Islamic finance ideal for alleviating poverty

Islamic finance is well-suited for addressing poverty, whether it is used by Muslims or non-Muslims, says the organisers of the 4th Global Islamic Microfinance Forum (GIMF), which kicks off on 1 November in Dubai at the Dusit Thani Hotel.

Muhammad Zubair Mughal, Chief Executive Officer, AlHuda Centre of Islamic Banking and Economics (CIBE) quoted research which has found that Islamic microfinance has a greater impact on poverty alleviation than general microfinance. Firstly, its focus on investing on assets can boost income levels, and opportunities for business, health and education. Secondly, it is available to the poor.

He further said that murabahah, musharakah, mudarbah, and ijarah are some of the options available, and micro takaful helps to keep those emerging from poverty from backsliding.

The forum runs from 1 to 4 November, 2014 and is jointly organised by AlHuda CIBE and Akhuwat. It is supported by the IRTI - Islamic Development Bank, Azerbaijan Microfinance Association, Association of Microfinance of Tajikistan, Indonesia Microfinance Association, Centre of Microfinance Nepal, Metropolitan Training Academy Turkey, Awqaf South Africa, and KFDWB among others. 

Go for ijarah sukuk and have respected shari'ah scholars certify them: IMF working paper

The type of sukuk and the choice of shari'ah scholar could affect interest in a sukuk issue.

In Do the Type of Sukuk and Choice of Shari'a Scholar Matter?, a working paper* from the International Monetary Fund (IMF) released in August 2014, authors Christophe Godlewski, Rima Turk, and Laurent Weill study a sample of 131 sukuk from eight countries from 2006 to 2013 and find both criteria do indeed matter.

Some observations from the analysis include: 

• The average coupon is above 4%, maturity is 8 years, and the average amount issued is US$1,270 million with a large standard deviation. 
• An average of three scholars certify an issuer’s sukuk. 
• On average, half of the team of scholars is from the same country as the issuer. 
• A typical scholar certifies on average 24 sukuk per year, or almost 75 issues over three years. 
• Issuing firms have issued on average more than 11 bond issues.

According to the working paper, ijarah (اجارۃ) sukuk "exert a positive influence on the stock price of the issuing firm". The authors suggest that ijarah structures may benefit the most from the expansion of sukuk markets because of the better investor reaction to them compared to other structures. 

The authors observe that sukuk in the musharakah and mudarabah formats, which are partnership contracts in which the financier and entrepreneur share profits based on pre-agreed ratios but also the losses that are proportional to their contributions (financial or physical) to the partnership, are not as popular. "Ijarah is a debt-based instrument that is not based on profit and loss sharing principles; hence, it does not suffer from the possibility of attracting borrowers of poor financial condition as would a musharakah instrument," the authors suggested.

A similar positive impact was observed with sukuk that had been certified by prominent shari’ah scholars from the same country as the sukuk issuer. In more than half of the sample, at least one scholar is from the same country as the issuer, the authors observed. 

"Our finding provides some evidence that high compensation for reputable shari’ah scholars certifying sukuk may be justified on the grounds of better valuation of issuing firms," the authors said.

*Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. The views do not necessarily represent the views of the IMF or IMF policies.

Al Baraka Banking Group working with World Bank to study musharakah, mudarabah

Al Baraka Banking Group has collaborated with the World Bank to begin a research partnership to benefit the global Islamic banking industry. The partnership's first initiative, part of a planned series of research projects, will be a study examining the risk-management challenges facing Islamic banks, with a particular focus on musharakah and mudarabah under the profit-and-loss-sharing system. Preliminary findings are expected to be available in the first quarter of 2015.

"We are committed to serving the sector by addressing several pressing issues that the industry is facing today. The research collaboration with the World Bank is yet another step in this direction," said Al Baraka's Group President and Chief Executive Adnan Ahmed Yousif. 

Abayomi Alawode, Head of Islamic Finance at the World Bank, said that the priority is to create an environment where the profit-and-loss system can flourish. "After a series of discussions with Al Baraka's Executive Management and Research Team, we recognise that the industry must address concerns that the majority of Islamic banking assets are debt-based and that the proportion of equity-based investments (such as musharakah and mudarabah) does not form a significant portion of the Islamic investments portfolio. The enabling support system to mitigate these inherent risks and challenges is either limited or nonexistent. As a result, equity-based investments remain under-represented in the Islamic banking industry," he said.

Adnan Ahmed Yousif added, "Being the first of its kind, the research project will not only collect data from a number of countries where musharakah and mudarabah are being used in banking transactions, but the project will also examine what enabling legal and regulatory environment would be needed to support the adequate risk management of musharakah and mudarabah."

Alawode remarked, "We look forward to our collaboration with Islamic financial institutions, such as Al Baraka, drawing on their front-line experience in the use of Islamic financial products. Their insights will contribute to producing a study that will encourage innovation and contribute to the sustainable growth of the industry. The Islamic banking and financial industry has reached a level where further growth is possible, if it develops new tools and innovative products that address those core issues."

The Al Baraka Banking Group is a Bahrain joint stock company licensed as an Islamic wholesale bank by the Central Bank of Bahrain, and is listed on the Bahrain Bourse and the Nasdaq Dubai stock exchanges. The Group has a geographical presence in fifteen countries: Jordan, Tunisia, Sudan, Turkey, Bahrain, Egypt, Algeria, Pakistan, South Africa, Lebanon, Syria, Indonesia, Libya, Iraq and Saudi Arabia.

Al Baraka is recognised as a pioneer in the Islamic banking sector for its thinktank, the Al Baraka Annual Islamic Banking Symposium (The Nadwa). The Nadwa is the only platform of its kind that annually provides the industry with resolutions and fatwas which form the basis of new products, standards and policies. 

*Click here for Investopedia definitions of musharakah and here for Bank Negara Malaysia's discussion on mudarabah.

Sabah Credit Corporation launches Sukuk Musharakah Programmes

State government agency the Sabah Credit Corporation (SCC) has launched the Sukuk Musharakah Programmes valued at RM1.5 billion with AmInvestment Bank as the Principal Advisor, Lead Arranger and Lead Manager.

SCC introduced its first Shari'ah compliant financing products to its customers in 2010 and is the first State Government Agency in Sabah to venture into Islamic financing.  As at December 2013, Islamic financing constitutes RM1,785.3 billion or 84.5% of the Corporation’s financing portfolio.

In line with the growing demand for Islamic financing in Malaysia, the Sukuk Musharakah Programmes provide an Islamic financing platform for the Corporation to tap the robust liquidity available in the local capital markets. This financing facility marks the second Shari'ah-compliant Sukuk programme under SCC.

AmInvestment Bank is acting as the sole Principal Advisor and Lead Arranger for the Sukuk Musharakah Programmes which comprise a seven-year RM750 million Islamic Commercial Papers Programme and a 20-year RM1.5 billion Islamic Medium Term Notes Programme, subject to a joint limit of RM1.5 billion.

The Sukuk Musharakah Programmes will provide the Corporation the flexibility to issue short-term and long-term Sukuk from tenure of one month up to twenty years. The proceeds from the Sukuk will be utilised by the corporation to fund its Islamic financial business. RAM Rating Services Berhad has assigned a short-term rating of P1 and long-term rating of AA₁ to these Sukuk Musharakah Programmes.

The launch event was witnessed by Yang Amat Berhormat Datuk Seri Panglima Musa Hj. Aman, Chief Minister of Sabah and Sabah Minister of Finance, Tan Sri Azman Hashim, Chairman, AmBank Group and YB Datuk Linda Tsen, Chairman, Sabah Credit Corporation. 

The ceremony also witnessed the dividend payment of RM25 million and loan repayment of RM21,824 by SCC to the State Government through the State Ministry of Finance. There were also CSR presentations to SMK Tebobon, Menggatal to finance its multi-purpose open hall, Rumah Anak Yatim dan Perlindungan, Tuaran and to the Kota Kinabalu Widows Association.