IslamicFinance.de

Increasing environmental awareness worldwide has seen a marked rise in the appetite for green bonds. Malaysia has been the market leader in the issuance of Green Sukuk, with guidelines issued in 2014 for socially responsible investment (SRI). These set out that the proceeds can be used to preserve the environment and natural resources, conserve the use of energy, promote the use of renewable energy and reduce greenhouse gas emission. Malaysia launched the world’s first Green Sukuk on 27 June 2017. The UAE's Green Growth Strategy was launched in 2012 to become a global hub and a successful model for the low carbon green economy. There will most certainly be challenges, like drafting of documentation acceptable to governments, investors and Shari’ah scholars. There is increasing appetite for environmentally friendly products and considerable potential in the UAE.

Dubai Financial Market (DFM) released the draft of its "Standard on Investment Funds", the first of its kind all-inclusive standard. The DFM invited Islamic finance professionals to provide counsel and feedback on the standard. The consultation period will be concluded on 11 May 2018. Dr. Hussein Hamed Hassan, Chairman of DFM’s Supervisory Board said the Standard complements the DFM Standard for Issuing, Acquiring and Trading Shares. It comprehensively explains the two ways of Shari’a-compliant fund management, Mudaraba or an investment agency contract (Wakala bil Istithmar) and the circumstances stipulating that fund management is responsible to pay Zakat. It also defines the key disclosures that should be included in the financial statements.

The Islamic finance sector is a subset of the overall domestic financial sector. Governments face pretty much the same contingent liabilities with Islamic banks as they do with conventional ones. Some 73% of total Islamic finance assets are within Islamic banks. Takaful accounts for a mere 2%, while the remainder 25% constitute assets within capital market instruments such as sukuk, mutual funds and others. Thus, within the Islamic finance space, banking is at least three times the size of capital markets. Policymakers would be well advised to seek not just to grow Islamic finance, but focus on the capital markets component. This is not just good from a macroeconomic vulnerability viewpoint, but is also more in keeping with the Shariah philosophy of risk sharing.

The World Bank and the Islamic Development Bank want to increase the use of long-term investments in Islamic finance. The two multilateral bodies set out a series of policy recommendations in a joint report, aiming to capitalize on the risk-sharing and asset-backed features of Islamic finance. Islamic banking products have often been developed under the same regulatory regime as conventional lenders, so instruments are sharia-compliant but economically similar to their interest-based counterparts. This contributes to an over-allocation of savings to short and medium-term financial instruments, with a reliance on risk-transfer rather than risk-sharing. To counter this, policymakers could help develop sector-specific investment banks as well as non-bank Islamic firms such as leasing companies, venture capital firms and crowdfunding platforms. The report also raised the need for tax incentives and Islamic insurance schemes to help extend maturities.

Turkey's Aegean province of Izmir will host an Islamic Development Bank Group (IDB) event between 26-27 April. The announcement was made by Turk Eximbank CEO Adnan Yildirim, who said that Turkey aims to boost trade relations with the IDB's 57 member countries. He added that Turk Eximbank wants to raise Islamic countries' 10% share of world trade to 20%. Turkey's current trade with IDB member countries is around $45 billion and the bank hopes to raise it to $100 billion within 10 years. Turk Eximbank aims to double its support to companies in IDB member countries. The lender ranks second globally after South Korea's Eximbank in terms of financing exports.

Malaysia has great potential to broaden its market share and strengthen its leadership in Islamic finance. According to the latest report by the Malaysia International Islamic Financial Centre, Asia’s Islamic financial assets amounted to US$528.7 billion (RM2.05 trillion), or 26% of the world’s Shariah-compliant financial assets as at end-2017. Malaysia continued to be the main driver for both sukuk outstanding and issuance for the year, with a market share of 51% and 36.2% respectively as at end-2017. The country also led in the Islamic wealth management industry with US$28.3 billion (36.5% global share). It also ranked first in terms of number of funds with a total of 394 funds and 27.9% global share, followed by Pakistan with 147 funds and Indonesia with 143. In the banking sector, Malaysia ranked third globally after Iran and Saudi Arabia with a total Islamic banking assets of US$204.4 billion as at end-2017.

The Dubai Financial Services Authority (DFSA) recently hosted the International Accounting Standards Board (IASB) as part of a consultancy meeting. The Authority's involvement reflects its commitment to developing an effective and supportive regulatory framework for Islamic finance. The DFSA is a member of the Islamic Finance Consultative Group (IFCG), which focuses on challenges that may arise in the application of International Financial Reporting Standards (IFRS). The meeting was attended by IFCG members from Bahrain, Indonesia, Malaysia, Pakistan, Saudi Arabia, the UAE and the United Kingdom.

The Islamic Development Bank (IDB) Group and the World Bank Group launched the second edition of the Global Report on Islamic Finance. The report is entitled "The Role of Islamic Finance in Financing Long-Term Investments". It presents a global perspective on the need for long-term investments in the Sustainable Development Goals (SDGs) and proposes the use of Islamic finance. Despite the huge potential in Islamic finance, the report notes that the Islamic financial sector is a small player in the global financial markets and requires a concerted push for the regulatory and legal changes to take root. It therefore recommends strengthening the Islamic financial system by developing a supportive legal, administrative, and regulatory environment. The biennial Global Report on Islamic Finance is a joint initiative of the Islamic Research and Training Institute (IRTI) of the IDB Group and the World Bank.

Ugandan investors are set to start a fully fledged Islamic institute called Midsoc Bank. Its promoter, Haruna Sebaggala, says it may start operations in six months, depending on licensing and funds. Midsoc Bank aims to target the unbanked population of the country, including both Muslims and non-Muslims. Currently, only 40% of 19 million potential customers have bank accounts. About 14% of Uganda’s 41.5 million population are Muslim. The nation’s largest banks such as Stanbic Bank Uganda and Standard Chartered Bank Uganda haven’t committed to Islamic banking. So far only Tropical Bank has confirmed it will offer Islamic products. Tropical Bank plans to initially run a dedicated department before establishing a subsidiary.

In 2016 The Reserve Bank of Zimbabwe (RBZ) introduced the Financial Inclusion Strategy to increase the banking population from 30% at the time it was implemented to at least 90% by 2020. The action targets groups such as Micro, Small and Medium-sized Enterprises (MSMEs), women, youth, rural population and the small-scale agricultural sector. While the strategy seems overarching, it forgot to include Muslims. RBZ should initiate the introduction of Islamic Finance through setting up an Islamic financial institution and through "Islamic windows" at conventional banks. Also, banks as a whole could set up an Islamic Bank that models ZimSwitch’s structure, in which all the banks have a stake.

The main precondition for Islamic trade finance to increase its presence in Islamic finance is a closer co-operation between banks and businesses. Experts say Islamic trade finance needs to be developed with instruments that allow better control of risks related to trade partners or countries. The Bahrain-based International Islamic Financial Market (IIFM) started a cooperation with the Washington-based Bankers Association for Finance and Trade to create an industry standard, a so-called master risk participation agreement. This standard is expected to create transparent market practices and contribute to an increase of the trade finance business on a Shariah-compliant basis. Bank Negara Malaysia is also pushing for Islamic trade financing to support 10% of the country’s total trade up to 2020. The bank is currently consulting initiatives which could include blockchain-based trade finance solutions, e-commerce and providing trade credit takaful to mitigate trade risks.

The Pakistani government is mulling a dedicated division at the finance ministry to deal with Islamic finance. The Prime Minister's Finance adviser, Miftah Ismail said the committee would be set up for the promotion of Islamic banking in Pakistan. He also said that the country is set to achieve a six percent economic growth in the current fiscal year. Deputy Governor Jameel Ahmad at State Bank of Pakistan (SBP) said Islamic finance industry needs to expand its product menu with special focus to reach out to the unserved sectors and regions. Ahmad said development of all components of Islamic finance industry is imperative to achieve inclusive economic development.

In this interview, Zahid Parekh, General Manager of Habib Bank Limited (HBL), speaks about the evolution and future of Islamic banking. In his view, Islamic banking has evolved as a natural phenomenon in Pakistan. HBL's initial focus was to bring in the faith-based customers and as a second step, to target the sceptics through personalised awareness campaigns. These initiatives have made a difference in changing mindsets and expanding the customer base. HBL has a wide banking portfolio and is looking to introduce a new Shariah-compliant mortgage solution in the forthcoming months. HBL has been a frontrunner in FinTech, it established the Innovation and Financial Inclusion Department almost two years ago, with the sole purpose of digitising banking processes. The concept of FinTech is still new in Pakistan, but Parekh believes it will be a game-changer not only for the Islamic banking sector, but for the overall banking sector as well.

Venture capital was of limited significance in the Muslim world until the recent past. Things came into gear when Malaysia in 2016 launched the world’s first Islamic venture capital fund endowed with $100mn to provide seed financing for startup companies and entrepreneurs. A company financed by Islamic venture capital cannot have conventional debt on its books or use debt in any way for expansion. In a first step, a startup seeking Islamic venture capital needs to be checked very thoroughly. Next, suitable Shariah-compliant financing models need to be chosen. The three common structures used in Islamic venture capital are mudaraba, musharaka and wakala. A fourth concept is shirka, where two or more partners invest a certain amount of capital in a start-up and share the benefits on a pre-agreed basis. The investing parties are equally involved in any decision to change the strategy of the company, even after the disbursement of funds.

According to Abdelilah Belatik, secretary-general of the General Council for Islamic Banks and Financial Institutions (CIBAFI), Turkey can play a leading role in Islamic finance. Belatik sees Turkey as a bridge between the Muslim world and the West. He said through Turkey's support Islamic finance was discussed among G20 countries, which was a milestone. Belatik added that Turkey had a key role to play in raising awareness about Islamic finance. CIBAFI expects the volume of the sector to reach $4 trillion by the end of 2020.

Reputable Muslim scholars participated at Forum For Islamic Education & Welfare in Nigeria. The President of MUSWEN, Alhaji Sakariyau Babalola said the adoption of the Islamic financial system was growing in the country. Central Bank of Nigeria expert Dr. Bashir Umar said that Islamic finance was the way to finance infrastructure projects and had an integrated cooperative model which can eradicate poverty and enhance economic empowerment. He noted that financial inclusion was the key element to achieve inclusive development needed for sustainable growth in the country. Umar added that the presence of Islamic banking in the country has brought the unserved and undeserved members of the society into the formal financial sector.

According to Moody’s, Islamic banking has grown in a decade from less than a third of the GCC banking market to account for 45% of the sector. Moody's senior analyst Nitish Bhojnagarwala said that growth in the Islamic finance sector would continue to outstrip that of conventional assets in coming years. In his view, growth will be supported by governments looking for diversification, as well as by continued demand for Islamic products from individuals. Another growth factor will be Islamic insurers' penetration into Southeast Asia and North Africa. Annual sukuk issuances have more than doubled to $100 billion from $42 billion from 2008 until September 2017. Moody's expects a similar level of activity in 2018.

The Bankers Association for Finance and Trade (Baft) and International Islamic Financial Market (IIFM) are creating an industry standard for buying and selling Islamic trade-related risk. The two parties have announced they have signed a memorandum of understanding to create a so-called master risk participation agreement. The industry already has such a standard, which was introduced 10 years ago and became the industry benchmark for such trade finance transactions. Baft president Tod Burwell said the association aims to repeat that success in the Islamic trade finance space, where standardisation is much needed. The Islamic risk participation agreement will incorporate considerations for funded and unfunded risk participations in trade assets within a Sharia-compliant framework. IIFM chairman Khalid Hamad said the cooperation with Baft would contribute to increasing the trade finance business on a Sharia-compliant basis.

According to Moody's Investors Service, the growth of the Islamic finance sector will continue to outstrip that of conventional assets across core Islamic finance markets. Islamic banking penetration in the Gulf Cooperation Council (GCC) increased to 45% of the total banking market, as of September 2017 from 31% in 2008. Moody's Senior Analyst Nitish Bhojnagarwala, said the Islamic finance sector would be supported by governments, as well as by continued demand for Islamic products from individuals. Another growth factor will be Islamic insurers' penetration into Southeast Asia and North Africa. Sukuk issuances grew 17% in 2017 to $100 billion, driven largely by GCC sovereigns. A similar level of issuance is expected in 2018, although the recent recovery in oil prices could lower financing needs for some sovereigns. Corporate and asset-backed sukuk activity was muted in 2017 because of more attractive conventional market opportunities and Moody's expects the same for 2018.

The Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) is working to establish standards and norms for Shariah-compliant banking practices worldwide. The AAOIFI has hundreds of member institutions from over 45 countries. In October 2017, Saudi Arabia’s central bank, the Saudi Arabian Monetary Agency, joined AAOIFI. Its standards are widely used in the industry and are compulsory in some countries such as Bahrain and Oman. To homogenize industry practices, in 2017 the AAOIFI adopted guidelines for centralised Shariah boards and new standards for gold-based products. In 2018, the AAOIFI is developing new draft rules on Shariah compliance and fiduciary ratings.