Islamic Finance Pakistan

Islamic Finance Industry Newsletter

Volume 4, Issue 3, April 2013

Editorial
Islamic finance not only remained stable, but also witnessed tremendous growth, in spite of the adverse impacts of political instability and global recession prevailing in the country, especially in the latter part of the preceding decade. Attracting depositors and potential clients for financings, through enhancing the current and developing new products has been the main area of focus for most of the bankers in Islamic financial industry, proving to be important attributes to the conquest and triumph of the industry. With the industry strengthening its foothold for growth, a key implication in technology has been the automation of Islamic Banking processes and functions in Core Banking Systems (CBS). This fact is also realized by AAOIFI and as an answer, AAOIFI has certified certain Islamic CBS (ETHIX by ITS and iMAL by Path Solutions). Other Islamic CBS claim AAOIFI compliance and are considering AAOIFI certification in their product upgrade roadmap. Where adopting Islamic CBS entail certain benefits, for most of the Banks its adoption is less significant due to the costs that the Islamic CBS lead to. As such, adopting the Islamic CBS has not been embraced enthusiastically. Additionally, the key challenge for the Islamic CBS as compared to conventional CBS is to incorporate the Shariah principles and tenets over and above the usual banking business process and regulatory requirements. In order to ensure that the Islamic banking is managed in a formal way and to ensure compliance with the precepts and tenets of Shariah, the State Bank of Pakistan (SBP) has also, via its recent instructions on profit and loss distribution and pool management, emphasized on maintaining IT based system catering the need of the Islamic banking for pool management. Happy Reading!

Ayat of Month:
No calamity befalls (one), but with the leave of Allah. And whoever believes in Allah, He guides his heart. Allah is AllKnowing about everything. Obey Allah, and obey the Messenger. But if you turn away, then Our Messenger has only to convey the message clearly.

*AlJumaa: 11 and 12+ Hadith of Month:

Ibn Abbas reported: The Messenger of Allah, Salallahu alayhi wasallam, said, Whoever continuously seeks Allahs forgiveness, then Allah will make a way out for him from every hardship, from every anxiety, and will provide him with sustenance from where he does not expect.

[Sunan Abu Dawud]

Advisory Board
Mufti Irshad Ahmed Aijaz Mufti Najeeb Khan Anwar Ahmed Meenai Mohammad Aslam Mujeeb Baig Faizan Memon Syed Abdul Rafay Ather

Editor-in-Chief
Nusrat Ullah Khan

Associate Editors
Shakil Khan Muhammad Shahzad Hussain Arshad Hussain Zubairi Rima Farooq

IFP is an initiative of IFP Forum and Hidaya Islamic Business Support Services (IBSS)
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News Story
IBI share in banking industry surges to 10 percent
The Islamic Banking Industry (IBI) continued to post a healthy growth, touching for the first time a share of 10 percent in the banking industry at the end of the Calendar Year 2012 (CY12). With a substantial growth of 35.5 percent or Rs 185 billion, IBI deposits surged to Rs 706 billion by the end of CY12 against Rs 521 billion at the end of CY11. According to the State Bank of Pakistan, IBI posted a healthy growth as far as deposit base was concerned during the period under review. IBI's share in the entire banking industry increased from 8.4 percent in CY11 to 9.7 percent by the end of CY12. IBI's asset base also continued to expend, touching Rs. 837 billion by the end of CY12, up from Rs. 641 billion in CY11, depicting an increase of 30 percent or Rs. 196 billion in a single year. Consequently, the market share of Islamic banking assets in the overall banking industry also increased to 8.6 percent by the end of December last year. Previously, it stood at 7.8 percent in December 2011. During CY12, one new Islamic Banking Institution was added to the Islamic Banking Industry, bringing the total tally to 18 such institutions working across the country. SBP's Islamic Banking Bulletin said that IBI barely managed to maintain the Rs 10 billion profit (pre-tax) level achieved in last year because of the significantly squeezed margins. The reduction of 2.5 percentage points in the policy rate translated into a significant decline in yields on financing and investments. While financing and investment yields were under stress, depositors' return remained relatively stable because of market competitiveness and regulatory directives to all banks, including IBI, to pay enhanced returns to smaller depositors (PLS). The squeezed margins translated into marginal reduction in profit before tax to Rs 10 billion in CY12 from Rs 10.6 billion in CY 2011 and significant reduction in ROA and ROE to 1.2 percent and 14.1 percent from 1.6 percent and 17.3 percent respectively in CY 2011. The ROA and ROE of Islamic banking also became lower than the overall banking system averages of 1.4 percent and 14.7 percent respectively. The IBI network also continued to swell and the network (including sub-branches) crossed 1,000-branch mark by the end of CY12. With an increase of 211, the total number of IBI branches surged to 1,097 by the end of December last year against 886 branches in December 2011. The number of new branches opened in CY 2012 was also higher than branches opened in CY 2011, in which 135 branches had been established by IBI. Out of new branches, as many as 120 additional branches were added to Islamic banking network during the last quarter (October-December) of last year. These additional branches were established across all provinces and three new districts Ghotki, Layyah and Shangla were added in the list of districts having Islamic banking branches. New branches were also set up in Balochistan and Azad Kashmir in the quarter under review. On Quarter-on-Quarter (QoQ) basis, Islamic banking industry assets grew by 12.8 percent, touching Rs 837 billion by the end of December last year, up from Rs 742 billion in September last year. The current growth in the assets of Islamic banking industry was higher than the overall banking industry. The two major components of assets - investments and financing - registered positive growth during CY2012 and net financing and investment also registered a growth of 32 percent or Rs 151 billion to Rs 626 billion end of CY12 from Rs 475 billion in CY11. Investments of Islamic banking industry grew by 43.8 percent during the previous calendar year, touching Rs 394.4 billion, up from Rs 274.2 billion in CY11. During the period under review, financing to private sector by Islamic banks registered a handsome increase of 14 percent or Rs 30.3 billion to Rs 242.1 billion by the end of December last year. All modes of financing except Musharaka witnessed an increase during the period under review. In terms of financing mix, Murabaha continued to have the highest share in overall financing followed by Diminishing Musharaka.
Source: Business Recorder, 2013

Islamic Finance and its Progress Over the Years

Compiled by Muhammad Usman Uppal
Islamic finance has its own structure where all its regulations are being deduced by the Quran and Hadith. In 1950, it was introduced in Pakistan as a small-scale interest free bank perhaps the results were not positive at all. Moreover, probably the first Islamic financial institution was created in Malaysia known as the Muslim Pilgrims Savings Corporation (MPSC), which was founded in 1963 to help Muslims to save money so that they would be able to make the once in a life time pilgrimage to the holy cities of Mecca and Medina in Saudi Arabia.

Basic principles of Islamic finance can be seen in the figure below...

No gain without the risk of loss

Prohibition of Riba

Prohibition of Gharar and gambling

Basic Principles of Islamic Finance

Prohibition of financing unethical activities

Asset backed

Islamic Finance and its Progress Over the Years

Over the past years Islamic finance has seen its growth. This has been elaborated by many organizations considering the fact that Ernst & Youngs World Islamic Banking Competitiveness Report 2013 elaborates that Islamic banking total assets grew by more than $ 1.3 trillion in 2011 with an average annual growth of 19% over the past four years. Moreover, reports further concluded that Islamic banking total resources are forecasted to grow beyond the goal of $2 trillion by 2014. Similarly we can further convolute that the reports of a leading management consulting firm known as AT Kearney which has made up a conclusion in its report that Islamic finance has a very promising future but it further needs to cater the problems it has been facing. Since one of the quandary it is facing now is that this industry has a very few professionals who knows about Shariah compliance. Moreover, it further needs to expand its presence outside GCC and Middle East reaching to European markets as well. So from some stances we can simply elaborate and deduce that Islamic finance has somehow made an efficient growth in its productive structure. Looking at the European structure what we can analyze is that usually many of the nations are being under the influence of conventional banking structure. Western markets were unaware of the Islamic finance, it developed interest only after the world economic crisis occurred where many banks were bankrupt and other organizations faced Mergers and Acquisitions etc. The popularity of Islamic finance has a major and positive impact on western nations like for example Luxembourg found first Islamic finance banking system back in 1978 known as Islamic finance house. Soon after Denmark was the second nation to step up Islamic bank known as an Islamic bank international. Since Islamic finance banking sector is still not on par with the conventional banking sector but at the same time senior analyst has concluded that Islamic finance has a very positive promising future. From the below table we can elaborate that conventional banks in Middle East are still on the higher side as compared with Islamic banks. We can simply construe that Islamic banks needs to further mobilize their assets in such a way that they meet the standards of conventional banks.

From below table we can examine the strength of Islamic finance sector and conventional banking sector: ( Number of banks with branches working)

Global News
Senegal seeks to become West African hub for Islamic finance
Senegal is trying to position itself as a center for Islamic finance in West Africa, where about 52 percent of the population is Muslim, as the government pursues changes that will enable the first sales of Sukuk. Senegal still needs to adjust its policies to be able to sell debt that complies with Islams ban on interest after postponing a plan last year to sell such bonds, said MD of the African Institute of Islamic Finance.

U.K. Islamic Bond back on agenda as London seeks Shariah market

The U.K. government is considering reviving plans to sell Islamic bonds as part of an initiative to boost Britains role as a center for Shariah compliant financing. Treasury Minister Greg Clark and Sayeeda Warsi, a minister in the foreign office, are leading a working group to raise the profile of the Islamic finance industry.

Investing in Malaysia, Trade, Finance and Islamic Banking

Shayne Heffernan has been bullish on Malaysia for several years and the run is not over yet according to HeffCap one of Asias leading financial advisors. HeffCap sees Malaysia as a developing hub for trade and banking, especially Islamic banking. Shayne Heffernan said that Kuala Lumpur has been quick to develop Islamic banking and has already built strong ties to the financial centers' of the Middle East.

Bahrain Islamic banking assets up by 13 percent

The total assets of Islamic banks in Bahrain have increased 13 per cent at the end of last year up from 4 per cent in 2003, said Islamic Banks and Financial Institutions general council secretary general Dr. Omar Al Hafiz. The figures were released by the Central Bank of Bahrain.

Norton Rose advises managers on DEWAs $1 billion Sukuk issuance

The managers comprised Abu Dhabi Islamic Bank, Citigroup Global Markets, DIB, Emirates NBDCL, SCB and RBS as Joint Lead Managers and Commercial Bank International, Sharjah Islamic Bank (SIB) and UNB as Co-Managers. The Islamic debt capital markets have become very buoyant in the Middle East over the past few months with clients expecting their advisors to navigate seamlessly through legal and Shariah issue.

Dubai Islamic said to set profit rate at 6.25% on Dollar Sukuk

Dubai Islamic Bank the United Arab Emirates biggest Shariah-compliant lender, will pay a profit rate of 6.25 percent on a $1 billion Islamic bond it plans to sell, said a banker familiar with the matter. Banks in the six-nation Gulf Cooperation Council are seeking to build their Tier-1 capital ratios as they attract deposits and extend loans to support state investment programs and retail demand.

ECB, IFSB conducting study on Islamic finance

The European Central Bank and the Malaysia-based Islamic Financial Services Board (IFSB) are conducting a joint study on policies affecting Islamic finance in Europe, the IFSB's top official told Reuters. "We are doing a joint study with Europe's central bank which brings together European scholars and regulators to examine a broad set of policy and regulatory issues in relation to Islamic finance in Europe," said IFSB secretary general Jaseem Ahmed.

Disclaimer:
The news included here is on the basis of information obtained from local and international print and electronic media sources. IFP and Hidaya IBSS team does not accept any responsibility about their bona-fide.
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Global News
New Sukuk issuances to exceed $100bn
There is little to hinder another strong performance by the Sukuk market in the next few years, Standard & Poor's said in a report published that, Investors Are Snapping Up Sukuk, Despite Questions About Creditworthiness." Despite increased growth, the market for Sukuk, is still a small segment of the global fixed-income world. Sukuk comply with Shariah law, meaning they do not technically pay interest; rather, they provide Sukuk holders a profit in.

Qatar says Islamic bank to be set up with IDB "soon"

Qatar expects to go ahead soon with its plan to establish a big, international Islamic bank, said Finance Minister Youssef Kamal. Last April the Qatari government signed a memorandum of understanding with the Jeddah based Islamic Development Bank, a multilateral lender, and Saudi Arabia's Dallah Albaraka Group to establish a bank with initial capital of $1 billion.

GCC, Asia still key engines for growth of Sukuk market

The new issuance of Sukuk worldwide could top well above $100 billion again this year, Standard & Poors said its recent report Investor Appetite Is Pushing Sukuk Into The Mainstream, amid current investment spending and economic growth, along with its forecast of continued high oil prices and low bond yields. In addition, jumbo issuance may pick up further, mainly on the back of huge infrastructure projects from sovereign nations.

Affin Eyes China For Islamic Banking Ops

Affin Holdings Bhd is eyeing China for its Islamic banking operations in view of the tremendous potential in the region, deputy chairman Tan Sri Lodin Wok Kamaruddin, said. "The structure has not been finalized yet. It is still preliminary but we are trying to put it in place to be submitted for approval, including by Bank Negara Malaysia," he told reporters after the group's annual general meeting.

Dubai Maritime City Authority encourages Shariah compliant shipping finance

Just as the Dubai Maritime City Authority (DMCA); a branch of the Dubai government which regulates, coordinates and supervises all aspects of the maritime sector in Dubai, announced its support for its ruler's initiative to turn Dubai into a Islamic hub, news has broken on the National Shipping Company of Saudi Arabia (Bahri)'s intentions to issue its debut Sukuk.

Islamic finance body says first Sukuk to debut within months

International Islamic Liquidity Management Corp., backed by a group of central banks located mainly in Asia and the Middle East, will launch its first Sukuk of $300 million to $500 million "in a matter of months", its chief executive said. Kuala Lumpur-headquartered IILM, established last year, aims to issue short term Sukuk, or Islamic bonds, to help Shariah compliant banks manage liquidity and create a liquid cross-border market for Islamic instruments.

BIBD, Big Winner At Islamic Finance News Awards 2013

Bank Islam Brunei Darussalam Berhad (BIBD) emerged as big winners at the Islamic Finance News (IFN) Awards 2013 held on March 5 at the Grand Hyatt Hotel in Kuala Lumpur. According to a press release from the bank, BIBD was presented with four awards, the "Structured Finance Deal of the Year 2012" for the Brunei Gas Carriers (BGC) Sdn Bhd US$170 million Islamic Financing Facility.

Disclaimer:
The news included here is on the basis of information obtained from local and international print and electronic media sources. IFP and Hidaya IBSS team does not accept any responsibility about their bona-fide.
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Local News
BoP 1st Islamic Banking branch Bank Alfalah, PAF sign MoU to launch Car Ijarah Scheme
Bank Alfalah Limiteds Islamic Banking Group, which has recently achieved the centennial branch milestone for its Islamic banking branches, has signed a memorandum of understanding (MoU) with the Pakistan Air Force (PAF) for the launch of the Car Ijarah Product Scheme in order to better serve the PAF personnel. This unique offer by the bank provides highly attractive terms to the PAF personnel in accordance with the Shariah guidelines, it said. The Bank of Punjab (BOP) has launched Islamic Banking to provide its customers with Shariah compliant services under license issued by the State Bank of Pakistan. The start of Islamic Banking at BOP comes in the wake of four years of committed hard work by the management to turn the Bank around. It has been a tough assignment to rebuild the Bank and win the confidence of clients and institutions alike but the hard work is paying off and the Bank is progressing.

Islamic finance market likely to grow

Pakistans Islamic finance market may continue to mature and expand in the years ahead given growing investment by the Islamic banking industry in federal government securities through Ijarah Sukuk (Islamic bonds), said bankers. Recent statistics issued by the State Bank of Pakistan (SBP) suggest Islamic banking institutions (IBIs) invested Rs. 266 billion in government securities during the third quarter of 2012 against Rs. 154 billion over the same period in the last fiscal year, showing a year-on-year growth of 73.2 percent. Of a total of Rs. 266 billion investments, more than Rs. 47 billion were provided by the Islamic banks via Ijarah Sukuk to the government for project financing.

Proceeds of the GoP Ijarah Sukuk to be used by Pakistan Domestic Sukuk Company Limited
The State Bank of Pakistan (SBP) announced that the proceeds of the government of Pakistan Ijarah Sukuk will be used by Pakistan Domestic Sukuk Company Limited (PDSCL) to purchase the assets as an agent for and on behalf of the investors. SBP will conduct an auction through which Sukuk investors will be identified. A circular issued by SBP said that the investors will execute the Sukuk subscription undertaking in favor of PDSCL and the National Highway Authority (NHA), which will record the commitments of the investors to subscribe the Sukuk to be issued by PDSCL. Under the Sukuk subscription undertaking, the investors will also appoint PDSCL as their agent. Each such Sukuk will represent an undivided ownership in the assets, it said. A Sukuk issuance undertaking will be executed by PDSCL and NHA in favor of the investors, whereby, PDSCL will undertake to issue the Sukuk to the investors.

Disclaimer:
The news included here is on the basis of information obtained from local and international print and electronic media sources. IFP and Hidaya IBSS team does not accept any responsibility about their bona-fide.
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Book in the Spotlight

Islam Aur Jadeed Maashi Masail (Seventh and Eight Volume) By Mufti Muhammad Taqi Usmani Publisher: Idara-e-Islamiat, Lahore
These are the two last volumes of the eight volume set of Islam aur jaded maashi masail, they are titled Islam ka maashi nizaam and Araazi ka islami nizaam respectively. The seventh volume is a comprehensive discussion about an ideal Islamic economic system. It starts with characteristics of any economic system which may differentiate one from another. On an exemplary basis author describes the two major economic systems i.e. capitalism and socialism, with their basis and features distinguishing them from each other. It not only converse about the economy but also regarding the impact of these systems on the political sphere and governments structure. The author also identifies prominent pros and cons of each system and assesses them in the light of Shariah, about their acceptance and impermissibility under Shariah principles. This is followed by a comparison of each system with a Shariah based economic system. As a way forward author suggests the changes that are needed to reform the ill features of the above mentioned system into an Islamic economic system. Eighth volume depicts a case proceedings in reference to a case filed against a courts verdict regarding land properties waqfed. The said verdict was under the martial law regulation 115 vide 1972, and several other land reform acts. The plaintiffs followed the proceedings with comprehensive and detailed laws of the land and the Shariah. For the proceeding purposes Shufaa (right to acquire accompanied land) rules and agricultural land rules of Shariah are also described and discussed in accordance with the laws of the land of Pakistan.

About the Author

Mufti Muhammad Taqi Usmani is one of the leading Islamic scholars living today. He is an expert in the fields of Islamic Jurisprudence, Economics, Hadith and Tasawwuf. Born in Deoband in 1362H (1943 CE), he graduated par excellence from Dars-e-Nizami at Darul Uloom, Karachi, Pakistan. Then he specialized in Islamic Jurisprudence under the guidance of his eminent father, Mufti Muhammad Shafi, the late Grand Mufti of Pakistan. Since then, he has been teaching hadith and Fiqh at the Darul-Uloom, Karachi. He also holds a degree in law and was a Judge at the Shariah Appellate Bench of the Supreme Court of Pakistan. He has been writing on various Islamic topics and is author of more than 60 books and numerous articles. Presently he is the Vice-president of Darul-Uloom, Karachi, Pakistan, where he teaches Sahih Bukhari, Fiqh and Islamic economics.

Ask Us
Questions / Answers
Question Is it permissible in Shariah to cover the loss in one Mudaraba operation from the profit of other Mudaraba operation? What are the Shariah injunctions for this case? Answer When loss is incurred in one Mudaraba operation it can be covered from the profits of other Mudaraba operations, and if it exceeds the profits it should be covered from capital. What should really matter is the final result of liquidation at the end of the financial period specified by the institution. The loss of a certain financial period should not be covered from the profits of another period which also includes the situation of constructive liquidation, except in the case of covering losses from reserves. Question What are the Shariah directives regarding the possession of subject matter in online sale contracts? Answer Regarding online contracts, possession in the strict Shariah sense takes place through all accepted methods of actual and legal possession. If the sold commodity is computer software or the like, possession in the strict Shariah sense takes place when the purchaser, after signing the contract, downloads the software or the data or any good of this type from the website to his personal computer. When the sold commodity is a currency, gold, silver or any other commodity in which instant exchange is required, instant exchange of the two objects of the contract should be ascertained during the contract's signing session.

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Upcoming Events
IFN EVENTS DAIRY (IFN ROAD SHOWS) Islamic Finance News Road show continue to educate and update the developing Islamic financial markets by organizing key Islamic finance events with the focus heavily on education and development.
Bangladesh 5th February 2013 Singapore 22nd March 2013 Morocco 28th April 2013 Australia 7th May 2013 Japan 12th June 2013 Hong Kong 25th June 2013 Pakistan 27th August 2013 Sri Lanka 29th August 2013 Turkey 3rd September 2013 Egypt 5th September 2013

International Islamic Finance Conference 2013Abu Dhabi, April 14-16, 2013

The aim of the conference is to investigate current political and socio-economic developments through leading thinkers in their field, the likely effects of those developments on the performance and future position of Islamic financial institutions, the regulatory set-ups, and popularity of Islamic products offered to the public, governments and businesses. In association with Emerald Group Publishing, the organizers will now work with all those involved in the programme to build on this platform for the exchange of invaluable research and ideas.

World Islamic Finance Conferences / Workshops and seminars Key Islamic finance events with the focus on education and development.

Islamic Banking and Finance, Challenges of Survival and Development 3rd May 2013 Oxford, United Kingdom The first International Conference on Islamic Wealth Management and Call for Paper Islamic Finance of Business and Journal (IFBJ) Best Paper Award 11th May 2013 Sentul City, Indonesia 4th Global Islamic Marketing Conference 30th May 2013 Istanbul, Turkey

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Article: Usman Uppal Ask Us: Mufti Ibrahim Essa and Mufti Javed Ahmed Book in the Spotlight: Islam Aur Jadeed Maashi Masail (Edition 7 & 8) News: Local and Global news

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