (SII), means a market capitali-zation of US$12.09 billion (RM45.30 billion) for Labuan Interna-tional Financial Exchange (LFX). Six Sukuk and six open-ended funds were among the US$600 mil-lion (RM45 billion) 10-year guaranteed notes, the rest comprising conventional debt securities and exchangeable bonds. The notes, which were three times oversubscribed, are guaranteed by SII’s parent company, SGOS Capital Holdings Sdn Bhd, which is wholly owned by Sarawak’s State Financial Secretary. SGOS will use the bulk of the proceeds from the notes to finance other gov-ernment agencies and projects in Sarawak. Ratings of Baa1 and A- were given to the issuance by Moody’s In-vestors Services Ltd and Standard & Poor’s Rating Services respec-tively.

NEWS BRIEFS

MALAYSIA Kulim secures financing for QSR acquisit ion

Kulim (Malaysia) Bhd is one step closer to acquiring QSR Brands Bhd. Kulim has appointed Commerce International Merchant Bankers Bhd and OCBC Bank (Malaysia) Bhd as joint lead arrangers for a Bai Bithaman Ajil facility to secure Islamic debt notes worth US$102.27 million (RM383 million). The financing was secured by a memorandum of deposit on QSR shares and the charge over certain sections of land. As at the 26th July 2005, Kulim held a 30.17% stake in QSR (71.92 million shares). Kulim’s purchase of 48 million shares from Wis-dom Innovative Technology Sdn Bhd will bring its total interest in the company to 50.31%. QSR director Tan Sri Nik Ibrahim Nik Ahmad Kamil owns 19.73% of QSR.


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Islamic notes issuance by Top Glove MALAYSIA

Top Glove Corp Bhd has plans to issue Murabahah/Ijarah commer-cial paper worth up to US$26.71 million (RM100 million) and Mu-rabahah/Ijarah Medium-Term Notes amounting to an additional US$26.71 million (RM100 million). The proceeds will be used to refinance the company’s borrowings, for working capital and to finance its capital expenditure. The issu-ance will also enable the group to access the private debt securi-ties market for funds when necessary.

NEWS BRIEFS

MALAYSIA RAM rating for My-InfoTech’s Islamic securit ies

Rating Agency Malaysia Bhd (RAM) has assigned a short-term rat-ing of P2 and a long-term rating of A2 to the proposed US$21.37 million (RM80 million) Murabahah Underwritten Notes Issuance Facility/Islamic Medium-Term Notes Facility (MUNIF/IMTN) of My-InfoTech (M) Bhd (MYIT). Proceeds from the proposed MUNIF/IMTN will partly finance the purchase of Formis Holdings Berhad and Formis Systems & Tech-nology Sdn Bhd from Formis (Malaysia) Berhad. These ratings are a reflection of MYIT’s and Formis’ established market positions; strong track records; provision of a wide range of IT services; diversified industry coverage; and the good outlook for the IT industry.

MALAYSIA SESCO keeps AA1 rating Syarikat SESCO Bhd (SESCO) (previously Sarawak Electricity Supply Corporation) has maintained Rating Agency Malaysia Bhd (RAM)’s long-term rating of AA1 for its US$161.61 million (RM605 million) Al-Bai Bithaman Ajil Islamic Debt Securities (BaIDS). SESCO’s strong financial profile, along with its recent privatization, its role as the only integrated electricity utility company in Sarawak, and the support of the Sarawak State Government, as a majority-owned subsidiary of listed company Sarawak Enterprise Corpora-tion Berhad (SECB), have all contributed to the ongoing AA1 rating.

MALAYSIA New RHB Islamic fund by year-end

RHB Unit Trust Management Bhd will release a new Islamic fund by the end of 2005, hoping to tap into the US$2.82 billion (RM10.54 billion) Islamic equity market. RHB Chief Executive Officer Michael Tan commented: ‘In terms of Islamic [funds], we are quite aggressive. We have got the Islamic Bond Fund, the Mudarabah Fund and the Islamic Growth Fund.’ This is designed so that the company’s investment products cater to a wide range of investors, from the conservative to the aggres-sive. Tan spoke to reporters in Kuala Lumpur at RHB’s annual charity drive to distribute ‘cleansed’ proceeds from its Mudarabah Fund to charity organizations. Non-Shariah compliant gains from RHB’s business activities are accumulated throughout the year and do-nated to charity.


15th August 2005 ©

FOR FULL GLOSSARY OF ISLAMIC FINANCE TERMS Visit www.IslamicFinanceNews today!

IDB meet in Jeddah SAUDI ARABIA

The 232nd session of the Council of the Executive Directors of Is-lamic Development Bank (IDB) began in Jeddah last week under the Chairmanship of IDB President Dr Ahmad Mohammed Ali. The meeting was scheduled to review a number of issues including financing of development projects and financing of foreign trade operations, as well as extending assistance to a number of Muslim communities in non-member states of the IDB. Participants will also review administrative and technical issues, including the memorandum of understanding recently signed by the IDB and Iraq.

NEWS BRIEFS

DUBAI Dubai Bank sees opportunities Dubai Bank’s 15-fold increase in net profit substantially came from the capital markets, however the bank also expects to see growth in its Islamic banking business. Dubai Bank CEO Ziad Makkawi said: ‘As an institution we are pursuing pockets of value where we can take advantage and we see many more opportunities, espe-cially in the area of Islamic banking.’ The bank announced a net profit of US$12.6 million (Dh46.4 mil-lion) for the first half of 2005, a 15-fold increase over the same period in 2004. The bank achieved a 12% growth in its total assets, reaching US735 million (Dh2.7 billion) as at the end of June 2005, com-pared to US$653.5 million (Dh2.4 billion) at the end of 2004, with deposits rising to US$517,319 (Dh1.9 million) and loans and ad-vances reaching US$462.8 million (Dh1.7 billion). The operating income of the Bank during the first half of 2005 was US$31.3 mil-lion (Dh115 million), including non-interest income of US$17.4 million (Dh64 million), an increase of 237% year on year.

Islamic finance solutions on real estate portal

The first fully independent and comprehensive UAE real estate portal – www.go-estates.com – will also offer an Islamic finance calculator, Ijaara. Powered by Amlak, this feature is among the additional enhancements to the portal. Other features include Frequently Asked Questions (FAQs) on aspects of property and real estate answered by Dr. Go and powered by Emirates Advo-cates, as well as a weekly property newsletter powered by AME Info. The www.go-estates.com portal provides simple, transparent and quick global coverage, allowing companies as well as individuals in the real estate business to buy, sell, rent, share and lease prop-erties more effectively.

MALAYSIA Musyarakah One gains AAAID rating

Malaysian Rating Corp Bhd (MARC) has assigned a long-term rating of AAAID to Musyarakah One Capital Bhd’s US$27.6 million (RM103.62 million) Sukuk Musyarakah Series 2005-B. This series is the second issuance of a US$666.8 million (RM2.5 billion) Su-kuk Musyarakah programme. Musyarakah One is a special purpose vehicle incorporated to ac-quire receivables from the originator, Time Systems Integrators Sdn Bhd (TSI). The receivables comprise rights, title, interests and benefits to the payment obligations of the Government of Malaysia to TSI, pursu-ant to a contract to supply teaching equipment and provision of services to various schools and certain government areas, and to implement a programme for teaching science and mathematics in English.

UAE

Bill to bring I jara mortgages under FSA

UNITED KINGDOM

The Regulation of Financial Services (Land Transactions) Bill is currently before parliament in the UK. One of the remits of the Bill is to align the regulation of Islamic mortgage schemes with other mortgage products that have been regulated since the 31st Octo-ber 2004, Norton Rose financial services lawyer Matthew Rutter told IFN. “A number of financial service providers in the UK have set up alterative means of purchasing homes for the Muslim community which are Shariah compliant. The two main forms of Islamic mort-gage are Ijara and Murabaha. Under Ijara mortgages the financial service provider will buy the property and then sell it to the cus-tomer at the same price in instalments. In order to make a profit, the service provider will charge rent on the property while it is being bought from them. “Murabaha works differently: under this system the lender will buy the property and then re-sell it to the consumer at a higher price, which can be paid in instalments over a number of years,” Rutter said. He added that Murabaha-based arrangements already fall within the FSA’s definition of a regulated mortgage and are regulated as such. But in the case of Ijara, because it works on a sale and lease basis, it previously fell outside the FSA definition of a mort-gage and as such were outside of the FSA’s remit. “The Bill will bring Ijara mortgages under the remit of the FSA and both forms of Islamic mortgage product will be regulated in the same way. This will afford UK consumers the same level of protec-tion, whether they choose an Ijara or Murabaha mortgage,” he said.


15th August 2005 ©

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New phone banking centre for DIB DUBAI

The Dubai Islamic Bank (DIB) has inaugurated a new phone bank-ing centre with a capacity of receiving more than 3,500 calls per day. The new centre was set up as a result of a 40% increase in cus-tomer calls recorded in the first six months of 2005, as compared to the first half of 2004. The centre will provide round-the-clock services such as utility bill payments, balance inquiry, fund transfer and credit card activation.

NEWS BRIEFS

BAHRAIN Bahraini Sukuk Al-Salam a success Bahrain Monetary Agency (BMA) recently announced that the monthly issue of Sukuk Al Salam Islamic bonds, No 51 has been oversubscribed by more than twice the issue amount. Subscrip-tions worth US$114 million were received for the US$40 million issue, which carries a maturity of 91 days. The expected return on the issue, which begins on the 3rd August and matures on the 2nd November 2005, is 3.71%.

MALAYSIA MARC rates Islamic securit ies Malaysian Rating Corp Bhd (MARC) has assigned a rating of A+ID/Marc-2ID to Goodway Integrated Industries Bhd’s US$21.3 million (RM80 million) Partially Underwritten Murabaha Notes Issuance Facility/Islamic Medium-Term Notes Programme. The rating agency said this reflected the group’s position as a leader in the formula-tion and development of various rubber and technical compound products in Malaysia; its wide network of clients in both the local and overseas market; potential growth in the retread industry; promising steady income growth; and commendable financial posi-tion, characterized by improving revenue trend and debt level. With a market share of about 30%, Goodway is principally engaged in the manufacturing and distribution of hot and cold-cure process rubber and retread-related products.

Rosy future for Islamic banking Speakers at a seminar organized by the Council of Islamic Ideol-ogy said the Islamic mode of banking is expected to grow in Paki-stan, as commercial banks are interested in providing banking facilities based on Islamic principles. Pakistan’s Central Bank has taken steps to promote Islamic bank-ing by allowing the opening of stand-alone branches. Askari Bank Senior Executive Amir Khalilur Rehman said there is a good ena-bling environment as many people wish to rely on this method of banking. In 2002 there was only one bank with an Islamic banking facility, but that number has increased since then. Within the next three years some 450 branches for Islamic banking will be set up by major banks, including MCB, Askari, UBL, Citibank, Bank al Falah and National Bank.

IRAN Islamic Development Bank agrees loan to Iran Yasa Company

The Islamic Development Bank (IDB) has approved a US$6.2 mil-lion (€5 million) loan to Iran Yasa Tire Manufacturing Co. The loan is aimed at financing the purchase and importation of the raw materials required by the company. Repayment of the debt will start 12 months after the purchase of the raw materials by the Iranian company. An addition of 1.5% or 2% will be made to the interest rate of the loan depending on whether the purchases are made from IDB member or non-member countries.

PAKISTAN

Amlak rights issue open UAE

Amlak Finance recently said that it had begun sending out invita-tions to its shareholders to subscribe to the company’s 1:1 rights issue. The rights issue will open for subscriptions on the 15th Sep-tember and remain open until the 26th September. Amlak shareholders endorsed a board decision at a recent ex-traordinary general meeting to raise the company’s paid-up capital from US$750 million to US$1.5 billion through rights issue.

MALAYSIA Jamelah tipped to head KFH

RHB Sakura Merchant Bankers Bhd Chief Operating Officer Jame-lah Jamaluddin has been tipped to become the first CEO of Kuwait Finance House (KFH)’s Malaysian branch. Jamelah’s contract at RHB Sakura is due to expire and she should be reporting for work at Kuwait Finance House by early next year at the latest. Kuwait Finance House is the first of three foreign banks to be awarded an Islamic banking licence to operate in Malaysia. It re-ceived the licence from Bank Negara Malaysia in May 2004. In another development, Muslim Consumers Association of Malay-sia (MCAM) Secretary-General Dr. Maamor Osman said KFH’s opening would be a mutual symbiosis and a win–win situation in which the Islamic finance system will prosper. He hoped that the opening of KFH would encourage the multi-national fraternity to become involved and participate in the Is-lamic financial system.


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GENERAL Venture capital: missing l ink in Islamic f inance

According to a recent report by the Global Entrepreneurship Moni-tor (GEM), while the venture capital system has played a leading role in the industrial development of the US, this form of financing is not popular with most Islamic banks. The report pointed out that while there is apparent consensus among Shariah jurists and scholars that the two major modes of Profit Loss Sharing (PLS) financing – Musharaka and Mudaraba – represent the most desirable ways of financing investment and business (because of their ability to tie reward sharing to risk shar-ing between the two transacting parties), most Islamic banks have never made them popular forms of finance. Less than 10% of the funds of most Islamic banks have been committed to these modes of finance, while many of the banks may have never practised them. Among the reasons attributed to this are secretiveness and lack of adequate transparency on the part of the managing partners with regard to the performance of projects, the high cost of following up and monitoring of projects, unfair treatment in taxation in some countries. While profit made from such contracts is taxed, interest, on the other hand, is treated as a cost item and is not taxed. Such discrimination can prove negative and can limit the growth of PLS contracts. Venture capital forms a major part of the businesses of most conventional banks and the successful implementation of Musharaka and Mudaraba activities by the Islamic banks should not have required anything more than the prudence and due dili-gence needed to be undertaken by a conventional venture capital-ist on a business being acquired or a new business venture being financed.

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NEWS BRIEFS

QATAR Qatar rulebook on Islamic f inance The Qatar Financial Centre Regulatory Authority has issued for public comment a draft rulebook on Islamic finance that will govern Islamic financial operations in the Qatar Financial Centre and sets out the requirements for firms undertaking Islamic financial busi-ness. The Authority is seeking comments on these rules from the interna-tional financial and legal community prior to their adoption in ac-cordance with Article 15 of the FSR.

MALAYSIA MISC plans to issue Islamic bonds

Malaysia International Shipping Corp Bhd (MISC) announced re-cently that it is proposing to raise up to US$266.8 million (RM1 billion) via Murabaha commercial papers/medium-term notes. The proposed programme was conditional on approval by the Secu-rities Commission. Commerce International Merchant Bankers Bhd (CIMB) and HSBC Bank Malaysia Bhd have been appointed joint lead managers, joint lead arrangers, joint book-runners and joint principal advisers for the Islamic bonds.

GLOBAL World’s first global Islamic bond index Dow Jones & Co, Publisher of the Dow Jones Industrial Average of stocks, said recently that it is planning to start a global index of Islamic bonds, believed to be the world’s first. Dow Jones and FTSE International Ltd have put together stock indexes for Islamic investors that are currently used as a bench-mark for managing money in Islamic compliant stocks. The proposed global Sukuk bond index would include corporate, quasi-sovereign and sovereign securities from countries in the Organization of the Islamic Conference (OIC) and the Organization for Economic Cooperation and Development (OECD).

USA US groups keen on Islamic banking Malaysia’s move to further liberalize the banking sector has drawn some interest from American financial services groups that are keen on Islamic banking services. The American Malaysian Cham-ber of Commerce (AMCHAM) Executive Director Dom LaVigne said 25 US firms from the insurance and banking sector have indicated their interest in obtaining licences for different types of Islamic bank assurances. He added that US securities firms were also interested in setting up brokerages or working with Malaysian clients.

GENERAL Islamic finance needs uniform standards

While there is no doubt that the Islamic Financing Services industry is currently recording a vibrant growth rate worldwide, particularly in the Arab region, clear regulatory procedures have to be in place. The industry also needs to be more proactive in accessing un-tapped funds, according to experts. Leading Islamic financing executives in the UAE said that while Islamic banks must develop the ability to respond more efficiently to increasingly sophisticated client demands and to compete more effectively with their conventional counterparts, the sector needs to fill gaps in regulation by setting up a central Shariah board and supervisory guidelines. With mergers becoming a trend among the Islamic banks, the emergence of stronger Islamic players is likely. Mergers would bring forth mega Islamic banks which could cast their shadow do-mestically, regionally and internationally. In the UAE, Islamic banks hold about 11% of the total assets of all banks in the country. Asset growth of Islamic banks has surpassed asset growth of the whole banking industry during the last three years. The share of Islamic banks in total deposits reached 18%; their share in equity 9%; and in profits 11%.


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Cagamas’ Islamic MBS raised US$547.53 mill ion

NEWS BRIEFS

Islamic banking wil l make up 15% of total banking system

PAKISTAN

The Pakistan Central Bank is expecting Islamic banking to take up 15% of the country’s banking system over the next five years. State Bank of Pakistan Head of the Islamic Banking Department Pervez Saeed said total investment in the Islamic banking currently stands at over US$838.1 million (Rs50 billion (US$838.1 million), and is gradually increasing. He added that two Islamic banks had already launched Islamic banking by introducing a number of products, while 65 Islamic branches of different banks were operating in 11 cities of the country.

SINGAPORE Islamic stock index urged A panel of experts on Islamic finance has called on Singapore to develop an Islamic stock index to allow the island republic to ce-ment its position as a global financial centre. The experts said that the index needs to be established soon, as China, Hong Kong and South Korea are already working on one. At present there is only one Islamic stock index located outside the Middle East (compiled by Dow Jones in the US). An Islamic stock index in Singapore, coupled with the nation’s reputation for good corporate governance and financial infrastructure, would help it tap into Islamic finance.

MALAYSIA

UNITED KINGDOM UK Islamic mortgage market to grow

The forum will also feature an exhibition of Islamic finance organi-zations. Sponsors of the event include Dubai Bank, Oasis, Dubai International Financial Centre (DIFC) and ABC Islamic Bank.

The UK’s Islamic mortgage market is set to grow by 47% a year and could be worth US$2.50 billion (£1.4 billion (US$2.50 billion) by 2009, according to a market research group. The research group Datamonitor said the entry of high street banks such as HSBC and Lloyds TSB has made a significant impact on the development of the Islamic mortgage market, given these banks’ extensive branch networks. While in 2003 there was only one bank offering Islamic mortgages in the UK, it is expected that by the end of 2005 there will be five, including the Islamic Bank of Britain. The current value of the Is-lamic mortgage market is US$292.29 million (£164 million (US$292.29 million).

TURKEY Turkish Finance Minister to deliver keynote

Turkish Finance Minister Kemal Unakitan is expected to deliver a keynote address at the International Islamic Finance Forum (IIFF) in September. The organizers are expecting over 400 attendees from across the world to attend the 3-day event held in Turkey from the 26th Sep-tember. The forum will open with a special session on Turkey, with issues discussed such as the impact of the WTO and the specific opportunities the Turkish market provides to Islamic financial insti-tutions.

Malaysia’s national mortgage agency last month raised US$547.53 million (RM2.05 billion) in the world’s first sale of Islamic securities backed by residential mortgages. The agency priced the multi-tenor AAA-rated asset-backed securi-ties between 30 and 73 basis points above comparable Malaysian Government Securities, in line with market expectations. Caga-mas’s bonds are backed by housing loans to civil servants. Cagamas raised US$137.35 million (RM515 million) via 10-year paper, while the other tenors amount to between US$66.68 mil-lion (RM250 million) for the three-year tranche, and US$109.35 million (RM410 million), for the 12-year issue. The lead managers were HSBC Bank Ltd, ABN Amro Holding NV (ABN), Commerce International Merchant Bankers Bhd and Am-Merchant Bank Bhd.

MALAYSIA National Heart Institute issues Sukuk Malaysia’s National Heart Institute or Institut Jantung Negara Sdn Bhd (IJN) is looking at raising US$55.8 million (RM209 million) through issuance of Sukuk. The issuance, under a Sukuk Musyarakah programme, will be to finance the expansion of the National Heart Institute, scheduled for completion in 2008. IJN, which is 99.9% owned by Ministry of Finance Inc, would issue this Sukuk via a special purpose vehicle company, IJN Capital Sdn Bhd. Malaysian Rating Corporation Bhd has accorded IJN’s Sukuk with maturities of seven years or less a rating of AAA, while those with maturities of more than seven years are rated AA+.

MALAYSIA Maybank opens Islamic branch

Malayan Banking Bhd (Maybank) has opened its first fully fledged Islamic banking branch in Sarawak. The AlIdrus Islamic branch in Kuching is also Maybank’s 10th Islamic branch nationwide, the bank said. The AlIdrus branch will focus exclusively on offering the group’s Islamic products and services. These include Islamic savings and current accounts, the 3-in-1 Premier Account, Shariah compliant investment funds, unit trusts, Takaful plans, mortgage and financ-ing facilities. Maybank has 17 branches in Sarawak that offer both conven-tional and Islamic banking products. It has also been providing Islamic financial services for business customers in Sarawak through a network of business centres in Kuching, Miri and Sibu.


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UAE

PAKISTAN Maiden local currency Sukuk in the offing

Pakistan’s Water and Power Development Authority (Wapda) is expected to issue the country’s first local currency Sukuk worth US$134.1 million (Rs8 billion (US$134.1 million). It was reported that Wapda is in the process of issuing Rupee Sukuk bonds con-ceived on the same lines as the recent issue of the Government of Pakistan’s Eurobonds. The size of the Wapda Sukuk issue will be up to a maximum of US$134.1 million (Rs8 billion) with a final maturity of seven years from the date of issue. The profit on the Wapda Sukuk will be pay-able in six-monthly instalments from the date of issue, with the rate of profit being re-set after payment of every coupon resulting from the change (if any) in the base rate. The rate of profit will be 0.35% above the base rate, which is six-month Karachi Inter-bank Offer Rate. The three lead managers for this issue of Wapda Sukuk are Jahangir Siddiqui & Co Ltd, Muslim Commercial Bank Ltd, and Citibank NA. The instrument will be in the form of Sukuk certificates and will be secured by an unconditional and irrevocable first demand guaran-tee from the Ministry of Finance of the Government of Pakistan, covering the purchase price and lease rentals of movable assets, which will be sold by Wapda to the Wapda First Sukuk Company Limited. The instrument is expected to receive a pronouncement from the Shariah Board confirming that the issue and its structure and mechanism are in compliance with Shariah principles.

Amlak profits soar by 268%

NEWS BRIEFS

INDIA Plans to launch Islamic banking

Amlak Finance PJSC, the UAE’s leading Islamic mortgage finance provider, recently announced that its net profits (before depositors share) rose 268% to US$19.63 million (AED72.088 million) for this year’s first half ending on the 30th June 2005, against US$5.34 million (AED19.603 million) for the same period last year.

In a bid to facilitate foreign investments from the Gulf states, the Indian government has been taking steps to launch Islamic banking in the country. The Ministry of Finance has discussed the issue with the Central Bank and has given the Reserve Bank of India the go ahead.

QATAR Doha Bank to formally launch Islamic banking division

Doha Bank’s fully fledged Islamic banking division will be officially launched within two months, it was announced last month. To be known as Doha Islamic, the bank will design and offer Shariah com-pliant products based on Qatar Central Bank regulations. Doha Islamic’s first branch has already opened its doors at Bank Saderat Iran building in Grand Hamad Street. The bank will be set-ting up 16 more kiosks offering both cash deposit and dispensing facilities at each unit. The bank will also be introducing new mobile units (bank on wheels) in Qatar.


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Saudi Brit ish Bank unveils f irst Islamic product

SAUDI ARABIA

Innovation is the name of the game for the Saudi British Bank. It recently announced that it has come up with a new Islamic product that is compatible with Shariah principles and approved by the bank’s Shariah Supervisory Committee for protecting borrowers against market price fluctuations. The product is said to be the first of its kind to specifically protect corporate borrowers, since it is priced in accordance with fluctuat-ing market trends throughout the term of finance. The rate for borrowing through Murabaha is to be fixed under the mechanism of this product and at the same time customer’s funds are invested in a counter-Murabaha. This will result in full protec-tion of the customer against price fluctuations, whereby an Islamic loan is extended and an Islamic price protection is provided.

GENERAL NEWS BRIEFS

IDB’s vision 2020 The Islamic Development Bank (IDB) recently announced that it has set up an IDB Vision 1440 (2020) Commission. This is on top of the 10-year Master Plan for the Islamic Financial Services Indus-try that was announced during the IDB Board of Governors’ 30th meeting, held in Kuala Lumpur at the end of June. The IDB Vision 2020 is aimed at producing a strategic vision for the pan-Islamic multilateral development bank (MDB) over the next 15 years. This should enhance its three core objectives of promot-ing intra-Islamic trade between its 56 member countries, which currently stands at only 12%; promoting Islamic banking and insur-ance worldwide; and alleviating poverty in member countries, most of which, especially those in Sub-Saharan Africa, are classified as Least Developed Countries (LDCs).

SUDAN DIB buys Al Khartoum Bank Dubai Islamic Bank (DIB) last month announced that it has signed an agreement with the Government of Sudan to acquire 60% of its stake in Al Khartoum Bank. Prior to this agreement, the Govern-ment of Sudan owned 99% of the bank’s total shares and Suda-nese investors owned the remaining 1%. According to the agreement, DIB will own the majority of shares in Al Khartoum Bank, Sudan’s first bank, established in 1913. DIB will now take responsibility for all operations and development of Al Khartoum Bank, with a view to offering the best banking services in Sudan. With a paid up capital of US$45 million, Al Khartoum Bank has a strong presence in Sudan. It has a network of 53 branches across the country, of which 17 are in Khartoum.

ABU DHABI ADIB opens new branch In just 29 days, Abu Dhabi Islamic Bank (ADIB) has opened a new branch in Bani Yas in response to residents’ requests. The seventh branch within Abu Dhabi, the new branch is a result of the expan-sion plan aimed at opening new branches throughout the UAE. The new Bani Yas branch offers a wide array of innovative banking services and products such as covered cards, car financing, cur-rent accounts and many other flexible Islamic banking products. ADIB will also be announcing the opening of El Mina branch in Abu Dhabi.

KUWAIT Kuwait Real Estate Bank ready to become Islamic bank

BAHRAIN US$26.55 mill ion net profit for KFH Bahrain

Kuwait Finance House (KFH) in Bahrain recently announced that its net profit has risen dramatically to US$26.55 million (BD10 million) for the six months ending on the 30th June, compared to US$5.3 million (BD2 million) during the same period last year. The bank saw a 65% increase in total assets, which grew to US$769.24 million (BD290 million) from US$464.18 million (BD175 million) since December. Total operating income for the period also grew substantially by 165% to US$43.24 million (BD16.3 million), up from US$16.45 million (BD6.2 million) for the same period in 2004. Total equity reached US$157.56 million (BD59.4 million), compared to US$131.57 million (BD49.6 million) in December 2004, while re-turn on average equity for the six-month period was 18.2%.

It is all systems go for the transformation of the Kuwait Real Estate Bank into an Islamic bank. The bank has successfully completed several measures required for the change. The bank’s Shariah committee has prepared contracts, including those related to Islamic services and products. The bank’s assets, once operational and once the green light has been given by the Kuwaiti Central Bank, will amount to about US$75 million.


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Chairman Shelby, ranking member Sarbanes, and distinguished Members of the Committee: Thank you for inviting me to speak to you today about the modes, strengths and weaknesses of Islamic finance as practiced in the Middle East, narrowly defined. The conclusion of my analysis, as presented below, is that there is no reason – in theory – to suspect that Islamic finance would be particularly immune or particularly vulnerable to abuse by money launderers or terrorist financiers. In this regard, it is important to recognize that Islamic finance utilizes relatively sophisticated finan-cial methods – originally devised for regulatory arbitrage purposes – to synthesize modern financial practices from simple contracts such as leases and sales. The emergence of those sophisticated regulatory arbitrage techniques in the U.S. and other developed economies has prompted regulators and enforcement agencies in those countries to increase the level of sophistication of their staff (hiring PhD economists, MBAs, ex-bankers, etc.). Unfortunately, regulators and enforcement officials in the Middle-East may possess significantly lower levels of sophistication than Islamic finance practitioners who utilize state-of-the-art regulatory arbitrage techniques. Moreover, the Islamic finance industry has been – thus far – largely self regulating. This suggests that develop-ment of a comprehensive regulatory framework for Islamic finance, and training regulators and enforcement officials in the region, should be priorities for governments in the region, as well as inter-national financial institutions and other governments providing technical assistance. U.S. Treasury efforts to understand Islamic finance Islamic finance has attracted increasing levels of interest and scru-tiny in Washington recently, due to its phenomenal growth, but es-pecially following the terrorist attacks of the 11th September 2001. Shortly after those attacks, then Secretary of Treasury O’Neill and Under Secretary Taylor visited Bahrain – one of the main centers of Islamic finance in the Gulf Cooperation Council (GCC) region. They met with various leading practitioners of Islamic finance in the area at Citibank’s facility in Manama. Needless to say, the primary con-cern that prompted interest at the time was fear that Islamic fi-nance may invite disproportionate participation of terrorist financi-ers, and/or exhibit particular vulnerabilities to abuse thereby. Having learned some of the basics about Islamic financial practices and regulation during the Secretary and Under Secretary’s visit to Bahrain, U.S. Treasury organized an “Islamic Finance 101” work-shop in April 2002, to educate Government as well as Capitol Hill staffers about this fast-growing industry. Also, Treasury Secretary Snow and then Under Secretary Taylor attended the Second Inter-national Islamic Finance Conference held in Dubai, September 2003, where they gained additional information and understanding about Islamic finance. Following that second visit, Treasury decided to create a post of “Scholar in-Residence on Islamic Finance”, which I had the privilege to occupy June through December 2004. During my tenure at Treasury, I provided more than a dozen workshops for staffers of U.S. Departments, Government agencies, regulators, and House staffers. In addition, we co-ordinated our staff efforts with those of

the World Bank and the International Monetary Fund (IMF) staffers, the latter having simultaneously and independently increased their involvement in Islamic finance. The interest of International Finan-cial Institutions in Islamic finance aims – in part – to ensure the application of best practices in anti-money laundering and combat-ing the financing of terrorism. Those efforts also aim to integrate Islamic finance within a regulatory framework that ensures systemic stability and economic efficiency at national, regional and global levels. In the remainder of this written statement, I shall describe briefly the roots of Islamic finance, its current modes of operation in the Middle East, and its emerging regulatory framework in the region.

Historical Roots of Islamic Finance The Canonical Texts of Islam – echoing and elaborating on Biblical Texts forbade “usury” under the name riba (equivalent to the He-brew term ribít), classically interpreted as any interest charge on matured debts or loans. While some Islamic scholars have argued for more restrictive definitions of the forbidden riba, the vast major-ity of contemporary Muslim jurists and scholars have equated the classical term “riba” with “interest”. This equation has led to para-doxical statements about Islamic finance being “interest-free”. In fact, Islamic finance replaces interest on loans and pure debt in-struments (e.g. bonds) with interest characterized as rent in leases or price mark-up in sales. As Islamic finance began to take shape in the mid 1970s, jurists also considered the more subtle prohibition of gharar (excessive risk or uncertainty), which impacts modern forms of insurance, management tools for credit and interest rate (rate of return) risks, derivatives, etc. Islamic finance as practiced today aims to mimic modern financial practices (banking products, insurance products, money and capital market instruments, etc.) with variations on clas-sical (medieval) contract forms that were deemed devoid of forbid-den riba and gharar. The historical roots of Islamic finance date back to the 1950s and 60s, and the theoretical literature from that period continues to shape the industry’s rhetoric to this day. Islamic finance was mainly envisioned by leaders of Islamist movements, such as Abu al-‘A’lå al-Mawdúdí, Sayid Quñb, and M. Båqir al Íadr. They created a field of study known as “Islamic economics”, which subsequently flour-ished particularly in Pakistani and Indian-Muslim areas, and coin-cided with political independence movements in various Muslim countries. This literature gave rise to numerous hypotheses about how Islamic finance would operate within an “Islamic economy”, one envisioned to thrive in an “Islamic society”, ostensibly arising in newly inde-pendent nations like Pakistan. The main paradigm that emerged

STATEMENT

“The interest of International Financial Institutions in Islamic finance aims – in part – to ensure the applica-tion of best practices in anti-money laundering and combating the financing of terrorism”

Money Laundering and Terror Financing issues in the Middle East By Mahmoud A. El-Gamal

In a statement to the US Senate Committee last month presented by Mahmoud A. El-Gamal, Islamic finance in the Middle East was the topic with a particular focus on the potential for money laundering and terror financing.

You can now read the full testimony.


15th August 2005 ©

suggested that all finance would be interest free, based on the sharing of profits and losses. In particular, bank alternatives were envisioned to function on an equity basis, like mutual funds. In-stead of lending, Islamic banks were envisioned to engage in equity participations with their clients, thus sharing in their profits and losses. The bank’s funds would in turn be raised through equity participation in the bank’s portfolios of investments, thus “depositors” would share in the pooled profits or losses of the bank. When the oil boom of the 1970s made Islamic banking a reality, emerging Islamic banks – following a series of reported losses on their financing – quickly learned to abandon profit and loss sharing in favor of debt-based forms of financing. Thus, conventional bank loans were replaced in Islamic banks with receivables from credit sales or leases. More recently, other assets of conventional banks (including corporate and sovereign bonds, asset backed securities, etc.) have been replicated through Islamized structures. On the liabilities side, however, Islamic banks have continued to maintain that “investment depositors” must share in the banks’ profits and losses, and Islamic finance promoters have continued to speak of profit and loss sharing generally as “the ideal Islamic form of fi-nancing”. Contemporary methods of Islamic finance Contemporary Islamic finance emerged in the mid 1970s, with funding from the oil-rich GCC region, following the first oil price shock of 1973 (the industry has been booming in recent years, mainly fueled by high oil prices). Among the first Islamic financial institutions were Kuwait Finance House, Dubai Islamic Bank, and Faisal Islamic Banks in Egypt and Sudan. The GCC region remains to-date the primary financier of Islamic finance worldwide. In addi-tion, countries such as Saudi Arabia, which had originally resisted the growth of Islamic finance within its own borders, have recently allowed the “Islamization” of some of their largest retail banks, including National Commercial Bank of Saudi Arabia. Indeed, while some of the earliest Islamic banks were pioneered and funded by Saudis (Prince Muhammad b. Faisal Al-Saud and Sheikh Saleh Kamel), those pioneers were not allowed to operate Islamic banks within Saudi Arabia. The first Islamic bank in Saudi Arabia (and the largest in the Middle East) was Al-Rajhi, which was only allowed to operate on the condition of avoiding the use of “Islamic” in its name. In recent years, excess liquidity in Saudi Ara-bia (due to high oil prices and repatriation of funds after 11/9/2001) was migrating to Bahrain and Dubai – which estab-lished themselves as competing centers of Islamic banking in the region, attracting to Islamic finance international financial providers such as Citigroup, HSBC, Credit Suisse, UBS, etc. To retain those funds, Saudi Arabia finally allowed the current trend of Islamization of its banking system to emerge. Given contemporary Islamic banks’ abilities to emulate most operations of conventional banks, it is likely that banking systems within the GCC will become mostly or completely “Islamized” within a few years.

Financing modes – Murabaha (credit sale with mark-up) As mentioned in the previous section, Islamic banks started from their earliest days in the late 1970s to mimic the asset structures of conventional banks. The instrument of choice to replace loans was Murabaha (cost plus) financing. Under this arrangement, the

bank would first purchase the property desired by its customer, and then sell it on credit at a mark-up price determined by market inter-est rates (typically tied to the London Inter-bank Offer Rate – LIBOR; the industry in GCC is heavily staffed and influenced by London-trained bankers). Many innovations were introduced in this practice to eliminate the bank’s risk exposure beyond normal banking risks (such as interest-rate, credit and liquidity risks). For instance, Is-lamic banks were permitted to obtain binding promises by virtue of which customers were obliged to buy financed properties from the bank once the latter acquired them – thus eliminating non-banking commercial risks. In the early years of Islamic banking, this transaction was used mainly for financing the purchase of durable goods (e.g. automo-biles, real estate, etc.), which made it tantamount to an elaborate form of secured lending.1 However, the practice was soon utilized for trade financing, within which it can be used easily to synthesize conventional loans. For instance, a customer can obtain financing for the purchase of $10 million-worth of aluminum or diamonds (owing the bank, say, $11 million at a later date), and then sell the commodities to obtain cash – thus obtaining credit without formally violating the prohibition on interest-based loans.

Financing modes – Tawarruq (credit sale at markup followed by spot sale) A retail banking variation on this multi-trade synthetic-loan transac-tion has emerged in recent years in GCC countries under the name of Tawarruq (literally: monetization – of the traded commodity). Under this form, the bank commonly performs all the necessary transactions to synthesize a loan: purchasing the commodity in its own name, selling it to the customer on credit, and then selling it on behalf of the customer for its cash price. Banks now have standing agreements with commodities dealers for repeated use of their commodities in this type of transaction, thus reducing transaction costs through large trading volumes/frequencies, and logistical economies of scale. In addition, agreements with dealers eliminate residual market risks (associated with commodity prices) to which banks and customers may be exposed in Murabaha financing fol-lowed by independent cash-sale of the financed property. It is noteworthy that Tawarruq was only deemed acceptable by a small minority of Islamic jurists, most of whom later rejected its systematic use by Islamic banks. Despite that general rejection by the majority of jurists, this practice has been one of the fastest growing forms of retail Islamic finance in the GCC. Financing modes – Ijåra (operating lease) Responding to criticism of credit-sale financing as thinly veiled inter-est based lending, Islamic bankers slowly migrated to lease financ-ing as a favorite alternative form of secured lending. In some in-stances, operating lease forms adopted by Islamic financial institu-tions also provided tax benefits in western jurisdictions, where they were eventually used to structure corporate leveraged buyouts for subsequent private placement to GCC investors. More recently, the volume of lease-based Islamic financing has also increased due to its potential for securitization. In this regard, the majority of Muslim jurists have maintained that accounts receivable (e.g. from credit sales) represent debts, which may not be securi-tized or traded in secondary markets. In contrast, they argued, lease receivables represent rent based on ownership of underlying physi-cal assets, and thus may be traded in secondary markets. The most significant application of this paradigm has been in the area of Is-lamic bond alternatives.

STATEMENT (continued…)

“The first Islamic bank in Saudi was Al-Rajhi, which was only allowed to operate on the condition of

avoiding the use of “Islamic” in its name”

“The volume of lease-based Islamic financing has also increased due to its potential for securitization”


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Financing methods – Lease-based long-term bonds The Monetary Authority of Singapore recently estimated that the outstanding volume of Islamic Sukuk (an Arabic term meaning cer-tificates or bonds) worldwide stood at US$30 billion at the end of 2004. Long-term bonds are obviously intended for trading on sec-ondary markets, and thus the structure of choice is lease-based. For instance, the US$700 million issuance by the State of Qatar (Qatar Global Sukuk) in December 2003 was structured as follows: A special purpose vehicle (SPV) was created for the bond (Sukuk) issuance. The SPV issued the certificates and used their proceeds to buy some land in a medical complex from the State of Qatar. The SPV then leased the land back to the State of Qatar, thus collecting principal and interest in the form of rent, which was passed through to the certificate holders. At lease-end, the SPV is obliged to give the land back as a gift to the State of Qatar. In other structures, the SPV is forced to sell the land back to the lessee. Similar bond struc-tures have been used by the governments of Malaysia and Paki-stan, the German State of Saxony-Anhalt, Dubai Civil Aviation Au-thority, World Bank, among other governments and corporations.

While such lease-based certificates may – in principle – have finan-cial risks different from conventional bonds, the legal structures are typically constructed to eliminate all such differences. Thus, in their justification of the A+ rating that they granted the Qatar Global Su-kuk discussed above, Standard and Poor’s analysts argued that the only relevant risk based on the Sukuk legal structure is the sover-eign credit risk of the State of Qatar. In other words, despite the complicated structure, the end result is in fact replication of con-ventional bonds, on which the issuer (corporate or sovereign) pays the same interest it would have paid on regular bonds (or nearly the same, accounting for higher transaction costs). Financing methods – Forward-sale-based short-term bills For short term (bill-type) government bonds, the lease-based struc-ture imposes excessive transaction costs. Thus, Bahrain Monetary Agency (BMA) has pioneered the issuance of sale-based bills known as Sukuk al-Salam (certificates of pre-paid forward sales). In those structures, BMA collects the proceeds of bill sales as pre-payment of a forward price for the purchase of some commodity (say alumi-num). Ostensibly, BMA promises to deliver aluminum at the bill maturity date. However, BMA also promises to arrange for the alu-minum to be sold on the Sukuk holders’ behalf at a predetermined price (equal to the collected proceeds plus interest based on the appropriate LIBOR plus credit spread). Those bills have been tradi-tionally held to maturity – mostly by Islamic banks looking for per-missible instruments to manage liquidity. In its effort to develop a liquid Islamic money market, BMA has recently announced the de-velopment of a repo (repurchase) facility structure that will allow for liquid trading of those bills. Islamic mutual funds Perhaps the easiest segment of the Islamic finance industry to de-velop was that of equity investment in mutual funds that shun cer-tain types of stocks. Providers of those funds exclude stocks of “sin industries” (casinos, breweries, etc.), as well as other industries whose primary business is deemed un-Islamic (e.g. participating in certain types of genetic research potentially leading to human clon-ing). In addition, stocks of companies that pay or earn excessive

interest are excluded through various screens (e.g. debt to moving average of market capitalization, or receivables as a percentage of revenues, exceeding certain thresholds). Within the remaining universe of securities, conventional portfolio management techniques are utilized. It is interesting to note that despite the high publicity received by those Islamic mutual funds and their index-provider licensors (e.g. Dow Jones Islamic Indexes), the total volume of assets managed by those Islamic funds remains very small (compared, for instance, to the estimated US$1 trillion of Saudi funds being invested in U.S. assets). One traditional explana-tion of this phenomenon has been that customers who prefer “Islamic” structures may have relatively low levels of risk tolerance, and the bulk of high net worth individuals and institutional investors (with more tolerance for financial risks) in the GCC are too sophisti-cated to participate in costlier “Islamic finance” (for instance, the most famous Saudi investor, Prince Al-Walid b. Talal, is not known to have shown much interest in the industry). Islamic investment banking More sophisticated investors with an appetite for Islamic finance often invest in U.S. and other western equities through investment banking and private equity boutiques. Those Islamic investment bankers often operate independent or semi independent branches in the home countries of target companies, and use “Islamic” forms of leverage (e.g. lease-based as discussed above) in their acquisi-tions. Their generated assets are then privately placed through their GCC based home institutions and networks of investment advisors. Advanced financial structures To address the high level of risk aversion among retail GCC Islamic investors, Islamic financial practitioners have developed compli-cated financial structures to replicate payoffs that normally require trading in derivative securities (which is not permitted by the vast majority of Muslim jurists). For instance, Al- Rajhi and National Com-mercial Bank in Saudi Arabia both provided protected principal in-dex participation structures to their clients in the early 2000s.

Those structures involved a partner or advisor, who is typically a conventional investment bank, with no qualms about trading in derivative securities. The partner or advisor provided investors full or partial protection of their principal (which is tantamount to a put option), and was compensated with a portion of returns and/or returns above a certain threshold (which are tantamount to call options). In some instances, call options were also directly synthe-sized from earnest-money-like down-payment trades known as ‘urban, and used in those protected-principal structures. In all cases, providers highlighted the fact that the principal was not “guaranteed” by the provider, and thus positive returns did not rep-resent forbidden riba. With investment bankers pursuing fees from new structures, Islamic finance providers have most recently begun marketing “Islamic hedge fund” structures that promise “absolute returns”. It has been interesting to note that some of the indirect publicity associated with one of those “Islamic hedge funds” has been – purposefully or otherwise – playing on the confusion caused by the misnomer “hedge fund” (translated literally as Sanadiq al-Tahawwut). In one web article and at two conferences in the Middle East, I have wit-nessed two jurists associated with an “Islamic hedge fund” actively


“Customers who prefer “Islamic” structures may have relatively low levels of risk tolerance, and the bulk of high net worth individuals and institutional investors

in the GCC are too sophisticated to participate in costlier “Islamic finance”

“I have witnessed two jurists associated with an “Islamic hedge fund” actively providing examples of hedging, and arguing that “hedge funds” are vehicles for investors to hedge their market exposure”


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providing examples of hedging, and arguing that “hedge funds” are vehicles for investors to hedge their market exposure. Insurance alternatives The majority of jurists deem conventional insurance contracts to be impermissible due to two reasons. First, the high-quality debt instru-ments in which insurance companies normally invest their premi-ums (e.g. bonds, mortgage backed securities, etc.) are deemed forbidden based on riba. Second, the insurance contract itself is deemed by those jurists to be a form of gambling (since the insured pays a premium, but knows not whether he will ever file a claim), and hence forbidden based on the canonical prohibition of gharar. To solve both problems, providers of a co-operative insurance form – known by the Arabic name Takaful – have emerged. To solve the first problem, premiums are invested in Islamic variations on bonds, asset-backed securities, etc., like the ones discussed ear-lier. To solve the second problem, the relationship between insurer and insured is not viewed as a commutative financial contract (in which the uncertainty associated with claims would deem the con-tract impermissible). Instead, the Takaful company is said to pay claims based on voluntary contribution (Tabarru’), as a form of so-cial co-operation. Paradoxically, none of those companies ostensi-bly providing co-operative insurance are in fact structured in a mu-tual corporate form. Instead, the companies are commercially owned by stockholders, but offer binding promises to policyholders that they will make “voluntary contributions” whenever valid claims are filed by an insured party.

Investment account holders at Islamic banks A number of thorny issues regarding corporate governance have been raised by the quasi-equity position of investment account holders at Islamic banks. The most important issue, which has been under study in a working group of the recently created Islamic Financial Services Board (IFSB, based in Kuala Lumpur, Malaysia), relates to protection of those investment account holders (IAHs). In this regard, IAHs lack the protections of fiduciary depositors (who are creditors and first claimants on the Islamic bank’s assets, but earn no interest), but also lack the protections of shareholders (who are equity holders represented on the bank’s board of directors). Paradoxically, the solution through mutual corporate structures (e.g. as used by mutual savings banks and credit unions in the U.S.) has not been a subject of serious discussion in the industry, despite having been utilized in the earliest days of Islamic finance in Paki-stan in the 1950s. One explanation is that growth in Islamic finance has been driven by profitability of providing financial products to a trapped market segment with minimal competition, while mutual structures are often times implemented in non-profit settings. Issues related to criminal financing Investment account holders’ liability For the purposes of this hearing, one must address two aspects of Islamic bank liability structure that relate to potential criminal finan-cial abuses, especially in the aftermath of the 11th September 2001 terrorist attacks: (1) Are investment account holders to be deemed owners of the Islamic financial institutions; and if so, how

responsible can they be held for any criminal financial activities in which the institution may engage? (2) In case of dissolution of an Islamic bank (perhaps due to its prior engagement in criminal finan-cial activities), what is the seniority of investment account holders’ claims on the bank? The answer to the second question is a difficult one that has been the subject of intense study at the IFSB. It is clear that IAHs theoreti-cally have lower seniority than fiduciary depositors (who receive no return on their deposits), but higher seniority claims relative to shareholders. However, since management determines the magni-tude of profits or losses disbursed to the IAHs, and consequently the amounts assigned to the residual claimant shareholders, it is not clear how liquidation would in fact take place. The IFSB and the Accounting and Auditing Organization for Islamic Financial Institu-tions (AAOIFI) have attempted so far to reduce this problem by set-ting transparency standards for the mechanisms used to assign profit and loss distributions. However, the final standards have yet to be set on issues of ownership, control and seniority of claims to Islamic bank assets. The answer to the first question may seem at first to be rather straight forward: Since investment account holders lack operational control of the bank’s activities (even if in some cases they can ear-mark their funds for investment in specific sectors), it would seem most unlikely that they can be held responsible for the bank’s illegal or criminal activities. On the other hand, complications might arise from differences of views on what constitutes criminal financial activities. For instance, an Islamic bank may be known to disburse charitable contributions on behalf of its customers in certain ven-ues. In this regard, it is no secret that certain charitable organiza-tions and destinations of funding thereof were (and in some cases may continue to be) viewed differently by different governments and different bankers. This issue is clearly relevant for all Islamic banks’ and Islamic finan-cial providers’ customers (mutual funds may also disburse charita-ble zakat contribution on behalf of investors). Moreover, it is also a valid concern for most Muslims whose charitable contributions are disbursed by specialized institutions. Solutions to this problem re-quire addressing the thorny issue of harmonizing standards of anti-money laundering and terrorist financing agencies worldwide, and establishing clear criteria upon which Islamic charities and financial institutions can rely in their future dealings. Significant convergence has occurred over those issues, but some confusion continues to this day. Relative vulnerability to abuse It seems rather naïve to think that a group intent on committing criminal activities would favor Islamic financial venues, especially since they are likely to come under closer scrutiny in that domain following the terrorist attacks of 9/11. On the other hand, it is natu-ral to ask whether the mechanics of Islamic finance make it particu-larly vulnerable to abuse by money launderers and terrorist financi-ers. In this regard, one cannot escape the fact that regulatory arbi-trage methods used in Islamic finance to camouflage interest and other factors deemed forbidden by the industry (an activity that I have labeled Shariah-arbitrage) bear striking resemblance to meth-ods used in criminal financial activity in recent years. The “asset (or commodity)-based” nature of Islamic finance, which the industry advertises as its main virtue, may in fact be viewed as a source of weakness, since multiple-hop commodity and asset trading at losses or profits is a standard method used to hide the source (in money laundering) or destination and transmission route of funds (in terrorist financing). Of course, one must remember that this is merely a historical acci-


“It seems rather naïve to think that a group intent on committing criminal activities would favor Islamic financial venues, especially since they are likely to

come under closer scrutiny in that domain following the terrorist attacks of 9/11”


15th August 2005 ©

Note : The author is Chair of Islamic Economics, Finance and Man-agement, and Professor of Economics and Statistics, Rice Univer-sity – Houston, TX

dent. The most sophisticated methods used by Islamic financiers to hide debt and by criminal financiers to hide sources or destinations of funds, as well as the routing of those transactions through off-shore financial centers, are simply methods of the regulatory-arbitrage structured-finance revolution of the 1980s, meant initially to capitalize on various tax and regulatory advantages. Due to the increased utilization of those methods, bankers, regulators and law enforcement officials have grown more sophisticated in analyzing such dealings, and uncovering the underlying objectives of their parties. With offshore centers also applying increasingly better pru-dential standards, the risk of abuse has been diminished greatly, though obviously not eliminated. In this regard, one must admit that regulators and law enforcement officials in the Middle East are relatively unsophisticated in dealing with those complicated financial structures, at least compared to their western counterparts. In this regard, technical assistance through direct inter-government interactions, indirect private sector initiatives of multinational banks, and involvement of the World Bank and IMF, have all contributed to increased awareness. On the other hand, with the possible partial exception of Malaysia, I am not aware of any country that has a comprehensive regulatory framework for Islamic financial institutions. Such a comprehensive framework would have to take into account peculiarities of Islamic finance: e.g. assets and commodities used as degrees of separa-tion in purely financial dealings, resembling “layering” methods of criminal financiers. Laws passed for regulation of Islamic banks in GCC (e.g. in Kuwait, Bahrain, etc.) appear to be simple augmenta-tions of conventional bank regulations, with the additional provi-sions of appointing a religious “Sharíah supervisory board”, etc. However, conventional bank regulators in those countries generally lack the sophistication required to understand complicated finan-cial dealings fully. There may not be major cause for concern, since central bankers in the GCC region, where the bulk of Islamic finance takes place, are among the most sophisticated in the Middle East. That being said, regulatory standards and talents in the region continue to lag be-hind those in advanced countries, and Islamic finance does exist in a number of countries with inferior regulatory infrastructures, and does operate across borders – seeking regulatory arbitrage oppor-tunities. My recommendation in the short-run would be to bring all Islamic finance under the same standards applied to conventional financial practice through a simple conversion operation: reduce all Islamic transactions for regulatory and enforcement purposes to their con-ventional counterparts. This has been the approach, for instance, partially used in Turkey with relative success. For the longer term, we need to enhance and support efforts by AAOIFI and IFSB to-wards developing a set of standards for Islamic finance that harmo-nize their accounting and regulatory methods with best accepted international standards. Concluding remarks In conclusion, Islamic finance differs from conventional finance only superficially. However, that superficiality entails degrees of separa-tion through superfluous trades and leases that make regulation and law enforcement more challenging. There is no reason in the-ory to assume that Islamic finance would be more or less vulner-able to abuse by criminal financiers, based on its utilization of those methods. On the other hand, fighting criminal financing in the traditional banking sector of the Middle East is already a significant challenge, due to limited human resources and regulatory infra-structure. The extreme measures that can be (and are occasionally) taken to eliminate criminal financing in that region could also stifle

legitimate financial activity – in a region that is in desperate need for enhanced economic efficiency and job creation. To the extent that Islamic finance utilizes more sophisticated finan-cial structures, the challenge faced by regulators and law enforce-ment agencies in the region is increased. The goal should be elimi-nating criminal activities, while fully allowing legitimate financial activity. Towards that end, more co-ordination with regulators and enforcement agencies, including technical assistance and involve-ment in development of standards, remains crucial at this time. 1 Indeed, when this practice was applied in the U.S. by United Bank of Kuwait, the OCC interpreted both Murabaha financing, and lease-based Ijara financing (discussed below) as forms of secured lend-ing, see: OCC interpretive letters #806 of 1997 and #867 of 1999 at www.occ.treas.gov.



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DOCTORAL WORK

This research involved a customer survey and semi structured inter-views with bank officers in Riyadh and a detailed analysis of the data and interview information. It revealed that some bank staff had a poor knowledge of the Islamic products they were offering, and that customers were often misinformed and lacked confidence in the integrity of the products. It is apparent that more staff training and customer education in Islamic finance is needed.

(The doctoral work was successfully completed in May 2005 and the thesis is in Durham University library.)

Client perceptions of Islamic banking in Saudi Arabia By Salih Rashed Al -Askar

All banks in Saudi Arabia now provide Islamic deposit and financing facilities and there are three Islamic banks currently operating, including the Al Rajhi Banking and Investment Company, the larg-est stock market listed Islamic bank in the world. However clients often have a poor understanding of the products on offer and how they differ from their conventional equivalents, and the banks themselves are often accused of not doing enough to educate and inform their own customers.

This is the second in a series of doctoral papers on Islamic finance by Durham University postgraduates who hail from the Arab World. The papers are courtesy of Professor Rodney Wilson, Director of Postgraduate Studies at the School of Government and International Affairs at

the University of Durham, United Kingdom. In this issue details are provided of the work of doctoral students from the Gulf Co-operation Council states on Islamic banking and insurance.

Financial Reporting by Islamic banks in Saudi Arabia By Sultan Abdullah Al -Abdullatif

Banks offering Islamic deposit and financing facilities in Saudi Ara-bia are not obliged by the regulatory authorities to implement the standards of the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). Most of the banks however attempt to comply on a voluntary basis. This investigation is concerned with the present financial reporting practices of Saudi banks, the segregation of Shariah compliant operations and how accounting procedures and standards could be further adapted and improved to take account of the unique char-acteristics of Shariah compliant assets and liabilities, as well as

profit and income streams that are quite different from interest payments and receipts. Potential conflicts between different stakeholder groups are also examined, notably the differing rights and objectives of investment depositors and shareholders. A detailed web based questionnaire survey was undertaken, and this was followed up by interviews with relevant officials. (The research started in January 2002 and the thesis should be submitted within the next six months.)

Service Quality in Islamic banking in UAE By Obaid Saif Al -Zaabi

This is the first examination of customer perceptions of the quality of services provided by Islamic banks in the United Arab Emirates. Obaid Al-Zaabi is a Manager with the Dubai Islamic Bank, and his work covers his own bank, as well as the Abu Dhabi Islamic Bank and the National Bank of Sharjah, that converted from a conven-tional bank to being entirely Shariah compliant. Three hundred questionnaires were distributed to bank customers, and 268 responses received. In addition 10 Managers and Shariah board members from each of the three banks were interviewed to seek their views on service quality and responding to client needs.

The analysis of the survey findings revealed much good practice and general client satisfaction with service standards and informa-tion technology provision, but there was concern about waiting to be served, and sometimes misunderstandings between expatriate, mainly South Asian staff, and customers who were local Emirates citizens. All three banks are rapidly replacing expatriates with local staff, which should help resolve these communications problems. (The research started in October 2003 and the thesis is scheduled for completion by September 2006.)

The market for Takaful in the Gulf By Abdul Rahman Tolefat

Relatively little academic research has been conducted on Takaful and there has been much debate over what organizational forms and Shariah principles should be applied. Consensus only exists on the avoidance of Riba in managing premium contributions, as well as Gharar, contractual uncertainty, and Maisir, where the premium represents a wager or gamble. The question of whether all Takaful companies should operate as mutual societies, or whether incorporation with shareholders as well as policyholders, has yet to be resolved. Some Takaful com-panies operate under Wakalah agency contracts, whereby the policyholder appoints the company as agent to provide specific protection for a fixed fee. Under the Tabarru principle premiums are treated as donations, which avoids the problem of Maisir, as

the payments represent an act of giving without the right of ex-change. The work will cover family Takaful, the Islamic equivalent of life insurance, as well as general insurance. Abdul Rahman Tolefat is on leave from the Bahrain Monetary Agency, where he works, in order to undertake the research. The focus is on Takaful in Bahrain and the insurance services offered on the island for other GCC nationals and expatriates. (The research started in January 2005 and the work is still at a preliminary stage.)


15th August 2005 ©

DOCTORAL WORK (continued…)

Marketing issues are also within the remit of the research, and an attempt is being made to discern customer preferences through a sample survey of house buyers and potential buyers. Semi struc-tured interviews are planned with bankers involved in both Shariah compliant and conventional home finance. (The research started in April 2005 and the work is still at a prelimi-nary stage.)

No academic research has been conducted into Islamic mortgages in Kuwait, although the Kuwait Finance House has provided Islamic housing finance for many years and the Real Estate Development Bank is making its new financing activities Shariah compliant. This research is examining whether Murabahah, Ijara or diminish-ing Musharakah based mortgages are most appropriate for Kuwait, and the merits and drawbacks of each contract. The pricing and expenses and fees relating to each structure are being investi-gated. The costs of Islamic home finance are being compared to conventional mortgages.

Islamic home finance in Kuwait By Humoud Al-Mutari

CONTACT INFORMATION Professor Rodney Wilson, Director of Postgraduate Studies

University of Durham, School of Government and International Affairs Email: [email protected]


15th August 2005 ©

Socially responsible banking the Islamic banking way By Professor Bala Shanmugam

Have you ever wondered how banks - the custodians of your funds - actually make use of your money? Or are you simply interested in the yield? What if your money is being used to finance armament factories that produce bombs that blow up innocent women and children? Can you sleep peacefully at night know-ing that it was your money that was responsible for such senseless killings? It is this line of thinking that has given birth to what is popularly becoming known as socially responsible banking. Most people fail to think of their bank as a catalyst for social change. No longer is socially responsible banking an utopian concept that remains a pie in the sky and as such is not really practical or achievable. It is an evolving process where investors work together to ensure that their investments mirror their values and banks are held accountable for translating these values into viable as well as socially responsible transactions. Socially responsible banking has actually reached our shores. In Malaysia it is called Islamic banking. The inequities and vagaries inherent in the usurious system of banking led the founding fathers of Islamic banking to formulate alternate financing possibilities which encourages commerce but minimises the opportunities for unilateral profit while at the same time ensures the use of funds in a socially responsible manner. No

doubt, one can argue that what is considered socially responsible by some may not be viewed similarly by others. But differences in opinions will always persist and what is more important is that core tendencies of humaneness, compassion and excessive profiteering are avoided. The conventional banking system has been largely responsible for having created 358 billionaires worldwide by the beginning of the new millennium. But 1.3 billion people live on less than US$1 per day and 2.7 billion people - nearly 40% of the global population - live on less than US$2 per day. This may be the result of our current capitalistic system with the conventional financial system being central to the system. Islamic banking in a broad sense seeks greater equality. It runs on a rationale over and above a singularly designed profit motive. En-couraging profit and loss sharing arrangements to minimize undue risk and to maximize equality, Islamic banking refrains from invest-ing in frivolous, unethical or destructive activity. This is Malaysia and the Muslim world’s answer to socially responsible banking.

SECTOR REPORT

The First Islamic Finance Summer School The Sunstar Park Hotel, Davos - Switzerland

Tuesday, 23rd - 26th August 2005 Organized By: Davos Management Institute

Innovations in Islamic Finance

The Yale Club, New York Thursday, 8th September 2005 Organized By: Shariah Capital

Islamic Funds World

Shangri-La, Dubai Monday, 12th - 15th September 2005 Organized By: Terrapin Conferences

Risk World Middle East

The Jumeirah Beach Hotel, Dubai - UAE Monday, 19th - 21st September 2005 Organized By: Terrapin Conferences

Private Equity World Middle East

Jumeirah Beach Hotel, Dubai Tuesday, 19th - 21st September 2005 Organized By: Terrapin Conferences

2nd Annual Asian Islamic Banking & Finance Summit

Mandarin Oriental Hotel, Kuala Lumpur Tuesday, 19th - 21st September 2005 Organized By: Euromoney Seminars

EVENTS DIARY Islamic Trade Finance Crowne Plaza Hotel, Kuala Lumpur Thursday, 22nd - 23rd September 2005 Organized By: IIR Middle East

2nd Conference on Islamic Banking & Finance Singapore Monday, 26th - 27th September 2005 Organized By: ABF Asia 8th International Islamic Finance Forum Ceylan Inter-Continental Istanbul Turkey Monday, 26th - 28th September 2005 Organized By: IIR Middle East Indonesian Securitization & Islamic Securitization Shangri-La Hotel, Jakarta Wednesday, 28th - 29th September 2005 Organized By: IBC Asia World Islamic Economic Forum Sunway Lagoon Resort, Kuala Lumpur Saturday, 1st - 3rd October 2005 Organized By: Asian Strategy & Leadership Institute (ASLI) Islamic Economics and Banking during the 21st Century Jakarta Monday, 21st - 24th November 2005 Organized By: IDB, Bank Indonesia, University of Indonesia

Note: The author holds the Chair of Accounting and Finance at Monash University Malaysia. He is also the Director of the Banking and Finance Unit. As Head of the Accounting and Finance Depart-ment he supervises postgraduate research, undertakes independ-ent research and consulting and teaches postgraduate classes. He has an extensive publication record.


15th August 2005 ©

The Central Banks of Bahrain and Malaysia in particular have been very proactive in promoting Islamic finance whereas others have taken a more pragmatic approach. Clearly more can be done. What can Central Banks do to

initiate growth within the industry and how involved should they become?

BALJEET GREWAL

Chief Economist/ Head of Fixed Income Aseambankers Malaysia

The Islamic financial services industry is now at the threshold of its next development stage. In the past dec-ade, significant progress has been achieved in Malaysia and Islamic finance has now gained acceptance as a form of financial intermediation. This is due to firm commitment from the authorities in promoting the devel-opment of a comprehensive Islamic financial system. Efforts/steps taken by the local authorities include: • Provision of infrastructure towards the development of a comprehensive Islamic financial system

(Islamic banking system, Takaful industry, non-bank Financial Institutions, Islamic interbank and capital markets)

• Regulatory framework to cater for the Islamic banking & finance market (e.g. Islamic Banking Act and guidelines on Islamic structures)

• Tax legislation - tax incentives/exemptions on Islamic instruments to encourage product development and innovation

• Harmonization of Shariah principles • Liberalization of the domestic banking sector to allow entry of foreign players which encourages transfer

of knowledge, enhance competition and further product innovation • Malaysia plays active roles in international Shariah bodies – accounting/auditing, harmonization, regula-

tory framework (e.g. Malaysia’s participation in the establishment of Accounting & Auditing Organisation for Islamic Financial Institution and the chair of the Islamic Financial Services Board)

• The latest move - to ensure sustainability of progresses made in the Islamic finance services industry thus far, the authorities have formulated a 10-year master plan which defines the blueprint for the future development of Islamic finance

Future challenges for Central Banks include: • Building critical mass in products (different structures across maturities and sectors), people (training/

education), system & earning power • Encourage joint ventures between IFIs and market players • Promoting corporate governance & transparency • Continuous effort in Shariah harmonization – in terms of principles and accounting & auditing standards

The success of the Islamic finance services industry is the combination of efforts/responsibilities of several parties and not that of Central Banks alone: • Market players/Private Sector (Investment Bankers) – provide comprehensive and complete range of

dent financial products and services • Regulators – comprehensive and conducive regulatory environment • Governments – Incentives for new products/services/structures. Provision of training

PROFESSOR RODNEY

WILSON

Director University of Durham

The Bahrain Monetary Agency has been very active in promoting Islamic banking and finance as it contrib-utes to the island's position as an offshore banking centre which has helped create much needed, relatively well paid, employment. Over 2,500 are directly employed in Islamic banking in Bahrain, and their spending probably results in another 7,500 jobs in services and retailing. In the case of Malaysia the support of Bank Negara and the Government for Islamic banking has to be seen in the context of Muslim Malay economic empowerment, which has proved very successful. It has also facili-tated financial links with other Muslim states, most notably those with the oil rich states of the Gulf, from where there have been significant investment inflows that have contributed to the country's economic devel-opment. Other central banks in the Muslim world have been less pro-active either because governments have associ-ated Islamic banks (wrongly) with Islamic political parties and movements, or because there has been skepti-cism, and often ignorance of Islamic banking. Special laws are unnecessary to promote Islamic finance but some regulatory changes are necessary to facili-tate Islamic banking. The assets that qualify for reserve requirements have to be defined more broadly to include inter-bank deposits managed in a Shariah compliant basis and Sukuk securities rather than merely interest yielding treasury bills. Government should be encouraged to issue Sukuk rather than conventional bills and bonds. Official accreditation of Shariah scholars who serve on the boards of banks offering Islamic financial products may also be helpful, as it enhances the credibility of both the scholars and the banks.

CONTINUED….


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Countries with state dominated banking systems have been generally less accommodating towards Islamic banking than those where banking is in the private sector and responds to client demands, including that for Shariah compliant finance. In other words financial liberalization and privatization facilitate Islamic banking. As the trend in most countries is towards greater liberalization and market responsive systems, the future for Islamic banking seems assured. Even in non-Muslim countries such as the United Kingdom, regulators can prove helpful; as the Financial Services Authority in London wants to ensure that as far as possible the special needs of British Muslims are catered for by local banks.

IJLAL AHMED ALVI

Chief Executive Officer International Islamic Financial Market (IIFM)

Central banks have a vital role to play in the continued growth of Islamic finance. The establishment of ade-quate institutional frameworks will ensure the sustained expansion of Islamic financial markets. Islamic finan-cial institutions afford an alternative to not only commercial banking activities but also alternative means of meeting the needs of venture capital, consumer finance, investment and asset management. Sufficient sup-porting arrangements should be established to direct both the institution and the investor in realizing their needs and these would be supplemented by the central bank. The numerous Islamic financial institutions use different Islamic modes of finance through different avenues. Such a variety may eventually lead to a misunderstanding of the nature of these contracts. As such, there is a need to standardize financing methods particularly in a dual system of Islamic and conventional finance. Furthermore, the proper regulation and supervision of Islamic banks is imperative and will ensure the contin-ued investor confidence in the system. In this regard, numerous factors contribute to the distinctiveness of Islamic financial markets and the central bank should implement guidelines for financial controls, operational controls and Shariah compliance. Financial controls would include adequate capital adequacy ratios, liquidity ratios, profit sharing ratios among capital providers and other feasibility studies. Operational controls refer to the dependability of the Islamic banks’ processes and to establish this, the central bank needs to embark on numerous procedures such as applying adequate and consolidated accounting standards, reviews of project financing initiatives, supplying banks with essential technical assistance concerning problems they may face dealing with investing enterprises. Investor confidence can only be boosted through the conformity of Shariah compliance. Without rigid Shariah compliance regulations, non conformity would result in declining investor confidence that can cause the failure of one bank to ultimately lead to a wide ranging crunch on the financial system and possible crisis. Due to the initiatives and vision of the Bahrain Monetary Agency (BMA), the Kingdom of Bahrain has become a hub for Islamic financial institutions. A comprehensive set of regulations was introduced in 2000 by the BMA to address sectors relating to asset quality, capital adequacy, corporate governance, management of invest-ment accounts, and liquidity management. Furthermore, pertinent to Islamic finance has been the establish-ment of key infrastructure institutions addressing different aspects of the industry. The Accounting and Audit-ing Organization for Islamic Financial Institutions (AAOIFI) is the authoritative industry leader for Islamic finan-cial institutions with regards to accounting, auditing and transparency standards. The Liquidity Management Centre (LMC) addresses issues of liquidity in Islamic financial markets. The International Islamic Financial Market (IIFM) is committed to its multilayered objectives of developing global Islamic money and capital mar-kets, promoting Islamic financial products worldwide and developing a secondary market trading of Shariah compliant instruments. Islamic Rating Agency provides investors with reliable risk and Shariah quality assess-ment of Islamic Financial instruments. Furthermore, the BMA implemented a rulebook of applicable regula-tions with a volume specific for the Islamic financial industry.

(continued…)

15th August 2005 ©

NEWS BRIEFS

Newsbriefs 22 • AMAN expands co-operation agreement with FWU Group • Takaful market to grow up to 20% • Takaful Ikhlas may set up re-Takaful company

SINGAPORE

• QIIC posts 274% rise in net profit • EAIC to discuss Takaful • Takaful to pay out 25% of profit to policy holders

• Interview 24 Rob King, General Manager of Family Takaful, Solidarity talks to Islamic Finance News

Inside Takaful News:

A new Islamic Takaful fund, Amanah, has been launched by NTUC Income, making Islamic bonds available in Singapore for the first time. Its launch value of US$182.08 million (SG$300 million), in-creasing to US$364.17 million (SG$600 million) by the end of 2005, means it will be the largest Islamic fund in Singapore. Amanah offers a diverse portfolio of global Islamic bonds and equi-ties. Investors will have the options to mix their investment equities and bonds in proportions that suit them; make their investments regularly or in a single sum; top up their savings; make partial with-drawals; and revise the investment mix in line with their require-ments. To ensure that the Amanah fund works as a Takaful fund and re-mains in line with Islamic principles, NTUC Income has established a Shariah Panel comprising international, regional and local Shariah experts. RHB Asset Management (RHBAM) and State Street Global Advisers (SSGA) have been appointed as fund managers. NTUC Income Chief Executive Tan Kin Lian believes that the com-pany’s status as a co-operative means NTUC Income’s ethos closely resembles the principles of Islamic business and, as an ICMIF member, the company would like to share its experiences with other members who may be considering the development of Takaful products.

Record profits of US$267.1 million (RM1 billion) were gained by the Public Bank group for the first half of this year.

NTUC Income launches f irst Islamic bonds

Takaful International health premium to hit US$2.65 mill ion

BAHRAIN

Bahrain based Takaful International recently announced that the com-pany’s premiums from health covers would reach US$2.65 million (BD1 million) by the year-end. Takaful General Manager Younis Al Sayed Jamal said that for the first six months of the year health premiums stood at US$1.59 million (BD600,000). The company has 7,000 health covers, a number that is expected to rise to 10,000 by December.

MALAYSIA Public Bank bids for Asia Life Public Bank Bhd plans to purchase a majority stake in Singapore’s oldest life insurance company, Asia Life Assurance Society Ltd, as part of its efforts to extend its range of financial services. The bank also recently announced its intention to expand into Is-lamic banking. Group Chairman Tan Sri Teh Hong Piow said it was looking into applying for Takaful licences and an Islamic banking subsidiary. Public Bank has submitted a bid to Asia Life’s parent company, Asia General Holdings Ltd, to buy its 74.58% equity interest in Asia Life. The proposed bid is to include life insurance products and services in the bank’s range of financial offerings.

BAHRAIN Added benefits for Solidarity Family Takaful savings plan customers

Protection benefits will be an exclusive added benefit for the saving plan clients of Bahrain-based Solidarity Family Takaful. Features of the new protection benefits product include Takaful pro-tection on death, Takaful protection for critical illness and Takaful protection for waiver of contributions on death.

MALAYSIA New plans for US$6.67 mill ion fund size Syarikat Takaful Malaysia Bhd said its two newly launched invest-ment-linked Takaful plans will help to push its fund size to US$6.67 million (RM25 million) this year. Chief Operating Officer Md Azmi Abu Bakar said at present the company’s two funds, Tabung Istiqrar and Tabung Ittizan, have a combined size of US$2.67 million (RM10 mil-lion). The company launched Takaful Dana Hana and Takaful Dana Tar-bawi. The former is a retirement scheme whereby benefits earned, similar to a monthly pension, would be paid out until the policy holder reaches 75 years of age. Additional benefits, if chosen, include critical illness coverage. Takaful Dana Tarbawi is a savings scheme for parents to plan their children’s education in higher learning institutions. The company also launched Takaful Infaq, which provides a Muslim individual with a financial programme for the purpose of donating to charity.

15th August 2005 ©

NEWS BRIEFS (continued.. . ) DUBAI QATAR

Dubai Islamic Insurance and Reinsurance Company (AMAN) recently announced that they have expanded their existing co-operation agreement with Munich based FWU Group to offer in-vestment oriented life Takaful products in the United Arab Emir-ates, primarily through bank distribution partners. According to the terms of the extended co-operation agreement, the FWU Group would be providing specific product ingredients and offer an advanced technological system that would enable the bank distributors to deliver policy documents, and attend to policy servicing online. FWU’s regional headquarters in Dubai is the appointed marketing manager for the bank distribution channels for AMAN for this product.

QIIC posts 274% rise in net profit The Qatar Islamic Insurance Company (QIIC) has posted US$6.87 million (QR25 million) in net profits during the first half of this year ending on the 30th June, marking an increase of 274% over the corre-sponding period last year. The profits constituted earning per share of US$1.37 (QR5) (for each of the five million issued shares) against US$0.60 (QR2.2) (for each of the three million issued shares) for the corresponding period in 2004, representing a return of 33% on average shareholders’ equity (net of shareholders’ fair value reserves) as at the 30th June 2005. As for policy holders’ insurance operations, the company said the gross premiums written during the period exceeded QR64.4 million (US$17.70 million), securing an impressive increase of 42% over 2004, while net policy holders’ insurance surplus reached US$1.73 million (QR6.3 million).

AMAN expands co-operation agreement with FWU Group

ABU DHABI Takaful market to grow up to 20% The global Islamic insurance market is expected to grow between 15% and 20% each year, making it one of the fastest expanding financial industries in the world, according to Solidarity Family Takaful general manager Rob King. Solidarity Family Takaful is one of the Middle East’s leading Takaful companies, and is cur-rently poised to enter the UAE market with life Takaful products. Recently, Abu Dhabi National Takaful Company, a subsidiary of Abu Dhabi Islamic Bank, reported a 646% increase in net profits for the first three months of 2005, reaching a total of Dh 3.7 million (US$1 million). Takaful contributions grew from US$299,493 (Dh1.1 million) to US$2.94 million (Dh10.8 million) in the first quarter of 2005, a record achievement of 888%. The company’s assets also re-corded a healthy growth, reaching US$25.67 million (Dh 94.3 million).

MALAYSIA Takaful Ikhlas may set up re-Takaful company

MNRB Holdings Bhd’s Takaful arm, Takaful Ikhlas Sdn Bhd, said recently that it is considering setting up a re-Takaful or Islamic reinsurance company. MNRB CEO Anuar Mohd Hassan said if the re-Takaful company did go ahead, it would be in conjunction with MNRB’s associate company, Labuan Reinsurance (L) Ltd. To date Malaysia has only one re-Takaful company, Asean Reta-kaful International (L) Ltd, an offshore subsidiary of Syarikat Ta-kaful Malaysia Bhd.

BRUNEI EAIC to discuss Takaful The 23rd East Asian Insurance Congress (EAIC), to be held in Brunei next year, will discuss topics relating to Islamic insurance. Three of the country’s insurance companies are said to be delivering papers on Takaful. The proposed topics include: Takaful (Islamic Insurance): What it Means for the Conventional Insurance Industry’ and ‘The Challenges of Regulating the Insurance Industry in a Market with Takaful and Conventional Insurance’. The bi-annual congress, scheduled to take place at the International Convention Centre, would bring together some 1,000 decision makers and leaders of the insurance industry across Asia to discuss key is-sues facing the region. The proposed main topics for the 23rd EAIC would focus on the challenges and opportunities that regional insur-ance industries are facing.

MALAYSIA Takaful to pay out 25% of profit to policy holders

Syarikat Takaful Malaysia Bhd (Takaful Malaysia), which controls over 50% of the country’s Islamic insurance market, will continue to give out more than 25% of profit to its policy holders for the next few years. Chief Operating Officer Md Azmi Abu Bakar said Takaful Malaysia’s performance has allowed the company to pay out the profit at a rate of not less than 25% of the participants’ contribution over the past years. Takaful Malaysia’s Mudharaba profit is estimated at US$9.3 million (RM34.9 million) for its financial year ended on the 30th June 2005, while total claims payout during the year was about US$31 million (RM116.3 million). For the financial year ended on the 30th June 2004, Takaful Malaysia registered US$6.43 million (RM24.1 million) net profit on the back of US$31.29 million (RM117.3 million) revenue, up from US$4.05 mil-lion (RM15.2 million) net profit and US$26.57 million (RM99.6 mil-lion) revenue in 2003.

15th August 2005 ©

The Takaful system, as a whole, is based on the principles of Shariah. Relying heavily on the virtue of fairness to con-sumers and the society, this system helps all parties benefit fairly. Takaful becomes a worthy social cause, providing prudent financial security not only to its policyholders, but also to the entire community.

Solidarity is a company that was founded and incorporated under the laws and regulations of Bahrain. Its main purpose is to focus on providing products that comply with Islamic Shariah across the GCC and selected Middle Eastern, European, and Asian countries and to serve the Islamic community by offering protection against the widest possible range of risks and by its complete offering of Shariah compliant savings opportunities. Its mission is to be the leading Takaful Company globally, operating in full accordance with the principles of Shariah, providing a range of Family and general Takaful products to the highest degree of service possible. Their full range of Shariah compliant savings plans, includes: Family Takaful (SolidMarriage, SolidEducation, SolidStart, SolidMarriage, SolidHajj/Umrah, and SolidBond); Gen-eral Takaful (Commercial, Personal and Marine); as well as a range of Fund Management services. The firm was set up in direct response to the growing demand for Takaful insurance products across the region and is poised to lead the way in providing the utmost safety and protection against the widest possible risks, along with a diverse range of prudent savings opportunities. Currently, with US$100 million paid in capital, Solidarity is gearing up to become the largest Takaful Company in the Kingdom of Bah-rain and the largest Islamic Insurance Company in the world. To facilitate its operations and growth they will ultimately move to their new headquarters in the first phase of the prestigious Bahrain Fi-nancial Harbour. Coming from a marketing background, what do you see as the ma-jor differences in marketing Takaful products to those conventional insurance products? Solidarity has enacted a system of total relationship marketing. The need for one to understand the client’s wants and preferences are paramount in implementing a successful strategy. We work one on one with each client to customize a plan that meets their individual needs. This is important for client retention, and it is especially important to offer products that do not cause a conflict of religious belief. We are reacting to our core audience’s desire to move away from ethically regressive protection means, opting for consumer driven products that compliment the holistic nature of Islam in-stead. Our infrastructure ensures the distribution of our products on a global scale. It’s imperative that all products are marketed to meet customer demands and it is our commitment to be aware of these. In many instances over the last year, companies have developed and forced Islamic Insurance products onto the market when there is no need, causing customers to ask why. We revolve around a

market led strategy which caters for the people’s needs first and foremost. For this reason, we set up a business development department which works hand in hand with the marketing department to gather intelli-gence about the current markets as well as future markets, product knowledge and new business opportunities by recognizing new mar-ket requirements Where does your stiffest competition come from? It is clearly understood that at Solidarity our total marketing strategy is to provide a financial service to the Muslim community. The provid-ers of Shariah compliant savings and accumulation products are very thin on the ground on a global basis. Conventional insurance will always provide stiff competition. However, we believe that with the development of our Shariah compliant products from front end to back end will give a welcomed new choice to the Muslim population and to those people who would prefer to have their money invested in a more ethical vehicle. There seems to be a general lack of consumer awareness for Takaful products. How are you tackling this? We have employed several strategies to cover consumer awareness. Through public relations and marketing campaigns, we reflect our image to the public and educate the various markets on our diverse range of products including Takaful and Re-Takaful. Another way we help to create consumer awareness is through our partnership with Friends Provident International Limited (FPIL), one of the most respected and revered insurance providers in the interna-tional financial services world. By combining our innovative products and market knowledge with the technical systems and customer support systems of FPIL, we will continue to ensure we remain at the cutting edge of the Takaful industry. Training schemes, better client servicing, improved product develop-ment and distribution are all going to come into fruition under this partnership and the two companies will continue to prosper in their markets for many years to come. In addition, we strive to stay ahead of the curve. We are committed to developing new products and services that will cater to the ever ex-panding range of Shariah compliant savings needs that exist in the marketplace. By working closely with our marketing and sales teams, and by partnering with effective advertising and public relations part-ners, we can communicate the value of Takaful to our core audience. What are some of the other major obstacles Solidarity has faced in the past and managed to overcome? In the manufacture and development of Shariah compliant products, one has to understand the complexities of the infrastructure, against those of the more conventional unit linked product. However, we have overcome these challenges by working very closely with our Shariah board who has continually provided us with guidance, knowl-edge and support in order for us to achieve our objectives of intro-ducing fully Shariah compliant products into the market. And what are the current obstacles you are facing? One current obstacle we are facing is the lack of market education regarding Takaful products and benefits. The information dissemina-tion on such products has not been mainstream, and many Islamic

Rob King , General Manager of Family Takaful, Solidarity talks to Islamic Finance News

INTERVIEW

15th August 2005 ©

investors may not understand the values of Takaful, or be informed about the wide range of products and savings solutions that exist for them. You have very ambitious expansion plans. What is your market penetration level now and what is your target for five years? Currently expected annual premium growth is between 15 per cent and 20 per cent but Takaful has no frontiers. There are over 1 bil-lion Muslims in the world; Solidarity will address this immense mar-ket systematically for the opportunity to help plan Shariah compli-ant financial futures for them. There is major potential in a market that includes more than 20 per cent of the global population. We are immediately looking at building on the Bahraini, Qatari, and UAE markets as well as entering Saudi Arabia, Lebanon, Kuwait, Oman, Egypt and the UK. We are also looking closely at Morocco, Yemen, Iran, Pakistan, the European Union and the lucrative Far East markets. How many customers does Solidarity currently have on its books? Solidarity Family Takaful has introduced its products into Bahrain and Qatar over the last 7 months so it is relatively new. However, I am extremely pleased that our existing client base has already exceeded 1,000 clients and as we develop and introduce new products especially with our newly launched Takaful Protection Products and entry into new countries we believe that these num-bers will increase on an on-going basis. Would you say the Family Takaful industry in the Middle East is currently product or market driven? Family Takaful industry in the Middle East is currently Market Driven. We believe that Takaful will be the next big thing in the world of savings and investing. The Global Takaful market, which has been in existence for over 30 years, is still in the early develop-ment stages. Some markets across the globe are admittedly more developed than others, but generally there is a large potential for growth. Until there is more mainstream knowledge about the products and benefits available for Takaful, the industry will remain market driven. The Middle East is a region that is indigenous to Muslims, and therefore there is an inherent need for products that comply with social and religious beliefs. The market has a need for Takaful products, and, as stated earlier, the challenge is educating the market about what is available to them. The principle at the heart of Takaful is to provide protection that is in line with the fundamental tenants of Islam.

What are your most successful products at the moment? At the moment, our focus is on providing Family and Life Takaful products as well as Takaful and Re-Takaful general assurance prod-ucts across the GCC and selected European, Asian, Middle Eastern and North African countries. Our most successful product is a difficult question to answer as there is no specific regular premium product which has outshone the other. However, our SolidStart, SolidEducation and SolidRetirement are the products that appear to be most attractive at this time. On the lump sum or single premium investment, our SolidProduct has performed successfully in the market place since its launch in February. In your expansion plans you have many other Middle Eastern coun-tries lined up as well as the UK and Luxembourg. How do you envis-age conquering these markets? In the past, we have signed agreements with Qatar Islamic Bank (Qatar) and Shamil Bank (Bahrain), making them the sole distributors of Solidarity Islamic products in their respective countries. However, as we look at different markets we will take it as a case by case deci-sion, ensuring we find the best solution to meet our customers Insur-ance requirements. We have a clear strategic plan to enter a number of countries during the latter part of 2005; namely UAE, Oman, Kuwait and Saudi Arabia. The distribution methodology will differ from country to country. We will utilize new relationships with major banking organizations, de-velop our own distribution infrastructure or perhaps even join forces with other major insurance organizations. Is South East Asia in your plans at all? We aim to expand to Asia and China specifically, yet no plans are made for the Southeastern part of Asia. We are always looking for new markets to expand our projects and widen our scopes. China is a region of interest and we are in discussions to make it reality in the near future. We have had several promising visits to China with Shamil Bank and we have checked the many opportuni-ties in that ever growing Market. As a major regional institutional investor, what are your current as-sets under management and where are you investing? Solidarity’s share capital is US$100,000,000 which is invested and managed in-house across a diversified range of investments. Being a Shariah compliant company our portfolio is diversified across all as-set class categories including Murahaba products, real estate invest-ment, equity investment and Islamic Funds.

INTERVIEW (continued…)

• In House Counsel • Private Practice Lawyers • Investment and

Corporate Bankers • Internal Auditors • Risk Managers • Compliance Professionals • All Islamic Banking

Professionals • Senior Management • Consultants • Regulators

WHO SHOULD ATTEND: ORGANIZED BY:

For more information, contact: ANDREW TEBBUTT Tel: 603 2141 6022 Fax: 603 2141 5033 Email: [email protected]

7th - 8th SEPTEMBER 2005

EXPERT COURSE DIRECTOR SOHAIL ZUBAIRI, Head of Shariah Co-ordination

Dubai Islamic Bank


15th August 2005 ©

ISLAMIC FINANCE News Team

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ISLAMIC FINANCE Tra in ing

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DISCLAIMER Published every other Monday (25 issues per year) Individual Annual Subscription Rate: US$360 Group Wide Subscription Rate: US$1,450 A RedMoney Publication: RedMoney Sdn Bhd, Suite F, 20/F, Bangunan Angkasa Raya, Jalan Ampang, 50450, Kuala Lumpur, Malaysia. Tel: +603 2143 8100, Fax: +603 2141 5033 All rights reserved. No part of this publication may be reproduced, duplicated or copied by any means without the prior consent of the holder of the copy-right, requests for which should be addressed to the publisher. While every care is taken in the preparation of this publication, no responsibility can be accepted for any errors, however caused.

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Editor Sreerema Banoo Tel: +603 2141 6021 [email protected] Sub-Editor Frances O’Sullivan Tel: +603 2143 8100 [email protected] Senior Writer Seelan Sakran Tel: +603 2143 8100 [email protected] Correspondents Kamal Bairamov Tel: +603 2143 8100 Shirene Shan Research Director Shih Yan-Ting Tel: +603 2143 8100 [email protected] Newsletter Manager Christina Morgan Tel: +603 2141 6025 [email protected] Production Manager Geraldine Chan Tel: +603 2141 6024 [email protected] Marketing Manager Zalina Zakaria Tel: +603 2144 5033 [email protected] Managing Director Andrew Morgan Tel: +603 2141 6020 & Publisher [email protected]

SAUDI BRITISH BANK - Jeddah Effective from the 1st August 2005, John Coverdale will be as-suming the position as the new Managing Director of The Saudi British Bank. He will be taking over from Geoff Calvert who is returning to HSBC Group, London. He brings with him an extensive banking experience within the HSBC Group. Prior to joining SABB, he was Executive Director and Deputy Chief Executive of HSBC Bank Malaysia.

ALLIANCE BANK - Malaysia Veteran banker Bridget Lai has been appointed Chief Executive Officer of Alliance Bank Malaysia effective 1st September. She joined the bank in July this year. Ms Lai was initially scheduled to join Temasek Holdings, the investment arm of the Singapore Government, earlier this year. Temasek, via its Duxton Investment Pte Ltd arm, has a sizeable stake in Malaysian Plantations Bhd, which in turn owns Alliance Bank.

SOVEREIGN ASSET MANAGEMENT - DUBAI James Fitter has stepped down as Chief Executive Officer and director of all Sovereign group companies in order to pursue other interests.

MOVES

CITIGROUP - Abu Dhabi Elissar Farah Antonios has been appointed as Chief Officer of the Citigroup Private Bank (CBP) based in Abu Dhabi. Ms. Antonios carries with her over 13 years of Middle East pri-vate banking experience including her previous tenure with ABN Amro Private Bank and Credit Agricole Indosuez Private Bank.

DUBAI DEVELOPMENT & INVESTMENT AUTHORITY - Dubai

Abdulhamid Juma has joined the Dubai Development and In-vestment Authority (DDIA) as Deputy Director General and will play an active role in the expansions taking place both at the local and international level.

AL SALAM BANK - Sudan Mr. Abdu Mahmoud Mohd. Khalil was named the new General Manager for Al Salam Bank-Sudan by the Board Members. Abdu Khalil has extensive experience in the banking industry. Most recently, Abdu Khalil held the position of Assistant Gen-eral Manager at Qatar International Islamic Bank.

WESTERN UNION FINANCIAL SERVICES - Middle East

Jean Claude Farah has been promoted from Director to the Regional Vice President Middle East, Pakistan and Afghanistan. Mr Farah will be overseeing two regional offices in Dubai, United Arab Emirates and Islamabad, Pakistan.

1st Islamic Finance Summer School by


15th August 2005 ©

ISLAMIC LEAGUE TABLES

For all enquires regarding the above information, please contact: Catherine Chu Email: [email protected]; Phone: +852 2804 1223; Fax: +852 2529 4377

TOP 20 ISSUERS OF ISLAMIC DEBT AUGUST 2004 - AUGUST 2005 Issuer or Group Nationality Instrument Amt US$ m Iss. %Share Manager

1 Dubai Global Sukuk FZCO UAE Sovereign Islamic Bond 1,000 1 13.7 Citigroup, Dubai Islamic Bank, HSBC

2 Pakistan International Sukuk Co Ltd

Pakistan Sukuk-Al-Ijara Sovereign Islamic Bond

600 1 8.2 Citigroup, HSBC

3 Wings FZCO UAE Islamic Sukuk-Al-Musharaka Issue

550 1 7.6 Dubai Islamic Bank, Standard Char-tered Bank, HSBC

4 Cagamas MBS Bhd Malaysia Sukuk Musyarakah Islamic Bond 542 6 7.5 CIMB, HSBC, ABN AMRO, AmMerchant Bank Bhd

5 Cagamas Bhd Malaysia Bithaman Ajil Islamic Securities 368 7 5.1 Cagamas Bhd

6 Sarawak Corporate Sukuk Inc Malaysia Sukuk-Al-Ijara Sovereign Islamic Bond

350 1 4.8 UBS (London)

7 PLUS Expressways Bhd Malaysia Serial Bai Bithaman Ajil Islamic Securities

349 4 4.8 Commerce International Merchant Bankers Berhad

8 SAJ Holdings Sdn Bhd Malaysia Al-Bai Bithaman Ajil Islamic Debt Securities

337 2 4.6 Aseambankers Malaysia, Bank Islam Malaysia, Commerce International Merchant Bankers

9 Jimah Energy Ventures Sdn Bhd Malaysia Istisna' Islamic MTN Facility 245 10 3.4 AmMerchant Bank, RHB Sakura Mer-chant Bankers, Malaysian Interna-tional Merchant Bankers, Bank Mua-malat Malaysia

10 Gold Sukuk dmcc UAE Islamic Sukuk-Al-Musharaka Issue

200 1 2.7 Standard Bank, Dubai Islamic Bank

10 International Bank for Reconstruction & Development - World Bank

Supranational Bai' Bithaman Ajil Islamic Debt Securities

200 1 2.7 ABN Amro Bank Bhd, Commerce Inter-national Merchant Bankers Bhd

12 Saudi Hollandi Bank Saudi Arabia Islamic Bond 187 1 2.6 ABN Amro, Saudi Hollandi Bank

13 DRB-HICOM Bhd Malaysia Bai' Bithaman Ajil Islamic Debt Securities

181 1 2.5 AmMerchant Bank Bhd, Malaysian International Merchant Bankers Bhd

14 Encorp Systembilt Sdn Bhd Malaysia Al-Bai' Bithaman Ajil Notes Issu-ance Facility

180 1 2.5 United Overseas Bank (Malaysia) Berhad

15 Special Power Vehicle Bhd Malaysia Bai' 'Inah Islamic MTN Facility 163 13 2.2 Malaysian International Merchant Bankers Bhd, AmMerchant Bank Bhd, RHB Sakura Merchant Bankers Bhd, Bank Muamalat Malaysia Bhd

16 Optimal Chemicals (Malaysia) Sdn Bhd

Malaysia Al-Bai Bithaman Ajil Islamic Debt Securities

149 10 2.1 Aseambankers Malaysia, Malayan Banking, HSBC Bank Malaysia

17 Musyarakah One Capital Bhd Malaysia Asset-Backed Sukuk Musyara-kah Issuance Programme

149 5 2.0 Commerce International Merchant Bankers

18 Ranhill Power Bhd Malaysia Islamic MTN Programme 142 12 2.0 Aseambankers Malaysia

19 International Finance Corp - IFC Supranational Al-Bai Bithaman Ajil Islamic Debt Securities

132 1 1.8 Commerce International Merchant Bankers, HSBC Bank (Malaysia)

20 Optimal Glycols (Malaysia) Sdn Bhd Malaysia Al-Bai Bithaman Ajil Islamic Debt Securities

119 10 1.6 Aseambankers Malaysia, Malayan Banking, HSBC Bank Malaysia

Total of issues used in the table 7,278 200 100.0


15th August 2005 ©


Catherine Chu [email protected] +852 2804 1223

If you don’t release the information on the deals you have advised on then you can’t expect to have the information included!

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LEAGUE TABLE DATA – IS IT CORRECT??? If you feel that the information within the league tables is incorrect then please contact the following:

TOP 20 ISSUERS OF ISLAMIC DEBT YEAR-TO-DATE Issuer or Group Nationality Instrument Amt US$ m Iss. %Share Manager

1 Pakistan International Sukuk Co Ltd

Pakistan Sukuk-Al-Ijara Sovereign Islamic Bond

600 1 15.5 Citigroup, HSBC

2 Wings FZCO UAE Islamic Sukuk-Al-Musharaka Issue

550 1 14.2 Dubai Islamic Bank, Standard Chartered Bank, HSBC

3 Cagamas MBS Bhd Malaysia Sukuk Musyarakah Islamic Bond

542 6 14.0 CIMB, HSBC, ABN AMRO, AmMerchant Bank

4 PLUS Expressways Bhd Malaysia Serial Bai Bithaman Ajil Islamic Securities


5 Jimah Energy Ventures Sdn Bhd Malaysia Istisna' Islamic MTN Facility 245 10 6.3 AmMerchant Bank, RHB Sakura Merchant Bankers, Malaysian International Merchant Bankers, Bank Muamalat Malaysia

6 Gold Sukuk dmcc UAE Islamic Sukuk-Al-Musharaka Issue

200 1 5.2 Standard Bank, Dubai Islamic Bank

6 International Bank for Reconstruction & Development - World Bank

Supranational Bai' Bithaman Ajil Islamic Debt Securities

200 1 5.2 ABN Amro Bank, Commerce International Merchant Bankers

8 DRB-HICOM Bhd Malaysia Bai' Bithaman Ajil Islamic Debt Securities

181 1 4.7 AmMerchant Bank, Malaysian International Merchant Bankers

9 Special Power Vehicle Bhd Malaysia Bai' 'Inah Islamic MTN Facility 163 13 4.2 Malaysian International Merchant Bankers, AmMerchant Bank, RHB Sakura Merchant Bankers, Bank Muamalat Malaysia

10 Musyarakah One Capital Bhd Malaysia Asset-Backed Sukuk Musyara-kah Issuance Programme


11 Ranhill Power Bhd Malaysia Islamic MTN Programme 142 12 3.7 Aseambankers Malaysia Bhd

12 Cagamas Bhd Malaysia Bithaman Ajil Islamic Securities 105 4 2.7 Cagamas Bhd

13 Konsortium Lapangan Terjaya Sdn Bhd

Malaysia Al-Bai Bithaman Ajil Islamic Debt Securities

101 1 2.6 Alliance Merchants Bank Bhd, United Overseas Bank (Malaysia)

14 Kingdom of Bahrain Bahrain Sukuk Al-Ijarah 80 1 2.1 Bahrain Monetary Agency

15 Konsortium Lebuhraya Butterworth - Kulim Sdn Bhd

Malaysia Bai' Bithaman Ajil Islamic Debt Securities

66 25 1.7 Bank Muamalat Malaysia Bhd

16 Intelbest Sdn Bhd Malaysia Al-Bai Bithaman Ajil Islamic Debt Securities/Murabahah Underwritten Notes Issuance Facility

42 4 1.1 Abrar Discounts Bhd

17 Ample Zone Bhd Malaysia Sukuk Al-Ijarah 39 13 1.0 Malaysian International Merchant Bankers

18 PT Indonesian Satellite Corp Tbk - Indosat

Indonesia Syariah Ijarah Tahun 2005 30 1 0.8 PT Andalan Artha Advisindo

19 PT Apexindo Pratama Duta Indonesia Syariah Ijarah Tahun 2005 26 1 0.7 PT Andalan Artha Advisindo, PT Mandiri Sekuritas, Standard Chartered

20 Midas Plantation Sdn Bhd Malaysia Sukuk Ijarah 24 8 0.6 OCBC Bank (Malaysia) Bhd



15th August 2005 ©

ISLAMIC DEBT BY CURRENCY JULY 2004 - JULY 2005

ISLAMIC DEBT BY COUNTRY JULY 2004 - JULY 2005

ISLAMIC DEBT AUGUST 2004 - AUGUST 2005


ISLAMIC DEBT BY COUNTRY YEAR-TO-DATE

ISLAMIC DEBT YEAR-TO-DATE

ISLAMIC DEBT BY CURRENCY YEAR-TO-DATE

Manager or Group Amt US$ m Iss. %Share

1 HSBC 1,321 35 18.1

2 CIMB Securities Sdn Bhd 1,047 19 14.4

3 Citigroup 633 2 8.7

4 Dubai Islamic Bank 617 3 8.5

5 Aseambankers Malaysia Bhd 421 39 5.8

6 UBS 350 1 4.8

7 United Overseas Bank Ltd 336 4 4.6

8 Standard Chartered Bank 292 3 4.0

9 AmMerchant Bank Bhd 282 41 3.9

10 Government bond/no bookrunner 263 3 3.6

11 EON Bank Bhd 250 38 3.4

12 RHB Bank Bhd 223 25 3.1

13 ABN AMRO 193 2 2.7

14 Bank Muamalat Malaysia Bhd 177 49 2.4

15 Bank Islam Malaysia Bhd 112 2 1.5

16 Cagamas Bhd 105 4 1.4

17 Standard Bank Group Ltd 100 1 1.4

18 Saudi Hollandi Bank 93 1 1.3

19 Abrar Discount Bhd 83 6 1.1

20 Bahrain Monetary Agency 80 1 1.1


Manager or Group Amt US$ m Iss. %Share

1 CIMB Securities Sdn Bhd 869 16 22.4

2 HSBC 754 8 19.5

3 Citigroup 300 1 7.7

4 Dubai Islamic Bank 283 2 7.3

5 EON Bank Bhd 232 37 6.0

6 AmMerchant Bank Bhd 214 30 5.5

7 Standard Chartered Bank 192 2 5.0

8 Bank Muamalat Malaysia Bhd 168 48 4.3

9 Aseambankers Malaysia Bhd 142 12 3.7

10 Cagamas Bhd 105 4 2.7

11 RHB Bank Bhd 102 23 2.6

12 ABN AMRO 100 1 2.6

12 Standard Bank Group Ltd 100 1 2.6

14 Bahrain Monetary Agency 80 1 2.1

15 Alliance Merchant Bank Bhd 51 1 1.3

15 United Overseas Bank Ltd 51 1 1.3

17 Abrar Discount Bhd 42 4 1.1

18 PT Andalan Artha Advisindo 38 2 1.0

19 Oversea-Chinese Banking Corp Ltd 24 8 0.6

20 PT Bank Mandiri 9 1 0.2


Amt US$ m Iss. %Share

Malaysia 4,136 185 56.8

United Arab Emirates 1,750 3 24.0

Pakistan 600 1 8.2

United States 332 2 4.6

Saudi Arabia 187 1 2.6

United Kingdom 100 1 1.4

Indonesia 95 6 1.3

Bahrain 80 1 1.1

Total 7,278 200 100.0

Amt US$ m Iss. %Share

Malaysia 2,185 118 56.4

United Arab Emirates 750 2 19.4

Pakistan 600 1 15.5

United States 200 1 5.2

Bahrain 80 1 2.1

Indonesia 61 3 1.6

Total 3,876 126 100.0

Amt. m (US$) Iss. %Share.

Malaysian Ringgit 4,217 187 57.9

US Dollar 2,700 5 37.1

Saudi Arabian Riyal 187 1 2.6

Indonesian Rupiah 95 6 1.3

Bahraini Dinar 80 1 1.1

Total 7,278 200 100.0

Amt. m (US$) Iss. % Share

Malaysian Ringgit 2,385 119 61.5

US Dollar 1,350 3 34.8

Bahraini Dinar 80 1 2.1

Indonesian Rupiah 61 3 1.6

Total 3,876 126 100.0


15th August 2005 ©

MALAYSIAN ISLAMIC BOND UPDATE

MYR ISLAMIC DEBT YIELD CURVES

SPREAD VS GII (in b.p)

RINGGIT ISLAMIC DEBT MARKET : FORTNIGHTLY SNAPSHOT

For enquiries regarding the above information, please contact:

Tel: +603 7628 1758; Fax: +603 7620 8255 Email: [email protected]

AS AT 12th AUGUST 2005 Key Benchmarks Trend (By Volume) Rating This week close (%) 1/8/2005 (%) 18/7/2005 (%) 4/7/2005 (%)

Private Debt Securities

PLUS 0.00000% 16/6/2017 - SERIES 2 5.95 6.00 6.04 6.04

SSHMC RM45M 3-YR 20/09/2007 AAA ID (S) (MARC) 3.55 3.55 3.55 3.55

PLUS PRIMARY BONDS SERIES 5 - 31/05/2007 3.42 3.43 3.43 3.41

KEV BAIDS SERIES 12 07/01/2011 AA+ ID (MARC) 4.36 4.51 4.40 4.55

PLUS PRIMARY BONDS SERIES 6 - 30/05/2008 3.71 3.71 3.75 3.75

DRB-HICOM 0% 26/07/2010 AA- ID (MARC) 5.17 n/a n/a n/a

Government Investment Instruments

GII/1 2003 0.00000% 31/03/2008 3.15 3.20 3.20 3.27

GII/1 2004 0.00000% 15/06/2007 3.06 3.02 3.07 3.10

GII/1 2002 0.00000% 02/12/2005 2.47 2.45 2.59 2.66

GII/3 2004 0.00000% 29/10/2009 3.40 3.47 3.49 3.60

PROFIT-BASED GII 1/2005 16/03/2015 4.15 4.19 4.17 4.31

Quasi Government

KHA1/04 1.15B 0-CP 5Y 18/9/2009 3.51 3.57 3.54 3.65

CAGAMAS SAC 7/2004 17.08.2006 2.95 2.95 2.95 2.95

KHA 2/03 1B 0-CP 5Y 18/9/2008 3.40 3.32 3.28 3.37

IFC 2.880% 13/12/2007 3.10 3.10 3.10 3.20

KHA1/05 1B 0-CP 5Y 18/01/2010 3.53 3.63 3.63 3.68

KHA 3/99 1.15B 0CP 10Y 18/9/2009 3.62 3.62 3.55 3.67

TENURE

1-year 3-year 5-year 7-year 10-year

Government Investment Instruments 2.71 3.24 3.43 3.72 4.24

Cagamas 0.24 0.31 0.32 0.34 0.35

Khazanah 0.09 0.07 0.19 0.2 0.22

AAA 0.35 0.5 0.65 0.75 1.2

AA 0.45 0.87 0.95 1.05 1.35

A 2.09 2.6 3.02 3.3 3.52

WEEKLY YEARLY

TERM SHEET

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CLOSING DATE: WEDNESDAY, 19th OCTOBER 2005


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*Over and above the 10 individuals - just US$100 each.

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Payment can be made by cheque or telegraphic transfer in US$ or RM. A confirmation will be sent once payment is received. Please note that subscription is not confirmed until payment has been made in full. � By Cheque:

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Please send me more information on the following courses:

� Key Legal, Documentary and Structuring

Issues for Islamic Financial Products 7 - 8 September 2005, Dubai

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14 - 18 November 2005, Kuala Lumpur

� Sukuk, Islamic Funds & Private Equity Investing

5 - 6 December 2005, Singapore

� Structuring Islamic Financial Products 11 - 14 December 2005, Dubai

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