HAPPY EID AL-ADHA TO ALL MUSLIMS

Eid al-Adha (Festival of Sacrifice) is the latter of the two Eid festivals and is celebrated to commemorate the willingness of Prophet Ibrahim (as) to sacrifice his son, Prophet Ismail (as) as an act of obedience to Allah swt.

Men, women, and children are expected to dress in their finest clothing to perform Eid prayer in a large congregation in a mosque. Muslims who can afford to do so sacrifice their best domestic animals (usually sheep, but also camels, cows and goats) as a symbol of Ibrahim's sacrifice. The sacrificed animals, have to meet certain age and quality standards or else the animal is considered an unacceptable sacrifice. Generally, these must be at least a year old.

The regular charitable practices of the Muslim community are demonstrated during Eid al-Adha by the concerted effort to see that no impoverished person is left without sacrificial food during these days. Distributing meat among people is considered an essential part of the festival during this period, as well as chanting Takbir out.

Note :

I would like to wish my brother who (again!!!) is unable to celebrate Eid with the family in Kuala Lumpur - "Selamat Hari Raya Aidil Adha". Take care & may you be in the protection of Allah swt always.....

FURTHER INCENTIVE FOR ISLAMIC FINANCE IN MALAYSIA'S 2010 BUDGET

Malaysian Prime Minister and Finance Minister, Datuk Seri Mohd Najib Tun Abdul Razak delivering his 2010 Budget to the Dewan Rakyat (the parliament) on 23 October 2009 announced several key incentives aimed at sustaining the steady development of Islamic finance in the country through the Malaysia International Islamic Financial Centre (MIFC) initiative. These are effectively extensions of the existing regime of tax incentives which are due to expire in 2010, to 2015. The extensions apply to:

a) stamp duty exemption of 20 per cent on Islamic financing instruments;

b) tax exemption on Islamic banking and takaful companies profits derived from overseas operations; and

c) double deduction on expenditure incurred in promoting Malaysia as an international Islamic financial centre.

Similarly, the extensions apply to the Islamic capital market, which include:

a) deduction on expenditure incurred on the issuance of Islamic securities approved by the Securities Commission (SC) and by Labuan Offshore Financial Services Authority (LOFSA);

b) tax treatment accorded to Special Purpose Vehicle (SPV) established under the Companies Act 1965 and under the Offshore Companies Act 1990 electing to be taxed under the Income Tax Act 1967;

c) tax exemption on profits received from non-Ringgit Sukuk originating from Malaysia and approved by the SC and by LOFSA; and

d) deduction on expenditure incurred in the establishment of stock broking companies.

Let us see whether the initiatives can spur the growth of FDIs into the country especially from the MENA region....

CAUTION TO MALAYSIA

Excerpts from The Star (2 Nov 2009) :

While Malaysia is doing a great job in promoting Islamic finance, the adaptation process to some of its products will need a deeper look or “a second visit”, according to a renowned Muslim scholar. Dr Hatem El-Karanshawy, founding dean of the Qatar Faculty of Islamic Studies, has voiced caution over the need to quickly Islamise products just to be at par with other conventional instruments. “We should not rush to adopt products and Islamise them because we would like the products to be on the same footing as other western institutions or non-Islamic banking that are not based on Islamic principles,” he said.

I tend to agree with the statement above. In our efforts to tap into the lucrative business of Islamic finance and attract the Middle East’s petrodollars, we got carried away by “liberalizing” the Islamic financial products so that they are deemed to be Shariah compliant but in actual fact, they are exactly like their conventional counterpart.

There have been numerous calls from the Shariah scholars and finance academicians – if we do not curb such activities and continue with the replication that result in “direct mutation” of conventional products into Islamic products, the ummah as a whole is not generally better-off.

Malaysia has huge potential to be the main player in the Islamic finance arena because of the following reasons :

a) Bank Negara Malaysia is very supportive of the move to bring Islamic financial institutions into Malaysian soil. They have been aggressive in promoting Islamic finance opportunities with strong backing from the Government of Malaysia

b) The industry players are also strong advocates of the move initiated by BNM.

c) The HQ of IFSB is in Kuala Lumpur. It is hoped that more standards and guidelines can be issued to meet the needs of Islamic financial institutions and takaful operators in the near future

d) The setting up of INCEIF and ISRA in Kuala Lumpur – it is hoped that the graduates that are well versed in both Shariah and Finance fields can be produced to support the shortage of human resources in the Islamic finance field. On-going researches can be conducted to find ways and means to improve the current situation and promote new innovation

e) Various incentives and tax benefits

And the reasons can continue on. However, despite the above, we must not forget that there are other improvements that need to be looked at locally and internationally :

a) the local laws in Malaysia are still under civil laws and some of the Islamic commercial cases are not given due justice. Therefore, there must be amendments to the relevant Acts to cater for these cases.

b) here is a need for a paradigm shift in the thinking ways of the industry players. We acknowledge the fact that profit orientation is the motivation to run a business, however, having a 100% Shariah compliant product does not deny the businessman his profits. So there must be a clear understanding about the Islamic concepts in finance so that these businessmen/bankers etc do not only chase after “big bucks” but to ensure that the process and the financial product do not contravene any Shariah rules/guidelines. We should scrap the famous “tidak apa” or “never mind” attitude and sway away from the famous “darurah” reason. Islamic banking has been in Malaysia for more than 2 decades and since then, the industry players could have improved the way they are doing business and come with more innovative and accepted products and drop the “controversial and unacceptable” products like inah and arranged tawarruq.

c) improve the Islamic money market instruments so that the Islamic financial institutions can have the mechanism and platform to compete fairly with their conventional counterparts.

It is very disturbing to find out that despite Malaysia having the infrastructure and stable economic and political condition, we failed to attract enough FDIs (we even lost to Thailand – where politically is relatively less stable than our country, in fact we can see on TV, the riots between the Red Shirts and Yellow Shirts almost on weekly basis and yet able to attract more FDIs into their country).

Investors are generally looking for opportunity to make money for themselves and Islamic finance is a lucrative and huge business and Malaysia having been promoting itself as a hub for Islamic finance is still unable to attract investors into the country – well, there is surely something wrong somewhere.

Is it the Government?

Is it the regulators – too strict or too liberal?

Is it the incentives – not competitive?

Is it the infrastructure?

Is the financial products?

Hhmm, which is it, I wonder…..

ISSUE OF ISLAMIC RISK MANAGEMENT

Risk management for Islamic banking financial products and services is one of the greatest challenges that many westernized, as well as Islamic banks, are facing today.
As a result of this market growth in Islamic financial products there is a high demand to understand how to assess and manage the risks arising from applying these products and services. Credit, operational, market and liquidity risks together with the risk of non compliance with the Shariah are becoming very hot issues for financial institutions.

Risk traditionally means possibility of meeting danger or suffering, harm or loss. Risk is an element of life in this world for being ignorant of the future. It is also factor of investing that one should take time to understand prior to selecting any specific investment instruments or any new adventures.

The Holy Quran has presented stories of the previous prophets so that Muslims can take the lessons from their experiences. The story of Prophet Ya'qub as, tells us about the management of risks as Prophet Ya’qub as commanded his sons to enter Egypt from different gates. The Holy Quran states, "Further he said: "O my sons! Enter not all by one gate: enter ye by different gates. Not that I can profit you aught against God (with my advice): None can command except God: On Him do I put my trust: and let all that trust put their trust on Him" (Quran 12:67).

There are three basic types of Islamic risk management products and mechanisms:

a) those that are formally being standardized. There is a global trend towards the unification or de facto standardization of risk management products, which can be currently observed in the market

b) risk management methods directly based on the well-recognized Islamic financing modes and rules

c) the possibility to use formally Shariah compliant mechanisms to replicate conventional risk management products and risk profiles. Conventional financial instruments have been developed to solve "conventional" problems and needs, and it may well be that the needs of the Islamic industry differ from those faced by its conventional counterpart. Islamic banks must manage risks specific to themselves, which cannot be encountered in the same way and extent in non-Islamic institutions. This holds true both at the product-specific / individual level and on the portfolio / balance-sheet level for Islamic banks.

According to Siddiqui in his article “Risk Management in an Islamic Framework”, risk management in Islamic framework should ensure that :

a) debt proliferation is minimized. This implies that corporations raise additional funds via equity, not by issuing bonds

b) interest on debt is not practiced. This will in effect kill the bond market

c) debt is not traded

d) risks are shared between financiers and producers/businessmen

e) regulators should not allow purchase of business or financial risks by outsiders not involved in the business or supply of investible funds for the business but only taking chances on the outcome

We all know that the rating agencies (e.g. S&P, Moody’s, Fitch) do the ratings for Islamic financial institutions, however, as rightly (and timely) put by Amit Khandelwal in his article titled “ Risk Management in Islamic Finance”, Islamic financial institutions need to be rated by specific Islamic rating agency due to :

a) rigorous and consistent analysis of quantitative and qualitative factors

b) assessment of risk profile of institution or product

c) removal of asymmetry in information on the variety of business operations

d) investors in Islamic countries desire to know the credit worthiness of the institutions and products and the legitimacy, in terms of Shariah compliance, of institutions and products

Some of the conditions/guidelines of Basel II are deemed not appropriate/compatible for Islamic financial institutions and IFSB has tried to provide additional guides/principles to assist and streamline the risk management concerns, however, more needs to be done in view of the evolving nature of the Islamic products and contracts and the dynamic spur to innovate more Islamic products in the market.