IslamicFinance.de

A recent report from Standard & Poor’s said that Islamic financial assets had accelerated toward the end of 2016, but that such progress was unsustainable in the long term. The agency pointed out too that a lack of standardization was a barrier to creating a truly global industry based in the Middle East. The Islamic economy would continue to grow but at much lower rates than in the boom years from 2007 onward. It is against this background that recent events at Dana Gas should be seen. In 2013, the company issued sukuk totaling $700 million. Dana, which does a lot of its business in Egypt and Iraq, had problems getting paid in those countries. Earlier this month, Dana said it had received new legal advice which meant its sukuk were no longer to be considered Shariah-compliant. The Dana debacle confirms the belief that what is really needed is a much more standardized regulatory approach in the Islamic finance market.

At the moment Islamic fintech is more of an aspiration than a reality. As the fintech industry and the demand for ethical investments grows exponentially, we are witnessing a want for the convergence of two. Seeing this space in the Middle Eastern banking industry, the Kingdom of Bahrain has entered a partnership with fintech incubator Singapore Fintech Consortium (SFC) and asset management and advisory firm Trucial Investment Partners. This partnership stands to initiate, nurture and sustain Bahrain’s fintech ecosystem while pulling from the experience of global industry leaders. Likewise, Bahrain has also recently opened a consultation led by the Central Bank of Bahrain (CBB), with the aim of establishing a regulatory sandbox for fintech. It enables businesses to take advantage of the concentration of Islamic financial institutions and the consultation focuses on crowdfunding, including Shari’ah-compliant crowdfunding.

According to a recent study by the International Monetary Fund (IMF), Kuwait’s Islamic financial services sector is growing rapidly, with Islamic banking emerging as the most developed component of the industry. Islamic banks’ market share increased rapidly between 2005 and 2010 and has since then stabilised at around 38%. Kuwait’s Islamic banking sector includes systemically important banks. The largest Islamic bank in Kuwait accounts for 23% of total banking system assets, over 70% of the Islamic banking assets. The capital adequacy ratio and Tier-1 capital remain above 15%. The IMF report notes that the economic diversification effort could help drive further growth in Kuwait’s Islamic banking industry.

The International Monetary Fund (IMF) has warned that the rapid growth of Islamic finance in Kenya is happening without adequate protection of depositors. Despite the fact that the Shariah banks are already offering loan products, Kenya is yet to refine its prudential regulations to cater for Islamic banking. Kenya is also yet to come up with a Shariah-compliant deposit insurance scheme and is continuing to manage deposit insurance premiums in a single pool for all banks. This situation could complicate compensation of depositors if a bank offering conventional and Islamic products collapses. According to the IMF, Kenya should seek to bring clarity to the grey areas in Islamic finance as it drafts amendments to the banking law as promised in the 2017/18 budget.

According to S&P Global Ratings, the Islamic finance industry will continue to expand this year, but will lose some momentum in 2018. Even though sukuk issuance accelerated in the first half of this year and will likely stay strong in the second half, S&P Global Ratings believes this growth rate is not sustainable. In their view, the current economic situation in core Islamic finance markets and depreciation of local currencies have weighed on the industry’s performance in 2016 and 2017. The report foresees a deterioration of GCC Islamic banks’ profitability in 2017 and 2018 as the cost of funding has increased and the cost of risk is on the rise. Sharia is still interpreted in different ways across the various Islamic finance markets. However, the industry appears to be going in the right direction with the proposal for central Shariah boards.

Bursa Malaysia added Inter-Pacific Securities Sdn Bhd (Inter-Pac Securities) to its Islamic Participating Organisations (Islamic POs) list. Bursa Malaysia CEO Datuk Seri Tajuddin Atan welcomed the new company and said that with this addition investors would have a wider choice of Islamic POs to represent them. Inter-Pac Securities Director Tan Mun Choy expressed his gratitude for Bursa Malaysia's approval to carry out Islamic stockbroking services.
With the inclusion of Inter-Pac Securities, there are now 12 Islamic POs carrying out Islamic stockbroking services of which 1 is on a full-fledged basis (BIMB Securities) and the other 11 are on a window basis.

According to a recent report issued by the Central Bank of Oman (CBO), the Islamic banking industry is growing at a faster rate than conventional banking, with Islamic banking assets up more than 62% year on year. Total assets held by Islamic banks and Islamic banking windows in February 2017 amounted to 3.27 billion Omani riyals (Dh31.2 billion), compared to 2.43 billion riyals a year earlier. This took Islamic banking’s market share from 5.1% in 2015 to 10.8% by February 2017. Islamic banking has a sizeable market share of more than 25% in the GCC. Saudi Arabia dominates the region with an Islamic banking market share of 51.2% in terms of total banking assets, followed by Kuwait at 45.2%. In UAE, Qatar and Bahrain Islamic banks’ market share stood between 20-30% of gross assets. In Oman, within a span of four years from introduction, the Islamic banking segment has reached OMR 3.07 billion in gross assets with a market share of 10.8% as of February 2017. The two main players in Oman are Bank Nizwa (BKNZ) and Alizz Islamic Bank (BKIZ).

The Middle East has been a late adopter of financial technology, or fintech. According to Accenture, of more than $50bn in fintech investment globally since 2010, only 1% has gone to the Middle East and North Africa. Now several cities are racing to establish themselves as fintech hubs. Last year Cairo launched two accelerators and Abu Dhabi has created the region’s first regulatory sandbox, allowing new products to be tested for two years without full regulatory compliance. In March Abu Dhabi signed an agreement with the Monetary Authority of Singapore to undertake joint fintech projects and Dubai’s new fintech accelerator has already begun accepting applications. Bahrain, too, has teamed up with Singapore to develop a fintech ecosystem. Fintech can serve the masses of migrant workers in need of remittance services and it can also bring cheaper services to the unbanked. According to the World Bank, over four-fifths of the population in the region are unbanked, which means a higher proportion than anywhere else in the world.

According to Fitch Ratings, Islamic banking products in Morocco could expand their deposit bases by 5 to 10%. Fitch notes that the ability to grow the deposit base is positive for Morocco’s economic development because deposits represent about 70% of banking sector funding. The experts also noted that banking penetration is already high in Morocco, with 70% of adults holding a bank account. Therefore, participation banking is unlikely to take a significant market share from the well-established conventional banks. Growth rates in the Moroccan banking sector have been volatile in recent years, reflecting unsteady economic trends. Deposit growth has outstripped loan growth, but credit demand is set to accelerate. The ability to offer participation banking services could broaden the pool of potential depositors in the country, mitigating the competitive pressure.

Saudi Arabia's Sedco Capital has launched an investment strategy combining environment-conscious and sharia-compliant principles. The move could help develop green investing in the Middle East and make Islamic finance appeal to a wider client base. Green finance is increasingly important for Islamic firms seeking to differentiate themselves from peers. Sedco said its new strategy, dubbed Prudent Ethical Investing, would focus on due diligence and transparency around investment structures, while integrating environmental, social and governance (ESG) criteria. The firm launched two ESG funds in 2012 and has published research which showed how a combined investment approach
can outperform conventional funds. According to its research, such a strategy can lead to investments with lower financial leverage and better cash conversion qualities, adding a prudential element to those portfolios.

The state of Qatar lists rank nine this year on the annually published Islamic Finance Country Index. The index is part of the Global Islamic Finance Report 2017 and was compiled by London-based Islamic finance consultant firm Edbiz Consulting. Qatar’s ranking is testament to its solid Islamic finance industry which is built upon solely fully-fledged Islamic banks. The country with the world’s strongest Islamic finance industry remains Malaysia, followed by Iran, Saudi Arabia, UAE and Kuwait. This is the second year in a row that Malaysia has been in the top position, taking over from Iran in 2016. According to Edbiz CEO Sofiza Azmi, in the list of 48 countries, there are 14 that saw a decrease in their scores. Among the 13 countries that improved their ranking, Tunisia took the biggest leap. Other big gainers are Pakistan and Kazakhstan. The report concludes that the ranking suggests that countries with large Muslim populations are the future frontiers for growth in Islamic banking and finance.

The National Bank of Kyrgyzstan and Islamic Development Bank are working on creating a bank with Islamic finance principles in Kyrgyzstan, according to the chief of NBKR, Mr Tolkunbek Abdygulov.
Abdygulov said in a statement, that developing Islamic finance principles will allow the citizens to use other types of financing, which will increase the competition between banks and thus improve the quality of bank services and bank products. “After entering into force of a new law on National Bank and banking activities, Civil Code will be complemented by regulations on deals according Islamic principles.”

London’s popularity as an Islamic finance hub emerged in 2013, when Prime Minister David Cameron unveiled plans to develop the city into the Western capital of Islamic finance. In 2014, London took a step further when Britain became the first country outside the Islamic world to issue sovereign Sukuk. The key benefit of this policy was attracting additional liquidity from investors in the Middle East and Asia adhering to Islamic finance principles. The London Stock Exchange is a key global venue for the issuance of Sukuk. According to the LSE Group official website, over $48bn has been raised through 65 issuances. Other centres such as Dublin and Luxembourg also have ambitions to attract Islamic financial services. Furthermore, in April this year Saudi Arabia listed its biggest ever sharia-compliant bond on the Irish Stock Exchange, so the competition between the Western financial centres is more intense than ever.

Total assets of Islamic banks and windows in Oman reached to RO3.3bn at the end of March 2017. This accounts for 10.8% of total banking system assets in the country. According to Central Bank of Oman (CBO) statistics, Islamic banking entities provided total financing of RO2.6bn as at the end of March 2017 compared to RO1.9bn a year ago. Total deposits held with Islamic banks and windows also registered a strong growth to reach RO2.4bn in March 2017 from RO1.7bn in March 2016. The statistical bulletin said the financial position of the banks in Oman in terms of asset quality, provision coverage, capital adequacy and profitability remained sound. The gross non-performing loans as a proportion of total loans and advances stood at 2.1% at the end of December 2016. Private sector deposits, which accounted for 66.1% of total deposits with conventional banks, increased by 4.6% to RO12.6bn in March 2017 from RO12bn a year ago.

OneGram, a Sharia-compliant, gold-backed digital currency, has raised $461,497.59 so far in its OGC token crowdsale. The crowdsale will run for a total of 120 days, in which OneGram seeks to raise $500 million by selling over 12 million OGC tokens. For participating, investors are required to create an account on GoldGuard and purchase gold there. According to the official release, once the cryptocurrency is deployed on the blockchain, there will be a 1% transaction fee. 70% of transaction fees are reinvested to buy more gold, increasing the amount of gold that backs each token. 25% is used for development and operations, 2.5% is used for charity donations, and 2.5% is used to reward the POS miners. Sharia compliance is a key differentiator for the OGC token, the founders of OGC developed the solution so it would fit within the parameters of shariah law.

A report published by the Islamic Development Bank (IDB) Group and World Bank Group has outlined the potentials of Islamic finance in curbing income inequality and ending poverty worldwide. The report was unveiled by IDB President, Dr Bandar Hajjar, on the sides of the 42nd Annual Meeting of the IDB Group in Jeddah. It details the trends in Islamic finance, identifies the major challenges and recommends policy interventions to leverage Islamic finance. The report notes that the Islamic banking sector needs innovative risk-sharing products and services, enhanced scale and access to Islamic finance, improved liquidity and stability, and bolstered human capital and literacy in Islamic finance. The report also provides an overview of recent policy initiatives taken by several IDB member countries to promote shared prosperity.

A set of new Shariah standards for Islamic banking and financing have been launched by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). The launching ceremony was attended by Islamic finance scholars and specialists from across the region. The recently issued Shariah standards include No.(55) Competitions and Prizes Standard, No.(56) Liability of Investment Manager Standard, No.(57) Gold and its Trading Controls Standard and No.(58) Repurchase Standard. These standards are deemed important Shariah reference for the industry, including legislative bodies, regulatory authorities and financial institutions. They are also important to other professional entities such as law firms, accounting and consultancy firms, universities, academic institutions and research centres.

Professor Binta Tijani Jibril is the Director of International Institute of Islamic Banking and Finance, Bayero University, Kano State. In this article she talks about Islamic finance and its role in Nigeria. She believes that Islamic findance will help Nigerians in general in the sense that it will increase financial inclusion. The main challenge in Nigeria is how to educate the people to create awareness of this financial model. Bayero University has now short training programs, a masters degree in Islamic finance and very soon a doctorate programme we will start. There is also a special programme for journalists. According to Professor Jibril, Nigeria may soon raise sukuk, just like Osun state has done. It’s going to be about providing for infrastructure development as well as empowering the citizens. So Nigeria would be expanding and widening its reach into Islamic finance.

The Central Bank of #Oman and the Capital Market Authority allow Islamic financial institutions to follow the standards issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). AAIOFI’s financial accounting standards differ from International Financial Reporting Standards (IFRS). The differences between AAOIFI and IFRS standards have necessitated specific tax provisions for Islamic Finance Transactions (IFTs). To achieve this, a new chapter has been inserted in the income tax law of 2009. The chapter provides a framework to determine the tax liabilities of parties to an IFT. According to the new tax chapter, income includes any sum received in lieu of interest. The tax provisions also clarify that any partnerships designed solely to comply with Sharia will be disregarded. The latest tax law states that the financial statements can be prepared based on IFRS or any other similar standards approved by the Secretary General of Taxation (SGT). Institutions who have prepared their financial statements based on AAOIFI standards will have to reconcile their tax returns with the SGT.

The UK Government has been thinking about the possibility of introducing Shariah compliant student finance since 2011. The Higher Education and Research Bill is currently before Parliament. However, the Bill contains no time-scale for when a Shariah compliant system is likely to be in place. When the Bill was reviewed in the House of Lords, Lord Sharkey proposed an amendment to give a deadline of the 2018-2019 academic year for the introduction of such a scheme. This proposal was rejected by the Government. Lord Sharkey instead proposed an amendment requiring quarterly progress reports from the Secretary of State. The final outcome is that the Bill will proceed forwards and once it has completed all stages, the Secretary of State for Education will have the power to implement a Shariah compliant student finance system.