GLOBAL PERSPECTIVE ON ISLAMIC BANKING & INSURANCE
ISSUE NO 122. SEPTEMBER 2002 RAJAB - 1423
COMMENT: KING DESTINED TO GROW
IDENTIFICATION AND MANAGEMENT OFTHE UNIQUE RISKS RELATED TO ISLAMIC FINANCIAL PRODUCTS
IN THE FOREFRONT OF INNOVATIVE INVESTMENT PRODUCTS - VriONAL COMMERCIAL BANK
The institute of Islamic Banking & Insurance. London Searching for Better Investment Opportunities Worldwide.
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inlj I Jj uul I £uj www.kfh.com KUWAIT FINAHCE HOUSE CONTENTS Horizon
Chairman of Editorial Board 02 COMMENT Muazzam Ali ISLAMIC BANKING DESTINED TO GROW International Editors Dr Rifaat Ahmed A. Karim Manama 03 IDENTIFICATION AND MANAGEMENT OF THE Dato' Fadzil Yusof UNIQUE RISKS RELATED TO ISLAMIC FINANCIAL Kuala Lampur PRODUCTS AND SERVICES YusufTalal DeLorenzo United States Mr. Abdulkadir Thomas
DrAlireza Rahimi Brougerdi Tehran 08 CAPITAL INTELLIGENCE RATINGS Suleiman Dualeh OF ISLAMIC FINANCIAL INSTITUTIONS United Kingdom
Prof Murat Cizacka 07 TAKAFUL LIL-ISTITHMAR Istanbul Asean Retakaful Launches New Offshore Takaful Product Editor Rakiya Ibrahim-Sanusi
Assistant Editor I I GOLD DINAR TO PLAY BIG ROLE IN Hussain Rizvi GLOBALTRADE Executive Editor Extract from the speech delivered by Tan Sri Mohamed Yakcop, S.Ghazanfar Ali Economic Advisor to the Prime Minister of Malaysia, at the 'Stable Research Associate Daphne Buckmaster and Just Global Monetary System' conference held in Kuala Lumper, Malaysia CONTACT Editorial 16 Grosvenor Crescent 14 CORPORATE PROFILES London SWIX7EP, UK BIMB Holdings Berhad 2001 Tel+44 (020) 7245 0404 Fax+44 (020) 7245 9769 Islami Bank Bangladesh Ltd 2001 [email protected] 20 NEWS MONITOR Subscription & Advertising 16 Grosvenor Crescent New Horizon reports on the recent developments London SWIX7EP,UK within the Islamic financial world Tel+44 (020) 7245 0404 Fax+44 (020) 7245 9769 [email protected] www.islamic-banking.com
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New Horizon September 2002 Rajab 1423 I COMMENT
Islamic Financial System Destined to Grow
What is the future of Islamic banking in bankruptcy proceedings, debt contagion as much as other crises view of growing hostility of the west? restructuring, and workout mechanisms countries. While capital controls may This question is being nervously asked and processes which the present have played a role, some analysts by Muslims. One-fifth of the human international financial system lacks. believe its liability structure and its race adheres to Islam and desires to There are preliminary discussions general reliance on non-debt-creadng follow its principles in every aspect underway for an international sovereign flows made Malaysia less vulnerable to particularly finance. They believe that debt restructuring mechanism to be crisis. Islamic finance system has much more established, but there are many While the financial innovations of the to offer to humanity than any other comphcations. While such a 1990s in the conventional system have prevailing system. mechanism, if and when it comes into led to mobilization of financial being, will help reduce the risk of moral Dr. Abbas Mirakhor, Executive Director, resources in astronomical proportions, hazard and lead to better distribution of International Monetary Fund and an they have also led to the equally risk, it will not address the inherent eminent Islamic financial scholar replied impressive growth of debt contracts and fundamental fragility of a system to the apprehensions about the future of instruments. According to the latest largely based on debt contracts. Islamic banking. In an address to the reports, there are now US$32 trillion of London based Institute of Islamic In the mean time, there are no sovereign and corporate bonds alone. Banking and Insurance in July this year, guarantees that the international Compare this (plus all other forms of Dr Mirakhor said: By early 1990s, it financial system has witnessed its last debt, including consumer debt in was clear that an Islamic financial crises with their huge domestic costs industrial countries) to the production system was not only theoretically that, at times, have threatened the very and capital base of the global economy viable, but had desirable characteristics foundation and fabric of societies. The and one observes an inverted pyramid that rendered it superior to a debt-based example of Indonesia is a heartbreaker; of huge debt piled up on a nartow conventional system. The phenomenon it took this country 25 years to reduce producdon base that is supposed to growth of Islamic finance during the poverty by 50 percent, but it took a year generate the income flows that are to decade of 1990s, demonstrated the of severe financial crisis to wipe out serve this debt. In short, this growth in empirical and practical viability of the most of this gain. Countries with an debt has nearly severed the relationship system. otherwise viable economic system have between finance and production. paid dearly for crises generated by a Analysts are now worried about a "debt The crises we have been witnessing in debt structure whose nominal values bubble". For each dollar worth of the international financial system since and maturities were out of line, with the production there are thousands of 1997 have set the stage for Islamic ability of the economic structure to dollars of debt claims. An Islamic finance to demonstrate its viability as service them. financial system has the potential to potendally a genuine alternative global redress this serious threat to global financial system. The present There are many analyses of financial financial stability because of its internadonal system is deficient in many crises and a long list of their causes, but fundamental operating principle of a ways of which the two most important surprisingly litde is said about the one close link between financial and are: underlying common denominator to all productive flows and because of its of them: debt contracts that are by A debt-based system needs an requirement of risk sharing. nature out of sync, and unrelated to, the effective lender of last resort, and the income flows that the underlying Islamic financial system is destined to present international financial system productive and capital assets of these grow rapidly. Exploitive financial does not have one and it is not likely countries can generate to serve them. system of the west shall ultimately give that one will emerge anytime soon; and The jury is still out as to the reasons way to the superior Islamic system. A debt-based system needs why Malaysia did not suffer from That is the law of nature.
2 New Horizon September 2002 Rajab 1423 ISLAMIC FINANCE
Identification And Management Of The Unique Risks Related To Islamic Financial Products and Services Abdulkadir Thomas
Introduction depositor protection schemes? Do they murabaha, especially towards the LSE, Recent events have meant that we must comply with RICO standards and means that banks cannot always find now look beyond both Core Product engage in loan grading? Islamic risk transactions with a suitable yield. A Design Risks and Financial Risks, and assets may differ substantially from portfolio must thus be widely examine the changing Regulatory conventional loan risks. distributed across asset classes, tenures Risks, as well as complying with the and transaction structures, in addition to Credit Risk: The US regulators are latest Anti-Terrorism rules, which geographic and client distributions. particularly worried about narrow risks supplement the existing Money- in special-purpose entities, such as Rate-of-Return Risk: Focusing laundering and Know Your Customer Islamic entities. Is there any option to instrument pricing on shorter-term rules. This is on top of the normal securitize assets? Is there unusual indices lessens the relative rate-of- Islamic ethical considerations. moral hazard? Can the assets be retum risk. But, as noted above, the I will start with the laundry list of risk underwritten in similar terms to institution is at the mercy of short-term considerations and look at it from the conventional risk assets? And, is the rate trends. US/Basle perspective. I will then accounting necessarily different? If examine mortgages, banks, income funds and inbound property investment The most critical aspect of risk management in the US. The purpose of focusing on required by the Basle Committee is the presence the West is two-fold. First, this is of adequate monitoring systems, from the Board where the most aggressive and intrusive Audit and ALCO committees to day-to-day regulatory changes are underway, oversight of risk and compliance matters. especially in the US. Second, the last 24 months has seen a significant expansion of Islamic products in the different, is it so distinct that there is a Currency Risk: Most GCC entities US. unique risk embedded in the transaction are dollar-linked to minimize the risk of that would preclude securitization or currency volatility. But the Euro may, Risk Monitoring collection? Do documents conform to over time, result in a near-parity The most critical aspect of risk local customs regarding defaulters? currency to the dollar management required by the Basle Asset/Liability Mismatch: Growth All of these are depth-of-market issues. Committee is the presence of adequate requires long-term risk-taking, but The Islamic market will remain both monitoring systems, from the Board deposits are short-term. Without thin and small, and thus subject to Audit and ALCO committees to day-to• widespread securitization, the best way above-average risk, until a broader day oversight of risk and compliance to manage such mismatches is to price array of instruments is available and matters. The sub-categories of Risk medium- and long-term assets against securitization becomes the norm. Management include: short-term benchmarks. This allows for Hedging Strategies: Hedging Financial Risk: This is the most easily adjustment to meet changing rates, but strategies for Islamic investors are managed in this proposal. not for a run on deposits. severely limited, owing to the Sharia Loan Review: Are banks putting out Portfolio Composition: The and the absence of suitable means to capital in a maimer consistent with overweighting towards short-term transfer risk with assets and not incur
New Horizon September 2002 Rajab 1423 3 ISLAMIC FINANCE
considerable tax or business penalties. will have to make sure that appropriate anti-terrorism laws such as the USA policies and procedures are documented Patriot Act mean that GCC investors Regulatory Risk: The key issues of and in place. Implementation means face the risk that Islamic transactions regulatory risk come down to Safety proof of staff training. in the West will become objects of and Soundness and Know Your undue scrutiny. Customer The former rules are meant Operational Risk: The US is now to protect regulators from having to joining all the other Basle signatories to Event Risk: This is almost impossible take over a bank and rescue depositors, focus on operational risk. The US, for to analyze as each event is unique. and are mostly covered by the above set instance, now looks closely at the Examples are: of considerations. But, the next level of following areas: Contagion: The 1997 Asian Crisis is concern is that indicated in the new War Business Strategy Risk: Is the an example of contagion, where flight on Terrorism and its expansion of the strategy too narrow, too technology- from a region or market caused war on crime/drugs money-laundering dependent, not linked to the securities illiquidity. The US is considered a safe rules. markets? Entering a crowded market? haven, but, within the US, there has Specifically, all managers of inbound been contagion on a regional level (the Internal Operations Risk: Does an monies to the US are obliged to 1980s rolling collapse of S&L's). A institution employ sufficient internal complete a formal Certification for mitigation of this is that the US is itself controls in the extension of credit, in Compliance with the USA Patriot Act a number of significantly distinct marketing and in its processing? of 2001. This to confirm that they are regional economies. not engaged in money-laundering. Key Technology Risk: In the United States, Banking Crisis: Since the late 1980s, data for the owners of money entering the regulators now license technology the US regulatory system has been the US, or the control or management sub-contractors. Moreover, even a particularly vigilant. The absence of of US institutions, is: name of the simple balance inquiry is viewed as a derivatives or bond-trading significantly owner, personal owner (if the primary live transaction. Compared to a few reduces the risk profile of an Islamic owner is an institution), address, and years ago, internet and other technology institution. source of income. Beyond this applications are now scrutinized in comparison of investor names with the minute detail. Exogenous: Other exogenous events current Department of the Treasury are best defended against through a Mismanagement Risk: The Islamic Office of Foreign Asset Control list is vigorous management geared to sector has limited experience with the requirment to confirm that foreign implementing the law and allowing the down cycles and how to enforce nationals are not engaged in, or Board, the Sharia Board and the Islamic contracts with defaulting suspected of being engaged in, criminal regulators access to transparent records. consumers. activities, including terrorism. Terrorism: The frenzy following 911 Reputation Risk: This is a major risk resulted in a number of mistaken Compliance Management: In for any new bank and is managed identities, whereby US citizens and addition to Board oversight and through the implementation of a Sharia foreign nationals found their bank external audit, western regulators oversight board. require proof of on going monitoring of accounts frozen. This is a difficult compliance matters, including spot Business Risk: A strategy may be well process to undo, even for the innocent. audits. This will be heightened in the considered, but what if the intended A number of banks discovered that they light of the USA Patriot Act. market isn't there or the economy has had made inadvertent transfers of funds changed significantly? US regulators between suspected criminal and Legal: With the huge amounts paid to are now requiring back-up business terrorist parties, which, with hindsight, some very high-quality counselors, this plans and the means to implement would not have passed current scrutiny. is an area where Islamic investors may them. The fines are huge. have been the most careful. Country Risk: Investing in the West Policy: Boards and external counselors normally means no country risk. But
4 New Horizon September 2002 Rajab 1423 ISLAMIC FINANCE
Applications in Products the underlying contracts are many will feel that the structure of the and Services: significantly different. But what Islamic products denies them equal or happens in the case of foreclosure? The Mortgage Alternatives: Islamic fair access to credit for homeownership. answer is not yet determined because alternatives to a conventional mortgage More importantly, the entrance of the few Islamic transactions in the US entail the acquisition of property by the Freddie Mac in the market assures that have not yet resulted in a foreclosure. financier by one of three methods: pricing differentials are minimal and, as Therefore a risk exists in the form of purchase for sale to consumer; purchase a result, no consumer need feel residual uncertainty. in partnership with consumer; or penalized by making an Islamic choice. purchase to lease to consumer Apart Until now, the Islamic market has In conclusion, significant progress has from the first method, the contrast with skirted issues relating to taxes on two been made in Islamic alternatives to conventional mortgages is significant. fronts. First, the sector has benefited conventional mortgages, and the from a fairness-based laxity by the For instance, a conventional mortgage primary risks may be structured out of revenue service not to punish a allows for second or third mortgages the product. consumer for acquiring a home by a and the lender has no property level Investments: In Investment Products & means other than a traditional mortgage liabilities. Islamic instruments either Services, the issues relate more to a thin loan. Moreover, some Islamic preclude, or make difficult, secondary market. An Islamic money market fund instruments, such as the Samad lease- debt. (But a consumer may have a legal is being looked into, but faces the to-own arrangement, enjoy Treasury right in the US to take out a second definition of an instrument, limited department treatment as a banking mortgage, despite an Islamic structure.) providers, volatility, marketability and restricted universes. Until now, the Islamic market has skirted issues If we examine a murabaha transaction, relating to taxes on two fronts. First, the sector we can find an asset, a sales agreement, has benefited from a fairness-based laxity by the a debt arising from the sales agreement revenue service not to punish a consumer for and evidence thereof and perhaps a acquiring a home by a means other than a guarantee. A US money fimd requires a traditional mortgage loan. negotiable instrument, a limited term and high credit. The US securities instrument under a bank's mortgage regulators want evidence of the debt as Islamic home finance programmes powers, making it difficult for two the negotiable instrument and the often face unique underwriting branches of the same agency to argue guarantee as the credit. The Sharia considerations, given the reluctance of for different treatments! does not allow trading in negotiable instruments, and therefore we have a many Muslims to access credit to the In US Banking Law, the question of management problem of generating same degree as non-Muslims. Also, US Fair Lending looms large over Islamic negotiable instruments for regulatory credit underwriters now evaluate transactions. By structure, are Muslims purposes and staggering transactions to consumer creditworthiness on their total denying credit to others? It is an ironic avoid negotiating them. payment profile (apartment rent, question in the light of the very low utilities payments and cell phone levels of home ownership among By and large, the ethical issues facing performance) instead of on credit cards Muslims. But it represents a significant an Islamic investor fall into the sphere and mortgages. Thus, a curious shift from the Clinton Administration's of permitted ethical mutual funds in the convergence has emerged in the US endeavors to include everyone in their United States, so Islamic fund managers relating to alternative credit standards. specific way, and the Bush II are more restricted in their investment However, Islamic home finance Administration's cleaving to the choices than conventional investment processing seems to be similar to that smallest detail of the law. Having felt managers. The Sharia forbids the sale of conventional ones in regard to this concern, it is difficult to imagine, in of debt. Thus, Islamic ethical payment flows and obligations, even if a nation with 70% homeownership, that considerations go to the actual asset
New Horizon September 2002 Rajab 1423 5 ISLAMIC FINANCE
structure compared to conventional This often entails turning equity more uncertain. ethical concerns, where structuring is a investments into loans and raises the Institution-to-institution relationships tool to prevent fraud. question of whether or not one is mean that banks and investment banks changing names or engaging in self- For the past 18 months, I have been will engage in transactions whereby lending for tax management purposes. involved with the development of either only the institution is subject to new banking products and services or The most important development is the scrutiny. Here, the US will look at the formation and proposed launch of a USA Patriot Act and its implications for correspondent records, central bank new bank. Here we have that first changes in Anti-Money Laundering and reports and bilateral relations. For chimera, equal opportunity. But Know Your Customer standards. The instance, a Kuwait Finance House with another question overlapping the essence of the new statutes is to a clear US-investing history, strong securities area is: is either our universe increase the level of scrutiny that support from its central bank and of customers or our universe of bankers, investment bankers and money located in a country lauded for its products too restricted?. dealers must give to customers and support of US anti-terrorist efforts will business contacts. This act will be treated differently from a bank in In the securities field, this leads to a increase friction between countries with Indonesia, where the US investing black-and-white analysis. If there are low, or no, taxes and the US, because history is short, the central bank is too few customers, the organisers can't GCC investors, for instance, find it deemed to be weak, and the country is carry the overhead and lose money. If there are too few instruments, the volatility may be too great, resulting in By and large, the ethical issues facing an Islamic investor flight and fund failure. Or too investor fall into the sphere of permitted ethical few instruments may lead to yield mutual funds in the United States, so Islamic impairment. fund managers are more restricted in their But, for US banks, if there are too few investment choices than conventional investment customers, does a bank failure loom managers which will require regulatory intervention? If there is a Federal relatively easy to disguise their viewed as having waffled in the anti- rescue without any violation of law, personalities when investing in the West terrorist efforts of the US. Numerous then the taxpayer pays, but can one ask and to engage in fairly aggressive other comparisons might be made, all the taxpayer to abide by religious rules? strategies to minimize their tax of which may be discerned Banks are less likely to be accused of exposure. Under the new act, independently. yield impairment, because banks are the anonymous investing is virtually In the near future, regulatory most likely to deliver less yield, hence impossible. developments will continue to the paucity of instruments may mean Therefore, a new level of cooperation emphasize KYC. The concern will be that banks face a heightened liquidity will become institution-to-institurion. to learn why and where money is risk. And, in the event of a run, could Again, friction will increase between flowing and who is the owner Until an Islamic bank turn to the Fed for the US and low-tax jurisdictions. The there is uniform taxation and loans of money at interest? primary points of conflict will be so- widespread tax treaties between the Inboimd commercial property called shell companies and banks based GCC and the US, such developments investment for the US has long been in the former tax havens or in countries are going to discourage investment and challenged by FIRPTA and structuring that the US considers either less well cause inter-governmental friction. issues. The major tax management regulated or likely homes for supporters Beyond these Western ethical challenge has been to achieve a of 'terrorism'. I place that term in constructions, our Islamic structure that acquires portfolio interest quotes because the US refijses to define considerations must be incorporated status for the investors and does not fall the term, making this specific process into a relationship. To this end, life has foul of earnings-stripping rules.
6 New Horizon September 2002 Rajab 1423 ISLAMIC FINANCE TAKAFUL
become easier. The most important development of the last five years is the Dow Jones Islamic Markets Indices and TAKAFUL LIL-ISTITHMAR its Sharia Supervisory Board. This has Asean Retakaful Launches New Offshore Takaful Product taken the guesswork out of the core ethical evaluations of securities and companies operating in the West. The Offshore unit-linked investment selection are consistent with the rules next major development will be the product has been widely used in the and regulations of the Shariah. widespread adoption of the standards of European market by the investors for The portfolio investment is the Accounting & Auditing more than a decade. Few years ago, denominated in US dollar with the Organization for Islamic Financial this innovative investment concept minimum amount of US$ 20,000 and Institutions (AAOIFI). With their was introduced into the I.O.F.C. of any additional investment at US$ standardizing trend for core instruments Labuan in Malaysia, and a couple of 10,000. The investrnent and fund and their accounting treatment, the the leading Malaysian offshore management advisor for Takaful Lil- mystery will evaporate from most financial and insurance institutions lstithmar is Bank Islam (L) Ltd. aspects of Islamic finance and lead to a have started providing tailored unit- (BILL), the first Malaysian offshore focus on good business, not expensive linked investment products for their Islamic bank, also based in Labuan structuring. clients through the offshore island. I.O.RC.
Conclusion On 30th July 2002, another Malaysian Both ARIL and BILL are members of Comparing and contrasting the risks offshore unit-linked investment BIMB Holdings Berhad (Bank Islam involved in both conventional and product was launched by Asean Malaysia Group of Companies). The Islamic finance, my sense is that the Retakaful International (L) Ltd. premier provider of Islamic product evolving safeguards are sufficient to (ARIL) and officiated by the Deputy and financial services in the region mitigate and manage the risks. But Finance Minister of Malaysia, Datuk such as, Islamic banking and finance, there are two primary concerns to be Dr Mohd. Shafie Salleh. Islamic fund management. Islamic considered: stock broking, takaful, retakaful and The product namely Takafiil Lil- training services. 1. Nobody has yet enforced enough Istithmar is the first offshore unit- Islamic contracts to be certain of what linked investment product that is fully Apart from providing the global will happen. So a significant legal risk compliant with Shariah Principles access to the offshore Islamic funds, exists. (Islamic rules). It is also believed to Takaful Lil-lstithmar also provides the be the first of its kind in the world. takaful benefits (life insurance benefit 2. With the new war on terrorism, the Takaful that is operated the Islamic way) to its regulatory enviroimient has become Lil-lstithmar provides its participants participants. more invasive and this will continue. (policy holders) with professionally Technology remains the basis for future Takaful Lil Istithmar is a product that managed investment portfolios that regulatory developments in the understands the needs and demands of use carefully selected international enhancement of risk management. modem Muslims with regards to their Islamic funds from various reputable financial management, although non- fimd management companies around Mr. Abdulkadir Thomas is the President Muslims investors are also the world. and CEO of Samad American Holding encouraged to participate. This Corporation. To this effect, ARIL's Shariah product will be marketed both locally Supervisory Council, consisting in Malaysia and also internationally renowned Islamic scholars were given through ARIL's network of brokers, the task of ensuring that all its Islamic banks and takaful operators business activities, including funds worldwide.
New Horizon September 2002 Rajab \423 7 ISLAMIC FINANCIAL MARKET INDICES
ft 1 CfiPITAL ISLAMIC BANKS / FINANCIAL INSTITUTIONS I intelligence CURRENT RATING 6th September 2002 FOREIGN CURRENCY DOMESTIC SUPPORT OUTLOOK SINCE LONG SHORT STRENGTH BANKS TERM TERM BAHRAIN Albaraka Islamic Bank BB+ A3 NA 2 Stable Jul 2002 Bahrain Islamic Bank BB+ A3 BBB- 3 Stable Aug 2002 Shamil Bank of Bahrain BB+ A3 BB+ 2 Stable Aug 2002
JORDAN Jordan Islamic Bank for Finance & Investment BB- B BB 3 Stable Aug 2002
KUWAIT Kuwait Finance House A- A2 BBB+ 2 Stable Jul 2002
QATAR Qatar International Islamic Bank BB+ A3 BB+ 3 Stable Jun 2002 Qatar Islamic Bank BB+ A3 BB+ 3 Positive May 2002 UAE Dubai Islamic Bank BB+ A3 BBB- 2 Stable Dec 2001
MALAYSIA Bank Islam Malaysia BB+ A3 BB+ 2 Stable Feb 2002
PAKISTAN Faysal Bank C C B 2 Stable Nov 2001
PALESTINE Arab Islamic Bank NA NA B 4 Stable Aug 2000
! CORPORATES
BAHRAIN Al Amin Bank BBB Aug 2001 ATawfeek Co. for Investment Funds Ltd BBB- Oct 2001 KUWAIT Investment Dar Company BB- May 2001 A'Ayan Leasing & Investment Company BB Jun 2001 KEY S (STABLE) P (POSITIVE) N (NEGATIVE) ALL RATINGS ARE REVIEV^'D ON A REGULAR BASIS Source: Capitallntellegnece (CI), Bank Analysis and Rating Service, Limassol, Cyprus Tel: (Cyprus + 357 5 342 300 Fax: (Cyprus) + 357 5 343 739 / 87 750 Email: mari ton Hume • Sales & Marketing • Produrt Development • Investment Management • Training • Private Banking, Fiduciary, Trust and Managed Companies • Brochures, Web Sites and Annual Reports • Operational Infrastructure and Controls • Management Information Systems Clayton Hume Associates Ltd. Wooiland, Dorset, DT1) GiER United Kingdom Tel:+44(0) 125881772? Fax:+44 (0) 12588t78iS E-mail: enquines:acldytonttume.con-i Web site: •.vwvv.daytonhume.com ISLAMIC MONEY Gold Dinar To Play Big Role in Global Trade A two-day conference on "Stable and Just Global Monetary Systenns" j^^s. organised by the International Islamic University opened In Kuala Lumpur. The keynote speaker was the economic advisor to the Prime Minister,Tan Sri Mohamed Yakcop, who spoke on "Trade and the Gold Dinar - the next component in the International Islamic Financial System". Below is an extract from his speech outlining how the gold dinar could play a role in international trade What is the role of the gold dinar? How will the gold dinar be used? • The Malaysian exporters will be paid The proposed gold dinar will not The gold dinar will be used, initially, in ringgit by Bank Negara on the due replace the domestic currencies. The for settlement of trade on the basis of date of exports, based at the domestic currencies (e.g. ringgit) will bilateral payment arrangements (BPAs). ringgit/gold dinar exchange rate continue to be used for domestic Eventually the BPAs will be converted prevailing at the time of the export. transactions in the respective countries. into a multilateral payments Similarly, the importers will pay Bank The gold dinar will be used only for arrangement (MPA) with the Negara the ringgit equivalent of their external trade among the participating participation of as many countries as imports. countries. possible. The following is an • The Saudi central bank will do the illustration of how these arrangements Initially, the gold dinar will not exist in same for its exports and imports. work: physical form. It will merely be defined in terms of gold. For example, if one gold dinar is equivalent to one ounce of Given this opportunity to strengthen our gold, and the price of one ounce of gold relationships, using the gold dinar, I believe it is is today at USS290, then the value of incumbent on us as a fardhu kifayah to one gold dinar will be US$290 or collectively implement this next component of equivalent in other currencies, on the the International Islamic Financial System - basis of the prevailing exchange rates. Tan Sri Mohamed Yakcop. The actual settlement for trade can be Bilateral Payment Arrangement by way of the transfer of equivalent • Say, at the end of the three-month (BPA) amount of gold. It will not be a physical cycle on March 31, the total exports transfer of gold from one country to • Two countries, say Malaysia and from Malaysia to Saudi Arabia is 2 another, but a transfer of beneficial Saudi Arabia, sign a bilateral payments million gold dinar and the total exports ownership in the gold custodian's arrangement, under which trade of Saudi Arabia to Malaysia is 1.8 account. Where it is not possible to balances will be settled every 3 months. million gold dinar. transfer the gold, payment can be made is The trade will be denominated in • Therefore, for that particular three- by way of an equivalent amount in gold dinar. month cycle ending on March 31, the other acceptable currencies, but this Saudi central bank will pay Bank should be the exception rather than the The value of one gold dinar is Negara 0.2 million gold dinar The rule. defined, say, as one ounce of gold. actual payment can be by way of the New Horizon September 2002 Rajab 1423 9 ISLAMIC MONEY believe it is incumbent on us as a Saudi central bank transferring 0.2 S It is also possible to refine the fardhu kifayah to collectively million ounces of gold in its custodian's mechanism further, whereby the credit implement this next component of the account, in the Bank of England in or debit outstanding at the end of each International Islamic Financial System. London, to Bank Negara's account with quarter can be forwarded to the There is a famous Chinese saying that the same custodian. subsequent quarters and final settlement the journey of a thousand miles begins is made only at the end of the year The important point to note here is that, with a first single step. I do not want to under this mechanism, a relatively The advantage of this refinement is that small amount of 0.2 million gold dinar TABLE 1 (Gold Dinar - million) is able to support a total trade value of Export to MALAYSIA Saudi Arabia Egypt Total Export ^^^^ 3.8 million gold dinar In other words, MALAYSIA X 2.0 1.5 3.5 we optimise on the use of foreign Saudi Arabia 1.8 X 2.0 3.8 exchange. Even countries that do not Egypt 3.5 3.7 X 3.4 have a large amount of foreign Total Import 3.5 3.7 3.5 10.7 exchange reserves can participate significantly in international trade under exaggerate, but if we can succeed in a net import position for a country this mechanism. increasing substantially the volume of during a particular quarter may be trade among the Islamic countries, the offset by a net export position in the Multilateral Payment Arrangement rest will follow. (VIPA) subsequent quarter so that, for the year • The MPA functions in a similar as a whole, the payment flows are The promotion of direct trade between fashion as the BPA, but it involves further minimised. many countries and is, therefore, more TABLE 2 (Gold Dinar - million) efficient than BPAs. Export Import Net payment • To illustrate the efficiency of the MAUVrSIA 3.5 3.5 Nil MPA, let's assume that there are 3 Saudi Arabia 3.8 3.7 +0.1 countries involved, namely Malaysia, Egypt 3.4 3.5 -0.1 Saudi Arabia and Egypt. • Let us assume that the volume of Islamic countries, preferably through To summarise, we have spent a good trade between Malaysia and Saudi the mechanism of the gold dinar, could part of the last two decades in Arabia was the same as in the example be the initial first step in the proverbial establishing Islamic financial systems with BPA, and we add the additional journey of a thousand miles. in our respective countries. I believe the trade of those two countries with Egypt time is now right to complete or (table 1). complement the domestic systems with • In the earlier example, a total of 10.7 an international system - a system that million gold dinar of trade takes place will allow each Muslim country to among the 3 countries, with a net reach out to one another and strengthen payment of only 0.1 million gold dinar the level of trade - a system that will In other words, the only payment also allow the ummah to use its required is for Egypt to pay Saudi 0.1 collective surpluses to fund each other, million gold dinar, but the total value of and help each other grow. trade among the three countries is Islam places great emphasis on the substantial, at 10.7 million gold dinar, unity of the ummah. Given this (table 2) opportunity to strengthen our relationships, using the gold dinar, I 10 New Horizon September 2002 Rajab 1423 ISLAMIC FINANCIAL PRODUCTS In The Forefront of Innovative Investment Products - NCB THEnflTionflLcommERciHLBnnKdLJi NCB's Range of Shariah Compliant Prodcuts - An Overview National Commercial Bank (NCB) everywhere. The principal criteria are Sector funds pioneered the Saudi Mutual Fund based on the exclusion of prohibited In addition to the geographical funds industry in December 1979 with the industries, the financial ratio screens (to listed above, NCB also has launched a launch of Al-Ahli Short Term Dollar minimise the inclusion of interest), and series of Islamic Sharia compliant Fund, a conventional money market the prohibition of certain types of sector oriented funds as follows: fund investing in the traditional transaction, such as short sales and • Al-Ahli Healthcare Trading Equity instruments of commercial paper, derivative transactions. The advisors Fund certificates of deposit and short-term rely on publicly available information • Al-Ahli Small Cap Trading Equity bonds. The equivalent Islamic Sharia- to identify business activities and Fund compliant fiind, Al-Ahli International financial data. The evaluation of Trade Fund, followed somewhat later in permissible business activities is subject NCB will continue to offer new funds March 1987. Since those early days, to ongoing scrutiny and evaluation on a according to investor demand. NCB has successfully developed and company-by-company basis. launched a wide variety of both Al-Ahli Short-Term Funds The GTEF proved highly popular from conventional as well as Islamic Sharia NCB is a market leader in short term the start, and benefited from the equity compliant funds, and has recently funds, both Islamic Sharia compliant as bull market of the nineties, as well as embarked on a strategy of converting well as conventional, in Saudi Riyal the active management skills of the its conventional fiinds to Islamic and U S Dollars, for both one month as advisor Since then, it has slipped back Sharia-compliance where it is possible well as daily liquidity. Recently, it has in line with global markets, although to do so without compromising also launched an Islamic Sharia still comfortably ahead of its investment performance. Currently, all compliant fund denominated in Euros. benchmark since inception. It continues the long-term ftmds are Islamic Sharia Short-term funds have traditionally to dominate the Islamic Sharia- compliant. been very popular in the Kingdom, and compliant equity sector and has paved provide a handy pool for switching into the way for NCB's other geographical Al-Ahli Global Trading Equity Fund during periods of equity market and sector funds. (GTEF) turbulence. Al Ahli Global Trading Equity Fund, Other Regional Funds NCB short-term fiinds account for 54% launched in January 1995, was NCB's In addition to the GTEF, which has a of the total short term funds in the first Islamic Sharia-compliant equity global mandate, NCB also has the Saudi Market. fiind. Although such "screened" following Islamic Sharia-compliant portfolios were available from other A disadvantage of such funds is that regional funds: providers, usually in the form of private they may lull an investor into a sense of segregated accounts, the launch of this Al-Ahli Europe Trading Equity Fund security and conceal the long-term fund as a publicly available vehicle H Al-Ahli U S Trading Equity Fund opportunity cost of being "out of the gave a huge impetus to the market. • Al-Ahli Asia Pacific Trading Equity market". Indeed, the criteria first formulated by Fund the Fund's Sharia advisory and control Capital Protection These funds followed the restructuring committee has effectively become the The capital protected (conventional) and rationahsation of NCB's baseline standard for such Funds and secured (Islamic Shariah) series of conventional equity ftind range. New Horizon September 2002 Rajab \423 II As of 23 June 2002 Equity Global MCB: Al-Ahli Global Trading Equity Fund - NCB! Al-Ahli Global Trading Equity Fund Fund Oescripttan slamic Sharif Guidelines: Ves, With Shana Committe The Al-Ahli Global Equity Fund Is an open-end medium-to-high nsk Fund especially designed for Investors seeking a medlum-to long-tenn investment in companies with minimum debt equity ratios. The Fund invests in the secunties of companies listed on major global stock markets. Capita! gains and other income are added to the value of the Fund. Uninvested cash balances may be placed in Murabaha transactions. The Fund provides investors with the ability to partially or fully redeem thetr investments on a twice per week basis, however, Investors are encouraged to maintain their investments over at least a full market cycle of three years or more. Fund Details Launch Date; 1/1/199S Fund Type: Equity , Global Max. Rederription Fee: 0% Launch Price: 1 Minimum Invst.: USD 2000 Dividend: None Base Currency: US Dollar Min. Additional Sub./Red.: USD 1000 Mang. Fee: 1,75% Valuation Freq.: Twii:e per week Max. Subs. Fee: 0% Other Fees: 0% Beta: lOS iCorrelation (1 year): 88% Volatility (1 year): 2,9 Benchmark: MSCI World Fund Price Since Start i Quartet- Last: 1,6287 20/6/2002 1,6287 20/6/2002 1,628700000 2l3,/6/2002 Low: 1,6287 20/6/2002 1,6287 20/6/2002 0,975750082 23/1/1995 High: 1,8982 1/4/2002 2,0235 2/7/2001 2.950400000 27/3/2000 Average: 1,7709 1,8617 1.974854347 Fund Return and Benchmark Fund ? M I Year * Years 5 Years 10 Years S Ye.ir£. Performance of Similar Funds Fund 1 Year 2 Years J Years 5 Year* 10 Years 3 H Al-Rajhi: Global Equity Fund -0,2% -14.2% -40.2% -23,6% -3.7% - Riyad: Musharaka Fund -9,1% -10.8% -25.2% -11.2% - - SAMBA: Global Trading Equity Fund -11.3% -16,7% -45.4% - - - BSF; Global Modaraba Equity Fund -11.5% -16,9% -43.0% - - - Rivad: International Fund -11.6% - - - - SAMBA: International Equity Fund -11,9% -17,2% -38.9% -29.3% -24,6% - BSF: Global Equity Fund -12,1% -24.8% -48,0% -37.4% -28.5% - Al-Jazira: Al-Khair Equity Fund -13.3% -23,5% -55,6% -46.2% - - ANB; Arab Investor - Crescent Global Equitv Fund -15,4% -21,5% -40,2% -29.2% - - POSTGRADUATE DIPLOMA Islamic products and Investments.Takaful IN ISLAMIC BANKING (Islamic Insurance) AND INSURANCE • Free one year subscription to New Horizon. • Top quality distance learning For further information please contact • Open course The Course Coordinator The Institute of Islamic Banking & Insurance • Course contents: Islamic economics, 16 Grosevnor Crescent London SWIX 7EP Islamic banking, Email: [email protected] Tel: 44 020 7245 0404 Fax: 44 020 7245 9769 ISLAMIC FINANCIAL PRODUCTS funds were very popular during the investor is able to balance the holdings A remarkably high level of research is equity bull market and served a in his portfolio, avoid concentrations of available on the Saudi Mutual Fund valuable purpose in introducing risk and periodically review his industry. For example, the independent conservative investors to equities. allocations when these change as a financial advisor, Bakheet Financial Unfortunately the current economic result of market movements. Advisors, publish detailed performance environment renders participation rates unacceptably low and the product NCB FUNDS IN RISK RETURN SPACE therefore less attractive but this will no 3 yrs to 31/5/2 doubt change with the economic cycle, and the attractions of capital protection once again come to the fore. Challenges Ahead The underlying philosophy of the NCB investment range has been to respond to --^.^f' J global bond heslthcaretraijing ; investors' demands for Islamic Sharia- (-.•> batenced investment compliant fiinds covering as far as 15 possible the full range of investible europe tr; opportunities. The challenge ahead is to global tradingRe" ) us trading continue creating, with assistance from our advisors, such funds that mirror conventional products as they are and general information on their developed in the future. Asset Allocation Techniques website (www.bfasaudi.com) for each Conventional asset allocation local mutual fund (and also for local Al-Ahli Medium Term Funds techniques are based on conventional equities): For example, an important gap in many index returns and correlations. As Islamic Sharia compliant fund results from the equivalent Islamic Outlook complexes is that for medium terms Sharia compliant funds are likely to be Recent market turbulence has not funds, an asset class typically filled somewhat different, this may affect the diminished the benefits of a disciplined with bonds or bond-like instruments. optimal allocation proportions. This approach to long term investing; indeed Bonds are of course unacceptable as an will be overcome over time when the it is essential to avoid being buffeted by Islamic Sharia-compliant investment, Islamic Sharia-compliant indices (eg the crosscurrents of changing sentiment. but a possible equivalent could be a Dow Jones Islamic Market Index) NCB has a Regular Investment Service portfolio of equipment leases. The become better known and other asset to enable investors to benefit from cost main challenge then becomes providing classes are developed to produce a averaging at such times. New liquidity for an open-ended fund diverse universe of Islamic Sharia- opportunities are always emerging and structure. NCB has developed an compliant investments. NCB will continue to be in the intermediate risk fund through a forefront of innovative investment combination of the long term and short- Competition and Transparency products. term funds pending further In addition to the terms and conditions development of an Islamic Sharia which describe the fund objectives and compliant structure. risks, a quarterly commentary is available, showing the unit price Risk Coding movement. Other information, Each fund is allocated a risk coding including economic outlook is available through the colour of the Fund Logo to on the NCB website (www. Alahli.com) denote a qualitative risk level. Thus an New Horizon September 2002 Rajab /423 13 CORPORATE PROFILE BIMB Financial & Business Financial Trends Analysis HOUINGS Foreign Exchange Rate B E R H A 0 Year to 30 June 2001 30 June 2001: 1 USD = 3.80 Malaysian Ringgit "Increases in operating income and Group assets offset by Profit before Zakat & Tax higher provisions result in lower profit for the vear." 102.41 g 85.52 ^^^^ Ownership and Legal Status The principal activity of the Company, which, with all its subsidiaries, is incorporated • III in Malaysia, is to act as an investment holding company with business transacted in 1998 1999 2000 2001 accordance with Islamic principles. The Company's direct subsidiaries are Bank Islam Malaysia Berhad (100%) which, with its subsidiaries, undertakes Islamic banking, unit and other trust management and nominee services; Syarikat Takaful Malaysia Total Assets Berhad (74.25%) undertaking Takaful business and BIMB Securities (Holdings) Sdn. Bhd. (100%), providing stock broking and investment management services. The Year in Brief A brief summary of the financial results for the Group is followed by the financial i i 11 results for the three main operating divisions of the Group. 1998 1999 2000 2001 For the Group, profit before zakat and taxation (PBZT) was 17.68% or RM15.12 million lower at RM70.40 million (2000: RM85.61 million). Net profit was 44.53% or Shareholders' Funds RM21.46 million lower at RM26.73 million (2000: RM 48.19 million), amounting to -we earnings per share of 4.7 sen (2000: 8.6 sen). Total assets increased by 23.75% or 1.37 RM2.40 million to RM12.52 million (2000: RM10.11 million). Bank Islam Malaysia Berhad continues to be the largest contributor to Group profit, accounting for 60.87% of the total. PBZT increased by 31.86% to RM56.38 million i I I I from RM42.76 million in 2000. The increase was mainly from financing income, 1998 1999 2000 2001 following aggressive disbursement of financing during the year. Total financing income increased by 18.42% to RM330.16 million from RM278.81 in 2000, while total income increased by 18.24% to RM491.86% from RM415.99 million in 2000. Total Total Deposits assets increased by 21.79% to RM10.34 billion from RM8.49 billion in 2000, mainly 8.98 as a result of a 29.31% increase in financing to customers, up to RM5.03 billion from RM3.89 billion in 2000. The risk-weighted capital ratio of the Bank remains strong at 2 3.50 16.1% compared with the current commercial banks industry average of 12.3%. Non- performing financings (NPF) increased by 21.89% to RM870.57 million from RM714.22 in 2000, although the net NPF ratio decreased slightly to 11.3% (2000: ill 13.10%). Provision for bad and doubtful financings was higher at 2.5% (2000: 2.0%). 1998 1999 2000 2001 Syarikat Takaful Malaysia Berhad (Takaful Malaysia) Group recorded a reduction in Takaful Fund PBZT of 71.34% to RM4.11 million from RM14.34 million in 2000. However, the Group's total assets increased by 78.44% to RM1.34 billion from RM750.95 million in 2000. Despite the generally lower returns on Islamic investments, and subdued equity 1043.96 markets, at Company level Takaful Malaysia recorded a 178% growth in total ~ 1000 246.21 374.85 ^^^^ • contributions to RM713.6 million. Sharply lower investment income of RM0.89 million g 500 (2000: RM9.01 million) and provision for diminution in investment value of RM5.29 0 • • • 1 million contributed to a decline of PBZT of 50.51% to RM6.74 million (2000: RM13.62 1998 1999 2000 2001 million). On the capital markets side, BIMB Securities Group recorded a loss of RM5.61 million Financings to Customers compared with a profit of RM7.01 million in 2000. Total assets were reduced to RM36.11 million from RM86.83 million in 2000. The loss mainly related to BSSB which recorded a loss of RMS.57 million (2000: profit of RM6.79 million), due to the = : 3.33 3.81 ""^ B reduction of brokerage fee by 25% throughout the industry resulting in a reduction of RM7.22 million in net brokerage income. Higher provisions for diminution in value of investments of RM4.55 million also contributed to the loss. III 1999 2000 2001 Business Highlights Recommended dividend for the year is 4.25%, up by 0.25% on 2000. Earnings Per Share As of June 2001, the Islamic banking and Takafol sectors constituted 7.3% and 4.9% of the total banking and insurance market share respectively. The FSMP -15.60 notes a target of capturing 20% of their respective market shares by 2010. BIMB 8.60 4.70 is poised to lead the industry and play a bigger role in contributing towards the 2.20 growth of the domestic Islamic financial sector, with the two core subsidiaries aiming to acquire at least 25% market share of total Islamic banking and takaful I 1998 1999 2000 2001 industry by 2010. CORPORATE PROFILE Islami Bank Bangladesh Limited Financial Trends 2001 Financial & Business Analysis Foreign Exctiange Rate 31 Dec 2001: 1 USD = 54.69 Bangladeslii Tal "Another excellent year with strong growth in both balance Net Profit Before Tax sheet and profitabilitv" 576.1: .2 330.24 • Ownership and Legal Status ••= i283.52 70.75148.39178.31 _ • Islami Bank Bangladesh Limited was established in 1983 as the first interest free Shari'a Bank in the Country. The equity is widely held, with 9917 shareholders. 1996 1997 1998 1999 2000 2001 Foreign sponsors include Islamic Development Bank, Jeddah; Kuwait Finance House; Jordan Islamic Bank; Bahrain Islamic Bank, Al-Rajhi Company, K.S.A. Paid-up Capital is Tk. 640 million (2000: Tk. 320 million), with shares held 40.62% by local Total Equity shareholders and 59.38% by foreign shareholders. Total equity at year-end was TK. 2993.24 million (2000: Tk.2671.06 million); comprising 9.24% (2000: 10.59%) on risk- 2.67 weighted assets (v. 8.00% minimum requirement) The Bank has 121 (2000: 116) i 1 24 1-43 1.52 1-66 branches in 6 zones employing 3060 people (2000: 2685). The Year in Brief 1996 1997 1998 1999 2000 2001 Profit before tax was 74.4% or Tk. 245.87 million higher at Tk.576.119 million (2000: Tk.330.246 million. Within this figure, net investment income (after profit distribution) was 89.52% or Tk.611.5 million higher at Tk. 1294.6 million (2000: Tk. 683.05 million) Total Assets and commission and exchange income was 15.9% or Tk. 95.84 million higher at Tk. 602.69 million (2000: Tk. 602.69 million). Total operating expense was 24.36% or Tk. 39.37 166.5 million higher at Tk. 850.14 million (2000: Tk. 683.65 million). Operating 31.32 expenses were 41.02% of revenues (2000: 50.2%). Total provisions for bad and doubtful investments, diminution in value and other provisions were 86.2% or Tk. 299.12 million higher at Tk. 646.15 million (2000: Tk. 347.02 million). After 1996 1997 1998 1999 2000 2001 appropriation to statutory and general reserves of Tk. 234.64 million (2000: Tk. 66.21 million), Tk. 160 million was available for distribution to shareholders (2000: TK. 160.0 million. Total Deposits On the Balance Sheet, total assets increased by 25.9% or Tk. 10.19 billion to Tk. 49.55 billion (2000: Tk. 39.36 billion). Within this figure, general investments increased by 32.12% or Tk. 7.63 billion to Tk. 31.37 billion (2000: Tk. 23.74 billion), premises and fixed assets increased by 13.89% or Tk. 0.155 billion to Tk. 1.276 billion (2000: Tk. 1.121 billion) while other assets fell by 23.57% or Tk. 0.566 billion to Tk. 1.835 billion (2000: Tk. 2.401 billion)'. Total liabilities increased by 26.91% or Tk. 1996 1997 1998 1999 2000 2001 9.95 billion to Tk. 46.913 billion (2000: Tk. 36.967 billion), with Mudaraba deposits increasing by 31.72% or Tk. 8.56 billion to Tk. 35.56 billion (2000: Tk. 26.997 billion). Total shareholders' equity increased by 10.19% or Tk. 0.244 billion to Tk. 2.638 billion Total Income (2000: Tk. 2.395 billion). Off balance sheet contingent liabilities decreased by 8.05% orTk. 0.796 billion to Tk. 9.092 billion (2000: Tk. 9.888 billion). Business Highlights Total deposits continued to increase at a healthy pace, up 29.67% or Tk. 9.53 billion on the previous year (which was 27.48% up on 1999) (as compared to the average in the banking sector generally of 18%). The total number of depositors 1996 1997 1998 1999 2000 2001 rose by 21.01 % to 1,355,053 (2000: 1,116,006). In particular, the Mudaraba savings and savings bond continued to be popular, comprising 55.4% of total Total Expenses deposits. Other deposit products comprised Mudaraba term (21%), current and contingency (13.7%) and other deposit products (8.9%). New products introduced during the year included (i) Mudaraba Monthly Profit 14H •'•79 Deposit Scheme (MMPDS) which allows depositors to earn profit on a monthly 1.20 I'^S _ basis; (ii) Mudaraba Foreign Currency Deposit (MFCD) which encourages foreign wage-earners to remit foreign currencies; (iii) Mudaraba Muhor Savings Account iL (MMS) which enables Muslims to build a fund to pay fixed Muhorana to their 1996 1997 1998 1999 2000 2001 wives at time of marriage -> A 5-year perspective investment plan has been formulated in line with national economic priorities, aimed at diversification by size, sector, geographical area, Total Dividend economic purpose. Planned composition of the investment portfolio, to be _ 25.0-% 25-0%. implemented during the period 2003 to 2007 includes 43% for import, export and ^20.0% 21.0% 21.0% 21.0% local trade activities; 2.50% agricultural and rural investment; 18% industrial term investment; 13% industrial working capital; 10% housing and real estate and 4% transport and communications. Five new branches were opened during the year, bringing the total to 212. More u 1996 1997 1998 1999 2000 2001 branches are planned. 469 officials were hired during the year to meet additional human resource requirements. Rumman Faruqi Appointed CEO OfThe Institute Mr Muazzam Ali, Chairman of the From 1993 - 1997 he was associated «^ Institute of Islamic Banking and with the World Bank Group as a Senior Insurance, London has announced the Policy Advisor, Foreign Investment appointment of Mr Rumman Faruqi as Advisory Services, Washington DC. He the Chief Executive Officer and also served as the Advisor to the Director General of the Institute. "Mr Executive Director, World Bank from and Senior Economist, Trade Expansion Faruqi joins the Insdtute with his vast 1987 - 1993 representing twelve Branch, Manufactures Division, experience of international finance and countries on the Executive Boards of UNCTAD, Geneva. would be an asset to the Institute" said the World Bank, IFC and MIGA with Mr Ah. responsibility for reviewing and Mr. Faruqi's academic achievements approving their operational and lending include a Bsc (Economics) Honours Until recently, Mr Faruqi was the policies. from the London School of Economics, Chairman and consultant for various UK, M Phil (Economics) University of international organisations such as He also served the United Nations Cambridge, UK, Diploma in Economic World Bank, IFC, MIGA, United Institute for Training and Research planning. Institute of Social Studies, Nations, etc. (UNITAR) in New York as Project The Hague, Netherlands. AMP, Harvard Director Prior to 2001, he was the Director, Business School, Cambridge, MA, Economic Affairs Division, He has been a Senior Economic Affairs USA. Commonwealth Secretariat, London. Officer, Technology Transfer Division i New Horizon SUBSCRIPTION Standard annual subscription: UK £45; Rest of the world £55 • I year (12 issues) C 2 Years (24 issues) Please print Clear/ in Capital Letters Name Position Company Address City Postcode Country Telephone Fax Visa • Master Card C American Express • Card No : .J: JL-J L - - ;: L_J_ 'i ^. J:_. Expiry date (dd/mm/yy) Cardholder's name Signature I enclose a banl Please make your banker's draft or cheque drawn on a British bank payable to The Institute of Islamic banking and Insurance, London 16 New Horizon September 2002 Rajab 1423 NEWS MONITOR BAHRAIN Economic Research; the Executive should raise capital through the Director of Banking Supervision, issuance of Sharia-friendly bonds and Prime Minister Approves responsible for the three directorates of find other ways of lending. Inspection, Banking Supervision, and New BMA Structure "Such tools could solve the problem of Licensing and Policy; and the liquidity affecting these banks," he said, The Prime Minister and Chairman of Executive Director of Financial adding that the "Islamic banking sector the Board of Directors of the Bahrain Institutions, responsible for the three is rapidly expanding and numerous Monetary Agency (BMA), Shaikh directorates of Islamic Financial investors want to capitalize on their Khalifa bin Salman Al Khalifa, has Institutions, Insurance and Financial funds according to Sharia law. approved a new organizational structure Service Institutions. for the BMA. This was announced by "If Islamic banks can offer the same The BMA believes that the new the office of the agency's Deputy services as conventional institutions, organizational structure satisfies all the Governor they will be able to capture a good part administrative requirements essential of the banking sector," Bassam said. The new structure takes into for the agency to carry out on its consideration the additional duties and additional duties and responsibilities IIFM chief executive Abdul Rais Abdul responsibilities vested on the BMA as a and to further develop the kingdom Majid told AFP that the Islamic market single regulator of the banking and more effectively and efficiently as an was "created following the growth in financial sector, including insurance international financial centre. demand for new tools for investments companies and the Bahrain Stock in Islamic banks," which number Exchange. Bahrain Banl New Horizon September 2002 Rajab 1423 17 NEWS MONITOR was set up to examine in detail the In a paper presented at the 'Dynamics banking products and services. procedures necessary to establish a of the Islamic Financial Market' The Islamic home financing product is regional bond market," Abdullah seminar in Kuala Lumpur, Nik Ramlah based on the principle of Bai Bithaman Hassan Saif said in a statement issued said other challenges include addressing Ajil, or deferred payment sales, which jointly with the BMA governor, Sheikh the lack of awareness on products and eliminates the element of pricing. All Ahmed bin Mohammed Al Khalifa. services as well as on Shariah charges are determined and declared requirements. As a first step, the task force has up-front between the bank as the seller developed an issuance calendar for She added that Shariah scholars and and customer as the buyer government bonds, a common practice jurists must be involved in the "I am sure the Amanah Home adopted by regulators in international development process and the Financing will be well received by our bond markets. The issuance calendar is application of new technologies such as customers especially those who prefer designed to encourage financial e-commerce. Islamic and fixed-rate financing," said institutions and other investors to plan HSBC executive director and advisor for, and to participate in future bond Among the significant progress made to Datuk Sulaiman Sujak. issues, Saif said.The calendar, which date, she said, is the good take-up rate will be issued by the BMA, gives for Malaysia's sovereign US$500 According to Sulaiman, who oversees details of all fiiture government bond million (US$1 = RM3.80) global the bank's Islamic banking operations, issues. It will list nominal values, Islamic debt securities launched in the Islamic banking products and currency of issue and maturity dates for June. services complemented HSBC's all issues scheduled until the end of existing conventional mortgages. 2003. The debt papers which were twice oversubscribed, signals Malaysia's BMA will issue bonds worth $700 Malaysia To Use Gold Dinar penetration into West Asian market and million in this period.These bonds will the immense appetite the market has for in Trade With islamic be a mix of Government Development Nations Bonds, Islamic Leasing Securities, Al Islamic-based financial instruments. Salam Sukuk Securities and Treasury "This is the first time people there were Malaysia will start using gold dinar in Bills. All the proposed issues will be exposed to the product and they were its trade with some Islamic countries listed on the Bahrain Stock Exchange to looking for Shariah compliant by the middle of next year, says facilitate creating the trading and investments," she said. Special Economic Adviser to the liquidity and to leverage its existing Prime Minister Tan Sri Nor Mohamed clearing and settlement infrastructure. Nik Ramlah said internationally, there Yakcop. is more than US$180 billion of investable funds in Islamic instruments The Government has started talks with MALAYSIA and the size is growing at 15 per cent a a number of countries on the adoption year She said locally, 44 per cent of the of the medium on a bilateral payment Malaysia to Popularize private debt securities approved by the arrangement (BPA) basis, he said. Shariah Compliant Products SC in the first half of this year were "The process has started... we'd like to Shariah compliant, while Islamic unit and Services promote (the use of gold dinar) and trust fiinds represented 5.2 per cent of Malaysia must popularise its Shariah anchor it," he said when asked for an the total industry's net asset value as at compliant products and services to update on the initiative. May this year become the centre of the international Nor Mohamed was speaking to Islamic capital market. HSBC Launches Latest reporters after opening an international Securities Commission (SC) market conference on "Stable and Just Global Islamic Home Financing policy and development division Monetary System: Viability of The director Dr Nik Ramlah Nik Mahmood Product Islamic Dinar" in Kuala Lumpur said the country should continue its HSBC Bank Malaysia Bhd has efforts to develop innovative and He did not identify the countries with launched Amanah Home Financing, the competitive instruments to heighten its which Malaysia has begun latest addition to its range of Islamic profile internationally. 18 New Horizon September 2002 Rajab 1423 NEWS MONITOR negotiations, but said response has been He told a gathering this in Johor Baru opportunity for capital appreciation. It good. on Wednesday for the merchant bank's caters to investors with a low to major clients. Among the guests was moderate risk tolerance. Morocco, Libya and Bahrain are Menteri Besar Datuk Abdul Ghani reportedly among the West Asian The funds are suitable for investors Othman. countries to have expressed keen seeking investments are governed by interest in using gold dinar in trade. Yaacob said that the merchant bank's syariah principles but are not restricted experience in its field for the last 32 to Muslims. Prime Minister Datuk Seri Dr Mahathir years was proof of its capability to Mohamad had last year proposed that PUTB chief executive officer Mark Toh handle various challenges with proven gold dinar be adopted as a substitute said: "The equity market represents one management formulas and proactive currency for international trade as it is of the most developed segments of the approach towards preparing the bank more stable and less prone to domestic Islamic capital market. As at for new directions. speculative activities. end-September 2000, about three- He said that Affin Merchant Bank now quarters of the total number of equity Dr Mahathir, who is also Finance had capabilities in a spectrum of the counters traded on the KLSE and Minister, suggested that gold dinar be merchant banking business covering Mesdaq were approved as syariah initially used to settle bilateral trade corporate advisory services, capital compliant." payments, and its adoption widened market particularly in the areas of progressively. He said the introduction of two syariah corporate restructuring, debt indices - the KLSE syariah Index and Malaysia has to date signed BPAs with restructuring and raising of capital. RHB Islamic Index - in recent years 24 countries, but the Government is reflected the growing interest in Islamic ready to extend the use of gold dinar in Prudential Unit Trusts stocks. trade with any other interested party. launches islamic Equity, "This has provided a solid platform for Income Funds AFFIN Merchant Bank the growth of the Islamic fund Ventures into Corporate Prudential Unit Trusts Bhd (PUTB), the management and stock broking Financing Malaysian unit trust operation of British industries in Malaysia," Toh said. financial services giant. Prudential pic, AFFIN Merchant Bank Bhd will be has launched the PRUdana al-ilham, an actively venturing into new areas of Islamic equity fund, and PRUdana al- PAKISTAN corporate financing in line with its islah, an Islamic income fund. plans to become a full-fledged Modaraba Association of A total of 300 million units are investment bank. aggregated into the two funds, and units Pakistan Seek Support From Its chairman Gen (B) Tan Sri Yaacob in both funds are selling at 50 sen each Islamic Countries Mohd Zain said that the new fields it during their initial offer period, which The Islamic Chamber of Commerce and would be going into actively would be ends on Sept 3, according to a PUTB Industry has helped the Modaraba broking, business matching, placements statement. Association of Pakistan to attend the of funds and valuation. The PRUdana al-ilham (which means private sector meeting of OIC Countries "In this context, Affin Merchant Bank inspiration) seeks to provide investors to be held at Sharjah in December has already taken a step forward by with high capital appreciation and 2002. It will help Modaraba Association becoming the first merchant bank to caters to those having a moderate to of Pakistan to explore the possibilities offer advisory services according to high-risk tolerance. of funding from the Islamic countries Islamic principles, both in the financial for its diversified business ventures in The PRUdana al-islah (which means corporate sector or capital market," he Pakistan. innovation) seeks to provide investors said. with a stable income stream, and an New Horizon September 2002 Rajab 1423 19 NEWS MONITOR This was stated by Chairman of MAP, According to Mr Hassan, the proposed finance infrastructure work for the next Bashir Chowdry, during a meeting with dollar account will be based on five years, said Harris Irfan, Deutsche the Chairman of Securities and Modaraba principle, while 'Riba Free Bank vice president of global corporate Exchange Commission of Pakistan Rupee Saving Account', already finance. IChalid A. Mirza. Mr Chowdry also launched is based on the principle of "We've received the invitation to bid, headed a delegation of MAP members. Musharaka, he said. and it's certainly something we'll be He said the Islamic Chamber was Giving details of their products to going for," Irfan said in an interview. helping the Modarabas to project their come, he said that the Bank has already The DIFC said it invited several potential and possibilities to other launched 'Car Ijara' (car leasing) international banks, without naming Islamic countries. He said, to multiply Scheme in Karachi and expects to them. avenues of resource mobilisation for introduce it in Lahore by next month. Dubai, the second-largest emirate in the Modarabas, the MAP was actively The Bank also plans to introduce export United Arab Emirates, wants to extend engaged in development of Islamic refinance scheme and the proposal is its role as the biggest transport and TFCs with the help of SECP, setting up with the SBP for final approval, he tourism hub in the Persian Gulf by of an Islamic Ftmd, pursuing stated. developing a market where foreign multilateral agencies and Islamic The function was also addressed by the institutions can buy and sell shares and Development Bank and attracting General Manager Pakistan Kuwait debt of companies such as Emirates investments from overseas Pakistanis Investment Company, Zaigham airline and Dubai Aluminum Ltd. besides other Islamic countries. Mehmood Rizvi, President Al-Meezan The banks have until Aug. 25 to submit The chairman, SECP, while addressing Islamic Commercial Bank, Irfan their bids, which must include a the delegation of Modaraba Association Siddiqui and the LCCI Chief Dr Khalid proposal to sell at least $300 million of of Pakistan (MAP), advised the Leasing Javaid Chaudhry. bonds, Hussein Al-Qemzi, the center's and Modaraba sector to develop and Talking about products of the Al- chief operating officer, said in an provide their specialised expertise to Meezan Bank, Najm-ul-Hassan said interview. Some of the debt will comply the lessees with better products and that it is dealing in corporate banking, with Islamic law, which forbids increased outreach to counter the including corporate financing, financing charging or receiving interest, Qemzi commercial banks, doing leasing against FE25 deposit, working capital said. Typically, the bonds pay a rental business. finance, medium and long term fee from an asset like a property. financing and others. The advisory contract will be signed on Al-Meezan Bank to Oct. 1, Qemzi said. Introduce 'RIba-Free Dollar The center will build the infrastructure Saving Account' UNITED ARAB for a proposed $2 billion financial district which will house the banks and Al-Meezan Islamic Bank, which got EMIRATES other financial institutions. It will then licence for a scheduled Islamic invite property-development companies Conmiercial Bank from the State Bank Deutsche Bank Will Bid to to invest in constructing buildings to of Pakistan (SBP) in January 2002, is Help Dubai Build Financial rent to the banks, Qemzi said. planning to introduce 'Riba Free Dollar Centre Saving Account' in near fiiture. The banks will own 100 percent of their Deutsche Bank AG is planning to bid to businesses, as opposed to needing a help Dubai raise at least $500 million to This was announced by General local partner with a minimum 51 build an international financial centre. Manager of the Bank, Najm-ul-Hassan percent share in compliance with Germany's largest bank wants to advise while giving a presentation to the U.A.E. law. executive committee and members of Dubai International Financial Centre, a the Lahore Chamber of Commerce and body the Persian Gulf emirate set up to Industry (LCCI). develop a regional exchange and asset- management business, on how to 20 New Horizon September 2002 Rajab 1423 chemicals ceramics real estate jute trading marine food media Corporate Office 17 Dhanmondi, Road No 2, Dhaka 1205, Bangladesh Phones: (880)-2-861891,868220 Fax: (880)-2-863470,867647 Internet: http://www.beximco.net email: [email protected] When you have a vision in the world of Islamic investment, others cannot keep up with you. Our objective is to search out the best international investment oportunities for our customers and then select just those that can be verified as compatible with Shariah Law. We then take the most advanced banking systems and technologies in the world and adapt them for use with Islamic Investment instruments. The result is a level of service that we believe matches anything in the industry has to offer