EVENTS - MIFC Newsletter - MIFC Business Seminar on Islamic finance in Istanbul

Tun Dr. Mahathir Projects Sustainable Future for Islamic Finance at MIFC Business Seminar on Islamic Finance in Istanbul

Tun Dr. Mahathir Mohamad, former Malaysian Prime Minister, has urged countries to resort more to using Islamic finance in the aftermath of the global financial crisis and stressed that the industry is here to stay and definitely has a future in the global financial system. Tun Dr. Mahathir was giving a Special Address on the theme "The Future of Islamic Finance - Creating Global Linkages and Connectivity to the Growth Real Economy to Promote Financial Stability, Economic Growth, Employment and Prosperity" at the opening session of the Business Seminar on Islamic Finance which was organised by Bank Negara Malaysia in support of the Malaysia International Islamic Financial Centre (MIFC) initiative from 28 to 29 September 2011 in Istanbul, Turkey. The Seminar was attended by H.E. Saipul Anuar Bin Abd Muin, Malaysian Ambassador to Turkey; Bank Negara Malaysia (BNM) Deputy Governor Muhammad bin Ibrahim; Dr Mustafa Ibrahim Turhan, and Dr Turalay Kenc, Deputy Governors of the Central Bank of Turkey; Yasar Yakis, former Foreign Minister of Turkey; senior representatives from the Securities Commission Malaysia, Labuan FSA and Bursa Malaysia; and of the Turkish Treasury, the Banking Regulation and Supervision Board of Turkey, Capital Markets Board of Turkey and the Istanbul Stock Exchange. Other participants included MIFC Community members and Turkish participation banks, corporates and academia. (source and full story) In his Special Address, Tun Dr. Mahathir acknowledged that there definitely is a future for Islamic finance. It would not be spectacular; it would not be the cause of booms and busts. "It would be steady and would not cause the kind of social and economic upheavals that we are seeing today. Islamic banking and the wealth of the Muslims will cause the rest of the world to link up with Muslim countries. Muslims will feel comfortable doing business without going against the injunctions of Islam provided that the abuses of the riba banks are avoided hence, there will not be the periodical collapse of the Islamic financial system. We are seeing how the Islamic banks have remained unaffected by the current crisis. Insha’Allah it will remain crisis-free in the future," he added. The idea is not that Islamic banking should replace the current banking system, but there should be more resort to Islamic banking systems and principles in order to prevent greed and abuses from taking over. "Islamic banking," he advised, "should stay free from gambling and speculations, from the invention of financial products, and unlimited freedom to create money and leveraging which have all contributed to the downfall of the riba based financial system. In the absence of all these practices, Islamic banking would probably be slow in growing but then one must remember that the growth in wealth that we see in the countries which are based on the western financial system is not real. It does not create jobs, nor increases in trade, nor spin-offs into other businesses, nor help to spread wealth equitably and profitably." Indeed, Islamic banking, without interest and subjected to high moral codes would or should not yield the aforesaid results. However, because of these restrictions the growth of Islamic banks in the future would be slow and would also impact on economic growth and wealth creation. But the wealth created would be real, would be more fairly distributed, will spin off into real economic activities, creating jobs, increasing trade domestically and internationally. Tun Dr. Mahathir emphasized that the Islamic finance industry can learn about the mistakes of conventional finance if it is to avoid the same fate. The conventional banking system has served the developed economies very well by financing industry and services thereby enriching themselves through doing real business. However, these economies could not compete any longer with the emerging economies of the East and Latin America in the post-war years. This necessitated a switch to the financial markets with the promise of huge capital gains from investments in the share markets of the world. This also spurred on financial innovation in derivative products including collateralised debt obligations (CDOs), short selling, hedge funds and currency speculation, which bore no relation to real economic activities. Huge profits and greed was the order of the day which fuelled a boom that in reality was unsustainable, only for the financial system to come down like a house of cards, which is what happened in reality and which precipitated the financial crisis in 2008. "Capitalism has given many nations prosperity," advised Tun Dr. Mahathir, "but when capitalism is combined with unbridled greed, the result is what we are seeing today. In the western financial system the abuses are made possible because the system allows unlimited money to be created by the banking system. Loans by the banks have a guaranteed return. There was no risk for the banks, but new ways of guaranteeing returns were invented so that more money could be created and lent by the banks. The greedy played on the greed of people." Two panel discussions, one on Islamic Capital Markets and the other on Islamic Funds, Wealth Management and Product Innovation followed the opening session. The discussion on Islamic Capital Markets featured Hulusi Horozoglu, Director Global Islamic Banking, Citigroup; Muzaffar Hisham, CEO Maybank Islamic Berhad; Murat Cetinkaya, EVP, Treasury, Kuveyt Turk Participation Bank; and Yeoh Teik Leng, Head Capital Markets Malaysia, Standard Chartered Bank Malaysia. The panel on Islamic Funds comprised Noripah Kamso, CEO, CIMB Principal Islamic Asset Management; Avsar Sungurlu, Assistant MD, BMD Securities; Meliksah Utku, Assistant GM, Albaraka Turk Participation Bank; and Dr Daud Bakar, CEO, Amanie Advisors. The Business Seminar was preceded on the previous day by four presentations; one a country presentation discussing the business and investment opportunities in Turkey and Malaysia given by Ilker Ayci, President of the Investment Support and Promotion Agency of Turkey (ISPAT) and Baljeet Kaur, Managing Director, KFH Research ; a presentation on ‘Sukuk: Concept, Practice and the Malaysian Experience’ by Meor Amri Meor Ayub, CEO, and Mohd Shaharul Zain, Chief Business Officer, Bond Pricing Agency Malaysia; a discussion on ‘Liquidity Management Framework’ by Dr Daud Bakar, CEO, Amanie Advisors; Norfadlizan Abdul Rahman, Acting Global Head, Islamic Markets, Bursa Malaysia; and Isak Emin Aktepe, Treasury Department, Turkiye Finans, and one on ‘The Halal Economy: The Way Towards Sustainable Inward Investments’ by AmIslamic Funds Management.

Turkey-Malaysia Cooperation in Islamic Finance

Malaysia’s advancement in Islamic finance could be the basis for greater business and investment ties to enhance economic relationship between Turkey and Malaysia. The potential opportunities in this respect are huge. For example, large amounts of funds could be raised, via Sukuk, for the purpose of financing large infrastructure projects. This was the clear and present message of Bank Negara Malaysia (BNM) Deputy Governor Muhammad bin Ibrahim when he opened the Business Seminar organised by BNM in Istanbul at the end of September 2011 on the theme "Malaysia and Turkey: The New Silk Route in Islamic Finance - Strategies for Collaboration, Cooperation and Smart Partnership". The aim of the seminar was to strengthen economic, business and Islamic financial linkages for the mutual benefits of both countries. "The emergence of the ’Silk Route’, a term coined by Governor Dr Zeti in 2006," stressed the Deputy Governor, "opens up exciting prospects for countries and businesses. The new ’Silk Route’ not only carries traditional trade of goods and services of old but also manufactured goods, technological innovation and know-how, portfolio flows, private equity investment and mobility of human capital and knowledge. Today, Islamic financial products and services are truly ’new’ additions to this trade." In a changing world, which is currently experiencing serious financial and economic challenges, the search for new alternatives that could mitigate the contemporary issues and challenges is imperative. This is where Islamic finance can fit in and play a meaningful role, especially with its emphasis on the attainment of socio-economic goals based on Shariah principles; on a strong linkage to productive economic activity to generate legitimate income; and on accountability, fairness and transparency. These are the values, maintained the Deputy Governor that could also serve as a resilient form of financial intermediation; as an effective intermediary for the conduct of global business including promoting greater intra-regional trade not only within Asia but between the various regions of emerging markets; and contribute to sustainable global economic growth and financial stability. The Deputy Governor emphasized that Malaysia is committed to be a partner with Turkey in the Islamic finance space and is willing to share its 30 years of experience in developing its Islamic finance industry in parallel with its conventional counterpart. He identified five key areas of possible cooperation between the two countries. Sukuk Origination. Malaysia welcomes the Turkish financial and business community to use its comprehensive and tested infrastructure with its extensive investor network as a platform to raise funds such as Sukuk and Islamic syndication financing. The multi-currency Sukuk market in Malaysia is well developed and active with over 60 per cent of the outstanding Sukuk in the world originating from Malaysia. There is also the opportunity to list the Sukuk on Bursa Malaysia, the Malaysian bourse, which has emerged as the largest exchange for Sukuk listing in the world. This gives the listed Sukuks greater profiling, visibility and transparency in the global bond market. Collaboration in issuance of Sukuk, emphasised the Deputy Governor, would benefit Turkey, as the country’s aggressive diversification of its industrial base and services sectors will require huge financing needs that could be partially met through the Islamic financial markets. Indeed, projects such as the underground railway tunnel across the Bosphorus; new railway lines; bridges and highways may be funded through the issuance of sovereign Sukuk as an alternative source of funding. Islamic finance could also play an important role in Turkey’s on-going privatization programme. Cross-border Financial Activities. Turkish financial institutions could network with Malaysian-based investors, and practitioners to facilitate more business opportunities. Malaysia has diverse domestic and international players that engage in international currency business. There are now 150 entities in Malaysia’s Islamic financial system that offers a wide spectrum of Islamic products and services, including over 150 investment funds. These entities have the capabilities to structure funds for investment abroad, including into the emerging markets. Turkish banks and institutions could join Bursa Suq Al Sila’, the world’s first end-to-end Islamic multi-currency commodity trading platform, to facilitate liquidity management in the Islamic financial market. This fully-electronic platform facilitates Sukuk structuring, Islamic financing and investment transactions including inter-bank placements and customer deposits, by applying the concept of Murabaha and Tawarruq. Since its establishment in 2009, 23 Commodity Trading Participants from Malaysia, the Middle East and Europe have been registered with Bursa Suq Al-Sila’, contributing to the growth in its trading volume where 1370 trades were recorded in Q1 2011 with a total value of USD18 billion as compared to 728 trades in the final quarter of 2010 that totalled to an estimated USD11 billion. Fund Management. Following the launch of the first Participation Bank Index by the Istanbul Stock Exchange earlier this year, the investment products introduced in the Turkish market have been expanded to include Islamic equity funds and products. Through collaboration and strategic alliances between Malaysian Islamic fund management companies and the participation banks in Turkey, the development and distribution of Shariah compliant funds across borders could be made possible and new investment options to divest the savings of retail clients, as well as in the development of investment strategies to meet the needs of high net-worth individuals or sovereign wealth funds or institutional funds. Joint Product Innovation. Malaysian and Turkish market players and institutions could jointly develop innovative products and investment instruments, provide consultation and advisory services on complex legal, accounting, tax and Shariah matters as well as develop human talent to support the development of Islamic finance. Joint Islamic legal research could also be conducted with the International Shariah Research Academy (ISRA), a dedicated Shariah research entity in applied Islamic finance. Islamic Finance Education and Research. Collaboration can be explored between the International Centre of Education in Islamic Finance (INCEIF) and Turkish universities to give opportunities for Turkish students to enrol in professional and post-graduate programmes. Students from Turkey intending to deepen their knowledge in Islamic financial industry are encouraged to consider learning opportunities offered by Malaysia including possible attachments with Malaysian financial institutions. Indeed, a team from BNM and the Malaysian Islamic finance community was already in Ankara conducting a capacity enhancement programme on Islamic finance in collaboration with the Islamic Development Bank aimed at central bankers, regulators and Government officials. The relatively modest volume of trade and investment between the two countries currently reflects the enormous opportunity for further growth. During the recent visit of Malaysian Prime Minister Mohd Najib Abdul Razak to Turkey, he and his Turkish counterpart, Prime Minister Recep Tayyip Erdogan, agreed a new target for bilateral trade between the two countries from the current USD1.3 billion to USD5 billion. Turkish investors and financial institutions could use Malaysia as a gateway to the Asian region, while the Malaysian financial community could use Turkey as a gateway to Central Asia and Europe.

Malaysia and Turkey: Industry – Regulators Dialogue

The inaugural Industry-Regulators Dialogue was held on 29 September 2011 to initiate closer collaborations on various aspects of Islamic finance between the Malaysian and Turkish business and financial communities. The closed-door dialogue was jointly chaired by Dato’ Muhammad Ibrahim, Deputy Governor and Dr. Mustafa Ibrahim Turhan, Deputy Governor of the Central Bank of the Republic Turkey. A total of 40 Malaysian and Turkish delegations participated in the dialogue, whom amongst others included representatives from the Securities Commission, Labuan Financial Services Authority, Bursa Malaysia, Banking Regulation and Supervision Agency, Capital Markets Board of Turkey, Istanbul Stock Exchange, as well as industry associations and Islamic finance market players. Discussions were pragmatic and concentrated on what can be achieved over a short horizon, as well as discussing possible long term business ventures. The overriding consensus is that there is huge potential for linkages between Malaysia and Turkey in the Islamic finance space through smart partnerships and win-win situations. The dialogue agreed to intensify efforts on three strategic areas, namely (1) fostering mutual understanding and knowledge enrichment on Islamic finance, (2) promoting cross-border Islamic finance product offerings to support real economic sector particularly fund raising and fund management activities and (3) establishing joint infrastructure developmental initiatives particularly towards facilitating cross-border investments in Islamic equity market. Throughout the dialogue, both Deputy Governors emphasized the industry players’ essential roles in realizing the magnitude of opportunities for financial and business communities of both countries. In the words of Dr Turhan there are opportunities to catch; profits to be made; and money to earn. Turkey is opening up to Islamic finance. The market has its peculiarities, but it offers genuine opportunities in this space. MIFC community members need to be patient, thorough in their research; identify the right local partners; and be prepared to nurture the market through education and training initiatives if necessary.

Malaysian Budget 2012 and Islamic Finance

Malaysian Finance Minister Mohd Najib Abdul Razak, who is also the Prime Minister, delivered his 2012 Budget to the Dewan Rakyat (National Assembly) on 7 October 2011. The theme of the Budget is "National Transformation Policy: Welfare for the Citizenry, Well-Being of the Nation". The key highlights of the 2012 Budget are: Foreign direct investment (FDI) flows increased six-fold to RM29 billion in 2010, the highest growth in Asia. In the first half of 2011, it surged further by 75 per cent to RM21.2 billion compared with RM12.1 billion for the same period in 2010. The banking and financial system remains intact with the risk-weighted capital ratio at 14.8 per cent, far exceeding the Basel II requirements of 8 per cent. International reserves remains strong, registering RM414.5 billion on 15 September 2011, sufficient to finance 9.5 months of retained imports as well as 4.5 times of short-term external debt. Income per capita is estimated to increase to RM28,725 in 2011 compared with RM26,175 in 2010. GDP growth is estimated at 5 to 5.5 per cent in 2011. Total government revenues are projected at RM186.9 billion in 2012 compared with RM183.4 billion in 2011. Total government expenditure is projected at RM232.8 billion in 2012. The budget deficit in 2012 is expected to improve to 4.7 per cent of GDP compared with 5.4 per cent in 2011. The 2012 Budget also comprised a number of key policy decisions relating specifically to the Islamic finance industry. Key Islamic finance highlights mentioned in the 2012 Budget: Total financial assets of the Islamic finance industry comprised a 22 per cent market share of the total financial assets in 2010 compared with 6.9 per cent in 2000. The Islamic finance industry contributes 11 per cent of the total employment in the financial sector. Malaysia’s sukuk market continues to be the world’s largest Islamic bond market, accounting for two-third of the global sukuk outstanding as at end 2010. Specific New Provisions Relating to the Islamic Finance Industry in the 2012 Budget are: To further encourage sukuk issuance, a tax deduction on expenses incurred on the issuance of sukuk Wakalah will be given for a 3 year period commencing from the year of assessment 2012. Income tax exemption given for non-ringgit sukuk issuance and transactions is extended for another 3 years until the year of assessment 2014. To further promote the development of Shariah-compliant exchange traded funds (ETF) products, I-VCAP, a subsidiary of Value Cap Sdn. Bhd., will provide RM200 million as seed monies for Shariah-compliant ETFs. This fund will provide a matching loan subject to a maximum of RM20 million. To further promote the development of Real Estate Investment Trusts (REITs) industry, including Islamic REITs, the Government proposes that the concessionary tax rate of 10 per cent on dividends of non-corporate institutional and individual investors which was due to expire on 31 December 2011 be extended for a period of 5 years commencing 1 January 2012 until 31 December 2016. o further strengthen the contribution of small and medium sized enterprises (SMEs) to economic growth, a Shariah-compliant SME Financing Fund totaling RM2 billion to be managed by selected Islamic banks will be established in 2012. The Government will finance 2 per cent of the profit rate. To enable SMEs to commercialise research products, the Government will establish a RM500 million Shariah-compliant Commercialisation Innovation Fund with an attractive profit margin. This fund will finance SMEs whose products have undergone market commercialisation verification process. Effective 2012, this fund will be available at selected Islamic banks with the Government financing 2 per cent of the profit rate. Most houses are sold before construction starts and buyers bear risks of projects being delayed or abandoned. To protect buyers, the Government will encourage the construction of more houses using the build then sell concept. For this purpose, Islamic banks have agreed to provide Shariah-compliant financing and undertake construction risks. Installments only commence after the house is completed. This scheme will be implemented for houses costing RM600,000 and below.

Khazanah Issues World’s First Offshore Renminbi (RMB) Emas Sukuk
Khazanah Nasional Berhad, the strategic investment fund of the government of Malaysia enhanced its reputation as the world’s most proactive and innovative sukuk originator, with a landmark 3-year benchmark offshore RMB500 million (RM246 million) sukuk under Malaysia’s "Emas" or gold sukuk label, which denotes foreign currency denominated bonds or sukuk originated from Malaysia. The Sukuk Wakalah issued under the Malaysia International Islamic Financial Centre (MIFC) initiative was done via a Malaysian-incorporated special purpose vehicle, Danga Capital Berhad and is part of the latter’s multi-currency Islamic Securities Programme. According to Khazanah, the sukuk was successfully priced through a book building process on 13 October 2011 and at the tightest end of the price guidance at 2.90 per cent with overwhelming demand despite volatile global market conditions. The issuance was 3.6 times over-subscribed, enabling Khazanah to upsize the deal from an earlier announced size of RMB300 million to RMB500 million. The sukuk, which matures in 2014, will be listed on Bursa Malaysia (Exempt Regime) and Labuan International Financial Exchange (LFX). The pricing, according to Khazanah’s Managing Director, Azman Hj. Mokhtar, has been "executed at a very competitive price, setting a benchmark for offshore RMB securities while the order book in excess of RMB1 billion underlines the market’s confidence in Khazanah’s credit. The particular characteristics of a RMB-denominated with participation from across Asia illustrate the viability of the "New Silk Road" as an investment theme for Khazanah and others." In a statement, Khazanah stressed that the Sukuk demonstrates its "continued commitment towards the expansion of Islamic finance in line with the Malaysian Government’s agenda to establish Malaysia as an Islamic finance hub. It also attests to Khazanah’s continued effort to push the envelope on transaction innovation and the competitive positioning for Islamic structures." This transaction further underlined Khazanah’s confidence in China’s economic growth where it is involved in strategic sectors such as sustainable development, consumer, healthcare and education. Andrew Sheng, Chief Advisor to China Banking Regulatory Commission and a board member of Khazanah is confident that "this pioneering transaction offers a new RMB product which caters for both conventional and Islamic investors. This is an innovative, market driven and major step forward in the development of the offshore RMB market and supports the Chinese government’s move to internationalise the RMB." Source :  http://www.mifc.com/sift_09/newsletter/OCT-2011/index.html