CONFERENCE ON ISLAMIC CAPITAL MARKET IN THE FIRST HALF OF 2009

1-2 April 2009 Asia Pacific Islamic Finance Market Conference
Venue : Kuala Lumpur, Malaysia

25-26 May 2009 The World Islamic Funds and Capital Markets Conference (WIFCMC)
Venue : Bahrain

INTRODUCTION TO ISLAMIC CAPITAL MARKET IN MALAYSIA

In an Islamic capital market (ICM) market transactions are carried out in ways that do not conflict with the conscience of Muslims and the religion of Islam. Here, there is assertion of religious law so that the market is free from activities prohibited by Islam such as usury (riba), gambling (maisir) and ambiguity (gharar).

The ICM is a component of the overall capital market in Malaysia. It plays an important role in generating economic growth for the country. The ICM functions as a parallel market to the conventional capital market, and plays a complementary role to the Islamic banking system in broadening and deepening the Islamic financial markets in Malaysia.

As the market became more complex and sophisticated, it needed supportive infrastructure so that the system could operate and function more efficiently and effectively. The Securities Commission’s (SC) early initiative in setting up a dedicated Islamic Capital Market Department (ICMD) within its Strategy and Development Business Group was to provide the much needed infrastructure support. The mandate of the ICMD is to carry out research and development activities including formulating and facilitating a long-term plan to further strengthen the ICM in Malaysia.

The Shariah Advisory Council (SAC) was established in May 1996 to advise the Commission on Shariah matters pertaining to the ICM. Members of the SAC are qualified individuals who can present Shariah opinions and have vast experience in the application of Shariah, particularly in the areas of Islamic economics and finance.

Today, various capital market products are available for Muslims who only seek to invest and transact in the ICM. Such products include the SC list of Shariah-compliant securities, sukuk, Islamic unit trusts, Shariah indices, warrants (TSR), call warrants and crude palm oil futures contract.

REALITIES OF ISLAMIC FINANCE

The Fifth World Islamic Economic Forum (WIEF) was held last week in Jakarta, Indonesia, (2-4 March). The global Islamic financing industry has over US$1 trillion in assets. But the member states of WIEF account for 19 percent of the world´s population and only 6 percent of its income.

The Forum took place alongside a deepening Western banking crisis and recession. The more globalized and Westernized your economy, the more likely you will be hit hard. Many countries in Africa, Latin America, and Central Asia do not have the underlying economic strength and financial reserves of the Middle East and Asia and will go down with the West, without support.

This is the crisis of capitalism many predicted, bigger than the Wall Street crash of 1929-1933. It will lead to a New International Economic Order and the restructuring of global economic institutions (UN, World Bank, International Monetary Fund, World Trade Organization), which means there is global dependence on key Muslim-led economies to supply liquidity and demand. The G20 become more crucial than the G7 and three Muslim-led countries already reach the first rank : Turkey, Indonesia and Saudi Arabia.

Delegates to the Fifth World Islamic Economic Forum in Jakarta saw this could be the opportunity Islamic banking and finance has been waiting for, but many doubted it was yet strong enough to meet challenge.

It was claimed Islamic finance offered more reliable non-debt-based alternatives to the Western banking and financial system, which has been brought down by high leverage, greed and poor enforcement of inadequate regulatory systems.

But participants and commentators at the Jakarta Forum warned that Islamic banking and finance was a young industry and had not yet been truly tried and tested.

First, Islamic finance is highly institutionalized and capitalized in a small number of rich countries with small populations, notably in Saudi Arabia, the Gulf states and Malaysia, whilst it is least institutionalized and capitalized in countries with large Muslim populations, confronting large-scale poverty, notably Bangladesh, Egypt, India, Indonesia, Nigeria and Pakistan.

Second, in large population poorer Muslim countries where it is least developed, Islamic banking and finance is over reliant on basic banking services based on fixed-rate systems, (more similar to conventional Western finance), often with greater emphasis on saving than lending. Too many clients do not access loans, especially the innovative and attractive variable rate profit and loss sharing loans.

Finally the World Islamic Economic Forum needs to address more forcefully the weakness of South-South co-operation between Arab, Muslim and Southern economies. When the Organization of Islamic Conference helped set up the World Islamic Economic Forum in 2004, intra-trade between its members was only 4 percent. This has risen in four years to 7 or 8% but the target is 25 percent by 2011.

ISLAMIC BANKING DEFIES CRISIS WITH GLOBAL LAUNCHES

More Islamic banks and financial products have been launched worldwide since late in 2008 despite the global banking crisis that restricted conventional banks from doing so.

Joseph DiVanna, managing director of UK-based consulting and advisory firm Maris Strategies, said in last month's issue of The Banker that Shariah-compliant banks were performing better than conventional banks.

Islamic banks focus on ethical investing; speculative financing and trading is forbidden. This makes Islamic banks highly dependent on customer deposits for their liquidity.

"This in turn makes them less susceptible to changes in credit markets," according to DiVanna.

"Islamic banks were generally not impacted by collateralised debt obligation or asset backed securities," DiVanna said.

Since November 11, new Islamic banks had been formed, including the United Arab Emirates' first Islamic commercial bank, the Ajman Bank.

DiVanna added that while banks in the developed world had curtailed their expansion, 23 Islamic banks had extended their operations into new countries such as Botswana, Iraq, Kenya, Malaysia, Pakistan, South Africa, Sudan and Syria.

Qatar National Bank opened a full-service branch in Singapore and the Arab Bank opened a branch, specialising in Islamic banking, in Qatar.

South Africa has been offering Islamic banking since 1989 and all big four banks are developing or offering Islamic products.