Sharia Banking and the Financial Industry

The Finance Ministry’s debt management office plans to introduce new sharia-compliant debt instruments, including project Islamic bonds (sukuk) designated for infrastructure projects and sharia short-term Treasury bills, according to an official.

Director of sharia financing policy at the Finance Ministry’s debt management office, Dahlan Siamat, said on Monday, 21 Februari 2011 that the ministry was still assessing two possibilities for project sukuk. In the first scheme, proceeds of the sukuk issuance would be used to fund infrastructure projects as planned in the state budget, while the second would finance underlying projects. The first one is the most feasible because it doesn’t need new authorization. Approval to issue T Bill has been given.

The ministry was also studying plans to introduce one-year sharia and regular T-bills to meet demands for short-term sharia notes and to help the liquidity management of sharia banks.

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Bank Indonesia (BI) has received an approval from the House of Representatives to contribute US$5 million in equity to the newly established International Islamic Liquidity Management (IILM) to support the country’s growing Islamic banking sector. The approval was formally made during a hearing between Bank Indonesia and the legislators on Monday. During the hearing, BI governor Darmin Nasution said that with the equity participation of $5 million, the central bank would have five shares each worth $1 million in the institution. BI would become a member of the governing board in the institution which it and another 10 central banks and two multinational organizations in Asia established in October last year. BI will be able to invest in sukuk and other Sharia instruments issued by the IILM, and the government could also get higher ratings in issuances of sukuk or other Sharia instruments so that costs of financing could be lower. The IILM would also widen investors’ basis for global debt papers, including global sukuk issuances, and increase Indonesia’s participation in growing the Sharia industry both globally and regionally. The IILM is a multinational Islamic finance institution with 12 members including Iran, Malaysia, Kuwait, Luxemburg, Mauritius, Nigeria, Qatar, United Arab Emirates, Sudan, Turkey, Saudi Arabia and the Islamic Cooperation for the Development of the Private Sector (ICD). The House granted approval under conditions that the central bank must report to Commission XI about the development of its involvement in the IILM. (more…)

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Islamic finance is set to double in size in five years, but the $1 trillion industry must diversify and regulate to reach its full potential, analysts and economic reports. Diversification into new territories is also necessary to reduce the risk of exposure and utilize full potential.
Perhaps the most popular Islamic finance product is murabaha , which is used to finance a variety of consumer purchases from cars to houses. Sukuk is the equivalent of bonds used to raise funds for large-scale investments. Under a product called musharaka , which means partnership, the bank provides the funds to enable the customer to buy an asset, with the two parties agreeing a profit or equity sharing ratio for that asset. Losses are shared on a similar basis.

Despite the number of products offered, Amrith Mukkamala, director of asset allocation at Kuwait and Middle East Financial Investment, believes full potential is not yet realized. The products of Islamic finance that are available for investors are still very limited compared to high demand,” said Mukkamala, adding that the field of derivatives should be explored seriously. For his part, Kuwaiti economist Hajjaj Bukhdur believes there are enough products, and that even greater expansion has been subdued by a lack of both sufficient regulation and management skills. “Islamic finance already has around 30 different types of products and instruments, giving it a large degree of flexibility to meet investors’ demand and continue to expand rapidly,” Bukhdur said.

Australia as a Western country with minority muslim population has tried to adopt the Islamic financial industry. This country is eager to change the tax system to welcome the flow of Islamic investment. Dick Warburton, chairman of the Board of Taxation (Australian federal taxation agency), has launched a set of tax rules on Islamic finance industry, including banking and insurance. It news was announced on 13 October, as reviewed pages of The Australian on the next day. Board of Taxation will examine Islamic financial products in Indonesia, Malaysia, Britain and France. Study of the tax policy is believed to encourage investors more willing to invest in Islamic finance in Australia. Meanwhile, Islamic investment in developed countries was fairly low. A written report on this tax review will be conducted until 17 December. Open forum to gather public opinion will take place in Melbourne, Sydney and Canberra in November 2010. This is a step forward after last year’s Macquarie Bank’s former deputy, Mark Johnson, released a report on Islamic finance. (more…)

Islamic finance is toughening supervision of its powerful religious advisers as shareholders worldwide demand increasing accountability from directors, but key reforms may do little to boost transparency.  Competition for investor dollars and a growing market is putting pressure on the once-arcane industry to adopt clearer, more uniform guidelines.  Key to the challenges is the small number of scholars advising a growing number of banks on increasingly complex financing structures, raising issues such as transparency of rulings, independence of advisers and how to groom new scholars. But varying Shariah standards, different regulatory approaches and vast disparities in development across markets stand in the way of reforms to streamline and boost supervision, which are critical to growth.

With the Islamic finance industry worth an estimated $1 trillion and growing rapidly, it is no surprise that several Asia-Pacific nations are among a growing band of countries worldwide to signal their intention to carve out a larger share of the market. Malaysia, Indonesia and Singapore, along with Hong Kong, have set their sights on becoming hubs for Islamic finance, where investments are made according to Islamic principles. (Under Shariah, or Islamic law, charging interest and making investments in industries such as gambling and alcohol are forbidden.) While their sectors may be at varying stages of development, they are facing a common predicament: a shortage of professionals skilled in Islamic finance. Education institutions around the Asia-Pacific region, like their counterparts in the Middle East and Europe, are seeking to fill that gap by adding Islamic finance specialization to their master’s programs in business administration and elsewhere. The number of such courses available in those countries to the most developed Islamic finance sector in the region, is growing rapidly. (more…)

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