S P I N E

S P I N E

Module - I

The Institute of Islamic Banking and Finance# 12-2-800/445, Dilshad Nagar, Mehdipatnam, Hyderabad - 500 028. A.P. INDIA.

Tel. : 91-40-23522847E-mail : info@islamicbankinst.com Website : www.islamicbankinst.com

All Rights Reserved.

CAUTION : No part or parts of this material including title design should be transmitted, copied or reproduced in any form without written permission of the Institute. Any unauthorised use by individuals/organisations will be liable for appropriate legal action.

Note: In the E-Learning CD of Study Material due to technical reasons the studentwill note two page numbers one on the page of the text and the otherat the bottom scroll. Whever in the Assignments or study page number ismentioned it is always the page number given at the bottom of the pageand NOT the number mentioned in the below scroll which is for printingpurpose only.

Module - I

The Institute of Islamic Banking and Finance# 12-2-800/445, Dilshad Nagar, Mehdipatnam, Hyderabad - 500 028. A.P. INDIA.

Tel. : 91-40-23522847E-mail : info@islamicbankinst.com Website : www.islamicbankinst.com

All Rights Reserved.

CAUTION : No part or parts of this material including title design should be transmitted, copied or reproduced in any form without writtenpermission of the Institute. Any unauthorised use by individuals/organisations will be liable for appropriate legal action.

Credits & Acknowledgement :

The Institute is indebted to and acknowledges the under noted organisations, individuals, publications andjournals the material from which has been used as valuable inputs in the study modules. Permission, whereever required has been sought.

1. The Islamic Research & Training Institute, Islamic Development Bank, Jeddah, Saudi Arabia

2. Mr. David Williams, Editor, Islamic Banking and Finance magazine London, U.K. who is kind enough topermit IIBF to use its material in its publications subject to certain conditions mentioned later.

3. Various news papers and other journals from which matter has been used in the Brain Storming Session.

4. Title cover courtesy : Al Baraka Islamic Bank, Baharain.

5. IFIS Islamic Finance Information Service and Islamic Finance News, IFS for various inputs in the Globalround up section

Due care and caution has been exercised in compiling and printing these study modules. Errors if any, noticed by the students may be brought to the attention of theInstitute with details for rectification in the next reprint.

First Edition 2003

Reprints 2005

2007

2009

Revised Edition 2010

Present Edition 2013

CONTENTS

From the Deans Desk .................................................................................. 1 - 14

Islamic Banking & Finance Global Round Up ................................ 15 - 133

Chapter - I ................................................................................................ 134 - 149Global financial crisis

Chapter - II .............................................................................................. 140 - 163Islamic Finance Sector: Education, Training and Human Resource

Chapter - IIII............................................................................................ 164 - 172Religious Perspective - Background with socio-ethical aspects ofIslamic Economics, Banking and Finance

Chapter - IV ............................................................................................. 173 - 187Principles and Practice of Islamic Financing

E-SESSIONS

E-Session 1. Islamic Finance Product Evolution

E-Session 2. Islamic Finance Country Profile Bahrain, Dubai

E-Session 3. Miscellaneous

E-Session 4. News Makers

E-Session 5. Expert Opinion Islamic Philanthropy

E-Session 6. Additional Reading Material Global financial crisis

1 to 6 in this Module Page 133

Serenity and Peace Hallmark of Islam, lead you to a worldof knowledge and learning as you unfold page after page

Dean

1From The Deans Desk(Please read the complete text carefully)

Dear Student,

Welcome to the pioneer institution of learning - The Institute of Islamic Bankingand Finance. By registering for this course you have taken a valuable decision to acquaintyourself with a system about which none had spoken to you earlier even though it wasin vogue for hundreds of years. The Islamic banking and financial system did not makeenough progress as compared to the western model because it was considered to bean outdated, religious and dogmatic concept based on a religious ideology. This was notthe case. Western experts have now begun to realize that the interest based systemwhich is being practised around the world has many short comings and some say it isthe root cause of many economic debacles apart from the well known socio-ethicalevils. The current global economic crises, financial doom in Europe particularly in Grece,Italy and Sapin are all attributed to the element of interest in the economic system.Islamic Financial System is now understood to be the paacea for most of these evils.

About the Dean

The Institute of Islamic Banking and Finance is Indias first and only professionalInstitute in this field conceived and founded by Mr.M.A.MAJEED, a professional Islamicbanker. Trained at the Islamic Foundation, Markfield Liecester UK in Islamic Economics,Banking & Finance. Alumnus of the School of Business Administration, University ofMichigan, USA,. He is a former General Manager of Faisal Islamic Bank of Kibris, TurkishCyprus, Associate Member of the Indian Institute of Bankers, Bombay, India and aformer Member of Institute of Bankers, London. He has held various assignments in acommercial bank in India for 17 years and later in an Islamic Financial Institution (NBFC)in India where he handled a variety of assignments in operations, audit and administration.

He was invited as a special guest by the Central Bank of Islamic Republic of Iranto study the Islamic banking system in operation in that country. He attended the FifthOrientation course on Islamic Economics Finance and Banking held at the IslamicFoundation Liecester, United Kingdom. Attended the Silver Jubilee Celebrations of theIslamic Development Bank, Jeddah, Kingdom of Saudi Arabia. Invited to attend theHarvard Islamic Finance Information Program sponsored by Harvard University USA. Hewas invited to attend the II International Conference on Islamic Financial Markets heldat Bahrain in June 2007. He is an approved external guide for students of leading BusinessSchools for other MBA thesis. Leading Indian IT companies have approved him as theTrainer for Corporate training programs in Islamic Banking & Finance domain.

Invited to various seminars on Islamic banking in different parts of the World. Hehas presented papers on Islamic Banking and Finance which are published in leading

2journals. Travelled widely and studied the functioning of various Islamic banks and guideda number of post graduate students of Management in Finance of various universitiesfor their thesis presentation. Countries visited USA, U.K., Saudi Arabia, Iran, Bahrain,UAE, Turkey and Cyprus. He designs and conducts in house customized training programsfor IT companies and other institutions in Islamic Banking & Finance.

The Institute Profile

The Institute of Islamic Banking and Finance incorporated with the Governmentof Andhra Pradesh at Hyderabad, India, is the countrys maiden attempt atinstitutionalizing education at all levels in the field of Islamic Economics, Banking andFinance.

The Institute is a registered non-profit, equal opportunity, educational researchand training institution totally independent, non affiliated to any University nor accreditedto retain complete academic autonomy and intellectual independence regarding coursecontent, methodology and orientation. It has now acquired global recognition and thecourse in pursued by students from more than 20 countries worldwide.

The Dean has the sole discretionary authority to design and implement coursecurriculum with suggestions and advice from an Academic Council constituted andupdated with experts in respective fields. The aims and objectives of the Institute are :

1. To impart education and training to students desirous of getting acquainted with thelaws of Islamic Banking, Economics and Finance through Distance Education andcontact program method.

2. To organize Executive Development Programs for working executives/ graduatesfrom India and abroad in the fields of Islamic banking and finance apart fromconventional management science subjects like strategic planning, marketing,corporate management and human resource development.

3. To conduct lectures, conferences and seminars on subjects connected with Islamicbanking economics and finance.

4. To sponsor students for advanced training and professional education in the field ofIslamic banking and finance to various institutions in India and abroad.

5. To design tailor made course modules to suit specific requirements of individualinstitutions as per their specifications. The Institute offers customized in house trainingprogram for leading IT companies.

The Institute endeavours to offer you the best of select reading material on thesubject and expects active cooperation to develop good relations in the cause of learning.

While you progress in your study and go in depth into the subject you will besurprised to know how could such a viable system not be put to use for so manyhundreds of years. As a student of Islamic banking and finance there are certaindos and donts which have to be strictly followed to understand the subject.

3Do not compare the system with the conventional system and try to find out,search or locate similarities or dissimilarities between the two. This is for the reason thatno two systems are alike altogether or unlike. There may be some similarities anddissimilarities.

Do not think that every increase in monetary transaction is interest . Thereare strict jurisprudential parameters that describe and define what is interest andwhat is profit. The earlier being invalid, unjustified and the latter justified and valid.

Do not give credence to the arguments of common people or self styled religiousscholars most of whom do not have sufficient knowledge either of the technicality ofthe subject nor modern economics and banking. They argue mostly on logic and whateither they think is right or what they have been told by someone knowledgeable isright. They cannot quote a single authentic source to justify their argument.

Do not believe that the entire Islamic economic and financial system is confinedto Baitulmaals Interest free Islamic credit societies or Zakath collecting and distributioncentres, there is a well defined, commercially viable financial system which was notbeing explored for a number of socio-political reasons.

The Post Graduate Diploma in Islamic Economics, Banking and Finance is designedto be offered under distance learning mode with flexible learning convenience. Thisgateway program offers you all that is required to be learnt as a professional in thesubject. The course is now offered in more than 20 countries from US to Australia.More than 10,000 enquiries are received from 30 countries around the world.

Mode and Method of this Course

This course is designed keeping in perfect view the socio economic and geographicdiversity of India particularly and other countries in general. The method of distancelearning is now being adopted by many universities and Institutes of repute because itoffers a variety of conveniences for a student to learn. While one can learn at his/herown convenience at home without formally attending an institution during fixed hoursthe method will motivate a student to learn more from sources other than the readingmaterial supplied to him/her to augment his/her knowledge of the subject.

The Institute believes in a particular ideology for offering this unique course:Motivate - Support - Enrich and Evaluate. This system of education does not believein rushing through the entire material a month before the exams concentrating on important topics, passing the examination and obtaining the diploma. On the otherhand it encourages the student to learn the subject in depth, understand, investigateand master it in a reasonable time.

The course material supplied to the students may not be sufficient for many ofthem to satiate their hunger or quench their thirst for more information and knowledgeon the subject Hence it is strongly recommended that they constantly browse theinternet and get information from a number of sites on Islamic banking and financeapart from journals published abroad the addresses of which will be furnished on requestbut the cost is prohibitive.

4For the sake of convenience and learning the entire course has been dividedinto a number of modules and subdivided into Chapters. There may or may not be anycontinuity between two modules / Chapters as such the student has to study everymodule independently of the other. As part of its strategy to impart knowledge theInstitute may, on the condition of availability of sufficient number of candidates in anarea hold workshops, extension lectures contact programs to further enhance thelearning skills by additional inputs. As the entire course program is a participative venturethe candidates may themselves form a cohesive group and organise a session in theirarea with technical support from the Institute.

At the International level the Institute has categorised countries on the basis oftheir geographic locations like SAARC Countries, GCC Countries, Eurpoean, NorthAmerican and Canada, Far East and Australia. The course fee is based on the currenciesof these countries (not in equivalents) and convenience of remittance.

For the sake of administrative convenience and geographic status of the countrythe Institute has earmarked four nodal zones as under ;

East and North Eastern Zones - Comprising of N.Eastern states including WestBengal, Assam Manipur,Tripura, Orissa,Andaman& Nicobar islands based at Kolkata.

North Zone - Delhi, U.P., Bihar, Jharkhand Chattisgarh,Uttaranchal Himachal, Jammu & Kashmir, Punjabetc based at Delhi.

Central & West Zone - Maharashtra, Rajasthan, Gujrat, Goa, MadhyaPradesh based at Mumbai.

South Zone - A.P., Karnataka,Tamilnadu,Kerala, Pondicherry,Lakshadweep based at Bangalore.

The candidates will be advised to submit periodic assignments on topics selectedby the Institute for evaluation and to ensure that the standard of level of understandingand learning of the subject is satisfactory. If possible papers will be invited at short In-house seminars conducted by the Institute.

Similarly, to acquaint the candidates with practical operations of the system astaught by the Institute workshops may be held subject to availability of sufficient numberof candidates in an area or at the Institutes Head quarters at Hyderabad, India to offeran opportunity to the candidates to obtain first hand information about the operationalaspects of the system, In this connection candidates may also find out in their area localIslamic Interest free credit societies / Baitul Maals / Masjid committees collecting Qurbani

5skins and Zakath for distribution among the poor and the needy and study their functioningto acquire preliminary knowledge about the basic understanding of the subject by themasses and compare that with the subject under study.

The candidates are also advised to subscribe to some journals in India and abroadthe list of which is appended herewith. This is not compulsory but optional only toaugment their knowledge.

FAQs and their Answers

Question

1) How will this course help or benefit me in my job prospects or employment

opportunities in India or abroad ?

2) Making me different from others

3) Improving my understanding of the religion better.

Answer : No matter how best one is academically qualified in a subject he/she will notbe successful unless the same is put to practical use by knowledge, skills and experiences.If this holds good to cadre selection like IAS,IPS,IFS, IITians or IIMs the same holdsequally good for the course you have undertaken. A number of post graduates ofvarious Universities of India in MBA Finance have selected their project work on thissubject of Islamic banking and finance under the supervision of the Dean IIBF. Duringviva voce the external examiners were highly impressed by their knowledge of thisNew found subject and not only gave them very good marks but also requested themto provide more information about the subject.

Moreover for too long the world has ignored the Islamic financial system and forthe last one decade without naming it as the Islamic financial system the banks andother MNCs are adopting Islamic financial techniques in the form of mutual funds, unittrusts both close ended and open ended and such instruments which are totally deviantfrom interest based bank deposits. When a candidate equipped with a diploma in Islamicbanking and finance appears for an interview with any leading financial institutionanywhere in the gulf or elsewhere and he presents himself properly highlighting hisadditional qualification in Islamic banking and finance he will be distinguished fromother candidates and treated preferentially. This is a fact well noted by experience subjectto the candidates personal presentation. A number of our alumini have been successfulin securing middle level jobs in Islamic Banks and Islamic Financial Institutions.

From the moral and ethical point of view if one is not aware of a very importantpart of Islamic religion that is the economic and financial structure then ones life will bedeemed to be incomplete.

If, particularly as a Muslim, one is not aware of the Quranic injunctions on Riba,the Hadith and Fiqh aspects then who is to be blamed for this ignorance. The Institutethrough its courses offered at all levels gives an opportunity to the muslims, in particular,

6to learn, acquire knowledge and adopt a life style as permitted by the Shariah. Thecourses offered by the Institute are not solely commercial nor job oriented to promiseplacements but offer an indepth study of the system which can be socially, morally andeconomically very rewarding. It is no surprise that about 11% of our students are nonmuslim and some of them have surpassed the muslim students in their performance.

The Institute notes with considerable interest the enthusiasm exhibited by itsnon-muslim students around the world, more particularly from premier Business Schoolsin India and abroad who aspire to learn the subject in depth from an academic point ofview and seek answers to many questions on the subject.

4. How will this help the economic life in the country ? Comments.

After undertaking the PGDIBF as per the aspiration and desire of a cross sectionof people across the country who have written to this Institute they can themselvesstart small informal Islamic financial institutions in their area ensuring shariah complianceobtained through professional learning and public confidence and faith. At the grass rootlevel an economic revolution can be brought about by mobilizing small savings andchanelising the same from the haves to the have nots for economic activity offeringto the saver a reasonable reward as profit and charge to the utilizer a shariah permittedrent or profit. The Institute will surely guide self help groups if they come forward withproposals but will not be a part of them nor assure their credibility which will have to bea localized affair. Micro finance is the order of the day and Islamic Financial Systemencourages that in its microeconomic system. Our Alumni from Kerala state have alreadytaken the initiative and started Islamic Finance units in their native places.

Now coming to the subject proper

Economics, finance and banking are three important wings of any society aslegislature judiciary and the executive. They have been instrumental in changing thedestinies of nations since historical times and have been always undergoing a churningprocess to suit human needs. All major religions of the world and their scriptures devotedimportant chapters to directives regarding conduct of economic and financial matters ofthe public and the state. These include the Artha Shastra, the Quranic injunctions andBiblical teachings on usury. Keeping the historical perspective in the back ground let usconsider the prominent aspects of economics finance and banking in the modern ages.Banking and Insurance are not older than 200 years. What started as petty marketlending by money lenders to facilitate trade gradually modified and developed itself intotodays modern hitec banking.

During the later half of previous century particularly after the oil boom in middleeast the muslim community around the world found a new economic awakening andawareness for banking and financial transactions. This acted as a prelude to the

7investigation of a system conducive to and in accordance with the permitted norms ofIslamic economic system. The Quran, the holy scripture of muslims and the last revealedtext expressly prohibits giving and taking of interest referred to as RIBA or usury anddirects that all financial transactions should be free of usury which should be eliminatedfrom the economic lives of people. This prohibition as revealed in four Surahs undervarious contexts, alongwith the traditions of the Holy Prophet (PBUH) set forth guidelineswhich were refined and elaborated by the Four schools of Islamic thought by which wasevolved the Islamic jurisprudence on the subject of economics banking and financewhich is a full fledged discipline of study.

The muslim community under the above directions and stipulation is averse to allinterest bearing transactions including conventional banking and its operations. Thisnecessitates evolving a financial and banking system which could cater not only to theneeds of this group but also offers to the world economic order a system which istechnically viable in the modern times fulfilling most of the present day requirements.

This exclusive system came to be known as Islamic banking, Interest free bankingor non interest / non conventional banking and is now operating in all major countries ofthe world around the globe. Without delving too deep into the technicalities andcomplexities of the whole Islamic financial and banking system let me confine this addressto a few important aspects of Islamic banking.

Unlike the conventional banking system the Islamic banking system does notfunction on the sole premise of paying a fixed and predetermined rate of interest onDeposits nor does it permit charging of a fixed rate of interest on monies advanced toborrowers. The system does not treat money as a lendable commodity for the price ofinterest. As many students of economics will appreciate the Keynesian theory of interestthat clearly defines interest as the reward for parting with the liquidity of money whichis not acceptable under Islamic tenets instead a participative theory is put forth. Thebank and the customer in conventional system are technically Debtors and Creditorswhile in the Islamic system the bank is the Trustee/Attorney and the customer in theentrustor. The major financial instruments used by the conventional banks around theworld are overdraft, cash credit, term loans, bill discounting and other subsidiary serviceswhile the Islamic banks have a set of their own specially designed instruments themajor of which are :

- Ijara : Leasing- Musharika : Venture financing- Mudaraba : Trust financing- Morabaha : Cost plus financing- Mozareh : Forward purchase and some minor instruments- Istisna- Salam

The Islamic Development Bank based at Jeddah, Saudi Arabia is the muslim WorldBank with a membership of more than 50 nations. This bank works in conjunction withmore than 100 Islamic banks and Islamic financial institutions around the world includingEurope and America. The International Association of Islamic Banks, Islamic Research

8and Training Institute under the Islamic Development Bank, Governments of Countries,leading universities around the world including Harvard University and training centresare busy in research and development work to refine these financial instruments to suitthe modern day financial world.

After 9/11 most of the muslim worlds affluent society investors, both individualand institutional, withdrew their funds from US based banks, stocks, multinationalcompanies and other financial institutions and are said to have invested these funds inUK and Europe. It is reported that after London 7/7 bombing most of these funds areshifting to far east, Malaysia and other eastern countries. India should have been afavoured destination for these investments but because of lack of investment opportunitiesin Islamic financial sector the country is deprived of these funds as the investors are notinterested to invest in the booming Indian economy. No doubt some India specific fundshave started attracting investors attention in Middle East and in some parts of thecountry but unless legislation is passed to actively allow Islamic financial products in thecountry no large scale investor interest can be expected in near future.

Some common misconceptions and technical aspects

Interest free banking is commonly misconstrued as a charitable venture or bankingwithout returns. This is not true. Interest is not the only way of earning an income ormaking a profit. There are ways and means of earning an income and making a profitother than interest and it is on this premise that the whole concept works. Lease rents,Venture profits, Mark up, service charges etc all make up the earning and sources ofprofits to Islamic banks. Just as the balance sheet of any conventional bank disclosesthe Interest and Non Interest income of banks which consists of Bill discounts,Commission, L/C Commission handling charges etc briefly it may be mentioned herethat the Islamic banks earn their income from Lease rents, Venture Profits, forwardpurchases and investments in securities (not debt instruments).

The Islamic financial instruments in vogue are not something new to the financialworld as they are already in existence in some form or the other. In India there aremore than 1000 Islamic Interest Free Credit Societies mostly run on charities extendingconsumption loans to needy persons and registered as public societies charging a nominalservice charge to administer and manage the affairs. All mutual funds including sectorspecific mutual funds operate on the principle of Modarabah or profit and loss sharingwhere by the investor gets a dividend only if the Mutual Fund makes a profit and suffersloss if the Net Asset Value depreciates. The investment portfolio of the Mutual Fund istaken care of by the Trustees to ensure safe distribution of risk with a Footnote Warningto investors not to be assured of returns which is the cardinal DOCTRINE of Islamicbanking system. The fate of US 64 is an indication and the steps taken to revamp thesame offers the solution to system short comings. With the globalization of worldeconomy and economic liberalization more and more multinationals resorting to theIslamic financial system of banking and investments as evidenced by the fact that closeended, Fixed Rate of Return interest based deposits system is being discouraged andreplaced by open ended, readily liquid, return based instruments as preferred by theinvestors, indicating a dynamic shift in investor preference. Even lending on the basis offixed rate of interest is declining and under the free interest regime banks are permitted

9to fix their own rates based on the demand and supply respectively of funds peculiar totheir context. This is exactly what the Islamic banking system suggests for a zerointerest based bonds and modaraba funds.

Emerging trends on the International scenario of Islamic banking

Growing at the rate of 15 percent every year Islamic banks are likely to accountfor more than half of all deposits in the Islamic world by 2008 say banking and financialexperts. Islamic banking has been expanding at a steady clip. Despite problems withaccounting procedures, lack of recognition in certain countries and general restraints inthe muslim world itself. At present more than 150 Islamic banks and financial institutionsoperate in more than 50 countries 40 of them in the Gulf Cooperation Council countries.Islamic banking Industry currently manages assets worth 200 to 300 billion dollarsannually despite wide variations in the practices used by Islamic banks and also that thefinancial statements of different institutions are incompatible as commented by theAccounting and Auditing Organization for Islamic Financial Institutions. It is encouragingto learn that Islamic banks manage assets above 200 billion dollars and they havedeposits estimated at 45 billion dollars and the sector finances were 31 percent in trade30 in industry 13 in agricultural finance and 11 in services. According to one surveyIslamic banks in the world have 77 $ billion in deposits, 166 $ billion in assets and $ 6billion in capital. Keenly observing the trend and prospects leading interest based bankshave started turning towards offering the Islamic alternative. Americas Citibank openeda branch in Bahrain as Citi Islamic Investment Bank with a capital of 20 million US $.Robert Fleming a British merchant bank has launched as $ 16 million Islamic EquityFund. A BN Amro is planning to open an Islamic banking department in Bahrain.

ANZ Investment Bank has ambitious plans to start Islamic finance operations inthe sub continent by providing First ANZ International Modaraba an Islamic Fund providingaccess to cross border finance. The World Banks investment arm, the InternationalFinance Corporation is one of the principal investors in the fund. ANZ through its GlobalIslamic Finance division based in London has already launched leasing modarabas invarious countries and now targeting Asian markets particularly Malaysia. According toan IMF study interest free banking based on Islamic tenets adjusts more easily tofinancial shocks and these prove to be more stable than their western counterparts(staff papers Volume 33 No.1).

According to Mr Andrew Dixon, Managing Director of Saudi British Bank the SaudiBanks are exploring ways and opportunities to gain more profits by changing the strategiesof depending totally on loans. They are now concentrating on creating avenues forbanks without depending much on interest.

According to London based Institute of Islamic Banking and Insurance there is agrowing demand for Islamic Investment products from middle income groups living inthe West. Global banks such as HSBC and several US fund management groups aredeveloping products for the potentially lucrative market. Islamic banking is practiced bywestern banks through their Islamic units in Britain, Germany, Switzerland and Luxemburg.Key players in the field include Commerzbank AG, Deutsche Bank AG, HSBC and MorganStanley. Dean Witter Co Islamic Mutual funds represent one of the fastest growing

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sectors within the Islamic financial industry. There are estimated to be more than 90Islamic Mutual Funds functioning in the world. Islamiq.Com is the first Internet portalthat offers online financial services based on Islamic tenets. In USA Freddie Mac theleading financial corporate has entered into an agreement with LARIBA for commercialcooperation in its transactions based on Islamic financial norms. Amalgamations,acquisitions and mergers are taking place in order to consolidate the institutionalframework of the system.

The Indian Panorama

The Banking Regulation act does not permit Interest free banking in India. Incountries where full fledged Islamic banking is not permitted either partially or whollymodified instruments are allowed and special legislations have been enacted to facilitatesuch a system. The examples are Malaysia. Pakistan, Iran, Bahrain, UAE and Bruneietc. Under the Indian law as a full fledged Islamic bank cannot operate in view ofexisting provisions which have to be suitably amended with parliamentary approvalwhich is difficult to be obtained nevertheless the Reserve Bank of India had provided analternative in the form of Non Banking Financial Companies Directives 1977 under whichdifferent categories of Non banking financial intermediaries like Finance and InvestmentCompanies, Loan Investment Companies, Mutual Benefit Fund Companies etc arepermitted under stringent regulatory mechanism of prudential norms and classificationof Non Performing Assets.

Problems faced in the Country

In order to start or run an Islamic bank or an Islamic financial institution in thecountry registration with RBI is the first problem because the system is not recognizedas it is not properly understood and appreciated nor has it been adequately projectedby professionals in the field. Moreover the existence and disappearance of a largenumber of fly by night operators better known as blade companies which played havocwith the religious sentiment of gullible Muslims and vanished with their lifes savings havediminished the faith of investors in such Ventures though such unscrupulous deals wereindulged in by other huge corporations like plantation companies and other ventures yetthe few credible Interest free enterprises bore the brunt. Apart from registration theother requirement of SEBI (Securities and Exchange Board of India) for compulsoryrating by the stipulated agencies is difficult to fulfill because the conventional parametersused for rating of Interest based institutions. The other problem is of adhering to theInternational Accounting Standards. The balance sheets of Islamic financial institutionscannot fit into the proforma of a company Balance Sheet because of its peculiarities.The problem of disclosures and presentation has to be over come to facilitate theIslamic Financial Institution to present an acceptable form of a balance sheet in compliancewith the International Accounting Standards.

Islamic Banking - What can be done

It must be emphasized that Islamic banking is not a religious system exclusive toMuslims but an alternative to conventional banking and not restricted to any particularcommunity. Infact most foreign multinational banks have been operating an Islamic

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banking cell which structures deposit taking and financing transactions with in theframework of Shariah. It must be appreciated that it is not the intention of the Islamicbanks to doctrinate traditional banks into following the Islamic banking system. It isnecessary for the conventional banks and the customers to understand and appreciatethe Islamic system. The moral and socio ethical aspects of the system have been overemphasized and highlighted but the technical aspects have not been projected whichlead people to believe that this is an exclusive religious system meant for devout muslimswhich is not the case.

The nationalized, state and private sector banks have in the recent times launchedsubsidiaries for Housing Finance and leasing etc. alternative system parallel to mainlinebanking but distinctly different from interest based instruments and profit and loss sharingwindows like western banks would be a good proposition. Funds collected through thiswindow can be invested under the supervision of experts in leasing, cost plus financingforward purchase of bills etc which are permitted under the Islamic system. By this alarge section of population that is being left out and its preference to keep their savingslocked in non liquid assets like properly and gold will have an avenue to invest in shortand long term investment this will not only benefit individual investors but a large numberof institutional investors like charitable organizations societies and trusts etc. A dramaticturnaround, in the banking sector cannot be expected nor total conversion fromconventional interest based functioning to Islamic system of banking even then atransitional intermediary facility can be offered without resorting to legislative measuresbut by an executive order of the RBI Like the NBFC directives. To make a good beginningthe multinational and foreign banks operating in India who have the required expertiseof having managed Islamic finance operations else where in the world may be allowedto offer the alternative of Morabaha Funds / Modaraba Bonds on an experimental basiswhich will attract a large number of NRI depositors from the gulf and west after whichinstruments designed to suit the indigenous investors can be put into use attractinglocal investors. Most countries with a very small proportion of muslim population donot want to exclude them from the countrys economic mainstream and offer thealternative where as India with the second largest muslim population in the world issurprisingly unaware of this fact which forces the muslim community averse to bankinterest to keep their savings locked, as already said, in non liquid asset or lose themwith unscrupulous elements instead of participating in the countrys economic activityand improving its dynamic performance by offering the investment output. Anyhow aword of caution is always felt necessary and it has to be understood that theimplementation of this system requires an effective judicial administration system forrecovery of amounts advanced without unduly prolonged litigations and highest degreeof integrity and moral character on the part of promoters, beneficiaries of the systemand the institutions implementing the same.

Recent Developments in Islamic Banking in India and abroad

Reserve Bank of India has set up a special committee under one of its ChiefGeneral Managers to study and submit a report on the feasibility of introducing Islamicfinancial products in Indian money market. The Committee, it is reliably learnt, hasalready submitted its report. India cannot remain an Island excluded from outside worldwhere Islamic Banking in spreading very fast and with the establishment of Islamic Bank

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of Britain as the first stand alone bank permitted by the Financial Services Authority ofUK has given a boost to Islamic Banking in Europe.

In the following pages the student will read interesting developments around theworld in Islamic Banking and articles on the subject. At a recently held seminar onIslamic Banking - Problems and prospects in India sponsored by this Institute valuableinformation was provided to the participants. The Dean was intereviewed by Times ofIndia and Economic Times exclusively and the excerpts are enclosed for the studentsstudy. He has contributed articles to various news papers and journals excerpts ofwhich are included in the What the Press Says section of this Module. The ReserveBank of India has recommended to the government to amend Banking Regulation Actto facilitate Islamic Banking in India latest development indicates positive movements invery near future.

Important advice to students :

The students, in their own interest are advised to send the assignments promptlyin proper order through soft / hard copies as prescribed for local and overseas studentsand they are encouraged to send their doubts and questions on mail to seek answers. Alist of websites is given in this section apart from which the student should endeavour toexplore knowledge avenues of the subject through various means.

The course curriculum study material has been revised with addition of latestsubjects and developments in the Islamic finance world. To make the material moreinteresting and motivating and to overcome the monotony a separate CD / Multimediahas been added to the material even for B-Learning students. This covers some exclusivetopics of considerable interest.

This revised version of the course material also includes CDs (Text / Audio-Visual)on select topics. Care should be taken not to copy or allow copying of the materialwhich is copyright with the Institute.

Some students in the Exit interviews after completing the course have given theopinion that there is too much of theory in the course. To this our answer is; this is aprofessional course and not a degree examination, hence the student must have a firmand sound foundation of the subject both from career studies point of view. Theoperational Islamic banking chapter gives an insight into how the system works. Inview of the vastness of the subject only a few important aspects have been coveredso as to avoid heavy workload to students. This has to be kept in mind.

The Islamic Finance sector is very fast changing, dynamic and progressive andthe students have to keep pace with this by keep browsing various internet sites on thesubject. They should subscribe to some well known Islamic Finance magazines andjournals or atleast read some of their material on their webistes.

* Mr. David William has prescribed that on all the copies it must be made clear as to the source of the copy (Copyright NMP, publisher of Islamic Banking and Finance) and was kind enough to give the following DiscountOffer exclusively to students of IIBF provided they mention in the subscription form that they are bonafidestudents of this institute. The Annual Discounted Subscription will be only 20 instead of 30.

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Recommended Websites :

1. www.citiislamic.com2. www.bashisl.com.bh3. www.alislamic.co.ac/arabic4. www.jordan.islamic.com5. www.iifm.net6. www.islamic-world.net7. www.islamicconferences.com8. www.albaraka.com9. www.aaoifi.org10. www.islamic-fiance.com11. www.bi.go.id12. www.islamicfinancenews.com13. www.batelco.com.bh14. www.ncb.com.sa15. www.nbk.com16. www.anb.com.sa17. www.arib.com.sa

Recommended Journals, some books and Websites :Journals1. Islamic Banking & Finance* - NMP Ltd., #26, Victory Mews, The Strand, Brighton

Marina Village, Brighton, East Sussex, BN2, 5XB, UK. Tel. : +44 (0) 208 123-0704

2. The Islamic Banker Subscriptions and Marketing, Mushtak Parker Associates Ltd50 Portland Place, London WIN 3DG U.K.

3. IslamicaOnline subscription: www.islamica-me.comE-Mail: subscription@islamica-me.comTradewind Business Media & Communications Co. Ltd, PO Box 506510, DubaiU.A.E. Tel: + 971-4-2957790

4. Islamic Tijara Email: contact@islamitijara.com5. Islamic Finance News Malaysia

Books1. Issues in Islamic Accounting by Balashanmugham, Vignesan Perumal, Alfiya Hanuum,

Ridzwan, Universiti Purtra Malaysia Press - ISBN -983-3455-07-7

2. Islamic Bonds-Your guide to structuring, issuing and investing in Sukuk by NathifAdam and Abdul Kader Thomas, Tel. : +60-3-2143-8100

3. Islamic Bonds by Brian Kettel.

4. Islamic Retail Banking and Finance Edited by Sohail JafferPublished by Euromoney Books

5. An Introduction to Islamic Finance : Theory and Practice by Zamir Iqbal and AbbasMirakhor - John Wiley and Sons.

14

18. www.qib.com.qa

19. www.bankislam.com.my

20. www.azzadfund.com

21. www.riyadbank.com

22. www.islamicbankingandfinance.com

23. www.cimb.com.my

24. www.securities.com/ifis

25. www.thechildrensmutual.co.uk

26. www.bankerme.com/bme/2005/feb/how_to_structure_sukuk.asp

27. en.wikipedia.org/wiki/sukuk

(Student must verify the authencity of material on the websites and correctness of theaddresses. IIBF is not responsible for any errors on the above issues.)

Global Round Up

Islamic Banking & Finance

15

BAHRAIN

Gulf Finance House inks another restructuring deal

Daily Cover

BAHRAIN: Gulf Finance House (GFH) announced a restructuring of its remaining debtfrom a Wakalah facility amounting to US$100 million; having already paid US$55 millionof the total amount.

Under the new restructuring terms, the Shariah compliant investment bank will repaythe remaining debt over six years, until a final maturity in September 2018. Therestructuring period includes a two-year grace period; while the amortization of theprincipal amount will start from April 2014.

Banks involved in the syndication include Bahrain Islamic Bank, Emirates Islamic Bank,Liquidity Management Center (LMC) and Liquidity Management House.

The deal follows GFH's restructuring of US$110 million-worth of Sukuk outstandingcarried out in May 2012, in a transaction that saw the bank extend its repayment of thedebt; also over the next six years. The US$200 million Sukuk was sold in July 2007.

Hisham Alrayes, the acting CEO of GFH, said that: The restructuring of the Wakalahfacility is another positive development for the bank which will facilitate greater financialflexibility as the bank continues to accelerate and get back to long-term profitablegrowth.

This agreement follows the approval on the GFH Sukuk restructuring which was securedrecently. By retaining our key assets and extending the debt maturities, GFH has managedto enhance its balance sheet significantly and bolster its liquidity position moving forward.

The banks latest restructuring was led by LMC, which also advised on the restructuringof its Sukuk.

Gulf Finance House announces merger and acquisition plans

Daily Cover

BAHRAIN: Shariah compliant investment bank Gulf Finance House (GFH), whose unitGFH Capital is speculated to be in a takeover bid for UK side Leeds United Football Club,announced to the Bahrain and Dubai bourses on the 3rd September 2012 that it iscurrently exercising due diligence for the potential acquisition of asset management andreal estate development companies.

In addition to its assessment of various acquisition opportunities, GFH said that: "Thebank is looking to enhance shareholder value and strengthen its balance sheet. Toachieve this, we are looking to increase the stake in its group companies, subject toobtaining all relevant regulatory approvals."

Apart from GFH Capital, GFH's other associates include Khaleeji Commercial Bank, inwhich it owns 40%, Jordan's Al Barakah Takaful, Balexco (Bahrain Aluminium ExtrusionCompany) and Cemena Holding Company, a cement-focused business in Bahrain.

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GFH also clarified that GFH Capital, which successfully won a bid to acquire Turkey'sAdabank last year, is currently awaiting regulatory approval from the Turkish authoritiesfor the acquisition. In relation to another GFH Capital venture, its flagship InjazatTechnology Fund, GFH said that the firm is in talks with potential partners to launch theInjazat Technology Fund 2, following the close of the first fund.

The investment bank's merger and acquisition (M&A) plans follow its recent measurestaken to restructure around US$210 million-worth of debt; as part of a larger effort toregain its footing in the aftermath of the 2008/2009 financial crisis. In July this year, itannounced the restructuring of US$100 million outstanding from a syndicated Wakalahfacility, after in May disclosing the restructuring of US$110 million outstanding from aUS$200 million Sukuk sold in July 2007.

It has also strived to improve its financials; reporting a profit of US$4.74 million in thesecond quarter of 2012, against a loss of US$11.26 million a year earlier, on the back ofhigher income and lower expenses.

With the bank having strengthened its balance sheet, its M&A plans appear to signal thatit is ready to return to growth.

Today's IFN Alerts

US : Gatehouse Bank acquires US$155 million property portfolio in jointventure with Brennan Investment Group

UK : London Central Portfolio launches Shariah compliant residentialproperty fund

INDONESIA : CIMB Niaga Syariah to introduce fixed returns on retail depositaccounts

UAE : Al Ansari Exchange signs partnership with Noor Islamic BankGLOBAL : Sukuk market requires further development, say industry expertsUS : Shariah indexes outperform conventional indexes, says CEO of

ShariahSharesSAUDI ARABIA : Kingdom's mortgage law will also boot the mortgage Takaful industry,

says CEO of Tokio Marine Middle EastMALAYSIA : MARC withdraws its ratings on EP Manufacturing's US$37.46 million

SukukKENYA : Kenya Bankers Association appoints Asad Ahmed to its board of

directorsGLOBAL : SNR Denton makes three senior appointmentsPAKISTAN : Central bank developing a five-year plan for country's Islamic banking

industryGLOBAL : GCC Sukuk issuances rise almost twofold in the first half of 2012

from a year earlier, says MarkazUAE : Tamweel sees local home financing transactions surpassing US$2.17

billion in 2012UK : Gatehouse Bank completes purchase of department store building in

Leeds for US$53.05 millionMALAYSIA : MARC affirms UMW Holdings' US$257.31 million Sukuk at '1ID/AAAID'

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GLOBAL

Risk management instruments still lacking at Islamic financial institutions

Daily Cover

GLOBAL: Islamic finance has proven to be more resilient amid financial crises, butexperts believe that more can still be done to manage risks.

Despite Islamic banks high liquidity, namely; in the form of cash, the industry still lacksthe necessary depth to manage risks effectively, commented Jaseem Ahmad, thesecretary general of the Islamic Financial Services Board.

In that sense, there is still a shortage of Shariah compliant instruments and securities.A capital market is being developed but it is still not as liquid or as deep as we wouldwant it to be; and it needs to be deeper, Jaseem was quoted as saying.

Hence, there is room for substantial improvement in the equity management framework;as more instruments will afford Islamic banks more opportunity for risk management.

In addition to providing the banks access to a wider range of instruments, the banksshould also be incentivized and provided with the necessary resources to strengthentheir capabilities. Jaseem also noted that even high levels of loss-absorbing capital couldbe negated if risk management frameworks are not sufficiently strong and in spite ofIslamic banks practising more conservative banking methods.

There is a very high ratio of tier one capital and common equity among Islamic financialinstitutions which is loss-absorbing; and the kind of capital that Basel III has brought innow for conventional banks, he noted. However, insufficient risk management andrisky activities can still lead problems to crop up at any bank, even if it is an Islamicbank, added Jaseem.

EGYPT : Government considers Sukuk sale

INDONESIA : Moodys raises countrys sovereign debt rating to investment grade

MALAYSIA : DRB-Hicom puts speculation on Bank Muamalat Malaysia sale to rest

INDONESIA : International Islamic Trade Finance Corporation in US$60 millionsyndicated structured trade financing deal with Angels Products

QATAR : Qatar Islamic Bank reports US$376 million in net profit for the yearended the 31st December 2011

MALAYSIA : CIMB-Principal Islamic Asset Management targets US$64 million fornewly launched funds

PAKISTAN : Securities Exchange Commission of Pakistan gives green light to 2012draft Takaful regulations

UAE : Fitch assigns Tamweels US$300 million five-year fixed rate guaranteedtrust certificates a long-term rating of A

UAE : Abu Dhabi Islamic Bank appoints Abdul Hakim Ahmad Kanan as globalhead of audit

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Middle East banking M&As on the uptick

Daily Cover

GLOBAL: Shariah compliant investment bank QInvest and Egyptian investment bankEFG Hermes have announced that they are exploring a strategic alliance, amidexpectations of a revival of merger and acquisition (M&A) activity in the Middle East thisyear.

Another transaction on the burner is the sale of a stake in The Royal Bank of Scotlandby the UK government to Abu Dhabi sovereign wealth funds. The deal could be completedby the end of this year.

QInvest and EFG Hermes said that: The aim is to create a leading investment bankwith operations in the Arab world and beyond, comprehensively covering the MiddleEast, Africa, Turkey and south and Southeast Asia.

Businesses included within the scope of the banks discussions are securities brokerage,asset management and investment banking. However, EFG Hermes Private Equity willbe left out of the talks.

Should an agreement be met, the banks will announce a general framework of a jointventure and a timetable for its implementation, subject to relevant approvals.

Our primary objective in these discussions will be to create an investment bankingplatform that will play a vital role in the flow of foreign capital into the region, whileenabling Arab investors to participate in future investment opportunities in the regionsthat will fall under the umbrella of this new platform, said EFG Hermes.

The announcement comes as business leaders expect a surge in M&As in the MiddleEast this year, following a long period of sluggish activity. According to a recent surveyby law firm DLA Piper, the pick-up in consolidation will be driven by improved liquidity,increased bank lending and the growing financial needs for regional firms to expand.

The survey showed that the most number of deals are expected to occur in the UAE;followed by Saudi Arabia and Qatar, with financial services and insurance offering thegreatest M&A opportunities.

SAUDI ARABIA : Saudi Electricity Companys first global Sukuk may include 10-yeartranche, say market observers

OMAN : Islamic banking regulations almost ready, says central bank

MOROCCO : First draft of countrys Islamic banking regulations expected in Aprilthis year

CROATIA : Islamic banks to open in Croatia soon

UAE : DP World to settle US$3 billion debt ahead of schedule

KUWAIT : International Investment Group reaches deal to restructure US$200million exchangeable Sukuk

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MALAYSIA : Middle Eastern investors no longer involved in Medini Iskandar project,says Iskandar Investment

TURKEY : Local participation banks post US$450 million in net income for 2011

INDONESIA : Bank Permata Syariah seeks 65% growth in financing activities

PAKISTAN : Al Baraka Bank Pakistan reports US$4.7 million in total net incomefor 2011

MALAYSIA : Bank Rakyat reports record net profit for 2011

SAUDI ARABIA : NCB Capital plans to launch four investment funds in the second halfof 2012

QATAR : UAEs AXA Gulf ties up with Qatarlyst to reinforce Qatar Property &Casualty business

MALAYSIA : RAM no longer rating Poh Kongs US$64.57 million Sukuk Murabahah

OMAN : Bank Nizwa names Tariq al Farsi as general manager of retail andprivate banking

KUWAIT : SNR Denton names Stuart Cavet as managing partner of Kuwait office

RBS shake-up spills over into Islamic finance

Daily Cover

GLOBAL: The restructuring of The Royal Bank of Scotland (RBS)s equities assets hasshaken up the financial industry from the Middle East to Asia; creating a spillover intothe Shariah compliant market.

In Dubai, RBS officially ended its partnership with Rasmala Investment Bank to provideequity research on Middle East companies. Islamic Finance news understands that muchof the business has been in limbo since the UK bank announced in January this yearplans to dispose of its mergers and acquisitions business in the Middle East and reduceits workforce as part of its global restructuring.

RBSs exit has raised questions as to what action Rasmala will take in regard to thebrokerage; especially with the entry of the European Islamic Investment Bank (EIIB).EIIB has agreed to invest US$16 million in Rasmala via a facility convertible into sharesrepresenting around 35% of its enlarged capital.

EIIB is likely to keep Rasmalas asset management, private equity and corporate finance/investment banking business, but it is unclear what the bank intends to do with thebrokerage, commented an observer, who also noted that Rasmalas private equitybusiness has not been very active with deals over the past year.

In a separate development, RBS has also entered into an MoU with CIMB Group; inwhich the Asian bank has proposed to purchase RBSs Asia Pacific cash equities, equitycapital markets and corporate finance business.

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CIMB is also reportedly looking to retain around two-thirds of the 600 staff currentlyemployed at the divisions in question; and is in talks to provide guaranteed compensationpackages to keep some of RBSs employees should the deal go through.

With the CIMB name already cemented into the Islamic finance market, it is likely thatthe Malaysian banking group can leverage RBSs experience of managing foreign clientsand issuers to further expand its Shariah compliant business; in markets such as Australiaand Singapore.

Meanwhile, as RBS continues with further plans to relocate its Australian fixed incomeand currency trading business and seek suitors for its equities and mergers advisorybusiness; also in Australia, could its overhaul open up more room for smaller players toemerge in the UK banks place?

GLOBAL : Al Baraka Banking Group plans to purchase 75% stake in Indonesianbank

SAUDI ARABIA : Kingdom Holding Company seeks shareholders approval to sell Sukukor conventional bonds

QATAR : Doha Bank will not convert into a fully-fledged Islamic bank

SRI LANKA : Hatton National Bank launches Islamic banking unit, Al Najah

SINGAPORE : CIMB Bank targets US$79.8 million-worth of Islamic financing forSMEs in Singapore this year

BANGLADESH : Government to receive US$2 billion from International Islamic TradeFinance Corporation for fuel imports

INDONESIA : Bank Syariah Mandiri to increase agriculture financing to US$54.9million

BAHRAIN : Bahrains banking sector recovery relying on Islamic financialinstitutions

GLOBAL : Islamic banking industry has bright opportunities to thrive in Africa,says KFH Research

MALAYSIA : Government to hold talks with Islamic banks and other financialinstitutions for financial aspects of build-then-sell model

MALAYSIA : CIMB Islamic Bank to launch Ar-Rahnu service

TURKEY : Country may have to pay higher for sovereign Sukuk

MALAYSIA : Rally in ringgit-denominated Sukuk to end after central bank rules outinterest rate cut

MALAYSIA : CIMB Islamic reports US$148 million profit before Zakat and taxationfor 2011

EGYPT : National Development Bank posts US$98 million net loss for 2011

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UAE : National Bonds Corporation announces lowest profit rate of 2%

MALAYSIA : Malaysian Insurance Institute to elevate Takaful competencyframework

INDONESIA : Asuransi Jiwa Sinarmas MSIG to expand Takaful range in 2012

MALAYSIA : RAM places AA3 rating of Cerah Samas US$199 million Sukukprogram on Rating Watch

MALAYSIA : Fitch affirms HSBC Amanah Takaful (Malaysia)s insurer financialstrength rating at A-

INDONESIA : PEFINDO downgrades Berlian Laju Tankers Sukuk Ijarah II/2009 toidD(sy)

SAUDI ARABIA : Al Rajhi Bank names Sulaiman Abdul Aziz Al Zaben as CEO

Bahrain Mumtalakat Holdings Company in US$959.35 million Malaysian Sukuksale

Daily Cover

GLOBAL: Malaysia snagged yet another big foreign name into its Sukuk market, withthe entry of Bahrain Mumtalakat Holdings Companys 20-year, RM3 billion (US$959.35million) facility.

In a statement, Mumtalakat said the issuance is part of its strategy to manage its long-term refinancing and debt maturity profile.

CIMB and Standard Chartered are joint leads for the transaction. Islamic Finance newsunderstands that the firm is now in the midst of roadshows for the sale.

Mumtalakat, Bahrains sovereign wealth fund which manages its non-oil and gas relatedassets, announced the establishment of the RM3 billion Islamic medium-term notesprogram at the end of July 2012, after Mahmood Al Kooheji, its CEO, earlier in themonth said that the firm had no plans to sell new debt; but instead seeks to extendrepayments on existing debt and reducing its debt levels.

The firms debt outstanding includes a 5% US$750 million conventional bond issued in 2010.

Meanwhile, its Sukuk issuance, which was rated AA2 by Malaysian ratings agency RAM,marks one of Mumtalakats first fundraising exercises in Asia. In announcing thetransaction, Mahmood noted that the Malaysian issuance represents an effort to furtherstrengthen ties between Bahrain and Malaysias business communities, adding that thetwo countries have a history of engagement on a variety of economic and strategicfronts, while both are also leaders and innovators in Islamic finance.

As Sukuk issuances from the Middle East appear to be taking a breather during Ramadan,continued sales out of Malaysia look set to pick up the slack amid the lull.

MALAYSIA : Kuala Lumpur Kepong sets up US$320.46 million multi-currency Sukukprogram

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KUWAIT : National Bank of Kuwait to pay US$430.71 million for 11.05% stakein Boubyan Bank

UK : Qatar International Islamic Bank extends deadline for offer to buyIslamic Bank of Britain

BANGLADESH : IDB to launch member country partnership strategy for the country

MALAYSIA : LBS Bina Group redeems and cancels US$6.41 million Sukuk aheadof maturity

GLOBAL : Russia eyes Islamic finance collaboration with Brunei

UAE : Abu Dhabi Islamic Bank reports second quarter results

UAE : Union National Bank reports 6.3% profit growth in first half results

BAHRAIN : Investcorp reports US$67.4 million in full-year net income

MALAYSIA : CIMB-Principal Asset Management launches new Shariah compliantfund

International Bank of Azerbaijan expects to set up Islamic unit in Qatar in 2013

Daily Cover

GLOBAL: International Bank of Azerbaijan (IBA) has disclosed that it is looking toestablish an Islamic banking unit in Qatar.

In a report, Behnam Gurbanzada, its director of Islamic banking, said that the bank willtie up with a local entity, following which it will launch in Qatar in the first quarter of2013.

The bank, which is a conventional bank, provides Shariah compliant services through awindow in its home market, mainly catering to small and medium-sized enterprises.However, the sluggish development of Islamic finance in Azerbaijan has likely contributedto IBAs push to look abroad in its provision of Shariah compliant banking services.

In an earlier contribution to Islamic Finance news, Behnam noted that: Islamic financeand banking has existed in the Azerbaijani market since 1991, but due to an absence ofappropriate legislation and regulation; stemming from a lack of support from theregulatory authorities, much of the Islamic activity in the country has been imperceptible,only silently countenanced by regulatory bodies.

However, he added that since 2010, the industry had become increasingly sanctionedby officials. Nonetheless, he said that: The existing banking law does not prohibit theuse of certain Islamic banking tools, although at the same time it does not regulate thefundamental requirements of Islamic banking.

In spite of a limited legal framework for Islamic banking in Azerbaijan, IBA has participatedin several Shariah compliant deals in the country. In 2011, it financed three projectsamounting to US$9.7 million; booking US$40 million-worth of assets in its Islamic financeportfolio.

The banks Qatari venture will follow the establishment of its Dubai representative officein 2008. It also has subsidiaries in Georgia and Russia.

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According to Behnam, the banks services in Qatar will include deal arranging, extensionof credit as well as custody and advisory services.

KAZAKHSTAN : Debut sovereign Sukuk expected to spur more issuances from thecountry

GLOBAL : EFG Hermes expects completion of QInvest tie-up by the end of thethird quarter of 2012

GLOBAL : Three Malaysian banks in talks with ITFC for OIC trade tie-up

KENYA : Gulf African Bank launches women-oriented center

BAHRAIN : Liquidity Management Center reports US$1.22 million in secondquarter net profit

OMAN : Bank Sohar reports US$26.81 million in first half profits

MALAYSIA : Government can cease foreign borrowing with inflow of Islamic fundsinto Private Retirement Scheme, says Asian Strategic LeadershipInstitute

UAE : Emirates NBD Asset Management to dispose of it Islamic AlternativeStrategies Fund

GLOBAL : Islamic exchange-traded funds not in demand, say industry experts

UAE : CI maintains financing strength rating on Sharjah Islamic Bank

JAPAN : Nomura Internationals CEO and chief operating officer resign

SAUDI ARABIA : JP Morgan names Rayan Fayez as co-CEO and head of investmentbanking in Saudi Arabia

MENAs Islamic banks show positive growth momentum

Daily Cover

GLOBAL: Islamic banking showed growing popularity in the MENA region, driven by demandfor more trustworthy and stable funding amid the global financial crisis, a report showed.

Shariah compliant banking assets across 18 banks exceeded US$293 billion in 2011, aslending by 75 banks in the region reached US$855.7 billion during the year. Saudi Arabiatopped the list of the MENA regions Islamic banking market; with its five Islamic bankscombined assets amounting to US$123.4 billion, led by Al Rajhi Bank with US$58.94billion in total assets.

In terms of Islamic banks per country, Bahrain, Qatar and the UAE were tied for secondplace with three banks each, according to research by Forbes Middle East.

Al Rajhi also came in second overall as the regions second largest bank in terms ofassets; while Alinma Bank showed fastest growing profits in 2011, recording a growthof 2,737.7% to US$115 million in 2011. Another of the regions Islamic banks, ArabIslamic Bank of Palestine, came in first for deposit growth, with an increase of 232%.

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The results preceded a strong first quarter for the regions banks, which dominated GCCearnings during the period, representing almost 40% of total profits; as profits at GCCbanks rose 9% year-on-year to US$5.7 billion, according to research by Markaz.

In the GCC, Saudi banks reported a 23% year-on-year growth in profit; with Al Rajhiagain leading the way with an 18% year-on-year increase in net income to US$536million.

Meanwhile, of the listed Islamic banks covered by Global Investment Houses GlobalResearch, all save for Qatars Masraf Al Rayan showed results that were in line orsurprised on the upside in the first quarter of this year. Among these was Qatar IslamicBank, which reported a net income of QAR388 million (US$1.05 million) from QAR321million (US$870,638) a year earlier.

UAE : Tamweel mandates banks for planned Sukuk issuance

UAE : Emirates airline plans to further tap Islamic finance market

MALAYSIA : Local Islamic mortgage market overtakes conventional home loans,says central bank

INDONESIA : BNI Syariah records US$4.74 million in franchise financing

UAE : Islamic Finance Company in partnership deal with flydubai

MALAYSIA : Al Rajhi Bank Malaysia adopts collateralized commodity Murabahah-i

MALAYSIA : Securities Commission Malaysia to apply new Shariah compliantscreening methodology

UAE : Fitch affirms ratings on HSBC Bank Middle East

KUWAIT : AM Best Europe affirms Gulf Insurance Company and Gulf LifeInsurance Companys financial strength rating

MALAYSIA : MARC affirms rating on Ranhill Powers Sukuk programs

SINGAPORE : Grace Barki steps down as Bank Sarasins head of Southeast Asia

MALAYSIA : Prudential BSN Takaful names Anita Menon as new chief risk officer

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Fixed income markets unfazed by Eurozone jitters

Daily Cover

GLOBAL: The wider market may be feeling jittery due to the ongoing Greece crisis, butthe fixed income space remains unfazed; with Sukuk sales set to continue at a rapidpace.

Yields have also maintained stability and are expected to stay steady going forward.Although the euro declined to a near two-year low on the 24th May, as Greece movedcloser towards an exit from the Eurozone, the currency has not been massively devalued;with liquidity still abound in the market, commented the Malaysian head of debt capitalmarkets at a European bank.

Speaking to Islamic Finance news, the banker noted that while the debt market maysee some blips, these are not due to the Greek crisis; and more as a result of locally-centric factors.

Yields on Malaysian corporate AAA-rated Sukuk have risen marginally from the beginningof the year, to 3.89% as at the 23rd May; while falling from 3.91% a month earlier,according to data from Bond Pricing Agency Malaysia.

Meanwhile in Dubai, despite a small increase in yields to 4.32% as at the 23rd May from4.29% a month earlier, yields in the emirate have fallen from 5.28% at the start of theyear, data from the HSBC/Nasdaq Dubai Corporate US Dollar Sukuk Index shows.

Continued investor confidence and demand for Sukuk have also helped a slew of issuancesthis year; with issuers such as Banque Saudi Fransi, The National Industrialization Company(TASNEE) and Dubai Islamic Bank (DIB) successfully tapping the Islamic debt market inthe last two weeks.

Banque Saudi Fransis US$750 million offering saw orders worth US$4 billion; TASNEEsSAR2 billion (US$533.31 million) attracted an orderbook of SAR5.2 billion (US$1.39billion); and DIBs US$500 million program was oversubscribed four times.

With some banks cutting back on financing, the Sukuk market is clearly providing abooming avenue for corporate fundraising.

INDONESIA : Central bank could announce reduction in banks single-shareholderlimits next month

BAHRAIN : Gulf Finance House looks to diversify income

OMAN : HSBC Oman and Oman International Bank merger temporarily halteddue to lawsuit

MALAYSIA : OSK Holdings and RHB Capital merger receives approval from theSecurities Commission Malaysia

SAUDI ARABIA : Local lending market expected to continue growing, says Alinma Bank

OMAN : Islamic banking popularity on the rise

MALAYSIA : CIMB Group Holdings Q1 profit surges 10% year-on-year

MALAYSIA : Maybank reports US$428.46 million in first quarter profit

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MALAYSIA : Export-Import Bank of Malaysia posts net profit of US$56 million in2011

MALAYSIA : Securities Commission Malaysia updates list of Shariah compliantsecurities

INDONESIA : Bapepam updates list of Islamic securities

PAKISTAN : Diyanah Islamic Financial Services launched

MALAYSIA : Bursa Malaysia plans bond trading for individuals in the third quarterof this year

INDONESIA : Sun Life Financial to provide life Takaful coverage for fund investors

GLOBAL : StanChart names Morad Mahlouji as new regional head of MENA andPakistan

GLOBAL : Coutts appoints Ali Hammad as co-head of Middle East

Sukuk issuances reach record US$12.7 billion in the year-to-date

Daily Cover

GLOBAL: The volume of Sukuk issuances has reached a record US$12.7 billion in theyear-to-date (YTD), boosted by a landmark US$1.25 billion dual-tranche Islamic bondsale by the Dubai government on the 24th April.

Data from Dealogic shows that the level of Sukuk offerings so far this year is more thanthree times the previous record of US$4.2 billion issued during the same period in 2011.

Domestic issuance continues to dominate Sukuk volume and accounts for 63% (US$8billion) of total volume in 2012 YTD. Despite this, the share of internationally marketedSukuk issuance, dominated exclusively by the issuers from the MENA region, has risento 37%, the highest share since 2008 (43%) as volume has more than trebled year-on-year to US$3.5 billion, noted Dealogic in its DCM StatShot.

The unprecedented level of Islamic bond sales has fuelled optimism that 2012 will beanother record-breaking year for the international Sukuk mart. Professor Dr MalikMuhammad al Awan, the Shariah advisor at Hong Leong Islamic Bank and Hong LeongMSIG Takaful, believes that the market will close at US$125 billion this year; driven bysales from the GCC.

The activity in the Sukuk market has also seen competition heat up between Malaysianand Saudi offerings. Malaysian Sukuk sales that have traditionally dominated the marketrecorded a 42% share of domestic issuances in the YTD, a record low; while Saudi salesaccounted for 59% or US$4.7 billion of local Sukuk sales during the period.

Nonetheless, Dr Malik noted that Malaysia will continue to be an attractive platform forSukuk sales, due to the pricing of Islamic bonds in the country and its accommodativetax environment.

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Meanwhile, the DCM StatShot showed that HSBC led in rankings for international Sukukbookrunner, with a 31.8% market share; followed by Deutsche Bank and Citi withmarket shares of 18.6% and 13.2%, respectively.

UAE : Dubai government launches US$1.25 billion dual-tranche Sukuk

UAE : Emirates NBD may tap Sukuk market again

SOMALILAND : Government approves two-tiered banking system that utilizes Islamicbanking

KUWAIT : Gulf One Investment Bank advises and arranges US$23.5 millionIslamic debt refinancing for Gulf University for Science and Technology

BAHRAIN : Government eyes sovereign debt sale

HONG KONG : Legislative amendments for development of Sukuk market on track,says financial secretary

GLOBAL : The Central Bank of Turkey to host pre-summit event for IFSBs 9thAnnual Summit

UAE : Mashreqbank posts US$74 million in first quarter profit

QATAR : Masraf Al Rayans first quarter results higher year-on-year

BAHRAIN : Bahrain Islamic Bank reports lower profit in first quarter results

UAE : Dubai Islamic Bank launches two-year UAE dirham-denominatedinvestment certificate

MALAYSIA : Bumi Armada to be included in Dow Jones Islamic Market MalaysiaTitans 25 Index

MALAYSIA : Takaful Ikhlas to introduce new health and medical products this year

UAE : Dubai Gold and Commodities Exchange names Gary Anderson asnew CEO

MALAYSIA : C Rajandram to leave as executive deputy chairman and group CEOof RAM Holdings

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Islamic banks grow strongly but prospects still mixed

Daily Cover

GLOBAL: Islamic banks performed strongly last year, although expectations of furthergrowth in 2012 remain mixed.

In Pakistan, the State Bank of Pakistans July-September 2011 Islamic banking bulletinshowed that the industrys profits reached PKR8 billion (US$88.7 million) during theperiod, growing 58% from the previous quarter.

However, the statistics revealed that earnings growth of conventional banks with Islamicbranches was significantly higher than that of fully fledged Islamic banks. Furthermore,while fully fledged Islamic banks contributed to 55% of the industrys overall profit, theirgrowth rate was lower than in the previous quarters 100% increase, attributed to a lowbase effect.

Total assets of Pakistans Islamic banking industry amounted to PKR568 billion (US$6.3billion) as at the end of September 2011, constituting 7.3% of the countrys overallbanking industry assets.

Meanwhile, the Islamic financial services sector in the UAE has grown to make up 30%of the global Shariah compliant industry in 2011, according to a recent report by AbuDhabi Islamic Bank and the Oxford Business Group.

The growth has been attributed to the increasing demand for Islamic financial services,with Islamic banks playing a major role in financing infrastructure projects and residentialproperties for nationals in the emirates.

In 2010, Islamic banking assets in the MENA region rose to US$416 billion, representinga cumulative annual growth rate of 20% over five years, compared with less than 9%for conventional banks.

The market currently awaits earnings reports from banks in the UAE, althoughexpectations are dampened by continued prospects for provisions and non-performingfinancing.

UK : Sovereign Sukuk does not offer value for money

OMAN : Government has no plans to invest in Islamic banking industry, saysfinancial affairs minister

UAE : Limitless and creditors reportedly reach deal for US$1.2 billion Islamicsyndicated financing

GLOBAL : Al Baraka Banking Group looks to Oman presence in 2014

TURKEY : Citigroup Europe keen to enter countrys Islamic bond market

UAE : Majid Al Futtaim Holding to avoid bond issuances until marketconditions stabilize

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UAE : Al Hilal Bank mandates HSBC, National Bank of Abu Dhabi and

StanChart to manage US$500 million debut Sukuk

GLOBAL : Credit Agricole gets two Sukuk mandates in Saudi Arabia

BAHRAIN : Bahrain Islamic Bank and Al Baraka Islamic Bank fund Gulf Technics

new components business

OMAN : Bank Nizwa and Al Izz International Bank to float 40% of shares by

June, says central bank

PAKISTAN : IDB to provide US$3 billion financing to country during 2012-2015

period

SAUDI ARABIA : GACAs US$4 billion debut Sukuk oversubscribed three times

UK : Emirates Islamic Bank and First Gulf Bank Sukuk list on London Stock

Exchange

GLOBAL : Sovereign Sukuk market can meet demand from Islamic institutional

investors and banks, says Fitch

INDONESIA : Bank Muamalat Indonesia 2011 profit up 61.85% year-on-year

QATAR : Islamic Holding Group 2011 profit up 16%

INDONESIA : Bank BRI Syariah triples profits in 2011

QATAR : Qatar International Islamic Bank reports US$179 million net profit for

the year ended 2011

QATAR : Tebyan Asset Management unveils CHIME Opportunities Fund

PAKISTAN : UBL Fund Managers announces interim payout for UBL Islamic Savings

Fund

UK : BLME makes third property purchase for Light Industrial Building Fund

MALAYSIA : RAM assigns enhanced rating of AAA(bg) to Musteq Hydros Sukuk

Musharakah

MALAYSIA : Habibah Abdul is new independent non-executive director of CIMB

Islamic

SAUDI ARABIA : Faisal Shaker is head of wealth for Barclays Saudi Arabia

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Asia Pacific banks can manage impact of Europe crisis, says S&P

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GLOBAL: Europes debt crisis has raised concerns of creating a global contagion; but itsimpact on Asia Pacific (APAC)s banks will be manageable, according to S&P.

The firm, which has downgraded ratings for banks in Europe; including 15 in Spain, saidthat the interconnected risk between Europes sovereigns and its banking system doesnot have an immediate direct and material impact on APAC bank ratings.

Currently, the outlooks on 79% of S&Ps APAC bank group ratings are stable; backedby a number of factors including relatively solid growth prospects in the region, goodcapitalization, strong franchises and stable funding, it said.

However, it cautioned that should the euros debt woes lead to a more severe globalrecession; this could prompt it to lower its assessment of APAC banks. It could alsorevise its views on the regions banks if the industrys credit profile is impacted by apronounced global economic slowdown.

We may also consider negative rating actions if stresses in the Eurozone cause amarket dislocation and result in funding difficulties for APAC banks, it added.

On a positive note, the ratings agency commented that the regions banks generallyhave limited investment exposure to euro sovereigns such as Greece, Italy, Ireland,Portugal and Spain. It also noted that while a pullback of lending by European banks inthe Asian region could lead to higher credit costs, this could create opportunities for theregions banks to boost their local and global presence.

Nonetheless, rapid expansion will be constrained as a result of the tough economiclandscape; uncertainty regarding the stability of the foreign currency funding market;and higher capital requirements under Basel III, it added.

SAUDI ARABIA : Kingdoms investors said to be warming to proposed sale of US$2billion Sukuk by Goldman Sachs

PAKISTAN : Meezan Bank in talks to manage US$1.6 billion government Sukukissuance

INDONESIA : Central bank establishes ceiling for gold pawning at US$27,634

SAUDI ARABIA : Dar Al Arkan Sukuk surges on better outlook for debt repayment

UAE : Dana Gas Sukuk yield hits a low

MALAYSIA : Maxis secures Securities Commission Malaysias consent for proposedissuance of US$809.66 million Sukuk

UK : BLME signs US$22.2 million leasing agreement with Global MarineSystems

UK : HSBC Amanah against Mortgage Market Reviews decision to bannon-advised sales for home purchase plans

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INDONESIA : Bank Tabungan Negara to spin-off Islamic bank by 2016

OMAN : Oman Arab Bank to raise US$26 million for Islamic banking capitalthrough rights issue

BAHRAIN : Power and water venture part-owned by Bahrain Islamic Bankcommences operations

OMAN : National Bank of Oman could kick-off Islamic banking operations thisyear

UAE : Abu Dhabi Equity Partners set to launch soft commodity-backedproducts

MALAYSIA : AFFIN Holdings posts 11.2% increase in profit before tax for 2011

GLOBAL : Altaira Wealth Management launches Bahrain subsidiary

SAUDI ARABIA : NCB Capital Real Estate Fund raises US$74.7 million

UAE : Abraaj Capital acquires UK-based specialist fund manager AureosCapital

MALAYSIA : MARC affirms AAAID(bg) and MARC-1ID(s) ratings on Horizon HillsDevelopments Islamic bank guaranteed debt facilities

INDONESIA : PEFINDO downgrades Berlian Laju Tankers corporate rating to idSDfrom idCCC

IIFM and ISDA launch Shariah compliant profit rate swap standard

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GLOBAL: The International Islamic Financial Market (IIFM) and the International Swapsand Derivatives Association (ISDA) have launched standards for profit rate swaps forShariah compliant hedging; as the growing global business of Islamic financial institutionspoint to the need to mitigate foreign currency risks.

The new agreement, known as the Mubadalatul Arbaah (MA) standard, follows theISDA/IIFM Tahawwut (Hedging) Master Agreement launched in March 2010.

Islamic financial institutions have largely shown resilience in the current difficult financialenvironment and some are even going through an expansion phase. However, due tothe inter-linkages with the global financial system, the balance sheet of Islamic financialinstitutions are exposed to fluctuations in foreign currency rates and also cash flowmismatches due to fixed and floating reference rates, said Khalid Hamad, chairman ofthe IIFM.

The standards allow for the bilateral exchange of profit streams from fixed rate tofloating rate, or vice versa.

While some quarters still disagree on the use of hedging under Shariah, it cannot bedenied that Islamic banks need an instrument to protect against foreign currency risks.

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Banking giants such as Abu Dhabi Islamic Bank (ADIB) and Dubai Islamic Bank reportedforeign currency exposure on assets worth AED70.68 billion (US$19.24 billion) andAED85.17 billion (US$23.2 billion) for 2011, respectively.

In its financial statements, ADIB also noted that a 5% increase in the US dollar exchangerate would decrease its net profit by AED116.55 million (US$31.2 million) in 2011,against a decline of AED67.41 million (US$18.35 million) in 2010.

The new standard from IIFM and ISDA will provide product schedules based on twoseparate structures for transacting MA to mitigate cash flow risks. The documentationwas developed under the guidance and approval of the IIFMs Shariah advisory panel, incoordination with Clifford Chance as external legal counsel, as well as other global marketparticipants.

SAUDI ARABIA : Saudi Electricity Company launches US$1.75 billion dual tranche globalSukuk

MALAYSIA : Pembinaan BLT said to sell US$440.38 million Sukuk to yield between3.6-4.4%

UAE : Jafza reportedly preparing syndicated loans to refinance part of US$2billion Sukuk

MALAYSIA : Khazanah Nasional to use proceeds from US$357.8 millionexchangeable Sukuk for Asian investments

UAE : Central bank not responsible for setting up Shariah supervisory board,says minister of state for financial affairs

MALAYSIA : Cagamas issues US$162.34 million Sukuk Wakalah

INDIA : Countrys legal system a setback for Islamic banking, says ministerof state for finance

KUWAIT : Ahli United Bank Kuwait reports net profit of US$113.2 million for2011

PAKISTAN : The Bank of Khyber reports highest ever net profit for 2011

PAKISTAN : UBL Fund Managers announces payout for first quarter of 2011

OMAN : Oman United Insurance Company calls for more Takaful opportunities

JORDAN : IIRA reaffirms ratings of Jordan Islamic Bank

BAHRAIN : United Gulf Bank names Faick Al Saleh and Bader Al Awadi asindependent directors

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Non-traditional markets and cross-border deals fuelling Islamic finance forward

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GLOBAL: The Islamic finance industry is set for further growth with rising interest seenfrom non-Muslim markets, according to industry players.

According to Syed Alwi Mohamed Sultan, the head of Islamic banking for Asia at BNPParibas Malaysia, the bank sees greater diversification in the Sukuk markets investorbase; with the participation of more non-Muslim investors.

He also said that the market will likely see issuances from non-traditional markets forIslamic finance this year, such as South Africa, Kenya and Senegal; while Hong Kong hasissued its consultation paper on Sukuk aimed at leveling the playing field between Islamicand conventional bonds.

Cheryl Packwood, the CEO of Business Bermuda, is also quoted as saying that Chinahas shown growing interest in Islamic finance; noting that: Islamic finance is beginningto be seen as an alternative way of doing finance, rather than an extension of thereligion.

Meanwhile, Malaysias CIMB Investment Bank is looking to promote Islamic finance tothe oil and gas industry; as it woos foreigners entering Malaysia to take advantage ofthe countrys investor base.

Mukhtar Hussain, the global CEO of HSBC Amanah, also noted that Malaysia representsan important gateway for firms to access diversified funding sources; including in theIslamic markets. Malaysia has the ability to attract financing offshore and onshore; andalso using onshore liquidity to facilitate offshore transactions, he added.

With growing connectivity, it appears that growth in the Islamic finance industrys non-traditional markets and increasing opportunities in international transactions could bethe next way forward for the industrys further development.

UAE : Jafza to raise US$1.85 billion through Islamic facilities

EGYPT : Planet IB calls on EFG Hermes to postpone plans with QInvest

SINGAPORE : Sustained growth of Islamic finance is not guaranteed, says MonetaryAuthority of Singapore

GLOBAL : IDB calls for better connectivity between Islamic and conventionalfinance

INDONESIA : Government aims to raise US$106.38 million through new Sukukauction

MALAYSIA : KFH Malaysia aims to derive 20% of income base from regionalexpansion by 2015

SINGAPORE : CIMB Bank Singapore launches new range of Shariah compliantproducts

MALAYSIA : Central bank to intervene to keep short-term rates stable

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SAUDI ARABIA : Alistithmar Capital appoints Saudi National Technology Group to setup e-broking system

INDONESIA : Manulife Asset Management Indonesia signs cooperation agreementwith Bank Danamon

MALAYSIA : Employees Provident Fund reports growth in first quarter results

UK : UK Real Estate Fund acquires second property for US$34.43 million

GLOBAL : Dow Jones Islamic Indexes post negative returns in May

MALAYSIA : RAM reaffirms Bank Muamalat Malaysias Islamic notes

MALAYSIA : Etiqa Insurance names Kamaludin Ahmad as new CEO

StanChart riding on the strength of Gulf Islamic finance

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GLOBAL: Standard Chartered Bank (StanChart) has announced that it will be arrangingup t