5TH WORLD ISLAMIC ECONOMIC FORUM

Approximately 1500 delegates from 35 countries have arrived in Jakarta (Ritz Carlton Pacific Place Hotel) for the 5th World Islamic Economic Forum (created to establish dialogue through business partnerships amongst Muslim entrepreneurs as well as between Muslim and non-Muslim businessmen and seeks to foster channels of communication to help address and resolve important economic issues within the Muslim and non-Muslim world). An opening ceremony by Indonesian President Susilo Bambang Yudhoyono, began the day-long Pre-Forum program of the 5th World Islamic Economic Forum which focused on two key issues imperative to the development of the Islamic business community – businesswomen and young entrepreneurs.

The three plenary sessions of the Businesswomen Forum entitled Opportunities beyond Borders, Evolving role of Women in Business, Transforming Market Challenges into Opportunities and “Growing” the next Generation of Women Entrepreneurs: Engaging Young Women & Girls in Entrepreneurship jointly raised the agenda of how best to overcome the obstacles women faced in business and highlighted the unique role women play in this capacity. The key point stressed by multiple panelists was of the multifaceted role women perform in the social, organizational and individual context. This notion was flanked by the acknowledgement that indeed, the challenges faced by women in business are the same as that of their male counterparts.

Dato’ Dr. Norraesah Mohamad, Chairwoman WIEF Business Network, commenting during the Opportunities Beyond Borders plenary session stated, “The event today gives women in business a platform to foster cooperation amongst women industrial players from all parts of the globe and build a solid understanding of their common needs not only as women but also as key decision makers in business. This Forum provides a unique opportunity for us to make business connections across borders.”

Ms. Rina Fahmi Idris, Chairwoman of IWAPI (Indonesia Women Business Association) and member of the 5th WIEF Organizing Committee, added to this, stressing the need for a working plan, stating “These sessions actually provide a medium to invite women in business to connect and thereafter establish plans to collaborate and regroup after such an event to extend more detailed information, and develop strategies to sitting together after this big event and exchange more detail information on business side answering the same global challenges faced by our counterpart.”

The Young Leaders Forum, with plenary sessions entitled The Leadership Imperative: Towards a Good Succession Plan, Employment in the 21st Century: Understanding the Global Workplace, Banking on Integrity: The prospects of Islamic Finance in a Plural Society and Plugging ideas into Business: Creating Innovative Industries broached the strategic discussion of succession planning to provide better opportunities for leadership in young entrepreneurs and the role of Islamic finance at this time of global financial crisis.

Dato’ Sri Nazir Razak, Chairman of the WIEF Young Leaders Forum said “This is a golden opportunity for the Muslim community to leverage on the growing prominence of Islamic capital and finance as a means to revitalize Muslim leadership and advance its position on the world stage”.

ISLAMIC FINANCE RISES ON RUINS OF CONVENTIONAL BANKS

The Islamic finance industry, which refers to the banking activity conducted in accordance with the principles of Shariah (Islamic law), gained the limelight over the past two months during the global financial turmoil as one of the relatively safe havens for investments.

There are currently over 800 billion dollars' worth of deposits and investments lodged in Islamic banks, mutual funds and insurance schemes known as 'takaful,' more than five times the volume compared with 150 billion dollars in the mid-1990s.

Islamic financial institutions are reportedly expanding their balance sheets as demand continues to grow in Europe for financial products that avoid paying interest, in line with strict religious rules. These products instead pay profits from an underlying business or rent from a building used as collateral to raise money. The expansion of Islamic finances rests on a lack of exposure to toxic assets and derivatives, often related to mortgages that prompted the collapses in the United States and elsewhere in October 2008.

Besides its wide geographical scope, the expansion of the Islamic finance has been also taking place across the whole spectrum of financial activities, ranging from retail banking to insurance and capital market instruments.

The most striking phase could be the growth of Sukuk, the most popular form of securitized credit finance within Islamic finance. Sukuk commoditize capital gains from bilateral risk sharing between borrowers and lenders in shariah-oriented finance contracts into marketable securities without interest rate charges. The rise of the Sukuk market as an alternative investment activity, is attracting the attention of an increasing number of private sector and official circles across the globe including the British government which is reportedly mulling to become the first Western government to buy this kind of Islamic bond.

According to a new study by the International Financial Services London (IFSL), an independent organization representing Britain's financial services industry, Islamic finance will emerge largely 'unscathed' from the current world crisis. It attributed its findings mainly to the fact that Islamic financial institutions make little use of many of the complicated instruments blamed for the current problems in conventional banks such derivatives and short-selling.

FINANCIAL CRISIS WIDENS THE APPEAL OF ISLAMIC FINANCE

The financial crisis has widened the global appeal of Islamic finance as Western governments and institutions attempt to tap into deposits from the Islamic world, by courting Islamic Financial Institutions (IFI), which remain relatively unscathed by the sub-prime mortgage crisis.

IFIs comply with Shariah, or Islamic law, and one of the fundamental principles is that it is forbidden to sell what you do not own. Unlike other banks around the world, IFIs did not trade bundles of sub-prime mortgages, and therefore have no direct exposure to the sub-prime mortgage crisis.

In fact, finance that complies with Shariah now accounts for around $700 billion of assets and is growing at 10 to 30 percent a year, according to Moody's Investors Services. There has never been a more opportune time to open the doors to Islamic finance, and to drive the growth of the Islamic finance industry as a whole.

The International Quality & Productivity Centre (IQPC) is pleased to announce a perfect platform for conventional and Islamic industry leaders to address key issues in today's economic climate, and carry out business vital to sustain growth.

Leaders in Islamic Finance 2009, a global summit taking place on 19-21 April 2009 in Doha, Qatar, will see prominent figures in the financial world gather to discuss the main challenges currently facing the Islamic finance industry.

Khalid Yousaf, Vice President, Investments and Capital Markets, Siraj Capital, and former attendee and speaker at the 2008 summit in Istanbul, describes Leaders in Islamic Finance 2009 as 'the ultimate meeting place for Sharia scholars, Islamic financial institution principals, ministers, governors and regulators.'

Chris Corander, Senior Conference Director at IQPC, explains 'Islamic finance is an increasingly attractive prospect because it demonstrates good banking behaviour that has perhaps been lost in the last decade or so. Despite this, the industry still has problems of its own which need to be addressed in order to drive the Islamic finance industry forward.'

Two large problems that remain are the global standardisation of Islamic finance and the desperate need for innovation in terms of products and structures. Neither challenge can be addressed without the input of revered Shariah scholars, who sit on a vast number of advisory boards for IFIs and determine what is and what is not Shariah-compliant.

Chris adds 'This is why we have acquired the services of seven world-renowned scholars at Leaders in Islamic Finance 2009, who will take part in forums, roundtables and panel sessions throughout the main two-day summit. There will also be a full-day workshop led by Dar Al Sharia, a subsidiary of Dubai Islamic Bank, which is guided by the distinguished Shariah scholar Dr. Hussain Hamed Hassan.'

In addition, the summit is also supported by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) which is leading the way in standardising many aspects of the global industry, and the Qatar Financial Centre.

Qatar is emerging as one of the most dynamic economies in the Middle East. It has the highest per capita income in the world and enjoys one of the fastest growing GDPs, reaching 13.3% real GDP, and valued in 2008 at over US$80 billion. The economy is rapidly expanding in practically every sector and industry. A combination of government investment and the participation of multi-national companies is creating a culture of opportunity. In terms of Islamic finance, Qatar is home to some of the largest Islamic Financial Institutions in the world and is fast becoming another pivotal centre for this sector within the GCC.

DOW JONES ISLAMIC MARKET WORLD INDEX

The Dow Jones Islamic Market World Index was launched in February 1999 as the first benchmark to measure the performance of a global universe of Shariah-compliant investable equities. Over the past decade, the Dow Jones Islamic Market Index series has expanded to more than 100 indexes for all major established and emerging financial markets, regions and sectors. Amongst these are Islamic indexes for the ASEAN, BRIC and GCC regions as well as for global and Malaysian blue-chips.

Dr. Nasser H. Saidi, chief economist, Dubai International Financial Centre Authority (DIFCA), said “The sub-prime crisis has led to the extensive collapse of the conventional banking and financial systems leading to a questioning of underlying market mechanisms, corporate governance, regulatory failure and the effectiveness of boards and risk management. Clearly the Basel II framework and self-regulation have failed. We need a new paradigm. Islamic finance, based on partnership, risk sharing and management, embodies the sound principles of corporate governance and ethics and enforces greater transparency and accountability. The global Islamic finance industry is expected to grow to some $3.5 trillion in the next 5 years."

“Islamic Finance has proved, to date, resilient to financial contagion and crisis. The timing is right for governments responding to crisis to develop and use Islamic finance instruments, primarily Sukuk, as an integral part of public finance, deficit financing and for financing public works and infrastructure. Governments and regulators should seize this historical opportunity to integrate Islamic Finance into the mainstream of banking of finance.”

Stating that Islamic finance is a more robust and reliable option especially with the economic crisis threatening to usher in widespread global recession, Mr. Ali Afshar, senior vice president, Head - Institutional & Investment Banking, Al Hilal Bank said “With the financial crisis further deepening and with its impact being felt in all developed, developing and transitional economies, the relative success and sustenance shown by the Islamic finance industry has been quite noteworthy. Conventional financial institutions and capital markets have been severely affected but the Islamic finance industry has relatively come through unscathed.”

Mr. Afshar further added “The basic principles of Islamic finance that necessitate transactions being backed by tangible assets, prevent it from investing in loans, options, derivatives and hedge funds, prohibit speculation, hence make Shariah compliant products less exposed to the potential risks resulting from over exposure and speculation as compared to conventional products.”

The strict industry and financial ratio screenings for Shariah compliance defined by the unique and sophisticated methodology of the Dow Jones Islamic Market Indexes have made the Dow Jones indexes the most widely used Islamic indexes by market participants across the globe as a benchmark to measure Shariah-compliant investable equities.

Besides launching the first Dow Jones Islamic Market World Index, Dow Jones Indexes were also the first movers in sukuk indexing and combining Islamic with sustainability criteria in the Dow Jones Islamic Market Sustainability Index. Dow Jones Indexes was the first index provider to license its indexes as the basis for the first ever Islamic exchange-traded fund worldwide.

LIQUIDITY MANAGEMENT IN ISLAMIC FINANCE

The 3rd Islamic Financial Services Forum : The European Challenge will be held at The Westin Paris on 4th March 2009 and is jointly organized with the Financial Stability Institute and hosted by Banque de Paris.

The itinerary showed that it will focus on liquidity management - I guess this is due to the financial crisis that is happening all over the world right now.

Liquidity is about having access to a determinate amount of cash - and when you need it. This can be either through the asset side or the liability side of the bank or financial institution. On the asset side, it is about the preservation of capital on demand. That means that the asset must have undoubted quality with minimal credit risk. And it must be seen to have that quality behind it. That also means it must be free from price risk.

The Liquidity Management Centre and the International Islamic Financial Market in Bahrain and others have done some excellent work and new Islamic liquid instruments such as the Sukuks issued by Malaysia, Bahrain, the IDB and more recently by several corporates are coming on stream on a regular basis. Malaysia of course has had such instruments in its domestic market for some time. There have been great strides made but much more work needs to be done. Without an efficient capital market to operate within, Islamic banking finance will not continue to grow meaningfully. The market requires liquidity and price transparency to enhance a secondary market. It is all very well having entire issues oversubscribed – but there has to be an exit route to demonstrate liquidity. And this lack of truly liquid assets has paradoxically increased the demand for liquid instruments.

Islamic banks investing in long-term assets are still faced with a problem in that most of their deposit liabilities are very short-term leading to a massive liquidity problem. Liquidity management tools that are both flexible and undeniably Shari'h compliant are lacking. Although Sukuks can be traded most are held to maturity. This lack of market liquidity is often seen as the major constraint to the development of an integrated Islamic financial system. Malaysia is an exception where they even have overdrafts.I

It is inevitable that competition between various conventional banks and Islamic ones has led to segmentation and prevented a really substantial market being developed leading to an upwardly spiralling virtuous vortex of liquidity. For things to change there will need to be more co-operation amongst Islamic banks and between them and their Conventional counterparties.

The LMC and IIFM are providing just such a lead. In addition to the lack of long-term assets to invest in and get out of, Islamic banks face another serious problem in balance sheet management: the lack of an Islamic inter-bank market on the scale of similar sized Conventional markets. Because Islamic banks unlike Conventional banks cannot borrow at interest to meet unexpected withdrawals from their depositors, it is difficult for them to run mismatched asset and liability portfolios. And this is aside from the interest rate risk they run when they invest long at fixed rate and have their liabilities re-price frequently.The way banks have most commonly solved this problem is to have more liquid assets than would be in the case of Conventional banks and these are placed with commodity Murabahas on the understanding that they can get liquidity when required through early cancellations at an explicit or hidden cost. These are done through agency agreements or break clauses. But a facility for early cancellation does not come without cost explicit or otherwise.

There are a few Islamic liquidity vehicles but these are fairly small and could not withstand a several hundred dollar injection or withdrawal. There needs to be a market-wide central solution that allows institutions to park funds in between medium to long term investment sales and purchase. We need a solution that involves high quality, standardisation, gets away from bilateral Murabaha investments by the investor with all the problems of break clauses, listing and price transparency and be able to transact in substantial size.

MOU - BNM AND UKTI

Bank Negara Malaysia (BNM) had signed an MoU on 26 February 2009, with the UK Trade and Investment (UKTI) to establish a collaborative framework to promote co-operation in the field of Islamic finance. This will pave the way for Malaysia and United Kingdom to strengthen co-operation in the development of talent, expertise, business linkages and infrastructure support in islamic finance.

This is indeed good news as it reflects the commitment to further develop the Islamic finance industry in the United Kingdom and Malaysia.

Sir Andrew Cahn, the Chief Executive Officer of UKTI has rightly mentioned in the news conference, " As conventional liquidity has become difficult to come by, companies are looking for alternative financial options, thus helping Islamic finance become part of the mainstream international finance market."

STANDARDIZATION OF ISLAMIC FINANCE PRACTICES

This is another article worth commenting - see Finding the middle ground. The article was from Islamic Finance Asia (Feb/Mar 2009 issue).

For the information of all, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) has been set up to set standards to be followed by Islamic Financial Institutions to streamline and provide standardization of Islamic finance practices and build the confidence of customers and other stakeholders while promoting the sustainable growth of the industry. As I've commented in my earlier post, not many organizations and/or countries wish to adopt the standards issued by AAOIFI.

However, I disagree with some of the panelists in the article - standards should be set up even if the industry is still new. Islam does not restrict what you want to do provided the act is within the parameters of Shariah. Now, the parameters are unclear - they depend on interpretation of each Shariah scholar sitting in the Shariah Board - this should not be the way. As a result, you can see that certain "Islamic product" like Bai Bithaman Ajil (in Malaysia) is not being accepted in the Middle East.

Therefore, standardization is a requirement. Now, it is a matter of adoption of these available standards by the organizations/countries - this is the main problem.

ISLAMIC FINANCE HAS TO RETURN TO ITS ROOTS

When I first read this article Islamic finance has much to learn from the West, I felt a sense of regret that the author quoted the US as having "more shariah compliant financing" mechanism than practiced by Islamic banks in Islamic countries. I quoted here the basis for his argument - "American venture capital groups annually provide about $25bn in capital financing to entrepreneurs, scientists and engineers with new ideas. As a consequence of the availability of this type of financing the venture capital industry in the US has given birth and nurtured scores of Silicon Valley companies, including modern day icons such as HP, Cisco, Intel, Sun Micro Systems, Apple, Netscape, Ebay, and Google. All were created in the past 30 years or so from ideas grounded in science and technology. Scientists and engineers came up with the ideas, innovations and inventions while the venture capital industry provided the capital on a partnership basis. Millions of new jobs have been created as a result."

I believe the correct phrase would be Islamic finance has to go back to its roots (even the article's author wrote that the west's renaissance partly came as a result of learning from the Islamic world). Islam encourages development and abhors hoarding and idle of wealth, thus, encourages investments. True, the most popular mode of Islamic financing now is murabaha (cost plus), but there are Islamic financial institutions who have made the necessary steps to opt for other Islamic modes of financing e.g. musyarakah, which is a form of partnership (profit and loss sharing).

I would like to reiterate that we (especially the Muslims) must give Islamic finance a chance - major revamps need to be made so as they are able to compete with their conventional counterparts. The hardest part to make this a reality is - to obtain the consensus of all for standardization of shariah rulings.

There are many conventions and/or seminars on Islamic finance taking place every month in all parts of the world - changes can be seen, however, it is not at a rate that we hoped. Every Muslim has a duty to contribute (no matter how small a contribution) to ensure that Islamic finance (or Islam in general) is no longer being ridiculed by others. Islam is our religion and we must stand united to guard it at all cost.

CAN ISLAM SAVE THE ECONOMY?

Governments worldwide are struggling to manage the global financial crisis, with no end to the downturn in sight. But at least so far, one sector has been unscathed: the $1 trillion-and-growing business of Shariah-compliant banking.

That’s right, Shariah. The same combination of medieval Islamic law and modern post-colonialism that makes the terrorist clique supposedly so hateful of Western freedoms. Where finance is concerned, most muftis—Islamic religious scholars—agree that God prohibits charging any amount of interest on loans. Trading debt and risky speculation are off-limits too, as is investment in immoral enterprises like gambling, prostitution, and war profiteering. Transactions should be highly transparent and risk, as well as return, should be shared by all parties. You can’t trap people into owing more than they can pay. Basically, most everything that caused the current mess isn’t allowed. “Given their constraints, they actually don’t hold any conventional debt or conventional mortgages,” explains Samuel Hayes, emeritus professor of investment banking at Harvard. “They don’t have any of these derivatives or outright subprime loans. There’s no doubt that they have weathered this better than the conventional banks.”

From the view of Islamic law, writes Umar Chapra, a leading economist in Saudi Arabia, “while economic growth is essential, it is not sufficient for attaining real human well-being.” Rather, we depend on “spiritual health at the core of human consciousness, and justice and fair play at all levels of human interaction.” Much more than a business model for specialty banks, he and many others believe that Islamic economics offers a much wider vision. The conventional view of the homo economicus—super-rational, selfish utility maximizer—dehumanizes people, denying the divine stamp on our nature. A truly Islamic economic theory, they believe, should restructure consumer preferences, ensuring that basic necessities are plentiful and luxuries come only after everyone is provided for. People should feel motivated to work by knowing that they share equitably in the produce of their labors. Shariah guidelines for inheritance distribute wealth among families in ways that prevents too much accumulation. More than an economics in the usual “dismal science” sense, this is a comprehensive rulebook for playing well with others. It also claims its authority from God.

The theory has something in mind for governments as well. They are responsible for administering the zakat tax, one of the Five Pillars of Islam. Though often translated as “almsgiving,” it literally means “that which purifies.” These funds should be directed primarily toward redistributive purposes, to soften the market’s burden on the poor. However, they can also be used to fund religious causes, a fact which medieval regimes sometimes used to usurp zakat funds for expansionary warfare. But modern Islamic economists, by and large, discourage military spending wherever possible.