Islamic Finance Moves Toward Common Standards

By Oxford Analytica,

Regulation should help provide a basis for the industry's expansion.

Islamic finance is one of the fastest growing segments of international financial markets. Currently, total sharia-compliant assets amount to an estimated $1.125 trillion to 1.275 trillion, with an annual growth rate of 15-20%. The global credit crunch has not left it unscathed, and recent capital market growth has been hampered by conflicting interpretations of the sharia compliance of specific wholesale product structures (sukuk). Nevertheless, the outlook for the sector is positive.

AAOIFI. Efforts to standardize Islamic financial products should enhance the sector's prospects. The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) plays an important role in this regard:

--Originally subscribed by an alliance of domestic and international Islamic banks as well as the Islamic Development Bank, industry-sponsored AAOIFI has since extended its membership categories to include authorities that regulate and supervise Islamic financial institutions.

--It also offers observer member status to conventional financial institutions that operate Islamic 'windows' (special facilities offered by conventional banks to provide services to Muslims who wish to engage in Islamic banking).

Standards. AAOIFI’s Sharia Standards 2010 contains 41 standards, including 11 new stipulations pertaining to gharar (uncertainty) in financial transactions, arbitration, zakat (alms giving) and online financial transactions among others. Additionally, its Accounting, Auditing and Governance Standards 2010 contains 40 standards covering the areas of accounting, auditing, ethics and the governance of Islamic financial institutions.

National adoption. These standards are primarily targeted at individual Islamic financial institutions, but they have also been adopted at a national level:

--The AAOIFI's standards have been made mandatory for Islamic financial institutions in Bahrain, Dubai International Financial Centre, Jordan, Sudan, Syria and Qatar.

--Last month the State Bank of Pakistan announced that it had begun selectively to implement AAOIFI Sharia Standards and has advised Islamic banks to prepare for the phasing in of further standards in the near future.

--In other countries, including Indonesia, Lebanon, Malaysia, Saudi Arabia and the United Arab Emirates, AAOIFI standards have been incorporated into national guidelines and are adhered to by AAOIFI member institutions.

Standardization issues. The lack of standardization of Islamic financial products has been a major barrier to the cross-border sale of Islamic financial products. The AAOIFI and its sister standard-setting organization, the Kuala Lumpur-based Islamic Financial Services Board (IFSB)--primarily tasked with developing capital adequacy rules for Islamic financial institutions--have become key players in the construction of the emerging international framework that governs Islamic finance. The AAOIFI has over 200 members from 45 countries while the IFSB has 193 members operating in 39 jurisdictions.

More intrusive regulation. So far the compliance of member institutions with the standards can neither be enforced nor fully monitored, unless they are mandated at country level and then enforced by domestic regulators. Last month, the AAOIFI announced a timetable for taking a more intrusive approach to regulating Islamic financial products, including plans to create a watchdog committee--composed of sharia scholars and market practitioners--by the second half of 2010. However, increasingly different trajectories of Islamic banking and Islamic capital market development could in turn affect the further standardization of Islamic financial products.

Challenges. There are two major challenges to the further growth prospects and pace of development of the industry. Both could benefit from enhanced standardization and the AAOIFI's work more generally:

--Interpretation of Islamic law. Given the absence of a highest religious authority in majority Sunni Islam, assessing the Sharia quality of Islamic financial products depends on a number of representatives from different legal schools with sometimes widely varying interpretations.

--Scarcity of qualified sharia scholars. To address the shortage of scholars well versed in both sharia and finance, a number of programs have sprung up that offer degrees in Islamic finance.

Outlook.Overall, the outlook for Islamic finance remains positive. Recent efforts to develop common standards for Islamic financial institutions should help to provide a sound basis for the expansion of the industry. Learn more Understanding Islamic Finance (The Wiley Finance Series)

Source : Forbes.com

Islamic finance growth seen 10-20% in 3 yrs - study

By Cecilia Valente

Most executives involved in Islamic finance expect the industry to grow by between 10 and 20 percent over the next three years, a survey published by accountancy firm BDO showed on Thursday.

The study, based on responses from 173 financial services executives active in the sector, found that 53 percent expected 10 and 20 percent growth while another 22 percent felt the industry could grow by 20-30 percent or more.

Some 23 percent felt it would experience growth of 0-10 percent, or no growth at all.
The Islamic finance industry is estimated to be worth about $1 trillion and is dominated by the issuance of Islamic bonds, or sukuk. Growth, however, has been held back by a shortage of expertise and poor harmonisation of the criteria applied to products, the survey respondents said.

Islamic products must be endorsed by scholars able to interpret sharia law and understand the technicalities of financial products.

The industry has struggled to agree on a set of common principles as it is governed by a patchwork of national regulators, standard-setting industry bodies and individual scholars ruling on products and contracts.

Due to different interpretations of the sharia or Islamic law in different regions, a financial product accepted by one set of scholars could be rejected by others. These discrepancies make cross-border distribution difficult.

AAOIFI, a Bahrain-based body responsible for accounting, auditing and governance standards in Islamic finance, is setting up a committee which will try to establish common guidelines in the industry.

"We feel that these differences are damaging our credibility severely within the Muslim (world) and outside," said Mohamad Nedal Alchaar, AAOIFI secretary general, who attended the presentation of the survey results.

The committee will include representatives of scholars, lawyers, auditors, regulators and bankers who from next year will sieve through financial products and gauge their compliance with Islamic principles.

AAOIFI's standards are adopted in some Middle Eastern markets, including the Dubai International Financial Centre.

The committee will seek to convince providers to alter products it deems inappropriate but will be prepared to go public with its concerns if no progress is made.

The BDO survey respondents picked out Islamic retail loans as the product with most revenue potential, while Islamic insurance, or takaful, was the next most popular. Sukuk were only fourth on the list, behind Islamic mortgages.

Source : Reuters

Hong Kong to develop market for Islamic finance

Donald Tsang (R), chief executive of the Hong Kong Special Administrative Region (HKSAR) government, attends the Riyadh Chamber of Commerce Industry luncheon in Riyadh, Saudi Arabia, Jan. 29, 2008. Outlining Hong Kong's plan to develop a market for Islamic finance, Tsang said the city can play a significant role in structuring and financing Islamic investment products to meet the needs of Mainland Chinese borrowers. (Xinhua Photo)

DIB moves to improve corporate governance

by Rebecca Bundhun

Dubai Islamic Bank (DIB) has signed a "founding member" sponsorship agreement with corporate governance organisation the Hawkamah Institute, the bank announced on Thursday.

DIB said that the move shows its commitment towards strengthening its corporate governance standards.

“The Shariah Supervisory Board has become an indispensable aspect of our corporate governance and will be well paired with the objectives of Hawkamah, which aims to ensure these standards are being met to better protect all those associated with the bank,” said Abdulla Hamli, DIB’s chief executive officer.

Many experts have long called for increased regulation and transparency of Islamic banks, which are still relatively new to the market.
“Corporate governance plays a critical role in the development of modern businesses as it enhances investor confidence and helps in developing the capital markets of the region,” said Nasser Saidi, executive director of Hawkamah, said

“Islamic finance has experienced unprecedented growth so far, but the enactment and implementation of well defined corporate governance structures is essential if trust and confidence is to be maintained.”

Is Islamic finance at tipping point?

By Christopher Watts

Shari'a-compliant banking is fast moving from niche to mainstream, says Christopher Watts. But while continuing growth seems certain, challenges remain.

In January this year when the UAE's Sharjah Electricity and Water Authority (SEWA) needed cash to construct a power generation and desalination plant in the town of Hamriyah, it was Islamic finance that provided the answer: The utility raised USD 350 m by issuing its first ever sukuk – asset-backed bonds that comply with Shari'a, the Islamic legal code that prohibits interest.

By no means is SEWA alone in venturing into the Islamic capital markets. Corporate sukuk issuance leapt from USD 0.4 billion in 2000 to USD 24.5 billion in 2006, according to International Islamic Financial Market (IIFM), an industry association. Growth topped 122% in 2006 alone. "Islamic finance is no longer a niche market," says David Pace, CFO of Bahrain-based Unicorn Investment Bank (UIB), a Shari'a-compliant house. "It is increasingly a mainstream component of the global banking system."
To be sure, while the world's first Islamic bank was founded back in 1975, it is only in the last five years or so that Islamic finance has surged. Sniffing opportunity, conventional banks are now scrambling to set up Shari'a-compliant operations; and there has been a flurry of all-Islamic start-ups, from full-service investment banks to specialist advisory firms. Products have moved beyond lending, insurance and investment funds to include sukuk, hedge funds, currency swaps, and more.

Despite this boom – largely concentrated in the Middle East and South-East Asia – it's plain the Islamic finance industry still lacks global scale. Professor Rodney Wilson of the Institute for Middle Eastern and Islamic studies at Durham University in the UK estimates Islamic banking assets speak for less than 0.5% of the world's total. And worldwide sukuk debt outstanding amounts to perhaps USD 100 billion – just 0.1% of the global bond market.

Still, the signs point to a continuing surge in Islamic finance. Take economic growth: The Middle East and Asia are the two fastest-growing areas of the world. Kuwait Finance House expects 2007 GDP to rise 6.1% in the GCC and 6.2% in South-East Asia – in contrast to 2.4% in the EU and 2.2% in the US. Oil revenues lie behind the boom in the GCC; and in South-East Asia it is "the financial rigour adopted in the wake of the Asian currency crises," according to Douglas Clark Johnson, CEO of Calyx Financial, an alternative investment adviser based in New York.

Continuing growth in the GCC states and South-East Asia is fast creating a prosperous middle class among the regions' combined 410 m-strong Muslim population. As the ranks of the regions' newly well-off snap up credit to buy homes and cars, and invest in savings and retirement plans, demand for Shari'a-compliant retail financial services is set to accelerate. Behind such consumer products is a need for Islamic institutional finance too.

Consider, too, the vast cash-flows into the GCC region and South-East Asia: The IMF expects Indonesia and Malaysia alone to record a cumulative current account surplus of USD 132 billion for the five-year period to end-2008, in contrast to a deficit of USD 32 billion for the same period a decade earlier. And in the GCC, the surplus should reach USD 680 billion, versus a prior deficit of USD 8 billion.

Buoyed by this cash, regional governments are planning ambitious infrastructure programmes: Indonesia alone expects USD 110 billion of expenditure in the five years to end-2010; and consulting firm McKinsey estimates the GCC will invest USD 200 billion in the same period. Much of this spending is already being financed by sukuk – and the volume is set to balloon: Following its successful sukuk issue, SEWA hopes to raise another USD 2.7 billion. And in neighbouring Dubai, the electricity and water authority is eyeing a debut sukuk issue, with plans to raise USD 2.5 billion.

With ever-stronger foundations in the Middle East and Asia, Islamic finance is now starting to take hold in London, too. The UK's first standalone Shari'a-compliant bank opened its doors in 2004; two others have followed; another is on the way. (All are backed by Middle Eastern institutions.) And in April this year the London Stock Exchange listed its maiden sukuk, adding much-needed depth and liquidity to the market. Another milestone is in sight: the UK government is mulling its first sovereign sukuk issue, perhaps as soon as early-2008.

But challenges remain. If Islamic finance is to move deeper into mainstream global finance, the industry needs to improve transparency and foster credibility by harmonising standards and practices. Not least, Shari'a interpretation varies between regions and even institutions. Regulatory oversight need to be sharpened as well. These measures – and others – could be critical in broadening the appeal of Islamic finance and bridging the gap between Islamic and conventional financial systems.

The Islamic finance industry needs to work on innovation, too. Shari's-compliant products can be more complex than conventional ones because every transaction is backed a non-financial trade. Many instruments are still lacking, including corporate treasury and derivatives products. As UIB's Pace points out: "We [in the industry] need to change our perception of R&D, and view it as a core ingredient of success." But at the same time, innovation is hampered by the limited number of Islamic scholars able to vet financial products for Shari'a compliance.

For certain, industry practitioners are making progress. Earlier this year the International Capital Market Association and the IIFM agreed to develop standard contracts and common best practice for secondary trading of sukuk and other Islamic instruments. And it may help, too, that global banking giants are putting their weight behind Islamic finance. (Deutsche Bank, Barclays Capital and BNP Paribas are already among the world's top five issuers of sukuk.)

The question whether Islamic finance has reached critical mass remains open, of course. But Johnson of Calyx Financial is optimistic: "The tipping point may already have arrived," he ventures. Even if Johnson is wrong in his optimism, it seems unlikely history will prove him to have been very far wide of the mark.
Source : Economist.com

New Islamic bond sales fell 66 pct in '08-IFIS

KUALA LUMPUR, Jan 9 (Reuters) - New Islamic bond issuance fell two-thirds to a three-year low in 2008, with key market Malaysia dropping 78 percent, an industry body said, casting doubts about the sector's resilience against the global downturn.

Islamic bond sales have almost dried up in recent months as a worsening global economic outlook prompts banks to turn off the tap and consumers to tighten their belts.

Sales of new Islamic bonds, or sukuk, totalled $15.77 billion last year versus $46.65 billion in 2007, according to Islamic Finance Information Service (IFIS) which tracks data in the Islamic finance industry.

Total sukuk issuance last year was the lowest since the $10.76 billion recorded in 2005, it said in a statement.

Corporate sukuk sales totalled $9.72 billion last year, or about 62 percent of the total, IFIS said. Quasi sovereign issuance was at $3.83 billion and sovereign issuance at $2.23 billion.

Malaysia, one of the world's top Islamic bond markets, saw $5.86 billion of issuance last year, compared with $26.53 billion in 2007, IFIS said.

Sukuk are designed to comply with an Islamic ban on the receipt of interest. Instead, returns are derived from underlying physical assets, such as property.

Some industry officials had painted Islamic finance as a safe haven amid the deepening economic slowdown, arguing that the sector's conservative lending principles would shield investors from the worst of the fallout.

French bank BNP Paribas has forecast that sukuk issuance is likely to pick up this year and could beat 2007 levels after a dip in 2008. (For more Reuters coverage of Islamic finance, click on [ID:nISLAMIC])

(Reporting by Liau Y-Sing; Editing by Kim Coghill)

Islamic finance: Size will matter in Islamic banking

By Chris Wright

THERE ARE 300 Islamic banks operating in the world today. But this statistic, ubiquitous in presentations about the growth of Islamic banking, is not an entirely positive number: it’s far too high. Islamic banking is enormously fragmented. At the top end, there are: Al Rajhi Bank, with $33.3 billion of total assets in 2007; Kuwait Finance House, with $32.1 billion; and Dubai Islamic Bank with $22.8 billion. But after that, there’s daylight, and you don’t have to go too far down the list to get to the minnows.

Numbers are notoriously tricky to pin down in this field, but in a January study the IMF put total Islamic banking assets at $250 billion, citing several other studies. That’s an average of less than $1 billion of assets for each bank, and with the best part of $100 billion accounted for by the top three alone, there are many banks with very little to their name. "They say that something like 65% to 70% of Islamic institutions are capitalized at less than $25 million," says Agil Natt, chief executive of Malaysia-based Islamic finance training organization Inceif, and formerly head of Aseambankers and deputy chairman of Maybank. "That’s nothing."

Natt continues: "Moving forward, not only do you need balance sheet, but you need reach and the power to distribute the various instruments that you come up with. My opinion is that there is a need for a few large Islamic financial institutions with global reach. But the industry has not reached that stage."

There are the earliest signs of consolidation. This year, Maybank bought a 20% stake in Pakistan’s MCB Bank for $686 million. However, MCB is not actually an Islamic bank: only eight of its 1,026 branches at the time of the acquisition were dedicated Islamic branches.

Consider also the full merger of National Bank of Dubai and Emirates Bank: although there is an Islamic entity in the group (Emirates Islamic Bank), and both banks sell Shariah-compliant mutual funds, this is again a merger of conventional entities that happens to have an impact on Islamic subsidiaries. Likewise Malaysia’s CIMB Islamic, which runs Islamic banking and asset management operations in Indonesia through Bank Niaga: a cross-border presence certainly, but one that sprang out of the 2002 purchase of one conventional institution by another, both banks happening to have Islamic subsidiaries or licences.

There have been signs of Islamic banks becoming more globally minded but they have tended to do this through organic expansion. The clearest example is Al Rajhi and Kuwait Finance House, which have taken advantage of Malaysia’s policy of opening its doors to foreign entrants to establish itself as the global hub for Islamic finance. KFH opened in February 2006, and Al Rajhi a year later. A third bank followed: Asian Finance Bank, which at the time of launch was owned 70% by Qatar Islamic Bank, 20% by Saudi Arabia’s RUSD Investment Bank, and 10% by Kuwait’s Global Investment House.

For KFH, the Malaysia expansion – which has been followed this year by the licensing of an Islamic asset management business – was in keeping with a long-standing and against-the-herd policy of global engagement. Until recently one could have argued that KFH was the only Islamic bank to have expanded cross-border. It holds a majority stake in Kuyevt Bank, an Islamic bank in Turkey, and has operations in Bahrain, Algeria, Saudi Arabia and Morocco and affiliates in the United Arab Emirates, Oman and Bangladesh. Its first participation in Malaysia came in 1995 when it set up a leasing joint venture with several Malaysian partners and the Islamic Development Bank; at the same time it applied for a full Islamic banking licence from Bank Indonesia, but the Asian financial crisis put that on ice.

But the fact is it could have been even more of a trailblazer if it had got its way last year, when it bid to buy a 33% stake in Malaysian financial services group Rashid Hussain. It got as far as striking a preliminary agreement with the seller, Utama Banking Group, and outlined plans to invest a total of M$12 billion ($3.3 billion) in the group and turn it into an Islamic banking powerhouse.

It didn’t happen: Utama opted instead for Malaysia’s key pension fund, the Employees Provident Fund. And so this is still the transaction Islamic banking is waiting for – a truly transformative, intercontinental acquisition to make a global Islamic banking leader. But it’s still possible that one will emerge, and when it comes it’s likely to be KFH that achieves it. The Malaysia managing director Dato’ K Salman Younis said last year that, in Indonesia, "we have identified some target banks where we know the owners desire to divest. There are four or five of them. Once we get the green signal from the parent company, we will be able to move."

KFH apart, though, most other Islamic banks are more sluggish. Al Rajhi’s expansion into Malaysia was all the more notable because it marked the first time it had ventured outside Saudi Arabia. Its behaviour in Malaysia suggests a more ambitious view of the world – it opened with 12 branches, quickly announced plans to get to 50 by 2010, and launched a blanket marketing campaign – but the bank looks less likely to expand by acquisition. Dubai Islamic Bank is growing with gusto – last year it said it aimed to open 70 branches in Pakistan – but again, it’s organic.

So why don’t mergers happen? There are several answers.

First, Islamic banks are just too busy. Most estimates (McKinsey is a frequently cited source) say that Islamic banking is growing by 15% to 20% a year. If you’re doing that, the challenge is finding enough people to run your own business. Why bother acquiring a whole other shop that would need integrating? With growth rates and margins like this, anyone new can set up a franchise from scratch without having to pay a premium for an acquisition.

This is an argument that relates to the maturity of the sector. For the moment, Islamic banks are opening branches and in some cases expanding overseas; the imperative isn’t, yet, to cut costs and improve profitability because margins have been so good. There has also been no need to look overseas when pickings have been so rich at home. But in time, that focus will undoubtedly shift, as the increasing competition from all these players starts to push margins down. That’s when mergers are likely to get more attention as an idea.

The second argument is regulatory, and this applies in particular to anything cross-border. Many Islamic countries have restrictions on foreign ownership, or limit the number of licences that can be awarded to foreign entities.

A third concerns Shariah interpretation. If KFH had succeeded in buying Rashid Hussain, there was much conjecture about how it would have integrated its assets. KFH is considered one of the most conservative institutions in the world in terms of Shariah compliance, and there are marked differences in interpretation between Malaysia and the Gulf, which makes cross-border acquisitions trickier.

For a long time there was a fourth argument: high equity valuations, particularly in the Gulf, made takeovers prohibitive. Still, that argument has gone out the window following the recent plunges in Gulf stock markets along with those everywhere else in the world.

Could the much tougher global environment be the catalyst for consolidation? Islamic banks by and large have come through the credit crunch in good shape, since many of the securities that triggered the sub-prime crisis in the first place are off limits to Shariah-compliant banks. But there’s no escaping the effects completely, and bank growth rates will surely slow. A 20% growth rate can’t last for ever anyway: it’s a function of starting from a low base, and maintaining that pace becomes more difficult with every passing year. Also, we have been in the midst of a period of asset transfer, as more funds have moved across from conventional to Islamic structures as awareness and regulation have permitted. That free kick to Islamic asset growth will be gone sooner or later, and asset gathering will have to come from other sources, perhaps acquisitions.

One possibility is that regulators will become agents for change rather than opponents of it. If they raise capital requirements, for example, or define a minimum scale for Islamic banks, they will drive consolidation; they can further enable it by being more accommodating to foreign buyers. Malaysia brought its domestic conventional banking sector down from more than 50 financial institutions to 10 banking groups in less than a decade.

Logically, mergers should come: this is how the conventional banking world has ended up and Islamic banking, when it reaches a greater degree of maturity, will likely do so too. "There are merits in growing organically, but that takes time," says Natt. "The future is for Islamic banks to look beyond their borders."

Source: Euromoney

Practice of Finance: Islamic Finance at MIT Sloan School of Management

The MIT Sloan School of Management, based in Cambridge, Massachusetts, is one of the world’s leading business schools — conducting cutting-edge research and providing management education to top students from more than 60 countries. The School is part of MIT’s rich intellectual tradition of education and research.

MIT Sloan began in 1914 as engineering administration curriculum in the MIT Department of Economics and Statistics. The scope and depth of this educational focus have grown steadily in response to advances in the theory and practice of management to today’s broad-based management school.

A program offering a master’s degree in management was established in 1925. The world’s first university-based executive education program — the MIT Sloan Fellows — was created in 1931 under the sponsorship of Alfred P. Sloan, Jr., an 1895 MIT graduate who was then chairman of General Motors. A MIT Sloan Foundation grant established the MIT School of Industrial Management in 1952 with a charge of educating the “ideal manager.”

MIT Sloan School of Management teach subjects of Islamic Finance.
Description: Islamic financial institutions have in recent years experienced spectacular growth (+25 percent in 2006, +37 percent in 2007). Islamic financial assets now exceed 1 trillion dollars and what was once a small niche has gone mainstream. Indeed, most major Western financial institutions are involved in one way or another in Islamic finance. The first part of the course introduces the basic principles underlying the industry (the prohibitions of riba, gharar, etc.) and discusses its recent evolution. The second part focuses on the main Islamic products: murabaha, mudaraba, musharaka, ijara, sukuk, takaful, etc. and explains how Islamic deals are structured. The third part discusses the challenges — competitive, regulatory, political, religious, etc. — faced by Islamic institutions and considers the impact of the current financial meltdown on their future evolution.

Hugging Shari'a Finance at the Fed

By Alyssa A. Lappen
The first market day after President-elect Obama announced plans to appoint Federal Reserve Bank of New York president Timothy Geithner as Secretary of the U.S. Treasury, U.S. equities rose 6.5%. Pundits praised his experience handling crises and understanding of the troubled economy. But possibly, the market hoopla was premature, or even unwarranted. Some analysts seek his retirement.

As turmoil built, Geithner criticized Wall Street's self-regulatory system, negative incentives and market forces, sought tighter supervision and berated insufficient “derivative securities” regulation and “credit-default” swaps allowing investors to “insure” against loses---only to fail. The Treasury Department's former attaché to the International Monetary Fund had overseen U.S. responses to the 1990s Mexican, Indonesian and Korean bailouts. But at the Fed, Geithner did not use regulatory powers to check abuses, or advocate for more regulation, impartial supervision or new laws. He even concluded that markets were improving---and after Bear Stearns' collapse confessed, nobody “understands [the causes] yet.”

Worst of all, since Nov. 2003, Geithner let dangerous new Islamic and shari'a-based securities, markets and financial institutions gain business currency---despite the Fed's role in U.S. monetary policy, currency distribution, government securities markets, legal supervision, regulatory enforcement, bank and capital markets investigation, foreign accounts and a payments mechanism handling over $4 trillion daily in funds and securities transfers. Not to mention Fed officials' admitted lack of understanding.

On July 1, 2004, eight months after Geithner assumed command, the New York Fed hosted Asim Ghanfoor (sic), AG Group founder and managing director, to address its Seventh Annual Global Economic Forum on “ABCs of Islamic Financing” and Islam's increasing global financial role. A month later, Senators Charles Grassley and John Kyl identified Ghafoor as a representative of Boston's terror-funding Boston's Care International, the Global Relief Foundation (GRF) and the Al Harimain Islamic Foundation, which the U.S. Treasury specially designated a terrorist organization in September 2004 and again in June 2008. Given Ghafoor's connections, how could the Fed have featured him, much less warmly accepted Islamic finance?

In fairness, the New York Fed began authorizing obscure shari'a banking institutions, structured shari'a issues, and opaque Islamic securities trading long before Geithner arrived. “Islamic bankers have been quite ingenious in developing financial transactions that suit their needs,” New York Fed first vice president Ernest T. Patrikis told an Islamic Finance conference in May 1996. “We bank supervisors, too, can be ingenious and will want to work with any of you should you decide that you want to engage in Islamic banking” in the U.S.

The dangers of Islamic finance should have been apparent. From 1996 on, all 12 Federal Reserve banks received, and were charged to enforce many Treasury Department Office of Foreign Assets Control circulars designating Islamic groups and banks as terrorist-financing institutions, organizations and individuals. In 1998, OFAC warned the Fed against transactions with Osama bin Laden and his affiliates, in 1999 froze Taliban assets, in 2002 reminded banks to check customers against known terrorist lists and in 2003 warned against trading with any unnamed counter-party.

Meanwhile, had the Fed only noticed, there were warning signs elsewhere too. In 1999, Saudi scholar Mohammad Nejatullah Siddiqi proposed at Harvard that banning interest would “cure the ills of contemporary finance,” “create a safer, saner financial world,” incorporate the “institution of waqf [Islamic trust]” in economics and create “morally inspired” behavior. In 2001, Siddiqi openly labeled shari'a finance a revolution-driver---an “universal endeavor” to replace “excesses of capitalism.”

Alarm bells should have gone off at a New York Fed event on Nov. 21, 2002, furthermore, where shari'a banking proponent Wafiq Fannoun described Islam as “Peace through submission to Allah (God), however, “revelation-based [the Qur'an, Hadith] ... complete way of life” --- that is, a system of religious law proscribed by the U.S. Constitution from inclusion in secular legislation or regulatory systems. Equally at odds with Constitutional law and Western capitalism are other Islamic notions he described---namely that Allah is both creator and “owner” of all material things, and that “individuals” may not possess “natural resources important to society.” as “alternative financing for Muslims” and others recognizing individual ownership rights.

True, most of that happened before Geithner ran the New York Fed. But after he took the helm in November 2003, the bank missed several still more critical red flags on Islamic banking.

First came Basel II Capital Accord, supposedly designed to strengthen the “regulatory capital framework” for big international banks. Authorities increasingly expected to trust banks to internally assess their own credit and operational risks. However, in July 2004 Switzerland's Bank for International Settlements (BIS) reported, 53% of Middle Eastern bank supervisory staffs lacked the necessary training to meet Basel II's December 2007 deadline. Middle Eastern banks originated and still predominate in Islamic banking. Nevertheless, by 2007, they still needed historical data to fashion reliable risk models but instead counted on “heavy” collateral and “exceptional” economic conditions to eliminate risks.

Islamic institutions had manufactured “special purpose entities” (SPEs)---renamed, “special-purpose vehicles (SPVs)”--- such as coincidentally helped destroy Enron. These legal devices restructured “interest-bearing debt, collecting interest [as] rent or [a] price mark-up,” Rice University Islamic economics chairman Mahmoud el-Gamal warned in May 2007. “Interest-based” Islamic finance equaled “shari'a arbitrage,” concerned only “religious identity” and merely employed Western securitization methods to transform liquid, traceable cash flows from interest-bearing debt into illiquid, opaque assets.

Shari'a banking, though, had far fewer regulatory and accounting protections than sub-prime mortgages---and like “portfolio insurance” in 1987, mortgage-backed bonds in 1994, and sub-prime mortgages in 2008, could also cause huge market declines. Islamic banking purveyors admitted shari'a regulations could “override commercial decisions;” didn't “standardize” documentation; and used complex “inter-creditor agreements” and “off-balance sheet financing.”

Even hosting hosting Islamic financier Asim Ghafoor, a representative to three terror-funding organizations, on July 1, 2004 apparently gave no one inside Geithner's Fed reason to pause from its rush to further accommodate shari'a banking.

In March 2005, New York Fed general counsel Thomas C. Baxter Jr. asserted the Constitutional “wall of separation between church and state” Thomas Jefferson had described was “not absolute.” Chief Justice Warren Burger had in 1984 suggested that the Constitution “affirmatively mandates accommodation, not merely tolerance, of all religions,” Baxter told an Islamic financial industry “Legal Issues” seminar. “[S]ecular law should ... accommodate differing religious practices,” he indicated, apparently even if that meant specially excepting Islamic banking from secular laws and regulations.

In April 2005, New York Fed executive vice president William Rutledge admitted that the bank was “in no position to take a stance on shari'a interpretation.” He also claimed the bank would hold Islamic finance to “the same high licensing and supervision standards” as conventional banks.

Despite the New York Fed's role as a legal supervisor of Islamic banking, neither Rutledge nor Geithner noticed, however, that shari'a banking, a 20th century “tradition” invented by the Muslim Brotherhood, can't be severed from Islamic law---statutes that Mohammed initiated, which caliphs, scholars and jurists developed over the last 1,400 years. They hold that shari'a grants Muslims (the ummah) supremacy over all others---along with all land and property to hold in trust for Allah. Thus as Fannoun effectively told the Fed in Nov. 2002, land or property, once conquered or acquired by Muslims (or for Allah), can't generally revert to their original owners. Shari'a commands Muslims to wage jihad warfare until they subdue all “infidels” under universal Muslim rule, as Ibn Khaldun avowed in the Muqaddimah (trans., Franz Rosenthal, Princeton Univ. Press, 9th printing, 1989, p. 183).

Confiscating possessions from non-believers exacts “revenge,” wrote jurist Abul Hasan al Mawardi (d. 1058). Qur'an 57:2 argued, “To Him belongs all dominions of the heavens and earth.” Qur'an 59:7 echoed, “That which Allah giveth as spoil [war booty] unto his Messenger…” Allah authorized 2nd Islamic Caliph, Umar Ibn Khattab, to confiscate property by force, fulfilling an Islamic trust, or ruling under Allah’s law. It was thereby just to take anything from nonbelievers, (The Laws of Islamic Governance, Taha Publishing, 1996, pp. 207-251) including all territories Islam ever controlled.

Apparently, Fed officials also neglected to investigate the alliances and beliefs of shari'a advisors and their affiliates in the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and Islamic Financial Services Board (IFSB) standards agencies.

The shari'a-based Islamic Development Bank established the AAOIFI in 1990 to set Islamic finance standards. Its trustees include executives of Kuwait Finance House, Saudi Arabia's Dallah al Baraka Group and al-Rajhi Banking & Investment Corporation---all implicated in al-Qa’ida and other terror-funding---and Sudanese (and until recently Iranian) officials, both U.S. Treasury-sanctioned countries.

Former Malaysian Prime Minister Mohamed Mahathir in 2002 christened IFSB “a universal Islamic banking system” and “a jihad worth pursuing….” Its board members include the terror-funding Iranian, Sudanese and Syrian central banks and Palestinian Monetary Authority.

Yusuf Qaradawi, an U.S.-designated foreign terrorist barred entry since 1999 for example, supports wife-beating, suicide bombings, murder of American military forces and female suicide “martyr operations.” A large shareholder of Al Taqwa Bank, Qaradawi also chairs the recently designated terrorist-funding Union of Good “charity,” Qatar National Bank, its al-Islami subsidiary, Qatar Islamic Bank, and Qatar International Islamic Bank---and follows AAOIFI standards he helped create.

Similarly, Dow Jones Islamic Market Indexes (DJIM) shari'a board uses “stringent and published” methods to determine “compliance of index-eligible companies.” But its industry screens, financial ratios and biographies omit advisors’ affiliations or beliefs. Dow Jones Citigroup Sukuk Index (DJCSI)’s shari'a board certifies Islamic asset-backed bonds if structures meet “AAOIFI standards” and shari'a principles, but don't mention AAOIFI history or governance.

Until July 2008, shari'a banks, the Dow Jones Islamic Index board and an North American Islamic Trust (NAIT) fund also employed a 20-year veteran of Pakistan’s Shari'a Supreme Court, former judge Taqi Usmani, who taught at the Taliban spawning ground, Jamia Darul Uloom Karachi, headed the AAOIFI religious board, endorsed suicide bombing, and in 2007 advised U.K. Muslims to impose shari'a when their numbers suffice.

Shari'a finance advisor Muslim Brother Yusuf Talal DeLorenzo advised Pakistan's tyrannical Zia ul-Haq from 1981 to 1984, and ran the Virginia Islamic Saudi Academy educational program cited in 2008 for using hateful Islamic texts. Trained at Karachi's terror-espousing Jamia Al Alomia Al Islamia, he served the Muslim Brotherhood International Institute of Islamic Thought (IIIT) and from 1989, was secretary to the MB's Fiqh Council of North America.

Perhaps Treasury Secretary-designate Geithner seriously meant to keep Rutledge's promise to grant Islamic financiers no special favors. But allowing shari'a finance to exist at all is itself a special favor.

Moreover, on November 23, 2008 Geithner, Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke agreed to add another $20 billion taxpayer-gilded bailout to Citibank's previous $25 billion bailout---and offer $306 billion in new loans to cover Citi's losses on soured real estate debts and securities.

Only three days earlier Citigroup uber-shareolder Prince Alwaleed bin Talal, a godfather of Islamic finance, had announced plans to up his stake in America's largest (failing and “underpriced”) bank from 4% to 5%. On March 20, 2006, the Saudi Kingdom Holding Co. CEO was “honored for humanitarian contribution to Islam” at a “glittering gala to celebrate excellence in Islamic Finance” that also featured terror-financier and Dallah al-Baraka founder and president Saleh Abdullah Kamel.
Source : Frontpage Magazine

Islamic finance media heralds good times

While both the journalism and the financial industries stumble through some of their darkest days in recent history, one sector of financial journalism is enjoying rapid growth: Islamic finance news.

In the next two months, three Arabic-language financial news portals with regional and global aspirations will launch in the UAE, all of them catering to varying degrees to the growing interest in Shariah-complaint financial instruments.

The latest to join the trend is Alaswaq Alarabiya, the online business and finance presence of MBC’s Al Arabiya news channel, which this week announced plans to launch www.myislamicfinance.com, an e-portal dedicated to Islamic finance products and services.

“Islamic finance has always been a topic of interest for a lot of our audience,” said Ammar Bakkar, the director of new media at MBC. “We believe it is an important sector, and there is a large number of people, especially in a country like Saudi Arabia, where they are interested in learning about Islamic finance services.”

Although the portal will be open to all kinds of Islamic finance, it will focus especially on the stricter version practised in Saudi Arabia, where the Alaswaq Alarabiya website has its biggest audience. “We are more focused on being close to the school of thought that is popular in the GCC region,” he said.

The site was being launched in partnership with Mawarid Finance, the Dubai-based private finance company specialising in Shariah-compliant financial services, which was both funding the project and supporting it through the company’s relationships with Islamic organisations, he said.

Meanwhile, one of Al Arabiya’s main competitors in business news, CNBC Arabiya, is putting the finishing touches on a “radically redesigned” version of its own Arabic-language financial news portal, which is set to launch this year, according to Steven Hall, the company’s chief executive.

As with CNBC Arabiya’s television channel, which recently relaunched its Shariah-compliant finance show, the new portal would have extensive coverage of Islamic finance, he said.

“We do a fair bit with Islamic banking,” Mr Hall said. “I think we are uniquely poised to do it, with the financial background the cultural background that we have.”

Shortly thereafter, the financial news portal of I-Media, the Abu Dhabi-based company behind the soon-to-be-launched Arabic newspaper Alroya Altiqtissadiya, will also go live, according to Qusai Aljamous, the executive editor-in-chief. The Arabic and English-language portal would also have extensive coverage of Islamic financial instruments, he said.

Some of the industry’s recent rapid growth is a result of the global financial crisis, which has badly damaged the traditional financial institutions that had previously supported financial journalism.

“Particularly since the meltdown in the western capitalist system, there has been increasingly large focus on the virtues of Islamic finance,” said Max Linnington, the regional head of Middle East and South Asia for Bloomberg, which moved to Dubai in October to expand the company’s sales force and its Islamic finance information gathering operation.

“We expect to increase our news coverage of Islamic finance market,” he said. To that end, last week the company appointed Riad Hamade as its first managing editor of Middle East and Africa, based in Dubai. It has also moved its Islamic finance data collection from Europe and Asia to Dubai and also appointed the company’s first Middle East product manager. The company already offers many Islamic finance services, ranging from profiles of Islamic scholars to issuance league tables for sukuk, and it plans to do a formal launch of its Islamic finance service in the second half of next year.

But much of the growth had been under way before the credit crunch bit. Andrew Morgan, the managing director and publisher of the Red Money Group, the Malaysia-based publishing company that publishes Islamic Finance News, said he has seen “phenomenal growth” in the industry since his company launched in 2004.

“New players are entering the market every day,” he said. “When we launched there were only a few markets that were worth covering, outside of Malaysia, Brunei and the GCC. Since then, in Asia, we’ve seen Singapore, Hong Kong, Indonesia, Japan, South Korea. China are very interested in GCC money. We are seeing new players from Africa come in. We are seeing business from all corners of the world.”

The growth of Islamic finance has attracted many larger news organisations to the market, including Euromoney, which runs the Islamic Finance Information Service (IFIS) as one of the products of its emerging markets division. Since it launched in 2003, IFIS has expanded from three to about 75 countries and rolled out an array of new services, from regulatory resources to a listing of Islamic finance lawyers, according to Rakiya Sanusi, the director of the IFIS. She said the services has taken a few hits from the economic downturn, but has also been buoyed by people’s increasing curiosity about Shariah-compliant products. Learn more Understanding Islamic Finance (The Wiley Finance Series)


“There’s been an increase in internet [traffic] in Islamic finance, so we don’t expect to be affected to badly,” she said.

More recently, Mr Morgan said seen glossy magazines on Islamic finance “coming thick and fast” from the GCC.

“Everybody has jumped on the bandwagon,” he said.
Source: The National

Islamic Finance A Viable Alternative To Conventional Finance

KUALA LUMPUR, Nov 17 (Bernama) -- The current financial turmoil has provided an opportunity for Islamic finance to position itself as a viable alternative to conventional finance by providing investors with other asset classes and markets that provide stability, the Raja Muda of Perak Raja Nazrin Shah said.

He said there was much talk these days about the creation of a new international economic order.

"Some world leaders have called for a Bretton Woods II. There is growing consensus that the unregulated capitalism that has led us to this crisis needs to be reconfigured to provide greater resilience and stability to the financial system.

"The strengths of Islamic finance are derived from syariah principles, which also happen to be sound business principles.

"The syariah injunctions require that financial transactions be accompanied by an underlying productive activity thus giving ride to a close link between financial and productive flows," he said in his address at the launch of "The Malaysian Sukuk Market Handbook -- Your Guide to the Malaysian Islamic Capital Market," here, Monday.

Raja Nazrin said syariah principles prohibited excessive leverage and speculative financial activities thereby insulating the parties involved from too much risk exposure.

"It is worth speculating to what extent the world financial crisis could have been averted, or at least its impact considerably reduced, if the principles of Islamic finance had been more widely practised," he said.

He said there was now a greater awareness and interest among the world financial community of the merits of Islamic finance.

The Perak Regent said there was already a growing demand for Islamic financial products in the global market, far exceeding their supply.

Raja Nazrin said in recent years, "We have witnessed a rapid expansion of the Islamic financial services industry."

"Today, Islamic finance is fast becoming an accepted component of the global financial system.

"Malaysia's direct involvement in the development of Islamic finance has significantly transformed the financial landscape at both the national and international levels, making the country a leader in the international race to become a major Islamic financial centrem" he said.

He said the vibrancy and dynamism of Malaysia's Islamic financial system today was reflected in its continuous product innovation, diversity of Islamic financial institutions, comprehensive regulatory and legal infrastructure, as well as the availability of Islamic finance talent and expertise.

Raja Nazrin said the Islamic capital market in Malaysia today offered a wide range of retail and wholesale products such as syariah-compliant stocks, Islamic unit trust funds, Islamic exchange-traded funds, syariah-compliant real estate investment trusts, structured products and derivatives.

"These world-class financial products are available in both ringgit and non-ringgit currencies," he said.

On sukuk, he said, the country has not only achieved several industry "firsts", but has also successfully developed a deep and liquid market.

"We can lay claim to being the worlds largest and most innovative sukuk market.

"At end-2007, total sukuk originating from Malaysia amounted to RM213 billion (US$62 billion), constituting 68.9 per cent of the global sukuk outstanding," he said.

In the same year, the regent said, the worlds largest sukuk, amounting to RM15 billion (US$5 billion) was raised in the Malaysian sukuk market.

"Following the liberalisation of our foreign exchange administration rules, several foreign development banks, quasi-sovereign agencies and multinational corporations have joined our local corporations in tapping the local sukuk market for funds," he said.

He said the rapid growth of the sukuk market has been nothing short of remarkable.

"As a pioneer, Malaysia has set standards and provided leadership by example on many fronts," he said.

Raja Nazrin said the handbook by RAM Ratings would serve as a guide to institutions and professionals, particularly those from the international community who were keen to make the most of the Malaysian capital market for creating and transacting in sukuk. Learn more Islamic Bonds: Your Guide to Structuring, Issuing and Investing in Sukuk


Source : BERNAMA

CENTER FOR SECURITY POLICY TEACHING THE U.S. TREASURY ABOUT ISLAMIC FINANCE 101!

Sheild of the US Treasury.

The Treasury Department has announced it will teach “Islamic finance” to U.S. banking regulatory agencies, Congress and other parts of the executive branch today in Washington, D.C. – but critics say it is opening a door to American funding of Islamic extremism.

‘Islamic Finance 101′

According to its announcement, the “Islamic Finance 101″ forum is “designed to help inform the policy community about Islamic financial services, which are an increasingly important part of the global financial industry.”

The Treasury Department has collaborated with Harvard University’s Islamic Finance Project to coordinate the event. The department says it expects about 100 people will attend the seminar.

Some speakers include Assistant Secretary of the Treasury Neel Kashkari, senior adviser to Treasury Secretary Henry Paulson, Jr.; Harvard Business School professor Samuel Hayes; Mahmoud El-Gamal, chair of Islamic economics, finance and management at Rice University and Islamic finance adviser to the Treasury Department; Sarah Bell of the Federal Reserve Bank of New York; Yusuf Talal DeLorenzo, Shariah adviser and Islamic scholar; Michael McMillan, chair of the Islamic Legal Forum at the American Bar Association and professor of Islamic finance; and Rushdi Siddiqui, global director for the Dow Jones Islamic Market Indexes and vigorous advocate for Islamic finance.
Source : Shariah Finance Watch