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IFN 26/09/2018 : Kenya A New Horizon for Islamic Infrastructure Investment

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Opportunities in Kenya for Islamic Infrastructure Investment.

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IFN 26/09/2018 : Kenya A New Horizon for Islamic Infrastructure Investment

  1. 1. Much has been made of the US$26 trillion Asian infrastructure gap, and how Islamic finance could step in to fill this space. But there is another enormous infrastructure opportunity in the developing world — one that has captured far fewer headlines. Africa has an infrastructure gap of up to US$108 billion per year, and with relatively immature capital markets and high levels of public debt, private sector involvement and overseas investment are urgently needed. So how can Islamic finance help? This week, LAUREN MCAUGHTRY explores one of the less obvious investment opportunities on the African continent — the predominantly Christian Kenya. Widely perceived as the financial, communication and transportation hub for Central and East Africa, Kenya plays a pivotal role in the region’s economic development. One of the fastest-growing economies in sub-Saharan Africa, Kenyan GDP growth hit 5.8% in 2016 and, despite a lull of 4.8% growth in 2017 due to drought, election controversy and sluggish private sector growth, 2018 is expected to see that number rebound back to 5.5% (according to the latest World Bank figures). With this optimistic forecast, why the urgent need for external financing? The question is complex— but Islamic finance could form part of the answer. Infrastructure gap New estimates from the African Development Bank (AFDB) suggest that the continent requires US$130-170 billion a year to finance its infrastructure needs — with a current funding gap in the range of US$68-108 billion. To meet this need, the bank suggests that African countries must attract private capital to accelerate the building of critical infrastructure, and involve institutional investors through legislative reforms and new financial instruments. In April 2018, the World Bank highlighted that Kenya in particular faces a “significant infrastructure deficit” estimated at US$2.1 billion annually, with sustained expenditures of around US$4 billion per year required to meet its infrastructure needs. Yet with US$49 billion of public debt to service (currently standing at 57% of GDP, substantially higher than the 40% ceiling recommended by the IMF for developing countries), the government has limited public resources to meet this requirement, while the weak currency is making repayments to external debt (which makes up more than half of government borrowing) more and more difficult. This is already constraining growth and development. In April 2018, Kenya’s biggest infrastructure project in the last 50 years, a US$3.5 billion 473 kilometer intercity expressway, was delayed by US- based construction giant Bechtel Group amid concerns over high government debt. Earlier this year, Central Bank Governor Dr Patrick Njoroge urged the government to consider “non- debt-creating” methods of financing infrastructure projects because there is “less and less headroom for additional borrowing, given the currency concerns, and that room is narrowing”. Private sector participation The country urgently needs to mobilize the private sector to finance its infrastructure needs. The World Bank estimates that increasing infrastructure financing could improve Kenya’s per capita growth rate by three percentage Powered by: IdealRatings® (All Cap) COVER STORY The World’s Leading Islamic Finance News Provider 1100 1150 1200 1250 1300 TMSSFTW 1,198.42 1,212.62 1.17% Malaysia eyes mass market with new rules for retail Sukuk...6 South Africa to roll out new AI- based Islamic investment platform...7 The Maldives plans deep regulatory changes to boost Islamic finance...8 PODCAST: Islamic investor hunts for opportunities in blockchain, AI and robotics as tech appetite in Muslim world grows...9 26th September 2018 (Volume 15 Issue 39) continued on page 3 Kenya: A new horizon for Islamic infrastructure investment?
  2. 2. 2© 26th September 2018 IFN RAPIDS Disclaimer: IFN invites leading practitioners and academics to contribute short reports each week. Whilst we have used our best endeavors and efforts to ensure the accuracy of the contents we do not hold out or represent that the respective opinions are accurate and therefore shall not be held responsible for any inaccuracies. Contents and copyright remain with REDmoney. IFN Rapids ................................................... ..2 IFN Reports: • Togo intends to become ICD’s 55th member country • Malaysia eyes mass market with new rules for retail Sukuk • South Africa to roll out new AI-based Islamic investment platform • The Maldives plans deep regulatory changes to boost Islamic finance • PODCAST: Islamic investor hunts for opportunities in blockchain, AI and robotics as tech appetite in Muslim world grows • Malaysia’s way forward for Islamic finance • Company Focus: Zarai Taraqiati Bank • Sovereign Sukuk: Morocco finally issuing maiden Sukuk? ........................................................... 6 IFN Analyses: The US: Led by fintech................................... 12 Accounting and tax: Gulf states start implementing VAT........................................ 13 Case Study: Al Hilal Bank’s Sukuk: Ending a five-year hiatus......................................................... 14 Back To Basics: Roles of AAOIFI and IFSB in the functioning of Islamic banks.................................................. 15 Shariah Standard: Unilateral and bilateral promise.................... 17 Column: Words of wisdom Governance of Islamic banks.......................... 18 IFN Country Correspondents: Russia; Morocco; Qatar; the UK; Oman; Brazil19 IFN Sector Correspondents: Islamic Leasing; Real Estate .......................... 22 Special Reports: Crowdfunding and the evolution of Islamic finance............................................................ 24 New markets and challenges in Islamic banking for Russia ....................................................... 26 Country Feature: Recent Islamic finance developments in the Ivory Coast .............................................................. 28 Sector Feature: Is it possible to accurately outsmart criminals and be efficient?..................................................... 29 News ............................................................. 30 Deal Tracker................................................. 38 REDmoney Shariah Indexes...................... 39 Eurekahedge Funds Tables........................ 41 Dealogic League Tables.............................. 43 REDmoney Events ...................................... 47 Subscription Contact................................... 47 Volume 15 Issue 39 DEALS Bina Darulaman floats 30-day Islamic commercial paper DP World to issue Sukuk for US$1 billion with a 10- year tenor Emaar Properties reportedly hires three banks to arrange sale of perpetual Sukuk Indonesian Ministry of Finance auctions six Shariah securities Central Bank of Kuwait issues Shariah and conventional securities worth KWD160 million (US$526.94 million) Morocco to debut sovereign Sukuk in the first week of October Padideh Shimi Gharn obtains Securities and Exchange Organization of Iran’s nod for Sukuk issuance Sabah Credit Corporation auctions three-year Islamic medium-term note Investree to distribute Indonesia’s upcoming retail Sukuk issuance Maalem Financing Company plans to issue Sukuk NEWS IDB supports Community Development Emergency Scheme Institut SIMON Finance et Management International launches Master’s degree in Islamic finance Azerbaijan and IDB discuss development of their collaboration Investcorp closes first private equity investment in China IDB and Uzbekistan sign partnership worth US$1.3 billion National movement needed to spur Islamic finance, says deputy governor of Bank Indonesia Former Malaysian prime minister pleads not guilty to four counts of corruption Pos Malaysia accepts commodity Murabahah term financing Indonesian Shariah economic masterplan expected to be completed by end of this year Bank BJB Syariah inks agreement with Aneka Tambang’s Unit Bisnis Pengolahan dan Pemurniaan Logam Mulia Bank Syariah Bukopin likely to postpone divestment of shares to investors until after the presidential elections next year National Accountability Bureau works on Mudarabah/Musharakah cases AlBaraka Turk to launch digital-only Islamic banking service in Germany Central African Economic and Monetary Community looks for support from IDB ASSET MANAGEMENT Emirates REIT included in FTSE EPRA/NAREIT Global Index and all associated indices TAKAFUL Saudi Indian Cooperative Insurance Company receives Saudi Arabian Monetary Authority’s nod for capital hike Alizz Islamic Bank signs MoU with Takaful Oman Capital Market Authority highlights suspicious trading activities Central Insurance of Iran considering divesting shares of Iran Insurance Company in line with expanding private sector Trading of Mediterranean and Gulf Insurance and Reinsurance Company’s right issues ends RATINGS PEFINDO downgrades rating on Sumberdaya Sewatama’s Sukuk Ijarah paper MOVES International Islamic Liquidity Management Corporation appoints Dr Umar A Oseni as new acting CEO Arab National Bank’s board of directors accepts appointment of Ziyad Anwar Abdel Rahman Akrouk as board member Bank Muscat appoints Jeyaretna Sunderlal George as member of the board of directors representing Oman National Investment Corporation Central Bank of Oman approves appointment of V V Suresh Kumar as acting CEO of Taageer Finance Company KPMG Lower Gulf names Nader Haffar as CEO of UAE and Oman operations; Vijay Malhotra to continue as chairman MCB Bank appoints new CFO Investcorp appoints Michael Fallon as member of international advisory board
  3. 3. 3© 26th September 2018 COVER STORY points, and over the past six years has provided US$90 million in funding to foster private sector participation in infrastructure investments. In 2012, the International Development Association (IDA, an arm of the World Bank) loaned the government US$40 million to help establish a public-private partnership (PPP) law and a committee to manage projects in line with regulations. The loan helped create a robust, multi- sector pipeline of 69 PPPs that could be financed by the private sector, while a second loan of US$50 million in 2017 is now supporting the development of local PPPs and providing a project facilitation fund to finance viability gaps, making projects more attractive to private investors. An estimated US$10.4 billion in private investments has already been committed, while the PPP committee is now moving to attract financing from local pension funds and insurance companies, develop the capital market and encourage local currency financing. Domestic restrictions So far so good. But there are a few hiccups that are preventing the local private sector from capturing this opportunity. First, Kenyan banks are only allowed to lend a maximum of 25% of their core capital to a single borrower, which can often cut them out of financing the larger infrastructure projects. “Given the considerable financial outlays involved in infrastructure projects, commercial banks would need to enhance their capital base to participate in PPPs while remaining compliant with regulatory requirements”, noted Dr Njoroge. While this could potentially be solved by a syndicated financing approach, there is a further issue. In September 2016, Kenya capped commercial lending rates at four percentage points above the central bank’s benchmark rate — ostensibly in an effort to limit the cost of private sector borrowing. In fact, the policy has had the opposite effect. In the four years to 2017, the private sector’s impact on growth fell to -0.7% of GDP, compared with 1.3% in the four years to 2013, according to the World Bank. “The idea was that by capping interest rates, people would be able to borrow at a cheaper rate. Practically, however, what that meant is that the banks just aren’t lending money to the private sector,” explained Jean-Pierre Labuschagne, Deloitte’s Nairobi-based Africa lead for infrastructure and capital projects. “Whether intended or not, the consequence has instead been that the banks are borrowing government bonds. So instead of reducing the cost of borrowing for the private sector, the interest rate cap has in fact created a very cheap source of funding for the government instead.” Overseas investment The combination of a weak currency (poised to depreciate further after IMF support expired in September), limited bank lending capabilities and a capital market crowded out by the public sector has left capital-raisers with limited options — and opened up the field to foreign investors. As of November 2016, Kenya was one of the top three countries in Africa in terms of the number of projects funded by foreign direct investment (FDI), according to the latest research from the Institute of Certified Public Accountants of Kenya. In 2017, FDI into the country soared by 71% to US$672 million, according to the United Nations Conference on Trade and Development – in stark contrast to a 22% decline in FDI to Africa overall and a 23% global drop — boosted predominantly by attractive tax incentives and strong domestic demand. Islamic opportunity What does this mean for the Islamic finance market? In short, a compelling opportunity. “The problem that Kenya is facing at the moment is that the government’s ability to borrow is reaching its maximum. But there is a lot of space left for private sector financing, and I think that Islamic financing could have the potential to unlock that,” confirmed Labuschagne. “We haven’t yet seen any significant announcements of an Islamic financing tranche in the infrastructure space, but that is not to say that the opportunity is not there.” But it is likely to take overseas players to translate that opportunity into reality, as Islamic banks in Kenya simply do not have the capability to take on substantial projects yet. “I think it would require an offshore bank to push forward a significant Islamic investment into a large-scale project,” said Labuschagne. “I don’t think the local banks have the capacity that is needed to push Islamic financing into infrastructure investment on the scale that is currently needed. There is certainly a willingness to be involved, but I would not see the domestic Islamic banks as a primary driver.” Luckily, Gulf investors are already getting in on the act. Although in the past the Middle East has tended to look toward Asia for investment, traditionally associating Africa with weak governance, instability, corruption and currency risk, that is continued on page 4 Kenya: A new horizon for Islamic infrastructure investment? Continued from page 1 The problem that Kenya is facing at the moment is that the government’s ability to borrow is reaching its maximum. But there is a lot of space left for private sector inancing, and I think that Islamic inancing could have the potential to unlock that
  4. 4. 4© 26th September 2018 COVER STORY continued on page 5 now changing as economies establish and improve market regulation — while rising production costs in Asia are adding to the incentive. Dubai-based mall operator and regular Sukuk issuer Majid Al Futtaim in 2016 bought the Kenyan franchise of French supermarket chain Carrefour and has since launched six new stores, while in 2015 Dubai- based Shariah compliant asset manager Investbridge Capital partnered with Kenyan investment manager Centrum (the largest listed investment manager in East Africa) and global education network SABIS to build a chain of 20 international schools in Kenya and neighboring countries. In 2017, Dubai Islamic Bank (DIB) began operations in Kenya, and the Dubai Chamber of Commerce recently opened up an office in Nairobi. Kenya has received investment funds exceeding US$244 million from GCC wealth funds including the Arab Bank for Economic Development in Africa, the Saudi Fund for Development, the Abu Dhabi Fund for Development and the Kuwait Fund for Arab Economic Development; while in September 2018 Bahrain’s third-largest Islamic bank, Al Baraka Banking Group, announced plans to expand operations into Kenya as it seeks to claim a piece of the fast-growing Shariah compliant banking market in East Africa. The International Finance Corporation has also provided support to Bahrain’s Al Salam Bank and Oman’s Bank Muscat to enter the market through Gulf African Bank, as part of its remit to support the expansion of Islamic banks outside the MENA region. Market support Kenya has made a robust effort to instigate a supportive environment for Islamic finance, and is determined to lift its Islamic Finance Country Index score to 15 by the end of 2023 (up from 2.85 in 2017) as part of its 10-year Capital Markets Master Plan. The government established a Project Management Office in 2016 with the goal of developing an institutional, policy and regulatory framework and a National Shariah Governance Framework, along with new proposals for tax equality, and in December 2016 joined the IFSB. However, little has happened since. The government was expected to pass amendments to the Finance Bill 2017 to facilitate the issuance of Islamic finance products by the third quarter of 2017, but no news has since emerged. “What we need to see is a stand-alone ‘Islamic Finance Act’ in Kenya, which would regulate the Islamic finance sector, and establish a national Shariah board/council for Islamic finance product approval,” urged Mohamed Ebrahim, CEO of Ace Financial Advisory in Nairobi. Home to three fully-fledged Islamic banks (DIB, First Community Bank and Gulf African Bank) and five Islamic windows, along with numerous Takaful providers and at least three Islamic pension funds, the country has made its ambitions as an Islamic finance hub clear – but with religious tensions, a Christian majority and only a 6% Muslim population, the domestic retail industry looks to be somewhat curtailed. Sukuk strength The same is not true, however, of the potential in the Sukuk market — a sector that Kenya’s Capital Markets Authority has already identified as a key priority. In recent years, the regulator has amended the Capital Markets Act to facilitate Shariah compliant capital market products and the Income Tax Act to provide for equivalent tax treatment, as well as exempting Sukuk from payment of stamp duty and amending the Public Finance Management Act to allow for government investment in Sukuk. The long-awaited sovereign Sukuk may not yet have materialized, but in its latest report on growth prospects for Islamic finance in African countries, Moody’s Investors Service identified Kenya as having considerable growth potential for Sukuk, noting that the country “recently implemented banking, legal and regulatory frameworks to spur growth in the Islamic banking sector”. Although Africa currently accounts for just 0.5% of global issuance, since 2014 the continent has seen around US$2.3 billion in Sukuk and Moody’s forecasts at least KES100 billion (US$983.49 million) of further issuance over the next 18 months. “Despite some structural constraints, we expect growth in Sukuk issuance to be driven by increasing financing needs (especially for infrastructure projects), global investors’ growing comfort with the relatively complex legal structure of Islamic instruments and the desire within Africa for stronger investment links with fast-growing economies in the Gulf and Asia that have large Muslim populations with large pools of available capital,” said Akin Majekodunmi, a vice-president and senior credit officer at Moody’s. As one of the higher-rated African nations (‘B2’ by Moody’s), Kenya is in a good position to take advantage of this potential. A sovereign debt market reform plan was approved by the National Treasury in March 2016 in partnership with the Central Bank of Kenya: A new horizon for Islamic infrastructure investment? Continued from page 3 I don’t think the local banks have the capacity that is needed to push Islamic inancing into infrastructure investment on the scale that is currently needed. There is certainly a willingness to be involved, but I would not see the domestic Islamic banks as a primary driver
  5. 5. 5© 26th September 2018 COVER STORY Kenya and the Capital Market Authority to improve primary issuance and the transparency and efficiency of secondary markets, and a sovereign issuance would go a long way toward providing an appropriate reference pricing point for infrastructure assets. “There is a huge potential for corporate Sukuk, especially for agri-businesses (farms and processors) and real estate developers (low/medium cost housing and industrial/commercial parks for SMEs,” said Mohamed. “In fact, securitization could be executed in Nairobi to raise funds for businesses across the East and Central African region — Kenya has the potential to unify the East African Community, especially given its aspiration to become an international financial center.” Chinese competition But is Islamic finance too late to the party? There is another major economic power that has set its sights on Kenya as a gateway to the wider East African region — and China has already cemented its position as one of the key investors into the country. As of March 2018, China accounted for a massive 72% of Kenya’s total bilateral debt — eight times more than its next biggest lending partner (France) and up 15% from 2016, according to Treasury figures as published by Kenyan news source Business Daily. Overall, China accounts for 21% of Kenya’s external debt (including development agency debt), with an estimated KES534.1 billion (US$5.25 billion) currently outstanding, primarily in the infrastructure space. Perhaps there is still room for maneuver by collaboration. In May 2018, Kenya became the newest country to join the China-led Asian Infrastructure Investment Bank (AIIB), a highly liquid and well-funded agency seeking to compete with the World Bank in the multilateral development space, in a move that is expected to open a new channel for cheaper financing of the country’s huge spending needs. Although at first glance the move looks to consolidate Chinese power in Kenya even further, it also opens up a new avenue for Islamic financing. In June 2018, the AIIB signed a historic agreement with leading Islamic development agency the IDB to establish a framework for strategic cooperation, including “actively seeking to co-finance projects in common areas of operations”. “We are delighted to strengthen our partnership with [the] AIIB,” said IDB Group President Dr Bandar Hajjar. “We have a number of common member countries in Asia and also in Africa and a significant overlap in sectors and financing activities.” Although Kenya is not currently a member of the IDB, the bank has executed a number of projects in the country — including three construction projects in 2018 — suggesting that collaboration could certainly be on the cards. An unlikely savior But concerns over Kenya’s high level of indebtedness to China are already pushing players to look elsewhere for funding opportunities. Between 2018- 21, Kenya is set to pay an estimated KES122 billion (US$1.2 billion) in interest on Chinese loans — the equivalent of one-and-a-half-year’s national healthcare spending, suggesting that debt repayment is becoming unsustainable. In this scenario, PPP development and capital market fundraising (as discussed previously) gain increasing importance. It is becoming clear that neither Kenya’s traditional reliance on multilateral development agency support nor its debt-ridden new relationship with China are sustainable in the long run. To support its pressing infrastructure needs — and wean itself away from unhealthily high sovereign debt levels — the country urgently needs a third option. Could Islamic finance — interest-free, ethical, large-scale and liquid — be the savior that Kenya is searching for? Kenya: A new horizon for Islamic infrastructure investment? Continued from page 4 What we need to see is a stand-alone ‘Islamic Finance Act’ in Kenya, which would regulate the Islamic inance sector, and establish a national Shariah board/council for Islamic inance product approval
  6. 6. 6© 26th September 2018 IFN REPORTS Seeking new ways to support the development of its private sector, Togo intends to join the Islamic Corporation for the Development of the Private Sector (ICD), and by doing so expects to open the floodgates to Shariah financing. MARC ROUSSOT has more. During a cabinet meeting, the government adopted a draft law, which if voted by the parliament, will allow Togo to become the ICD’s 55th member country and the 27th African nation* of the organization, leaving Liberia as the only West African state still not in it. The adoption of the bill will “enable the private sector to benefit from various opportunities and assets offered by this institution, especially in the sectors of agriculture, fishery, infrastructures, technology, power supply, education, health, real estate, trade and finance,” according to a press release. Through its financing mechanisms, including Islamic funds supporting African SMEs, and its regional Shariah compliant leasing company for West Africa, the ICD could contribute in bridging Togo’s MSME financing gap amounting to US$389.96 million and representing 9.74% of the country’s GDP, according to the SME Finance Forum’s data. In recent years, Togo has benefited from the ICD’s expertise and financing activities, including when it issued a debut Sukuk facility in 2016 worth XOF150 billion (US$268.59 million), in which the private sector arm of the IDB played the role of lead arranger. Last year, the ICD provided a EUR40 million (US$46.98 million) line of financing to Oragroup, the parent company of Togo- based Orabank, with the proceeds being utilized to fund West African SMEs. In 2017, the ICD approved five projects in sub-Saharan countries worth US$96.3 million, representing more than 10% of the US$930.8 million approved to support a total of 44 projects. Another major milestone achieved last year by the ICD in Africa was the provision of a US$100 million line of financing to Afreximbank for the provision of Shariah compliant financing to SMEs. *The ICD’s African member countries are Algeria, Benin, Burkina Faso, Cameroon, Chad, Comoros, the Ivory Coast, Djibouti, Egypt, Gabon, Gambia, Guinea, Guinea Bissau, Libya, Mali, Mauritania, Morocco, Mozambique, Niger, Nigeria, Senegal, Sierra Leone, Somalia, Sudan, Tunisia and Uganda. Togo intends to become ICD’s 55th member country Over the next few weeks, retail investors in Malaysia will have access to a greater variety of Sukuk while qualified issuers of Islamic bonds targeting the mass market will no longer be required to lodge a prospectus with the regulator as part of a series of liberalization reforms to attract retail participation in the domestic Shariah capital market. VINEETA TAN explores. Starting the 11th October, retail investors would be allowed to gain exposure in existing corporate Sukuk (and bonds) which, until then, have been reserved for sophisticated investors in the over-the- counter market. Under a new seasoning framework by the Securities Commission Malaysia (SC), corporate Sukuk which have been in the market for at least 12 months and hold a minimum credit rating of ‘A’, among other requirements, can be made available to retail investors. “The range of corporate bonds and Sukuk that can be offered to retail investors has also been expanded beyond plain vanilla bonds,” said the SC of its updated guidelines on corporate Sukuk and bonds issuance. Among those included in the investable Sukuk universe are sustainable and responsible investment (SRI) Sukuk. However, retail investors are still restricted to longer- term (above one year) local currency rated Sukuk. As far as the issuance process is concerned, the mechanism will be eased for qualified issuers — those who have issued or guaranteed bonds of at least RM500 million (US$120.68 million) in the past five years. Qualified issuers will not be required to make disclosures through a prospectus, only a product highlight sheet, whereas for SRI Sukuk issuers, it is mandatory for them to engage an independent expert to evaluate the eligibility of the underlying projects in compliance with the SRI framework and for the report to be made available to the public. These measures are expected to cement the position of Malaysia in the global Sukuk sphere; while the Islamic finance giant originates more Sukuk than any other markets in the world, its Sukuk market has largely been characterized by institutional investment. The third- largest bond market in Asia (relative to GDP) has ramped up efforts in recent years to broaden the investor base to include the mass market. Last November, the regulator established the Bond and Sukuk Information Exchange Malaysia to centralize and ease the dissemination of information on Sukuk and bonds to assist retail investors in making informed investment decisions. Malaysia eyes mass market with new rules for retail Sukuk
  7. 7. 7© 26th September 2018 IFN REPORTS Despite a recent uptake in the global Islamic fintech sector, the African region is lagging behind many Asian and European countries. But an Islamic investment platform may just be the answer to kick-start the sector in the rainbow nation. DURGAHYENI MOHGANA SELVAM delves deeper. Ismail Ibrahim Desai, CEO of Global Islamic Financial Services Firm (GIFS) and the Shariah advisor for various organizations, in an exclusive to IFN, explains that the platform, named Shariah Investment Board, is being built by GIFS using artificial intelligence (AI). The platform will serve as a one-stop center for investments focusing on individual investors across South Africa. In short, via the platform, investors will be able to access latest data and recommendations on companies and stocks. “Our immediate target is millennials. They are increasingly looking for alternatives online, where they can find information instantly,” Ismail says. The nation’s fintech industry has seen tremendous growth in recent years. In EY’s report on fintech adoption, South Africa did particularly well among countries in 2017, recording an adoption rate of 35%, which is two percentage points greater than the global average of 33%. It came in ninth among 21 nations. The country is expected to reach an adoption rate of 71% in the next few years, significantly higher than the global average and ranked third among the markets surveyed. But despite a strong and progressive outlook, the country’s Shariah compliant fintech industry is stagnant. The IFN Islamic Fintech Landscape, which tracks developments in the said sector in 24 nations, shows no activity in South Africa across 11 verticals. In fact, only Egypt, Nigeria and Kenya seem to have sporadic Shariah fintech activity in the entire African continent. Despite this, Ismail believes that the platform will change the game. “There is a renewed focus on innovation in the South African Islamic finance industry. Fintech will be the main market in the global Shariah finance sector in the next five to 10 years. With this platform, we can stay ahead of the current,” says Ismail. Starting out with individual investors, the platform will be available to banks and asset management companies in the future. A test launch is anticipated as early as next month, and an official launch is expected in February or March next year. South Africa to roll out new AI-based Islamic investment platform Our immediate target is millennials. They are increasingly looking for alternatives online, where they can ind information instantly
  8. 8. 8© 26th September 2018 IFN REPORTS The Maldives’s basic Islamic finance regulatory landscape will be dramatically transformed within five years as the Maldives Monetary Authority (MMA) plans to introduce new Shariah governance rules and a liquidity management framework as part of its Strategic Plan 2018-22. MARC ROUSSOT has more. The MMA has embarked on a five-year journey to develop and introduce new structural regulations with the aim of creating an enabling policy environment to boost the development of Islamic finance in the Muslim country where the Islamic banking market share was recorded at only 4.3% in 2016, according to IFSB data. “We will be looking at existing legislative, regulatory, supervisory, prudential and reporting frameworks with a view to remove any inconsistencies, improve transparency and disclosures. Furthermore, we are also looking at issues such as on-site and off- site supervision, accounting standards and taxation,” shares Ahmed Naseer, the governor of the MMA. Concretely, in its Strategic Plan 2018-22 published in July, the apex bank shared its intention to establish a comprehensive Shariah compliance framework. The new document will help strengthen existing ad-hoc requirements and compile them into one single framework that would clearly specify the roles of each organ of governance including the Shariah Council of the MMA, board of directors, executive management, Shariah committee, internal Shariah compliance function and Shariah audit. “Currently, we do not have a Shariah governance framework as such. What we have are a loose collection of ad- hoc Shariah requirements that licensed institutions are required to follow. The key requirement is for institutions to have a Shariah committee to advise them on Shariah issues and for them to have an in-house Shariah compliance officer. We do not have any detailed requirements relating to either the Shariah committee or the Shariah compliance officer. It is more or less up to the institutions,” says Ahmed who indicates that AAOIFI’s Shariah standards could be fully adopted. The MMA also intends to tackle liquidity management issues faced by Islamic financial institutions through the development of a comprehensive liquidity management framework including the mechanisms and the types of short-term liquidity management instruments. The MMA is already issuing Mudarabah and Murabahah certificates on a regular basis but those tools used for liquidity management purposes are primarily fiscal instruments designed to raise financing for state-owned enterprises. As a result, their issuance frequencies and amounts depend on the financing needs of state-owned enterprises and the Ministry of Finance and Treasury. “With the proposed liquidity management framework, what we hope to achieve is to provide industry players a mechanism whereby they can avail [themselves] of multiple liquidity management options. These would include the existing instruments as well as additional instruments that would provide more flexibility in tenor as well as investment amounts. Our vision is to see the establishment of a sort of localized money market which would cater to all the liquidity management needs of local Islamic financial institutions,” explains Ahmed. Given that it is the first time in the history of the country that the central bank has brought Islamic finance to its main agenda in a direct manner, Aishath Muneeza, the chairman of the Maldives Center for Islamic Finance, welcomes the MMA’s plan but regrets that key topics on Takaful, fintech, awareness and education, as well as innovation, are not addressed. “At the moment, we do not have a Takaful legislation, although Takaful was the first form of Islamic finance that was adopted in the country in 2003. A comprehensive legal framework is also required to develop a non-banking financial sector dealing with Islamic finance. Fintech is another area I wanted to see in the strategic plan as the integration of fintech mechanisms and blockchain technology is important and the MMA should lead on this. There is also a need to increase the number of innovative products offered in the market. Up until now, there is no Islamic credit card offered in the country and there is only a limited range of products available in the market,” Aishath says. IFN contacted Maldives Islamic Bank and the Bank of Maldives for comments but has yet to receive an answer. The Maldives plans deep regulatory changes to boost Islamic inance With the proposed liquidity management framework, what we hope to achieve is to provide industry players a mechanism whereby they can avail [themselves] of multiple liquidity management options
  9. 9. 9© 26th September 2018 IFN REPORTS Gulf Islamic Investments (GII), which manages about US$500 million in technology assets, is on the lookout for more opportunities beyond enterprise software to expand its tech portfolio as Muslim investors show an increasing appetite for the technology sector, the investment manager tells VINEETA TAN. “Shariah compliant investors are eager to tap into technology investments especially in the last four to five years. A lot of investors have been approached by tech funds but these are not always structured in a Shariah compliant way, hence, new Islamic tech funds are often oversubscribed,” explains Mohammad Al Hassan, co-CEO and the co-founder of GII. “If you look at most investors in the GCC who deal with Islamic investments, they are big users of technology, and they understand technology as a space,” echoes Pankaj Gupta, GII’s co-CEO and co-founder. About one-third of GII’s US$1.5 billion in assets under management are in the technology sector. A significant proportion of the portfolio comprises investments in mature tech companies at the pre-IPO stage which are already generating steady and recurring income of between US$50-100 million. However, the firm also has a fund — the GII Tech Fund — which gains exposure in early- stage companies at Series A and Series B funding levels. Mainly invested in software technology, GII has identified new verticals of interest: blockchain technology, robotics, artificial intelligence (AI), the internet of things, machine learning, wearables and virtual reality. “For us, it is not only about the technology; the promoters behind the technology, their experience, growth strategy and robust business management model are also very important,” says Gupta, who added that companies with an aggressive expansion strategy are often preferred. “Not only will we be bringing investments into the technology sector, but we will also be bringing tech innovation to the GCC.” This is an excerpt of an interview with the co-CEOs and co-founders of Gulf Islamic Investments. For the full conversation on technology investment trends among Muslim investors, log on to IFN Podcasts. PODCAST: Islamic investor hunts for opportunities in blockchain, AI and robotics as tech appetite in Muslim world grows DOWNLOADNOW LATESTPODCAST Growing appetite for tech investments Pankaj Gupta and Mohammed Al Hassan Co-CEOs and co-founders of Gulf Islamic Investments If you look at most investors in the GCC who deal with Islamic investments, they are big users of technology, and they understand technology as a space
  10. 10. 10© 26th September 2018 IFN REPORTS The growth of Islamic finance in Malaysia has been a remarkable success story, with this sector having transformed from several niche products to fully-fledged banks within a few short decades. The market share of Islamic banking assets in Malaysia leapt to a high of 28% in 2016 from 7.1% in 2010 but this has since plateaued, signaling the need to explore opportunities to boost growth and reinvent its strategies to capture the market. VINEETA TAN writes. One dramatic shift observed in the Malaysian market is the move by Islamic financial institutions toward value-based financing as a new growth driver — in line with the global trend of impact- driven, value-based and sustainable banking and investment. Pundits view this Malaysian phenomenon as a natural progression from traditional Shariah compliant banking toward a more dynamic and wholesome value proposition. Ethical values aside, there is also commercial value to be gained from such a strategy: research by the Global Alliance of Banking on Values has shown that banks which serve the real economy consistently deliver better and more stable financial returns than those shown by the largest banks in the world. The move has gained significant momentum in recent years as regulators across the world, especially among developing nations, recognize the merits of value-based banking. In Malaysia in particular, Bank Negara Malaysia led the way with its Value-Based Intermediation (VBI) Strategic Paper in 2017, an initiative to harness the full potential of Islamic finance and to cement Malaysia at the forefront of Islamic banking leadership globally. The overarching objective of VBI is to strengthen the roles and impact of Islamic banking institutions toward a sustainable financial ecosystem by incorporating holistic business practices, conduct and offerings that have a positive and sustainable impact on the economy, community and environment. “VBI reflects the true essence of Islamic finance. VBI principles such as fairness and social responsibility are very much aligned to Shariah principles. So, it’s quite natural for Islamic financial institutions to take the lead,” said Rafe Haneef, the organizing chairman of the Global Islamic Finance Forum 2018 (GIFF2018) and CEO of CIMB Islamic Bank. “Beyond providing great financial products and services, VBI requires financial institutions to balance different stakeholders’ interest and play an active role in shaping a more sustainable future and creating a positive impact on communities and the environment.” The focus on VBI has seen impactful offerings such as ‘rent-to-own’ house financing and favorable financing rates for purchasing green-certified homes and hybrid cars being introduced in Malaysia. The Malaysian central bank is due to introduce the VBI initiative scorecard at GIFF2018 next month where VBI will be a central theme guiding conversations on integrating sustainability into finance, technological disruption and driving systemic change, among others. The scorecard will evaluate financial institutions based on qualitative and quantitative metrics on a variety of value-based areas. Organized by the Association of Islamic Banking and Financial Institutions Malaysia, GIFF2018 speakers include Dr Adnan Chilwan, group CEO, Dubai Islamic Bank; Dr Sheikh Nizam Yaquby, member of the ISRA Council of Scholars; Chris Skinner, CEO of the Finanser; Omar Selim, CEO of Arabesque Asset Management; Dr Ioannis Ioannou, associate professor of strategy and entrepreneurship, London Business School; and Dr Simon Lord, chief sustainability officer, Sime Darby Group. Malaysia’s way forward for Islamic inance Pakistan’s agricultural bank Zarai Taraqiati Bank, which secured a license in July to offer two unique Shariah compliant financing products, expects to launch its Islamic window by the end of the year. Finalizing some red tape to meet the State Bank Pakistan’s requirements and putting the final touches to the development of its in-house core banking software, Zarai Taraqiati Bank’s Islamic window should be up and running as early as the end of October. Operating 489 branches in the entire country, the bank, which focuses on supporting small farmers’ needs, plans to convert 150 of them within five years to offer two unique Islamic financing products for the purchase of inputs and the acquisition of machineries, as well as Takaful solutions. The structure of these two financing products, close to Salam and Ijarah mechanisms, reduces some of the risks inherent in agriculture finance, explains Amir Islam, the head of the Islamic Banking Department at Zarai Taraqiati Bank. “There are Islamic products like Murabahah, Ijarah and Salam that are available for input financing and development financing but these are risky products in agriculture finance. If you use Murabahah for the purchase of seeds or fertilizer with the farmer due to pay after cultivation of the crop, there is a high risk that unforeseen events such as rainfalls for instance [will] impact negatively the harvest resulting in the impossibility for the farmer to pay back,” Amir says. Zarai Taraqiati Bank expects to break even in one and a half years and plans to make profit amounting to about PKR20- 25 million (US$161,536-201,921) after two years of operation and PKR500 million (US$4.04 million) after five years. Formerly known as the Agricultural Development Bank of Pakistan, Zarai Taraqiati Bank has been eyeing the launch of an Islamic window since 2011 but the lack of talent considerably slowed down the process. Company Focus: Zarai Taraqiati Bank
  11. 11. 11© 26th September 2018 IFN REPORTS After falling behind four times on its maiden Sukuk auction schedule, the Kingdom will reportedly issue its debut Shariah securities in the first week of October. MARC ROUSSOT writes. Morocco Morocco’s debut paper, which will follow the Ijarah structure with real estate assets owned by the government as the underlying assets, will be worth around MAD1 billion (US$106.33 million). Rents will be used to pay a coupon rate to investors. Kuwait The Central Bank of Kuwait issued three- month conventional bonds and related Tawarruq facilities for the total amount of KWD160 million (US$526.94 million). The offerings, which received KWD2.07 billion (US$6.82 billion) in bids, carry a profit rate of 2.5%. Malaysia A total of RM74.12 billion (US$17.93 billion)-worth of Shariah securities have been issued by Bank Negara Malaysia over the past seven days. Indonesia The Indonesian Ministry of Finance raised IDR4.9 trillion (US$329.19 million) from the sale of six Shariah securities for which it received bids worth IDR8.22 trillion (US$552.23 million). Brunei For the first time this year, Autoriti Monetari Brunei Darussalam issued Sukuk Ijarah worth BN$15 million (US$10.97 million) with a 364-day tenor. Such papers sold by Brunei’s apex bank on a monthly basis are usually worth BN$100 million (US$73.26 million) or BN$50 million (US$36.63 million) with a 91-day tenor. Bangladesh Bangladesh Bank auctioned a six- month Bangladesh Government Islami Investment Bond worth BDT345 million (US$4.08 million). The facility received two bids. On average, Bangladesh Bank will receive six bids for its six-month issuances worth on average BDT3.5 billion (US$41.36 million). Turkey In order to increase the domestic savings, broaden the investor base and diversify the borrowing instruments, the Turkish Treasury is due to privately place 728- day fixed rent rate lease certificates amounting to TRY1.7 billion (US$273.36 million) on the 26th September 2018. The papers carry a 12.2% periodic rent rate. Gambia The Central Bank of Gambia (CBG) on the 26th September 2018 is expecting to sell three-month, six-month and one-year Sukuk Salam instruments for GMD20 million (US$408,041) each. Gambia’s apex bank also separately sold three-month and six-month Sukuk Salam papers for GMD40 million (US$816,081) each and a one-year Sukuk Salam facility for GMD90 million (US$1.84 million). All three papers were undersubscribed. Sovereign Sukuk: Morocco inally issuing maiden Sukuk? Upcoming sovereign Sukuk Country Amount Expected issuance date Date of announcement Turkey Lease certificates • TRY1.7 billion • TRY1.3 billion • 26th September • 20th November 25th September 2018 Morocco Through four Sukuk worth MAD1-2 billion each • 1st issuance: About MAD1 billion 2018 • First week of October 19th September 2018 Egypt Dollar or euro-denominated Sukuk Fiscal year 2018-19 (starting the 1st July 2018) 28th June 2018 Ghana Up to US$2.5 billion (Sukuk, Samurai and Panda bonds) TBA 6th April 2018 Sudan About US$1 billion 2018 6th April 2018 Pakistan • US$3 billion (from Sukuk and eurobonds) • PKR100 million • Fiscal year 2019 (starting the 1st October) • TBA • 16th April 2018 • 20th March 2018 South Africa TBA (domestic) Fiscal year of 2018-19 (starting the 1st April) 6th March 2018 The Maldives MVR100 million TBA 19th February 2018 Oman TBA (international) TBA 9th February 2018 Iran IRR596 trillion (over multiple programs) • IRR20 trillion Throughout the fiscal year of 2018-19 • TBA 5th February 2018 • 19th March 2018 Kuwait TBA (conventional bond which may include an Islamic tranche) TBA 31st January 2018 Nigeria TBA TBA 26th January 2018
  12. 12. 12© 26th September 2018 ANALYSIS IFN COUNTRY ANALYSIS THE US Regulatory landscape The US still lags behind in terms of a dedicated Islamic finance regulation, but its existing laws are accommodative of certain Shariah compliant structures, if not all. Similar to conventional financial activities, Islamic finance is governed under established regulations set forth by the country’s various financial regulatory bodies such as the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, state banking authorities, the Internal Revenue Service and the Securities Exchange Commission. Banking and inance The Shariah banking and finance industry of the US is largely nascent against the backdrop of the aforementioned lack of regulation. Some of the most prominent Islamic financial services providers include Lariba Finance House, Devon Bank, Guidance Financial, Saturna Capital, University Bank’s University Islamic Financial and Azzad Asset Management, among others. Abraham’s River, a financial institution based in Chicago providing religiously acceptable investment options, was certified as Shariah compliant in 2016. Fintech While the Islamic banking and finance market remains small in the US, the Shariah fintech scene on the other hand is seeing strong activities. According to the IFN Islamic Fintech Landscape, the US took up 7% of the total number of start-ups serving the Muslim market as of July 2018, landing itself in the top five nations with the most number of start-up companies. The US houses 12 companies across 11 verticals listed under the IFN Islamic Fintech Landscape, with Islamic personal finance management, trading and investment dominating the US Shariah compliant fintech community with a total of four companies. Last year, a new investment and savings start-up was launched in September to facilitate Muslims in the US to fulfill their Hajj obligations based on Malaysia’s Lembaga Tabung Haji model. Wahed Invest, an Islamic robo-advisor established in the second half of 2016, secured US$5 million in seed capital and launched its services to US retail investors last year. The firm also began testing its technology in Bahrain earlier in January, and rolled out two new Islamic tracking funds earlier this month. UAE-based Islamic fintech company Codebase Technologies also collaborated this month with US-based Accuant to roll out Digibanc Identity, a digital identity and e-know-your-customer solution. Real estate Real estate forms the majority of Shariah compliant activities in the US. Mortgage financing is especially in demand among Muslims and international investors are keen to channel investments into US property. In August 2017, Brennan Investment, a US-based real estate investment firm, and a client of Arch Street Capital Advisors, a US-based real estate investment advisory firm, partnered to form a Shariah compliant joint venture to acquire, own and manage a substantial portfolio of industrial properties throughout the US. The new joint venture that has already purchased nearly 900,000 square feet of industrial real estate in Dallas, Charlotte and Green Bay will focus on acquiring individual industrial assets in major markets in the US that are critical facilities to tenants and leased on a long- term basis. Residential mortgage aside, corporates were also involved, particularly Soho Properties which in May 2016 confirmed that it secured US$219 million in Shariah compliant funding for the construction of its Tribeca condominium tower at 45 Park Place in Manhattan, expected to be completed this year. Apart from traditional Islamic finance providers, Shariah compliant real estate financing needs are also attracting alternative providers such as crowdfunding platforms like HalalSky based in Texas. Sukuk It is understood that a significant portion of Islamic deals in the US are private placements. The first corporate Sukuk issuance was made in 2006 by East Cameron Partners for US$166 million, and was backed by oil and gas assets that did not materialize and resulted in the firm filing for bankruptcy in 2008. GE Capital (the financial arm of General Electric) followed suit with a US$500 million Sukuk Ijarah facility backed by aircraft leases. In 2014, Goldman Sachs issued its much-talked about US$500 million Islamic debt, the first for the US investment bank, or for any conventional US bank for that matter. In April, University Bank issued a privately-placed Sukuk facility, believed to be the country’s first Shariah compliant debt transaction to be structured and governed under US laws. Shariah compliant funds The US Islamic fund market is small but fast-growing. The earliest Islamic fund in the country came from the Amana Mutual Funds family — the Amana Growth Fund was launched in 1984, with the Amana Income Fund following in 1994 and the Amana Developing World Fund in 2009. Other players in the area of Shariah compliant mutual funds in the US are Azzad Asset Management, which was established in 1997, and the Azzad Ethical Fund which was launched in 2000. Allied Asset Advisors offers a mutual fund, the Imam Fund, which was launched in 2000. The Dow Jones Islamic Index, which lists the aforementioned funds, was launched in 1999. The US is also home to an Islamic exchange-traded fund, the Falah Russell-IdealRatings US Large Cap ETF, launched in 2014. Last year, the Islamic Corporation for the Development of the Private Sector and Saturna, the Malaysian unit of Washington-based Saturna Capital Corporation, established an open-ended ESG fund which is expected to raise US$100 million in the first three years after launch. The US: Led by intech The US, despite being one of the most formidable powers of the world, has little to showcase in the global Islamic finance and banking sector. Nevertheless, its Islamic fintech asset class is flourishing and providing competition to strong contenders like Malaysia and the UK.
  13. 13. 13© 26th September 2018 ANALYSIS AAOIFI A total of 26 accounting standards have been published by AAOIFI and are currently in effect but the international standard-setting body is expected to come up with new and revised standards in the next few months as it is currently working on five accounting standards, namely FAS 3 Murabahah and Murabahah to the Purchase Orderer; FAS 8 Ijarah and Ijarah Muntahiya Bil Tamleek; Combination of Financial Accounting Standards on Islamic Insurance; Sukuk accounting; and Waad accounting. Over the past 12 months, AAOIFI has also issued four standards and four accounting standard exposure drafts. GCC member states Since the beginning of the year, Saudi Arabia and the UAE have introduced a 5% VAT rate as part of a plan mandating all six GCC member states to enact the levy. Qatar will introduce the tax during the second half of the year, Bahrain in October this year, Oman in 2019 and Kuwait in 2021. Prior to the launch of the tax, market players expressed their concerns and called for tax neutrality or equality rules with conventional transactions as the tax could dramatically affect Islamic banks, Sukuk issuances, Takaful and Shariah compliant fund managers, among others. In the end, the introduction of the VAT in the UAE and Saudi Arabia was relatively smooth with the release by the UAE of a VAT framework exempting financial services from VAT obligations and specifically exempting Islamic finance facilities with profit rates from paying the tax. In Saudi Arabia, the tax regime exempts margin-based services and applies the VAT only to fee-based services. Saudi Arabia The introduction of a new accounting method to the long-term investments of banks by the General Authority of Zakat and Tax created worry among financiers early this year as 11 of the Kingdom’s 12 listed banks were requested to pay additional Zakat claims estimated at around SAR9.8 billion (US$2.61 billion). However, in March, in an attempt to avoid any damage to his push to diversify the economy, Crown Prince Mohammed Salman directed the Saudi government to resolve the disputes with the banks. It is unclear how the disputes were resolved. Iran A few measures with regards to taxation were taken over the past 12 months in Iran including the creation of a task force to pave the way for banks to standardize their financial statements and tackle current issues and problems they are dealing with. Taxes have also been lowered on equity sales by 80% to 0.1% in order to further attract funds to the Iranian stock market. Algeria Algeria will tweak its legal framework to avoid double taxation issues, Abderrahmane Raouya, the Algerian minister of finance, said in October last year. The progress of this project is unclear. Kenya The Islamic Finance Project Management Office of Kenya proposed in May 2018 same tax on Islamic finance products with conventional offerings to boost the attractiveness of Shariah compliant products. The Philippines An important step was achieved in the Philippines toward the development of Islamic banking when a committee of the House of Representatives of the Philippines approved in February a tax neutrality provision in a bill seeking to establish a regulatory framework for the Islamic banking industry. The bill is aimed at achieving tax neutrality for the industry vis-à-vis conventional banks. Malaysia Islamic banking institutions set the rate of the GST at 0% starting from the 1st June 2018, compared to the 6% implemented since April 2015. The bill to repeal the GST has since been passed by the parliament and the GST is now replaced by the sales and services tax. Pakistan The Federation of Pakistan Chambers of Commerce and Industry (FPCCI) proposed a few measures including to increase the tax rebate for Shariah compliant manufacturing firms to support growth in the industry. The apex trade body recommended introducing a gradual approach of allowing a 2% tax rebate to those listed manufacturing companies which convert 20% of their conventional financing into Islamic financing and 20% of their non-compliant investments into Islamic investments. The FPCCI also proposed to enhance the tax rebate to 3% for those manufacturing companies which achieve 0% conventional financing and 0% non- compliant investments. Also, in April, the government announced considering a tax cut of 30% in the Finance Bill of 2018/19 to encourage the listing of Shariah compliant companies on the stock exchange. UK Islamic financial firms are reportedly lobbying the UK government to revise existing regulations to ensure tax parity in areas such as mortgage refinancing as they compete head-on with their conventional peers. The Chartered Institute of Taxation presented a submission to authorities on the matter. Accounting and tax: Gulf states start implementing VAT The year has been marked by many accounting and tax changes with the introduction of the value-added tax (VAT) in several Gulf states, the removal of the goods and services tax (GST) in Malaysia, as well as the introduction of a new accounting method by the General Authority of Zakat and Tax of Saudi Arabia. MARC ROUSSOT brings you the most important developments. IFN SECTOR ANALYSIS ACCOUNTING AND TAX
  14. 14. 14© 26th September 2018 CASE STUDY Al Hilal Bank’s Sukuk US$500 million 12th September 2018 Issuer AHB Sukuk Company Obligor Al Hilal Bank Size of issue US$500 million Mode of issue Regulation S, senior, unsecured Tenor Five years Issuance price 99.61% Profit rate 4.38% Payment Annually Currency US dollars Maturity date 19th September 2023 Joint lead managers and bookrunners Al Hilal Bank, Dubai Islamic Bank, Emirates NBD Capital, First Abu Dhabi Bank, HSBC, JPMorgan, Nomura, Standard Chartered Bank Governing law English law and UAE law Listing Euronext Dublin Rating Moody’s Investors Service: ‘A2’ Fitch Ratings: ‘A+’ Structure Mudarabah and Wakalah Face value/ minimum investment US$200,000 and integral multiples of US$1,000 in excess thereof Recent times in the UAE have seen a spike in corporate Sukuk issuances. One such paper to hit the market is Al Hilal Bank’s US$500 million five-year senior Sukuk facility. The issuance was floated as a ‘drawdown’ under the bank’s US$2.5 billion trust certificate issuance program which is listed on the Irish Stock Exchange. DURGAHYENI MOHGANA SELVAM has the details. “The Sukuk structure was a Wakalah/ Mudarabah, similar to the structure used for the bank’s debut issuance in 2013,” according to David William Whitcroft, the senior managing director- head of treasury of Al Hilal Bank. The structure was fixed from the start of the arranging process with no other principles considered, one of the deal’s bookrunners, who wished to remain anonymous, tells IFN. The paper hit the market after a five-month drought in the UAE’s senior public Sukuk market, with the last being from Noor Bank in April. Al Hilal’s Sukuk also marked the bank’s return to the senior Sukuk market since the last facility in 2013. Investor meetings were held in various locations around the globe, including in London, Hong Kong, Singapore and Kuala Lumpur prior to the issuance. The initial price guidance for the five- year paper was fixed at MS+165bps, and was later tightened to MS+148bps due to high demand. “There has been a lack of supply from the Middle East since May 2018 which created a good demand backdrop,” the anonymous bank explains. Whitcroft added to this, saying that: “Investors reacted very positively to the bank’s strong credit rating and 100% government ownership through the Abu Dhabi Investment Council.” The main challenge in issuing the paper was the tight competition from fellow Sukuk issuers at that time. “When Al Hilal was pricing its deal, Abu Dhabi Islamic Bank [ADIB] was pricing a Tier 1 Sukuk and the government of Saudi Arabia was pricing a 10-year Sukuk. We continually engaged investors in order to have them focus on the issuance and this paid off allowing us to successfully price the issuance,” the arranging bank expounds. Another hurdle was timing. “Emerging market issuance was extremely light over the summer period. Potential issuance from September onwards was viewed to be heavy. We needed to ensure that we timed our issuance at an opportune and ideal window in the market, and to be ahead of other issuers,” Whitcroft explains. The orderbook for Al Hilal’s issuance was recorded at US$1.4 billion, with demand from over 70 investors. The investor base was diversified geographically, with a 25% allocation to Europe, 20% to Asia and 55% to the Middle East. Al Hilal Bank’s Sukuk: Ending a ive-year hiatus Investors reacted very positively to the bank’s strong credit rating and 100% government ownership through the Abu Dhabi Investment Council
  15. 15. 15© 26th September 2018 BACK TO BASICS Sohail Zubairi is the projects advisor with the Dubai Islamic Economy Development Centre. He can be contacted at sazubairi1979@gmail.com. After having learned the stable parameters based on which Islamic financing transactions take place, and appreciating the multifarious layers of Shariah and corporate governance an Islamic bank is required to comply with, today we shall conclude our discussion on Shariah governance by discussing the two standard-setting bodies viz. AAOIFI and the IFSB. At times, people get confused about the roles of these two distinct bodies by viewing them as competitors in the sense that both are busy churning out standards on Islamic finance, one meant for Gulf countries and the other aimed at the Malaysian market. This is because AAOIFI is based in Bahrain whereas the IFSB operates from Malaysia. This is a completely erroneous perception as readers will know from the following. AAOIFI As per its own website, AAOIFI, established in 1991 and based in Bahrain, is the leading international not-for-profit organization primarily responsible for the development and issuance of standards for the global Islamic finance industry. It has so far issued a total of 100 standards in the areas of Shariah, accounting and auditing for use in Islamic financing transactions. It is supported by a number of institutional members, including central banks and regulatory authorities, Islamic commercial banks and financial institutions, accounting and auditing firms and legal firms from over 45 countries. Its standards are currently followed by all the leading Islamic financial institutions across the world and have introduced a progressive degree of harmonization of international Islamic finance practices. AAOIFI also has fellowship programs: certified Shariah advisor and auditor and certified Islamic professional accountant. The AAOIFI Shariah Standards provide parametrization for carrying out any Islamic financing transaction either based on sale or investment contracts. Over the period of a quarter of a century, the AAOIFI Shariah standards have assumed an undisputed global benchmark position for the Islamic finance industry. Although by nature the AAOIFI Shariah Standards are optional, several jurisdictions have made it mandatory for Islamic banks and financial institutions to adopt them in their day- to-day functioning. These countries include Bahrain, Jordan, the Kyrgyz Republic, Mauritius, Oman, Pakistan and Sudan. Recently, the newly constituted Higher Shariah Authority of the UAE set a deadline of 2020 for licensed Islamic banks and financial institutions to conform to the AAOIFI Shariah Standards. In parallel, AAOIFI has also issued accounting standards; however, these have not assumed similar recognition as the AAOIFI Shariah Standards and a majority of Islamic banks and financial institutions follow the International Financial Reporting Standards (IFRS) when publishing their annual audited results. Some of the IFRS provisions do not reconcile with the state of affairs at Islamic financial institutions owing to their business model being divergent compared with conventional financial institutions. However, this situation may continue until such time that the AAOIFI Accounting Standards gain wider international acceptability. IFSB The IFSB, based in Kuala Lumpur, was officially inaugurated on the 3rd November 2002 and started operations on the 10th March 2003. It serves as an international standard-setting body of regulatory and supervisory agencies that have a vested interest in ensuring the soundness and stability of the Islamic financial services industry, which is defined broadly to include banking, capital markets and insurance. In advancing this mission, the IFSB promotes the development of a prudent and transparent Islamic financial services industry through introducing new standards, or adapting existing international standards consistent with Shariah principles, and recommending them for adoption. To this end, the work of the IFSB complements that of the Basel Committee on Banking Supervision, the International Organization of Securities Commissions and the International Association of Insurance Supervisors. Roles of AAOIFI and IFSB in the functioning of Islamic banks The work of the IFSB complements that of the Basel Committee on Banking Supervision, the International Organization of Securities Commissions and the International Association of Insurance Supervisors
  16. 16. 16© 26th September 2018 BACK TO BASICS 5th October 2018 SGX Centre, Singapore Boasting one of the world’s most sophisticated financial markets rooted in transparency and a sound legal framework, and bolstered by a pro-business, stable and open economy, Singapore has all the hallmarks of a potentially successful global Islamic financial market. REGISTER FREE NOW www.redmoneyevents.com 603 2162 7800 ext. 22 #IFNSINGAPORE18infoevents@redmoneygroup.com MULTILATERAL STRATEGIC PARTNERSIN ASSOCIATION WITH PARTNERS MEDIA PARTNERSHOST MEDIA PARTNERS The need to set up the IFSB was felt 11 years after the establishment of AAOIFI due to the broader recognition by the Islamic finance industry that the Basel Committee standards on banking supervision cannot be applied ‘as is’ on Islamic banks. Readers may be aware that the Basel Committee on Banking Supervision is an international committee formed to develop standards for banking regulation. It is made up of central bankers from 27 countries and the EU. The IFSB’s corporate governance framework for Islamic financial institutions, mainly commercial Islamic banks and excluding Takaful or Islamic insurance, is categorized into the following core areas which are conspicuously diverse from the scope of the AAOIFI Shariah Standards discussed previously: A. General governance approach of Islamic financial institutions B. Rights of investment account holders C. Compliance with Islamic Shariah rules and principles, and D. Transparency of financial reporting in respect of investment accounts. It is hoped that readers will have understood the difference between AAOIFI and the IFSB vis-à-vis their functions and roles in supporting the overall Islamic financial industry. Moreover, the three articles on Shariah governance, including this one, will have provided a clearer picture as to the water-tight governance model prevalent in Islamic financial institutions. While the AAOIFI Shariah and Accounting Standards are available for further reading at a cost, the IFSB’s standards are available for free download from www.ifsb.org. The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions of the Dubai Islamic Economy Development Centre, nor the official policy or position of the government of the UAE or any of its entities. The purpose of this article is not to hurt any religious sentiments either consciously or even unwittingly. Next Week: Start of a new subject on Islamic financing and investment contracts.
  17. 17. 17© 26th September 2018 SHARIAH STANDARD This AAOIFI Shariah Standard summary series is brought to you exclusively by IFN in collaboration with Dar Al Sharia. The intention of this is to provide the reader with an initial understanding of the standards and this does not purport to be complete or is intended to replace the standard itself. It is also highlighted that the reader should not rely on the below for any Shariah guidance purposes. The next standard in the weekly series shall be Shariah Standard No 50 – Irrigation Partnership (Musaqat). About Name of the standard: Unilateral and bilateral promise Standard number: 49 Standard Issuance sate: 4th January 2013 Sections: Seven sections, Sections 2 to 6 provide core rules of the standard Purpose The purpose of the standard is to explain the concepts of unilateral and bilateral promises (or undertakings), their types and enforceability. Further, the standard discusses rules applicable to promises and contemporary applications in the activities of Islamic financial institutions. Scope The scope of the standard includes the following aspects of unilateral and bilateral promises: a) Definition of unilateral and bilateral promises. b) Types of promises. c) Applicable Shariah rules. d) Permissible applications. e) Impermissible applications. Summary A unilateral promise/undertaking is one of the key parts of Islamic finance products and transactions. A promise is a commitment whereby the issuing party undertakes to act in the future, while the other party, ie the holder, has the option to avail itself of the promise by choosing to exercise the right. Islamic financial institutions required Shariah guidance on the nature and acceptability of promises to adopt them to common transactions in Islamic financial activities. This standard provides the necessary guidance and explains the types of promises and their acceptability and enforceability as per Shariah. Some of the applications of the standard in banking and finance transactions Part of products developed under Ijarah and Murabahah structures. Derivatives, swaps and foreign exchange transactions. Highlights Nature of promises It is permissible to promise to perform an action or a financial transaction. From a classical perspective, the fulfillment of a promise is only a religious obligation which may not be legally binding. However, the contemporary position of scholars, particularly on financial transactions, has developed to make it legally enforceable as the promisor causes the promisee to incur a liability as a result of the promise. General Shariah rules a) Two or more unilateral promises between the same parties must not be organized in such a way which may lead to a forward sale. b) Any promise in a sale contract made by the buyer or the seller that results in a repurchase contract (Inah) is prohibited by Shariah. c) When a promise is made to enter into a contract in the future, such a contract is not effected automatically. The contract must be executed at the relevant time by an exchange of offer and acceptance. d) A legally binding promise is enforceable only against the promisor; the promissee may demand performance from the promisor or waive it. www.daralsharia.ae
  18. 18. 18© 26th September 2018 COLUMN Islamic banks face a challenge in their asset liability management when the market cost of funds rises, because of their inability to re lect this rise in their returns on assets in the short term Professor Rifaat Ahmed Abdel Karim is the visiting professor of the ICMA Centre at the Henley Business School of the University of Reading in the UK. He can be contacted at rifaatahmed@gmail.com. Islamic banks are established to provide an alternative banking service to those who wish to adhere to their Islamic faith in their financial dealings, as well as to others who are attracted by the products that these banks provide. To provide assurance to those who wish to adhere to their faith, Islamic banks have established an organ of governance generally known as a Shariah board, which presents a report addressed to all stakeholders that is included in the bank’s annual financial statements. In the report, the Shariah board provides an opinion as to whether the Islamic bank has complied in its transactions with the rules and principles of Shariah and in particular with those of the Fiqh Al Muamalat (Islamic commercial jurisprudence). In Islamic banks, the appointment and powers of the Shariah board tend to differ. Some banks appoint their Shariah board as a committee while others appoint them as a board. In some banks, Shariah boards are appointed by the general assembly, while in others they are appointed by the management. Some Shariah boards have the power to liquidate the Islamic bank (eg Faisal Islamic Bank in Bahrain), while other Shariah boards (eg Faisal Islamic Bank in Sudan) insist that the word ‘supervisory’ should be included in the title of their Shariah board. The other feature, which is different from non-Islamic banks and is frequently used on the funding side, is the so-called profit-sharing investment account (PSIA). The contract most commonly used is the Mudarabah, a form of partnership ‘between work and capital’ with the Islamic bank providing the work as the managing partner and the providers of funds as sleeping partners. The Mudarabah contract would not allow PSIA holders, being sleeping partners, to have a say either in the appointment of the management of the bank or its Shariah board. Neither would this contract allow holders of PSIA to interfere in the management of the bank. This contract typically allows providers of funds to withdraw their funds at short notice. Commodity Murabahah- based funding, which is defined by the IFSB as a Murabahah-based purchase and sale transaction, is also to be found to a significant extent in Islamic banks, such as those in Malaysia. Hence, Islamic banks face a challenge in their asset liability management when the market cost of funds rises, because of their inability to reflect this rise in their returns on assets in the short term. This exposure to the ‘rate of return risk’ (similar to the ‘interest rate risk’ in the banking book) may prevent Islamic banks from paying returns to their providers of funds that meet market expectations and thus further exposes them to the so-called ‘withdrawal risk’, ie the risk of the providers of funds withdrawing their funds to place them elsewhere. Perhaps this ability of holders of unrestricted PSIAs to withdraw their funds at short notice is some compensation for their lack of governance rights, similar to those accorded to equity investors, they might be expected to have. The IFSB addressed this issue in its IFSB-3 standard. Governance of Islamic banks COLUMN WORDS OF WISDOM
  19. 19. 19© 26th September 2018 IFN SECTOR CORRESPONDENT IFN COUNTRY CORRESPONDENT IFN Country Correspondents AFGHANISTAN: Manezha Sukhanyar former head of Islamic banking, Maiwand Bank ALGERIA: Dr Ahmed Tahiri Jouti COO, Al Maali Consultancy Group AUSTRALIA: Christopher Aylward partner, Finance and Major Transactions, Madison Marcus Law Firm BAHRAIN: Dr Hatim El-Tahir director of Islamic Finance Knowledge Center, Deloitte & Touche BANGLADESH: Md Shamsuzzaman additional managing director, head of operations wing, Islami Bank Bangladesh BRAZIL: Fábio Amaral Figueira partner, Veirano Advogados CANADA: Rehan Huda managing director, Amana Canada Holdings EGYPT: Dr Walid Hegazy managing partner, Hegazy & Associates GERMANY: Ahmet Kudsi Arslan CEO, KT Bank HONG KONG: Wilson Yeung member, The Taxation Institute of Hong Kong INDIA: Ali M Shervani partner, Consigliori Consultants INDONESIA: Irwan Abdalloh head of Islamic Capital Market, Indonesia Stock Exchange IRAN: Majid Pireh head of Islamic finance group at the Securities and Exchange Organization of Iran ITALY: Stefano Padovani partner & head of banking and finance, NCTM Studio Legale Associato IVORY COAST: Abbas Cherif head of Islamic finance, An Nour Consulting JAPAN: Dr Etsuaki Yoshida project associate professor, Kyoto University KENYA: Mohamed Abdi Shariah manager Islamic Banking- Barclays Kenya KAZAKHSTAN: Shaimerden Chikanayev partner, Grata Law Firm KUWAIT: Issam Al Tawari managing partner, Newbury Economic Consultancy KYRGYZSTAN: Daniyar Mamyrov CEO, Kompanion Islamic Microfinance MALAYSIA: Ruslena Ramli head, Islamic finance, RAM Rating MALDIVES: Aishath Muneeza chairman, Maldives Center for Islamic Finance MALTA: Reuben Buttigieg president, Malta Institute of Management MOROCCO: Dr Ahmed Tahiri Jouti COO, Al Maali Consultancy Group NIGERIA: Hajara Adeola managing director and CEO, Lotus Capital OFFSHORE CENTERS: Manuela Belmontes partner, Maples & Calder (Dubai) OMAN: Dhana Pillai head of real estate, tax and project finance,Al Hashmi Law Firm PAKISTAN: Muhammad Shoaib Ibrahim managing director & CEO, First Habib Modaraba PHILIPPINES: Rafael A Morales managing partner, Morales & Lumagui QATAR: Amjad Hussain partner, K&L Gates RUSSIA: Dr Ilyas Zaripov member, Partnership Banking Working Group, Central Bank of the Russian Federation SAUDI ARABIA: Nabil Issa partner, King & Spalding SENEGAL: Abdoulaye Lam president & CEO, Global Islamic Finance & Transactions SRI LANKA: Suresh R I Perera principal, Tax & Regulatory, KPMG TUNISIA: Mohamed Araar General directorate of External Financing and Settlements, deputy director of Private Financing and International Relations Department, Central Bank of Tunisia UAE: Anita Yadav senior director, head of fixed income research, Emirates NBD UK: Suhail Ahmad founder of the Financial Network and partner, Gateway Islamic Advisory IFN Correspondents are experts in their respective fields and are selected by Islamic Finance news to contribute designated short country reports. For more information about becoming an IFN Correspondent please contact sasikala.thiagaraja@ redmoneygroup.com RUSSIA By Dr Ilyas Zaripov Sberbank continues to develop its Islamic finance activities with its current project, PayZakat, an Islamic fintech project that aims to raise the effectiveness of wealth distribution in the Muslim world. PayZakat is an effective platform to attract and invest compulsory and voluntary charity contributions. It secured RUB5 million (US$75,170.3)-worth of investments at the initial stage. Payers can make calculations of payments (Zakat, Zakat Al Fitr and Zakat Al Adha) using special instruments like chatbots on social networks. PayZakat’s first charity partner was the Foundation for the Preservation and Restoration of Cultural, Historical and Architectural Heritage Sites in Ufa, Russia. Their first joint project is financing the construction of the Ar- Rahim mosque in Ufa. The Higher School of Economics in Moscow partnered with Sberbank to create a joint corporate accelerator that aims to organize and fund start-ups and SMEs in the area of education, e-medicine, e-commerce, fintech, leisure, new technologies, business services and other areas of the digital business. Sberbank received more than 575 applications from potential participants in the first stage. In the second stage, managers from selected companies will take part in studying and analyzing the market environment with the assistance of prominent businessmen. The enterprises that show the best results with proven effectiveness and profitability will move to the final stage where six winners will be chosen to sign financing contracts with Sberbank. The first Halal hotel, The Silk Way in St Petersburg, started its operations two years ago, providing Muslim customers a Shariah compliant means to stay and pray as well as a restaurant, swimming pool, gym and other facilities. The number of customers has increased three times after receiving from the Council of Muftis of Russia a rating of ‘three moons’ (an analogue of the ‘stars’ rating). The first Halal sports club opened on the 24th September 2016 at the multipurpose Muslim cultural, educational and leisure center in Moscow which celebrated its second anniversary by disclosing its financial results. The sports club is now offering fully- fledged Islamic sports services for Muslims, including fitness, swimming and training separately for men and women. The number of customers has increased from 30 in 2016 to 3,600, which shows great demand for Halal sport centers especially for women. The income of the sports club grew 2.5 times while net profit increased 180%. The multipurpose Muslim cultural, educational and leisure center in Moscow is a platform where visitors can attend business seminars; lectures on Islam and the Islamic law; an Arabic course and courses of foreign languages; and thematic classes on the history of prophets and Islam in Russia. Dr Ilyas Zaripov is a member of the Participating Banking Working Group of the Central Bank of the Russian Federation and the head of the Islamic Finance Educational Program of the Plekhanov Russian University of Economics. He can be contacted at iliyas888@yandex.ru. Sberbank of Russia starts new Islamic inance project
  20. 20. 20© 26th September 2018 IFN COUNTRY CORRESPONDENT MOROCCO Dr Ahmed Tahiri Jouti The centralized approach of the Moroccan Islamic finance experience constitutes its real specificity. Indeed, the Higher Council of Ulemas, which is the central Shariah board in Morocco, approves all the contracts used by Islamic banks. One year after their launch in Morocco, only three financing products are available which are all based on the Murabahah formula in addition to current accounts. The launch of Islamic banks in Morocco showed that there is a significant appetite for financing products while the migration of deposits remains limited. This is due to three main factors: 1. The absence of investment accounts significantly limited the migration of deposits to Islamic banks. There are people who have savings accounts and term deposit accounts in conventional banks and who are refusing to accept interest. Nevertheless, they are still waiting for investment accounts to have a Shariah compliant account. This consumer behavior requires rapid feedback to attract more deposits. 2. The absence of a comprehensive offer for businesses also reduces the migration effect. In the absence of services and financing products adapted to the needs of businesses, they would not deal with Islamic banks. 3. The communication campaigns of Islamic banks are focused more on financing products especially Murabahah and ignore deposit products. Thus, most of those who are moving to Islamic banks are those who receive Murabahah financing. All these factors combined constitute a real threat to the liquidity of Islamic banks. In this context, Bank Assafa, the market leader, submitted a refinancing contract based on the Wakalah mechanism in order to get adequate financing when needed. The contract submitted is an MoU between two parties. The first party is committed to provide financing every time the Islamic bank (the second party) requests for it. The MoU defines the total amount of financing to be provided by the first party. The Higher Council of Ulemas approved the contract which is ready for use by all the other Islamic banks. The Wakalah contract is a temporary solution which will provide the necessary funding for the activity of Islamic banks and will be replaced gradually by investment accounts, Islamic money market instruments and Sukuk issuances. Dr Ahmed Tahiri Jouti is COO of Al Maali Consulting Group. He can be contacted at a.tahiri@almaaligroup.com. Liquidity risk of Islamic banks in Morocco: What is new? QATAR By Amjad Hussain As summer comes to an end in Qatar, it is encouraging to see that there has been an uptick in activity over the last few weeks in the local market. This sets a good foundation for the autumn months, typically a busy season in Doha as decision-makers return from summer leave. From a macro perspective, the Qatari banking sector has reported a 3.5% growth in credit year-on-year last July. Deposits from non-residents and the private sector grew 6.1% and 2.2% month-on-month respectively. This shows a return in confidence to the local market and is likely to increase going forward. The Central Bank of Qatar signed a currency swap agreement in late August with the Central Bank of Turkey with a limit of US$3 billion. This is part of the support package that Qatar is providing to Turkey in view of the difficult time that the Turkish lira is facing currently. The IFSB’s data shows that Qatari Islamic banks are growing despite the Gulf crisis. Qatar Islamic Bank, Masraf Al Rayan, QIIB and Barwa Bank held a combined QAR358.6 billion (US$97.98 billion) in assets in the first quarter of this year, an 8.8% increase from a year earlier. Listed companies on the Qatar Stock Exchange have disclosed their financial results for the six-month period ended the 30th June 2018. The combined net profit of all companies as of the 30th June amounted to QAR21 billion (US$5.74 billion) versus QAR20 billion (US$5.46 billion) for the same period in 2017, an increase of 5%. It was nice to see that QInvest, a leading private investment group and one of the region’s most prominent Islamic financial institutions, was named Best Investment Bank in Qatar at the Euromoney Middle East Awards for Excellence. QInvest is expected to unveil new products targeting local investment opportunities in Qatar across sectors including healthcare, industrials, education and agriculture. The much-talked-about proposed merger between Islamic bank Barwa Bank and conventional bank International Bank of Qatar to create a leading Shariah compliant financial institution has recently been confirmed. The combined entity would have total assets of QAR80 billion (US$21.86 billion). The deal is pending approval from each bank’s shareholders and regulators. If successful, the enlarged entity would have a 6% share of Qatar’s overall banking market. In summary, the Qatari banking market generally seems to be showing strong positive growth and this is being reflected in the liquidity and general outlook for local Islamic banks. Amjad Hussain is a partner at K&L Gates. He can be contacted at Amjad.Hussain@ klgates.com. Steady summer in Qatar
  21. 21. 21© 26th September 2018 IFN SECTOR CORRESPONDENT IFN COUNTRY CORRESPONDENT UK By Suhail Ahmad Over 400 Islamic finance professionals, including distinguished guests and global leaders from government, banking and professional services, converged on Mansion House in London on the 5th September for IFN UK Islamic Finance Week. There were subsequent real estate and financial technology events held to provide in- depth discussions and insights on these key segments of the Islamic finance industry. The event highlighted key developments in the UK market as well as global developments with key discussions on the impact of Brexit, incorporating environmental and social responsibility into Islamic finance products and Sukuk issuances, among other topics. The same week, the Blockchain World Forum was also held in London bringing together blockchain technology investors, entrepreneurs and business leaders to discuss the impact of declining cryptocurrency prices and technology innovations. Several Muslim entrepreneurs also exhibited and presented at the event, including Tykn co-founder Khalid Maliki from the Netherlands showcasing the company’s blockchain technology solution for NGOs and governments to help manage humanitarian aid distribution. UK Islamic fintech property investment platform Yielders announced the successful closing of a pre-series A funding round. The exact terms and the amount of the funding were not disclosed but it was reportedly backed by Peach Ventures and Greenshores Capital as well as number of private investors. The funding comes at the same time the company announced the completion of regulator authorization in the Netherlands, Norway and Luxembourg. Additionally, the company also appointed Abdul Haseeb Basit as the company’s chairman. Suhail Ahmad is CEO of Advisory Direct. He can be contacted at suhail@advisorydirect. co.uk. London hosts industry leaders; Yielders closes funding round OMAN By Dhana Pillai Islamic banks in Oman have recorded a robust year-on-year growth in assets of over 14%, surging to OMR4.1 billion (US$10.62 billion) from OMR3.56 billion (US$9.22 billion) a year ago while total financing stood at OMR3.32 billion (US$8.6 billion) at the end of June 2018 compared with OMR2.75 billion (US$7.13 billion) a year ago, registering a growth of more than 20%, according to the quarterly bulletin report released by the Central Bank of Oman. Total deposits showed a growth of 18.42% with OMR3.15 billion (US$8.16 billion) in June this year from OMR2.66 billion (US$6.89 billion) in the same month of the previous year. Meethaq’s receivables at the end of five years of its formation stood at OMR1.06 billion (US$2.75 billion) in June, registering an increase of 16.1% from the previous year. According to Meethaq, it has extended a diminishing Musharakah facility to Sebacic Oman to set up the world’s largest plant for sebacic acid. It also supported a OMR50 million (US$129.56 million) project financing to A’ Namaa Poultry to set up the biggest poultry project in Oman, fulfilling the scope of the Tanfeedh program. Hydrocarbon Finder E&P (HCF) signed an Islamic project financing facility for the development of oil and gas fields in Block 7 of Oman operated by HCF while Muscat National Development and Investment Co signed term finance agreements with a total value of OMR16 million (US$41.46 million) for an upscale three-star hotel in Muscat and a crew reporting terminal at the airport. Under its OMR100 million (US$259.11 million) program, Meethaq has the mandate to issue Sukuk in various tranches from time to time to fund its growth plans and expansion of Islamic banking services across the Sultanate. Its maiden OMR25 million (US$64.78 million) issuance was oversubscribed and was increased to OMR44.6 million (US$115.56 million). The issue has an indicative profit rate of 5% per annum with a tenor of five years. Following the announcement of merger talks between Oman Arab Bank and Alizz Islamic Bank, which would create a merged entity with total assets of OMR2.63 billion (US$6.81 billion), National Bank of Oman and Bank Dhofar also announced a potential merger which would create a merged entity four times the size of that of the potential merger between Oman Arab Bank and Alizz Islamic Bank. The audited financial statements for 2017 revealed an increase of 1.89% in total investments of Takaful companies compared with 2016. Total investments of Takaful companies were OMR35.5 million (US$91.98 million) in 2017 compared with OMR34.84 million (US$90.27 million) in 2016. It is worth noting that Takaful represented about 6.11% of the total investments of insurance companies up to the end of 2017. Total proceeds from the investments of Takaful companies increased by 21.6% at 4.67% of the total proceeds from the investments of insurance companies. Takaful insurance premiums increased by 9% to OMR45.76 million (US$118.57 million). Takaful comprises 10% of the gross direct premiums in 2017 and 19% of total paid indemnities. Returns on investment for the year 2017, however, remained low for Takaful companies due to an increase in claims. The Capital Market Authority of Oman is the regulatory body for insurance companies in Oman. Dhana Pillai is the head of real estate, tax and project finance at Al Hashmi Law Firm (Oman). She can be contacted at dhana. pillai@ohlaw.net. Central Bank of Oman releases quarterly bulletin report on Islamic banks
  22. 22. 22© 26th September 2018 IFN COUNTRY/SECTOR CORRESPONDENT BRAZIL By Fabio Amaral Figueira The IDB is actively involved in two South American countries: Suriname and Guyana. South America is composed of countries which are former Spanish colonies, except for Brazil, a former Portuguese colony. Until the 1960s, there were the so-called three Guyanas: the British Guyana (currently Guyana), the Dutch Guyana (currently Suriname) and the French Guyana (which is still a French département). Suriname has about 600,000 inhabitants and its Muslim population is approximately 14%. The population of Guyana is approximately 800,000 and among them 7% are Muslims. The IDB in its efforts to have a significant presence in all continents is evaluating the possibility of opening a regional headquarters in Suriname at a later date. Suriname is making an effort to include itself in the Islamic economy and Trustbank Amanah will be adapting itself for such an inclusion. Guyana has applied for a US$20 million financing from the IDB, which has since been approved, to fund the upgrading project of Guyana Power and Light. The IDB also has a presence in other countries in South America like Venezuela, Argentina and Brazil in projects related to education. Islamic school projects are fast expanding in the city of Sao Paulo and the city of Florianopolis in the state of Santa Catarina. A Brazilian Arabic school for the Islamic Cultural Center in the city of Foz do Iguacu in the state of Parana is under construction. In Foz do Iguacu, the Muslim presence is evident despite being the smallest minority in the city. According to a 2010 census, Brazil only has approximately 36,000 people in its population who are Muslims. However, some Muslim organizations believe that the Muslim population corresponds to approximately 1.5 million people. Brazil is still in need of foreign investments to boost its growth and development in Islamic finance economically. Collaborative efforts between the IDB and Brazil could fulfill Brazil’s aim to make Islamic finance a reality. The IDB can assist in reviewing Brazil’s laws and regulations in order to accommodate Islamic finance. Brazil can also explore other paths related to Islamic finance rather than just being a relevant exporter of Halal food. Fabio Amaral Figueira is a partner at Veirano Advogados. He can be contacted at fabio. figueira@veirano.com.br. Brazil: The IDB and South America ISLAMIC LEASING By Shoeb Sharieff As oil prices start to creep upward again, Saudi Arabia’s Islamic leasing and banking sector is showing some improvement. Bankers from Saudi Arabia that participated in the Corporate Restructuring Summit in Dubai this month also noted that several banking reforms have helped the Islamic leasing and banking sector via a three-pronged approach. According to Thompson Reuters, some of the policy reform measures that were helpful included the easing of restrictions on home ownership which certainly carries a strong connection with Islamic leasing. To improve the atmosphere for small to medium businesses, banks have been using Islamic leasing as a vehicle to free up capital. Even the Saudi officials highlighted the easing of capital market restrictions. New York-based Wahed Invest has launched a number of Shariah compliant funds under its fintech platform for the underserved Muslim finance market across the globe. Wahed Invest’s mission is to introduce technological advancements and Islamic leasing fintech products into the Islamic finance industry. This effort is part of a wider push in Islamic financing by bringing technology into Shariah compliant products. FinTech Hive is considered to be one of the largest Islamic leasing financial technology companies in the entire MESA region that incorporates South Asia and Middle East countries. FinTech Hive announced that it would be partnering with the large US firm Accenture on their accelerator program earlier this year where Shariah compliant financial products and Islamic leasing are centerpieces. Out of more than 300 applications for this program, only 22, mostly start-up companies, were selected to go to the next stage. The program is designed to make sure that the accelerator positions itself among the most credible and reputable hubs in the world for Islamic leasing and other financial products. This move helps to spread Islamic leasing more widely because the accelerator start-ups are able to take advantage of Accenture’s connections in Hong Kong, London and New York. It is important that innovative start-up companies also have an Islamic leasing element in them by combining the latest innovations like fintech which will enable them to diffuse these Shariah compliant products quicker. Shoeb M Sharieff is the president and CEO of Ijara Community Development Corp. He can be contacted at shoeb@ijaracdc.com. Islamic leasing market picking up steam with partnerships and start-ups

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