2019

The World’s Leading Islamic Finance News Provider

ANNUAL GUIDE
 editor’s
prefacenote

The best of times, the worst of times

The end of the year is once again upon us, and the last 12 months seem to have
flashed past at the speed of light – it seems just a few short weeks ago that we were
Managing Editor Vineeta Tan
starting out in January with hope in our hearts and a spring in our step, high off the
vineeta.tan@REDmoneygroup.com back of a strong year for Sukuk and an even stronger surge of sovereign issuance. So
did that optimism translate into reality?

Contributing Lauren McAughtry 2018 was, as ever, a year of ups and downs – characterized, perhaps unusually, by the
Editor
lauren.mcaughtry@REDmoneygroup. external economic headwinds buffeting the industry as much as by its own internal
com challenges. Despite a strong recovery towards the end of the year the oil price remained
turbulent; while the strengthening US dollar and rising Fed rates put pressure on emerging
Senior Contributions Sasikala Thiagaraja markets and the ongoing threat of a US/China trade war exacerbated geopolitical tensions.
The spat between Qatar and its neighbors shows no sign of settling down, while in
Editor sasikala.thiagaraja@REDmoneygroup.com November the US added to the fuel to the fire with a full reinstatement of sanctions against
Iran.

Senior Copy Kenny Ng But that is not to say that we have not seen positive developments as well. In the GCC,
Saudi Arabia continues to go from strength to strength and the positive progress made
Editor kenny.ng@REDmoneygroup.com
towards regulatory reform, not to mention the enthusiasm with which the Kingdom has
taken to sovereign Sukuk issuance, is sure cause for celebration. Oman saw its Islamic
banking market boom over the year to top 12% of the total market, while an array of
Senior Marc Roussot
banking mergers across the GCC drove a growing trend of market consolidation. Dubai
Journalist marc.roussot@redmoneygroup.com retained its crown as the capital of the regional Islamic economy but Abu Dhabi has also
made great strides over the year – driven by the pioneering role of the admirably active
Abu Dhabi General Market. Also in 2018 the UAE market regulator finally introduced new
standards for Sukuk – a major step forward that underlines the ongoing standardization
Journalist Durgahyeni Mohgana Selvam
drive across the industry.
durgahyeni.selvam@redmoneygroup.
com
What else was new in 2018? The UK saw its inaugural corporate Sukuk issuance from Al
Rayan Bank, Singapore stepped forward once again to express an interest in the Islamic
Head of Hasnani Aspari finance space and Turkey made waves (although not always for the right reasons). Green
and socially responsible Sukuk hit the headlines with Malaysia and Indonesia taking a
Production hasnani.aspari@REDmoneygroup.com strong lead; and REITs stormed the asset management industry with as many as 11 new
funds launching over the past year.

Senior Production Norzabidi Abdullah The fintech space is another hotspot to watch — with blockchain booming, cryptocurrencies
climbing and investment soaring. The US$500 million Transform Fund from the IDB, the
Manager zabidi.abdullah@REDmoneygroup.com
ground-breaking Investment Account Platform in Malaysia, the Fintech Hive in Dubai,
Bahrain’s Fintech Bay, the newly launched Islamic Fintech Panel in the UK are just a
few initiatives that have supported the sector over the past year; while initiatives such
Senior Graphic Eumir Shazwan Kamal Bahrin as the new robo-advisory service from Wahed Invest, the successful seed funding for
the UK’s Yielders, the initial coin offering from Africa’s Ovamba and the first blockchain
Designer eumir.shazwan@REDmoneygroup.com
Sukuk transaction from Al Hilal Bank show that this support is already translating into real
commercial progress.
Head of Finance & Hamiza Hamzah
Administration The tumultuous progress of the past year only serves to showcase the strength and
hamiza.hamzah@REDmoneygroup.com sophistication of today’s Islamic finance industry, and in our Annual Guide for 2019 we
are delighted to do the same in microcosm — highlighting and applauding not only the
achievements and accolades of the last 12 months but recognizing and rewarding the
unique characteristics and individual strengths of each market. Featuring a comprehensive
Managing Andrew Tebbutt
overview of the industry from its most respected experts and experienced practitioners, we
Director andrew.tebbutt@REDmoneygroup.com are once again delighted to provide you with a truly tempting array of material to get your
teeth into.

Managing Director Andrew Morgan With my sincere thanks for all your support over 2018, I wish all our readers the very best
for the year ahead — now sit back, and enjoy the read!
& Publisher andrew.morgan@REDmoneygroup.com

Published By: Sdn Bhd

MALAYSIA UAE
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Fax: +603 2162 7810 Lauren McAughtry
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December 2018
T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
3
 contents

PREFACE INTERVIEW
3 The best of times, the worst of times
52
Interview with Dr Adnan Chilwan, group CEO of Dubai
Islamic Bank
introduction
Islamic finance: The dotted lines between sustainable country reports
6 growth and desired impact 54 Afghanistan
55 Australia
sector Reports
56 Bahrain
8 Alternative Investments
57 Bangladesh
10 Cross-border financing
59 Bosnia & Herzegovina
11 Cryptocurrency
60 Brazil
12 Cybersecurity
61 Canada
13 Debt capital markets
62 China
14 Education
63 Egypt
16 Entrepreneurship
64 France
17 Financial institutions & corporate Sukuk
65 Germany
18 Fintech
66 Hong Kong
19 Gold
67 Indonesia
20 Halal
68 Iran
22 Human capital
69 Ireland
23 Institutional asset management
70 Ivory Coast
24 Islamic accounting
71 Japan
25 Islamic crowdfunding
72 Kazakhstan
26 Islamic leasing
73 Kuwait
27 Islamic microfinance
74 Kyrgyzstan
28 Islamic social finance
75 Lebanon
29 Islamic treasury
76 Luxembourg
30 Law
77 Malaysia
31 Leadership
78 Maldives
32 Legal frameworks
79 Malta
33 Liquidity management
80 Morocco
34 Mergers & acquisitions
81 Nigeria
35 Private equity & venture capital 82 Offshore centers
36 Project & infrastructure finance 83 Oman
37 Ratings 84 Pakistan
38 Real estate 86 Palestine
39 Responsible finance 87 Philippines
40 Risk management 88 Qatar
41 SRI ethical & green 89 Russia
42 Shariah & corporate governance 90 Saudi Arabia
43 Standards 91 Singapore
44 Standardization 93 South Africa
45 Structured finance 94 Spain
46 Takaful & re-Takaful (Asia) 95 Sri Lanka
47 Takaful & re-Takaful (Europe) 96 Sudan
48 Takaful & re-Takaful (Middle East) 97 Tunisia
49 Trade finance 98 Turkey
50 Women 100 UAE
51 Zakat 102 UK
103 West Africa

4 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
December 2018
 INTRODUCTION

Islamic finance: The dotted lines between

sustainable growth and desired impact
Bello Lawal Danbatta is the secretary-general of
the IFSB.

Islamic finance (banking, capital markets and Takaful) has

achieved remarkable growth over the decades, above US$2.1
trillion as at the end of 2017, and is forecasted to grow
much higher by 2020. However, an important question that
needs an immediate assessment and answer would be if the
trend of growth is sustainable and had delivered the desired
socioeconomic impact over the decades? In a number of
jurisdictions, studies have shown that a majority of Islamic
finance customers have difficulties in differentiating between
Islamic finance products and conventional finance products,
particularly in terms of pricing and added economic value. This
had resulted in a slower market penetration, especially in the
banking and Takaful sectors. The growth in market share and
total assets is greatly attributed to the increasing issuance of
domestic and sovereign Sukuk in famous and new jurisdictions,
mainly due to the governments’ efforts to diversify their sources
of funds for capital expenditures.

This introduction piece is aimed at highlighting and provoking

thoughts on some of the key issues that need to be given the
desired attention by all stakeholders in order to sustain the steady
growth and to achieve the desired socioeconomic impacts of Islamic
finance across global economies, which herein are described as Implementation of prudential standards
“the dotted lines”.
This is the master key to sustainable growth and delivering the
Originality and diversity in products, continuous capacity and desired impacts of Islamic finance. The IFSB and other international
competency building, implementation of prudential standards and standard-setting bodies have invested time and resources over the
cooperation among standard-setters are the main dotted lines that years in researching and developing the necessary guidelines and
must be connected straight in order to drive sustainable growth and standards that will facilitate and promote resilience, soundness,
deliver the desired socioeconomic impact of Islamic finance. sustainable growth and desired impacts of the global Islamic finance
industry. Regulatory and supervisory authorities need to ensure
Originality and diversity of products that all issued prudential standards are fully implemented and all
bottlenecks to implementation are efficiently addressed, particularly
Finance in Islam and Islamic finance are two different terms. The the IFSB standards for institutions offering Islamic financial services.
current Islamic financial practices will be able to make the desired The IFSB has issued a substantial number of standards for effective
impact, if financing products are designed and marketed according regulation and supervision of Islamic banks, Islamic insurance
to finance in Islam rather than copying, modifying, purifying and (Takaful) and Islamic capital markets.
renaming conventional finance products. This is the originality of
products. Diversity of products has to do with the sincere ability Cooperation among standard-setters
of market players to diversify in terms of the range, mechanisms
and resulting economic impact of products and services on Standard-setting bodies are not supposed to duplicate or compete
customers. The market must diversify from debt-creating to equity/ with each other, particularly in providing guidance to the same
wealth-creating products and develop compatible and marketable sector. Instead, they are to complement and strengthen the work
products. Risk-sharing products are deemed to have more elements of each other. Hence, more cooperation and collaborations among
of originality and diversity in them. standard-setting bodies, particularly in their respective technical
work, will ease the implementation of standards, provide a timely
Continuous capacity and competency building response to the industry, drive sustainable growth and deliver the
desired impact.
The rapid advancement in technology and changes in market
dynamics that come with a new breed of consumers (the Conclusion
Millennials), requires Shariah scholars, Islamic finance product
development professionals, board of directors of Islamic financial Islamic finance growth can be sustained and will supersede the
institutions, regulators, standard-setters and other key stakeholders forecasted growth as well as deliver the desired socioeconomic
to continuously develop the right capacity and desired competency impacts across all sectors and jurisdictions, if the aforementioned
to address these new market challenges and technological ‘dotted lines’ are connected straight with strong commitment of
advancement. A lack of attention in these areas would lead to market players, regulators, supervisors and other stakeholders,
an unsustainable growth trend and the desired impact will be particularly in ensuring full implementation of potential standards
imaginative. issued by the IFSB and other standard setters.

6 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
December 2018
 Contact Information
+44 (0) 203216 2500
islamicproductgroup@eigertrading.com

Tim Openshaw
Director of Sales and Marketing
tim.openshaw@eigertrading.com

Award-Winning Islamic Financial Services

FT1000: Europe’s Fastest Best Islamic FinTech Best Islamic FinTech

Growing Companies Company (KL) Company (UAE)

www.eigertrading.com
 sector report
Alternative Investments

Capital allocation to alternative investments to

continue upward trajectory

Teh Wan Han is the executive director of Azimuth

Global Partners. He can be contacted at wan.han@
azimuthglobalpartners.com.

In 2016, global assets under management (AuM) were at

US$84.9 trillion and this is projected to grow to US$145.4
trillion in 2025 with Asia being the fastest growing region. For
alternative investments, AuM was at US$10.1 trillion in 2016
and is projected to more than double to US$21.1 trillion in 2025.
Alternatives investments include hedge funds, private equity,
commodities, infrastructure and real estate. On the other hand,
global Islamic AuM was at US$67 billion in 2017 after growing
19% from 2016. One-third or US$21 billion were invested in
Shariah compliant alternative investments.

In recent years, there have been growing interest from investors

to invest in the alternative investment sector for the potential in
creating alpha return to the portfolio and as a form of diversification.
In addition, real assets like commodities, infrastructure and real
estate provide predictable and steady streams of income, capital
appreciation potential and hedge against inflation.

Review of 2018
2018 can be marked as a year with great volatility driven by rising
interest rate by the Federal Reserve and the outflow of funds from
emerging markets that comes with it, ongoing uncertainty with
Brexit and the trade tension between the two largest economies
in the world: US and China. Despite this, investors have continued
to pile more cash into alternative investment especially in private
equity, venture capital, real estate and infrastructure.

In response to investors’ appetite, managers have launched

numerous large capital-raising exercises, most notable ones are
Softbank’s Vision Fund II which is targeting to raise US$100 billion
and Blackstone’s maiden infrastructure fund which has successfully coverage and pace may quicken in 2019. Nonetheless, new Shariah
raised US$10 billion and has a final target of US$40 billion. Although compliant fund launches may be focused on the infrastructure and
both funds are not listed as Shariah compliant, they still have real estate sector, given investors’ interest in these assets. These
managed to attract significant commitments from sovereign wealth sectors also have the flexibility of being country-centric and adopting
funds in the Middle East. a more rigid capital structure, unlike the other sectors which typically
need to invest globally in order to access the right opportunities and
There have been very few Shariah compliant fund raising and flexibility of funding sources.
the amount of capital is generally much smaller. Investors who
want to adhere to strict Shariah principles have mostly invested Investors may be prepared to move up the risk spectrum as valuation
directly to have more control over the acquired asset and the debt continues to rise. This may be through increase geographical
arrangement. Income producing assets remained the focus as risk diversification or investing in value-add/ opportunistic type of
aversion prevails. Due to the weight of capital, asset prices have opportunities in the main markets like the US, the UK and Australia.
continued to edge higher and to overcome this, the investors have
moved beyond the widely invested markets like the US, the UK, Given the wave of nationalism globally, changes to tax rules cannot
Germany and Australia into the Netherlands, the Nordic regions and be discounted. Regrettably, this is a growing trend but it is also
second and third-tier cities in the US. impacting all investors consistently. Investors are advised to be
vigilant with the changes while investing and be conservative in their
Preview of 2019 structuring and assumptions in order to avoid unwanted outcome.

On the backdrop of higher oil prices and a continuation of the Conclusion

diversification strategy, the wall of capital will continue to grow.
Coupled with the challenging prospects of finding the right Capital allocation to alternative investments will continue its upward
opportunities, investors may be more opened to consider investing trajectory while managers will seek to seize the capital by
in funds. As such, we project more Shariah compliant fund launches continuously innovating products to meet Shariah requirement and
in 2019. However, the geographical focus of these funds may be investors’ expectation on return and security. Innovation is expected
limited as Shariah financing and related services are only available in most in the real estate and infrastructure sectors as investors remain
selected countries only. Banks and service providers are also sensing income focus and preference to protect those incomes against
these opportunities and are gradually expanding their geographical inflation while capturing capital appreciation potential.

8 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
December 2018
Set up in 2008, Khalij Islamic is a premiere Shari’a compliant investment and advisory boutique. Khalij
Islamic is headquartered in London, along with presence in United Arab Emirates and Pakistan. In the
U.K., Khalij Islamic is authorised and regulated by the Financial Conduct Authority (FCA). Khalij Islamic
prides itself to be probably the only the only Shari’a Advisory Firm, which is authorised and regulated by
a recognised regulator, while remaining completely independent from any financial institution or Shari’a
Scholar.

Khalij Islamic offers ‘end to end’ services :

Shari’a consulting, advisory and monitoring for on-going Shari’a compliance;
Fund raising, distribution and placement;
Disposal of assets (including financial instruments);
Transaction origination;
Islamic treasury and liquidity solutions;
Fully automated and Shari’a compliant online Commodity Murabaha platform; and
Islamic securitization solutions.

Khalij Islamic manages and maintains relations with over 300 investors across Europe, GCC and Far
East. Over the last 3 years, Khalij Islamic has raised, placed or arranged in excess of USD 500 million
and actively advising on Shari’a compliant assets in excess of USD 700 million.

Khalij Islamic is retained as advisor by various financial institutions, asset managers, wealth managers
and GCC based families. Khalij Islamic has experience in working both in equity and debt instruments
across various sectors, including (but not limited to) real estate, hospitality, health care, manufacturing,
trade finance, oil & gas, shipping & logistics, Fintech & Crypto and aviation.

www.khalijislamic.com
contactus@khalijislamic.com
 sector report
Cross-border financing

Artificial intelligence to steer cross-border

financial flows
issuance witnessed a 12% decrease to US$55 billion in the first
Nida Khan is a doctoral researcher at the half of 2018 but it was accelerated by regular issuance from the
Interdisciplinary Centre for Security, Reliability and governments of Malaysia and Indonesia in the second half of 2018
Trust in Luxembourg. She can be contacted at nida. leading to overall a stable 2018 as per Sukuk issuance. The start of
khan@uni.lu. Sukuk issuance in the Turkish stock exchange and the launch of a
primary dealers program for government Sukuk in Saudi Arabia, all
point toward a growing market. Green Sukuk issuance is also on
Cross-border financing catapults a surge in domestic
the rise and Indonesia launched its first green sovereign Sukuk in
competition, while hedging against regional or national financial
February 2018, raising US$1.25 billion.
turbulences, amid both currency and political risk. The advent
of financial technology and continued financial globalization
Dubai Center for Islamic Banking and Finance indicates that the
have provided a renewed means to leverage on the availability
global Takaful market would reach US$52.5 billion by 2020 and
of overseas financial resources to maximize productivity
the country houses 27 foreign conventional and Islamic insurance
and outreach. The following report delves into the various
companies catering to the 10.5 million people living there, apart
subcategories that comprise cross-border financial flows.
from the domestic ones. Allianz Group, one of the world’s largest
insurance companies, increased its stake in Saudi Arabian Takaful
Review of 2018 joint-venture with Banque Saudi Fransi, by 18.5% to a majority of
Foreign direct investment (FDI) is a major component of cross- 51%.
border financing and plays a pivotal role in contributing to the GDP
by infusing capital injection, especially in developing economies. Preview of 2019
Bahrain recorded a staggering growth of US$810 million in FDI from
The issuance of green Sukuk by Malaysia and the initiative by Turkey
76 firms, equivalent to 138% since last year, in the first 10 months
in this domain should trigger the GCC and other countries to follow
of 2018. However, greenfield projects hit a 14-year low in Bahrain.
suit and diversify their economies. Malaysia will consolidate its
Saudi Arabia recorded a 130% increase in FDI licenses granted
position as being 23rd out of 190 countries by the World Bank in
over the same period last year with additional reforms to increase
its report titled, Doing Business 2018, and it is expected to attract
US$8 billion in FDI to US$18.6 billion as a part of Vision 2030, to
more FDI to be a gateway for the ASEAN market. Many new foreign
shift from a dependency on oil economically. The rise in FDI was
players are expected to join the Takaful bandwagon to diversify
accompanied by a yearly rise in greenfield projects in Saudi Arabia.
and increase the competition for domestic Takaful providers in
FDI into Malaysia slumped to US$686 million in the second quarter
different countries. As per a report by MGI, virtually every type of
of 2018 from US$2.8 billion in the previous period and US$2.08
cross-border transaction has a digital counterpart and trade which
billion in 2017.
was largely dominated by developed countries, and multinational
companies, has now embraced SMEs, developing countries and
Private sector capital flows like lending form another component of
even individuals to reach unimagined number of clientele through
cross-border financing. The UK is a major Islamic finance hub and
export activities and this will expand further with blockchain, a
according to the Bank for International Settlements (BIS), cross-
potent technological development facilitating low cost cross-border
border lending from the UK increased by US$316 billion from June
financial flows. A possible relocation of Islamic finance hub in
2016 to March 2018. However in the succeeding three months till
Europe from the UK to Paris (or possibly Luxembourg), might take
June, cross-border lending decreased by US$129 billion, which
place noting the geographical shift in market activity.
indicated the biggest drop over the last three years. At the same
time cross-border lending in France increased by US$93 billion
whereas in the Netherlands it grew by US$16 billion. Conclusion
Sukuk issuances as well as attracting conventional insurance
The fastest growth in cross-border bank credit in 2018 was through companies to partner with domestic Takaful providers can not
non-bank borrowers such as investment funds and SPVs. Sukuk only provide a diversified market to the consumers but also propel
growth in re-Takaful. In order to leverage from the surge in fintech
and globalization, companies should rework on their organizational
structure, strategies, products, assets and focus on where their
online shoppers are buying products from, including the type of
products being bought. Use of machine learning to tap into consumer
behavior and artificial intelligence to target them into increasing their
expenditure in domestic markets as opposed to importing goods
can scale the economy.

A timely intervention by the Shariah scholars is required to make

cross-border financial flows, especially digital, easy to implement.
The ‘One Belt, One Road’ agenda will boost the development of
cross-border Islamic financial flows in the coming years by
standardizing the cash inflows and outflows in many Muslim
countries to lead to an equitable and comprehensive economic
development. It is expected that an active role by governments of
Islamic finance dominated countries to implement regtech and work
on their regulatory measures and policies to attract FDI will enhance
cross-border financing leading to surpassing the predicted growth
in the coming years.

10 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
December 2018
 sector report
Cryptocurrency
Cryptocurrencies and Shariah law: A debate in
Islamic finance
Wissam Jarkassi is the managing director at
Institute I4. He can be contacted at wissam@
institutei4.com.
Cryptocurrency, a newly developed system of money, has
become the talk of the finance industry. Cryptocurrencies are
decentralized cash systems like bitcoins; in other words, it’s
digital money that does not emerge from a central location
such as bank.
The first successful attempt to create a cryptocurrency was in
2008 by Satoshi Nakamoto. Nakamoto created the bitcoin, the first
cryptocurrency to exist which gave rise to other cryptocurrencies,
yet bitcoin remains the most popular. Today and more than ever,
cryptocurrencies are quickly spreading and are under high demand
in many countries where some currencies have reached a price of
US$10,000 and more.
Cryptocurrencies did not only spread rapidly, but were relatively
quickly legalized in many countries, making its popularity grow
vastly. The emergence of cryptocurrencies gave rise to a Shariah
debate due to their unusual conditions and the involvement and
interest of Islam in money and finance where cryptocurrencies are
witnessing around 351.41 million transactions per day, according
to Blockchain.com.
Review of 2018
During 2018, new trends concerning cryptocurrencies in general
and bitcoin in particular have emerged changing the way they are
used internationally. Toward the end of 2017, bitcoin prices have
skyrocketed to sell for US$13,860.14 per bitcoin according to
Statista. However, ever since the beginning of 2018, bitcoin prices
have been decreasing; there have been a few instances where it
has increased yet not significantly. This increase and decrease
in prices were reflected in the total market capitalization of the
cryptocurrency which increased at the beginning of year to reach
a staggering US$629.5 billion, then decreased enormously to
US$447.9 billion in the following months (Investment Bank).
Although the total market capitalization of the cryptocurrency
has decreased from the beginning of this year till now, it is still
better than before, around US$326.7 billion, and this has created
more job opportunities; the focus now is on blockchain jobs which
are the second fastest-growing jobs in the market according to
InvestInBlockchain. With this big movement of the market toward
cryptocurrencies, more countries have started legalizing their use.
In 2018, some of the most notable countries which have legalized
cryptocurrencies are Venezuela, Uzbekistan, and Malta.
In light of the rapidly growing cryptocurrencies and the presence
of Islamic banking which is ruled by Shariah law, cryptocurrencies
have to be studied through Shariah law in order to determine
the rules governing their usage. Shariah law refuses the use of
cryptocurrencies due to a number of reasons, one being them
having no actual value except for that which participants agree on
giving them, allowing them to constantly fluctuate and another being
their decentralization, making them uncontrolled, unorganized
and at high risk of all kinds of catastrophic events such as being
hacked, becoming of no value, etc. Thus, Shariah law currently
December 2018
seemingly refuses and prohibits the use of cryptocurrencies under
their current situation, seeing as only one official entity, the Turkish
Higher Religious Institute, has issued a verdict regarding this issue,
while other entities are still silent about it despite the big debate.
It’s worth mentioning that the utilization of the cryptocurrency
has started to find its way in the Islamic finance industry where
Blossom Finance, an Indonesia-based company, is facilitating
finance through targeting the microfinance entities through
Murabahah schemes, but concerned authorities have not
commented on this. However, this doesn’t mean that Shariah law
will deem its use acceptable or prohibit it if both its conditions
and medium change. Yet this matter remains ambiguous and
needs further research, yet not many Shariah scholars are active
in this area.
Preview of 2019
As for predictions concerning cryptocurrencies in 2019 and
later on, there are a few to be made seeing as cryptocurrencies
are relatively new to the market and we do not have enough
information to predict their behavior in terms of value, risk, and
more. One of the highly expected cryptocurrency trends in 2019
is for Russia to launch its own cryptocurrency, the CryptoRuble,
something which President Vladimir Putin has discussed the
possibility of launching, claims Partz from CoinTelegraph.
As for the case of Islamic banking and cryptocurrencies, there
seems to be advancements in legalizing cryptocurrencies due to
the concept of blockchain which many, if not most crypto firms
and companies have adopted. According to DePeitro from Forbes,
a Saudi Arabian crypto company is studying steps they can take
to make blockchain technology more legitimate to comply with
Shariah law and regulations which will, in return, legitimize the
use of cryptocurrencies.
Conclusion
All in all, cryptocurrencies have rapidly gained popularity in the
last few years in the world of business, making some virtual
currencies the most expensive in the world. The decentralization
of these cryptocurrencies is the most important reason these
currencies are popular yet controversial. Over time, numerous
countries have legalized the use of cryptocurrencies, providing
them with a bigger medium of exchange.
Although most cryptocurrencies are unstable and are constantly
fluctuating in terms of value, that hasn’t formed an obstacle in
the face of the growing popularity of cryptocurrencies. Yet, one of
the most prominent debates concerning cryptocurrencies comes
from the perspective of Shariah law and Islamic banking which
have deemed cryptocurrencies to be illegitimate due to a various
reasons concerning the nature of the coins, and rules governing
its exchange. The future of cryptocurrencies in light of Shariah
law is unknown.
Some questions I leave you to think about concerning this matter
are: what would be the future and price of these currencies when
they reach the maximum limits? And what is the effect of
individuals’ ability to produce their own currencies on the society
and economy? Is it acceptable from Shariah perspective that the
currency could be exposed to sudden disappearance and non-
existence?
T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
11
 sector report
CYBER SECURITY

Neobanks and AI for fraud mitigation start to

take center stage to support digital in GCC

Fadi Yazbeck is the product manager for Temenos

IslamicSuite. He can be contacted at fyazbeck@
temenos.com.

We now live in a digital world. According to a report by emarketer,

smartphone penetration is 83% and 73% of the UAE and Saudi
populations respectively. Digital means instant, transparent and
seamless and increasingly, Islamic banking customers expect
their bank experience to also offer this approach. Banking
should be no different to interacting with those services that
support our digital lives such as Amazon, UAE ride-sharing
service Careem, and Google, etc. Fail to offer an intuitive, similar
banking experience and you fail to meet the expectations of the
new tech savvy Generation Z audience that are soon to be your
dominant target customers. Digital Islamic banking isn’t the
profile customer behaviour, using vast amounts of customer data
future, it’s the now, but there are risks.
and transactions to flag activities outside behavioral patterns that
could be a potential fraud. We are also working toward using cloud
Cybercriminals love digital, in fact, smartphone platforms are the
computing to deliver new algorithms that help solve the real-time
second most targeted platform by hackers after Windows. The GCC
fraud detection challenge.
in particular is being hit hard. PwC’s 2018 survey Pulling fraud out
of the shadows: A spotlight on the Middle East, highlights that fraud
Unfortunately, the stats for 2018 within the UAE in terms of
and economic crime has increased 12% in just two years. And digital
cybercrime indicate that few are currently managing to combat fraud
banking is taking a major hit; according to 2017’s Norton Cyber
despite recent advances in technology. In early October, the former
Security Insights Report, 29% of UAE respondents had payment
head of the one-day court in Dubai, Judge Ayman Abdul Hakam,
information stolen from their phones last year.
highlighted that cases of electronic fraud are on the rise across the
UAE.
These are frightening stats for the region but it is not taking this
issue lightly. At the very end of October, Saudi Arabia’s King Salman
issued a decree to set up the National Cyber Security Authority Preview of 2019
focused on enhancing the kingdom’s existing cybersecurity efforts 2019 will see the software to combat cybercrime in general using
and protecting its “vital interest, national security and sensitive elements of AI to address increasingly complex fraud threats
infrastructure”. The following month Jeddah-headquartered OIC and a greater push toward digital including neobanks becoming
launched its own cybersecurity center. These are just a few examples mainstream. McKinsey’s Digital banking in the Gulf research on
of how the end of 2017 saw a major focus in fighting cybercrime urban consumers in the UAE and Saudi Arabia showed that digital
within the region, but has this focus continued into 2018 and what banking is unsurprisingly set to be popular in the region, with at least
does the future hold? 80% of consumers now preferring to do a portion of their banking on
computers, smartphones, and tablets.
Review of 2018
Bahrain-based Bank ABC plans to launch a neobank early 2019
The end of 2017 saw the emergence of some GCC banks make
and many of our clients in the region, such as Al Salam, are able to
a confident move into the digital space by delivering separate
offer the same benefits of a neobank having undergone a full digital
neobanks such as Mashreq Neo and Liv bank. Neobanks sit on a
transformation. Mohammed AlShehabi, the head of innovation from
100% digital and mobile platform with no reliance on branches. To
Al Salam Bank, said: “We recognize the need to offer a truly digital
target this growing Generation Z market, they aim to offer an intuitive
service to our clients, one that will evolve with their changing needs
user experience platform (UXP) that feels familiar with other digital
at an individual level. Offering value added to our customers is a must
lifestyle interactions. Their systems are 100% new too, and so the
today, but trust and security ensure and form the indispensable base.”
cumbersome legacy of limited, inflexible back-end core systems
is avoided. And when teamed with a real-time fraud solution that
connects seamlessly to the core banking platform, this ongoing Conclusion
threat of fraud related cybercrime can be easily mitigated. However, Cybersecurity is vital to the business world, ranking as the top
this benefit isn’t unique to these streamlined neobanks as all can priority for more than 36% of CEOs worldwide in their digital
benefit particularly when using advanced technology such as transformation, according to IDG’s State of the CIO 2018 report, and
machine learning to detect fraud at initiation or during processing yet it continues to increase within the GCC and beyond. The impact
of a transaction. of this increase to Islamic banks is colossal; falling share prices,
fines, reputational and client/partner relationship damage etc. It also
Despite all the previous years’ hype surrounding artificial intelligence means more pressure on systems and processes to accurately
(AI), 2018 became the year that the benefits of AI are finally starting identify these. This means increased operational costs and more
to be realized in combatting cybercrime, and particularly fraud. At time spent on identifying fraud. In this developing digital environment,
Temenos for example, 2018 has seen the launch a new real-time where we live in a real-time world, fighting sophisticated cybercrime
fraud solution which uses AI to profile individual behaviours and schemes can be a struggle but it doesn’t have to be. Real-time fraud
detect this common type of cybercrime. Developed to combat solutions that utilize AI along with Shariah compliant core banking,
this growing risk that the new digital environment offers, banks are available regardless of a banks implementation strategy and
need self-learning capabilities, beyond rules-based engines, to Islamic banks can win this fight, but only if they are prepared.

12 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
December 2018
 sector report
Debt Capital Markets

2018 proved its resilience in the face of tough

market conditions
We have seen a move toward sustainable financing in 2018. The
Imran Mufti is a partner at Hogan Lovells (Middle government of Indonesia unveiled the first sovereign green Sukuk
East). He can be contacted at Imran.Mufti@ in February 2018, raising US$1.25 billion. Malaysia’s Shariah
hoganlovells.com. compliant BIMB Investment Management launched the world’s first
environmental, social and governance Sukuk fund in August.

HSBC Amanah Malaysia has launched the world’s first United

Sukuk remains popular as investors seek to expand their portfolios.
Nations (UN) Sustainable Development Goals (SDG) Sukuk. The
However, after a strong 2017, this year started off slower, with a
Sukuk will be the first-ever benchmark sustainable Islamic debt
significant drop in issuance in the first half of 2018, down 15.3%
issuance by a financial institution that will be used to support eligible
to US$44.2 billion compared with US$52.2 billion in the first half
businesses within HSBC’s selected seven UN SDGs.
of 2017. This was driven by lower volumes from the GCC region
according to Moody’s Investors Service.
Preview of 2019
Despite this, we have seen a broadly stable issuance pattern over the Sukuk issuance volumes are expected to continue to grow as
year, with regular issuance from government and corporate entities in governments across the core Islamic finance markets move towards
Malaysia and Indonesia supporting the market. Malaysia continues to combining conventional and Islamic instruments, according to a
dominate the market accounting for 38.7% of global Sukuk issuance vice-president and senior credit officer at Moody’s.
for the first half of the year.
The NASDAQ Dubai exchange plans to allow individuals to invest in
Deals later in the year across the UAE, Qatar and Saudi Arabia Sukuk by 2019, expanding the market beyond institutional buyers.
suggested an uptick in regional Sukuk activity, despite a drop in the
overall Sukuk issuances in the GCC when compared with 2017. The UAE plans to launch initial coin offerings (ICOs) during the first
half of 2019 to boost capital markets. This will allow companies
Review of 2018 to issue crypto tokens instead of shares. The SCA is working on
regulations with international companies. The CEO of the SCA also
The high-profile Dana Gas case between the Sharjah based energy
said they are going to issue new regulations on bonds, Sukuk and
company and holders of the Islamic securities came to a close, with a
securitization in the first half of next year. He said: “They should
consensual restructuring of the company’s US$700 million Sukuk. The
comply with the local laws, not the common English laws or the
newly agreed Sukuk stands at US$530 million with a three-year maturity
other foreign laws.”
and a new profit rate of 4% per annum. It is expected to save Dana
US$35 million per year in profit payments compared to the previous
Egypt plans to issue its first international sovereign Sukuk in the
Sukuk. The settlement should alleviate the concerns that arose around
2019-20 financial year, Finance Minister Mohamed Maait announced.
the cogency of the enforceability of Sukuk documentation created by
Egypt is aiming to issue about US$20 billion in foreign currency-
this legal saga.
denominated bonds by 2022. Issuing Sukuk could allow Egypt to
attract a new class of investor, as it implements a three-year IMF-
The Securities and Commodities Authority of the UAE (the SCA), which
backed economic reform program agreed in late 2016.
regulates Sukuk offerings in the UAE and by UAE companies in non-
UAE jurisdictions, passed a resolution requiring issuers of Sukuk to
The Securities Commission of Malaysia announced that it will put
enhance disclosures in issuances, including providing a mechanism
in place a regulatory framework to regulate digital asset exchanges
to resolve revenue allocation disputes in the event a Sukuk no longer
and ICOs, which will take effect in the first quarter of 2019. Budget
complies with Islamic law. Under the new disclosure requirements,
2019 also announced the establishment of a Special Committee on
issuers of SCA Sukuk offerings will need to explain the differences
Islamic Finance led by the Ministry of Finance. Together with the
between UAE law and the law of the country where an offering occurs
extension of tax incentives for Sukuk Ijarah and Wakalah, this will
as well as any deviations from the standards of AAOIFI.
reinforce Malaysia’s position as a global leader in Islamic finance.
Additionally, the extension of incentives for retail Sukuk and bonds
In the UAE, Union Properties received the approval of its shareholders
will encourage more issuances of such instruments and attract
to privately place a 10-year AED1 billion (US$272.23 million) non-
greater retail participation in the capital market.
convertible and unlisted Sukuk facility. Al Hilal Bank closed a US$500
million five-year senior Sukuk. The transaction, under Al Hilal Bank’s
Green Sukuk issuance is set to accelerate in Malaysia and Indonesia
new management team, reinvigorated the capital markets for GCC
as governments in both countries seek to promote sustainable
issuers. Al Hilal Bank was last in the market with a senior public Sukuk
policy agendas by attracting private capital into low-carbon and
in 2013. Also in the UAE, the coupon distribution for the December
climate-resilient infrastructure projects.
2017 – June 2018 period for Jebel Ali Free Zone (JAFZ)’s US$650
million Sukuk facility was made in June with a profit rate of 7%.
Conclusion
Real estate developer Aldar Properties’s 100%-owned subsidiary 2018 marked a turbulent year for the Islamic debt capital market
Aldar Investments issued its debut fixed rate US dollar-denominated space. Issuances were relatively healthy but mostly set against a
Sukuk with a tenor of seven years, raising a total of US$500 million. backdrop of political and economic fragility particularly across
Aldar Investments is the region’s largest diversified real estate Turkey and the GCC countries. These factors will continue to play a
investment company, and its highest rated non-government related part with Sukuk issuances going forward, as they always have, the
corporate. The new Sukuk was extremely competitively priced, with expectation financially is continued resilience in the market, and
a profit rate of 4.75%, underpinned by Aldar Investments’s ‘Baa1’ structurally more interplay between traditional Sukuk models and
credit rating, all of this reflecting strong confidence in the issuer, its fintech based financing solutions.
projects and its Islamic finance initiatives.

December 2018
T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
13
 sector report
Education

Islamic finance education excellence framework

Figure 1: Bachelor Degree Structure of Islamic Finance by Domains
Dr Kamola Bayram is the project director at the
International Council of Islamic Finance Educators.
She can be contacted at kamolaiium@gmail. 5%
com. Basheer Altarturi, a PhD candidate at IIUM 12%
7%
Institute of Islamic Banking and Finance assisted in
authoring this report.
7%

Over the past four decades, Islamic finance has been the rapid 29%
10%
rising sector of the international financial system. The market
prospective of the Islamic finance has enticed the East and
West in a several means. The interest in Islamic finance has
initiated an expression not exclusively in the business domain
but education as well. Banks, capital markets, insurance
companies, accounting standards, authority agencies and 29%
rating agencies are all queuing to enter the Islamic finance
sector. Similarly, academic institutions all over the globe are
eager to initiate or expand programs for teaching and research
in Islamic finance disciplinary at different levels. The number University required
of new books and journals on Islamic finance are growing.
Seminars and conferences on Islamic economics now mainly Islamic finance
focus on Islamic finance and its application on the financial Shariah & law
services. There is distinguished conjunction of Islamic finance
Islamic economics
to mainstream positions, equally in business and academia.
Islamic management
Review of 2018 Qualitive/research methodology/ICT
Growing Islamic finance sector requires sufficient talent pool. Project paper
Therefore, education, research and training are significantly
important. Generally, the market development leads and determines Source: MIFER (2017)
the type of knowledge and skills that are necessary for various
academic disciplines at several forms and levels. In different words, Starting by current curricula frames of Islamic finance, it shows that
education development has to follow the market needs. Programs Islamic finance education is limited to certain components, which
for education in Islamic finance were hastily designed to meet they are representing on the following domains namely Shariah
the market development needs. The hastiness caused unfitting and law, Islamic economics, accounting and auditing, Islamic
syllabi frames and course outlines. The lack of capable instructors management, and Islamic finance, which includes Islamic banking,
worsened the situation further, which led to compromises on the Islamic capital markets and Takaful. Where, Shariah and Law got the
quality of educational directives. Furthermore, the gap between lion’s share of teaching credit among other domains (see Figure 1).
theory and practice revealed increasing deviation. This leads Islamic finance to capture narrower picture in which the

14 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
December 2018
 sector report
Education

current status of Islamic finance education in a very unsatisfactory
situation. Current five domains we are articulating for the last three
decades are not sufficient. We need more domains to be addressed
is Islamic finance.
One of the domains, which should be incorporated into the
Islamic finance education, is information technology. In today’s
data-driven landscape, Data is a financial institution’s most
valuable asset. This requires specialists in data analytics more
than ever before. The new curriculum should be designed in
a manner that provides students with skills to maximize the
opportunities that Big Data offers, while learning to apply the
principles of data handling in the financial sector. Furthermore,
the programs offered should also provide an intensive focus on
conceptual and practical aspects of artificial intelligence, data
science, and machine learning in Islamic finance. The domain
should be specifically designed to allow Islamic finance students
to emphasize the principles and strategies of the significant role
that artificial intelligence plays in the development of Islamic
finance methods and concepts.
Preview of 2019
design thinking and systems thinking across the domains of Islamic
finance.
Islamic finance graduates require to apply their knowledge in unknown
and evolving circumstances. For this, they will need a broad range of
skills, including (i) cognitive and meta-cognitive skills, such as critical
thinking, creative thinking, learning to learn and self-regulation;
(ii) social and emotional skills, such as empathy, self-efficacy and
collaboration; and (iii) practical and physical skills, such as using new
information and communication technology devices.
The usage of this wider area of knowledge and skills in Islamic
finance will be facilitated by attitudes and values, for example
motivation, trust, respect for diversity and virtue. The attitudes
and values can be spotted at individual, local, community and
universal levels. While human life is enriched by the diversity of
values and attitudes arising from different cultural perspectives
and personality traits, there are some human values such as
respect for life and human dignity and respect for the environment
that cannot be compromised. Figure 2 shows the combination
of the knowledge, skills, attitudes and values within the Islamic
finance education framework.

The concept of curricula designs, syllabi frames and course outlines

infer more than just the gaining of knowledge and skills; it includes
the deployment of (i) knowledge; (ii) skills; and (iii) attitudes and
values to meet the market development needs. Graduates require
to have both comprehensive and specialized knowledge. Essential
disciplinary domains of Islamic finance such as Shariah and law and
Islamic economics will remain to be significant, as the raw material
from which new knowledge in Islamic finance is established, jointly
with the ability to think across the frontier of disciplines and connect
the dots between the domains of Islamic finance. Procedural
knowledge is obtained by grasp how a certain thing is completed
or made which represents by a series of steps or actions taken to
achieve a goal. Islamic finance procedural knowledge is domain-
specific, it transferable across domains. Procedural knowledge
normally grows over practical problem-solving, such as through
Conclusion
An examination of the historic context of current curricula of Islamic
finance and review of available literature suggests that Islamic
finance education needs to shift from the overly narrow goal of
classical five domains disciplinary. Instead, it should incorporate the
larger context of the deployment of knowledge, skills, attitudes and
values to meet the market development needs.
The current curriculum and education standards of Islamic finance do
not feature issues of sustainability as a component of understanding
Islamic finance, but instead push to narrow it within limited domain
disciplinary specially Shariah and law domain. Positioning Islamic
finance education within a larger framework of sustainability literacy
may help ensure Islamic finance education excellence.

Figure 2: Islamic Finance Education Excellence Framework

Knowledge
Disciplinary
n
Interdisciplinary io
pat
Epistemic
Parents t ici Teachers
An
Procedural
re
Ta nsi

era
s

Num cy
w ing

po
kin bil
lue

D
ne reat

g ity

y
va

at
c

Skills
C

ra

al
Lite

iter

Cognitive & meta-cognitive

Action
acy

Social & emotional Competencies

eracy

Physical & practical Students

l lit

He
ta

al

th
gi
Di lite
racy
Attitudes and values
Personal Reconciling
tensions &
Local dilemmas
Societal
Reflecti
on
Global

Communities Peers
Adapted from OECD (2018)

December 2018
T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
15
 sector report
Entrepreneurship

Entrepreneurship in the fourth industrial

revolution
Houssem Eddine Bedoui is the global lead Islamic
finance expert at the Islamic Development Bank. He
can be contacted at houssemeddine.bedoui@gmail.
com

There is no doubt that the global entrepreneurship market has

rebounded in 2018 with the development of entrepreneurship
ecosystems. The outburst of innovative technologies (such
as blockchain) has carried about many changes to the way of
developing startup business models. This presents a significant
opportunity for alternative business modeling that would pick up
in 2019 around the world.

Review of 2018
This year has also been a busy one for the establishment and
reinforcement of entrepreneurial ecosystems. The momentum was
marked mainly by nurturing enabling environment through the issuance
of laws, policies, and regulations that would help in offering access
to professional and legal services, venture capital and government
services. The purpose of that specific movement is to entice startups
and entrepreneurs to utilize the ecosystems to scale their ventures
globally and lessening bureaucratic obstacles. most sonorous words these days. However, I do believe that 2019 will
be noticeable by the increasing attention on digital entrepreneurship
Some OIC countries have made efforts to grow the entrepreneurial and tech startups, where technology and innovation would be a
ecosystem significantly. For instance, as part of the Saudi’s efforts leitmotif in many industries, as they hold vast promise for every society.
to invigorate entrepreneurship to fulfill the Saudi 2030 Vision
(Thriving Economy Rewarding Opportunities), the Small and Medium Malaysia, for instance, in its Budget 2019 is going all out to drive
Enterprises General Authority is working on reviewing regulations, digital economy growth. It has proposed a few initiatives. Malaysia
removing barriers and facilitating access to finance, and is launching is planning to create a digital entrepreneurial human talent
an operating entity (HUB1006) with a role of fostering the growing environment. Moreover, the government will allocate RM50 million
SME and start-up scene in Saudi Arabia. Moreover, in Tunisia a (US$11.94 million) to set up a co-investment fund to invest together
groundbreaking law, “Start-up act”, was adopted with the purpose with private investors through innovative alternative financing
to abridge administrative procedures and ease access to financing platforms (such as crowdfunding). It is expected that entrepreneurs
in favor of start-ups. These are young Tunisian entrepreneurs who, will straightforwardly move to disruptive blockchain-based business
throughout their entrepreneurial career, have had a lot to do with the models in banking, insurance, logistics, supply chain, energy,
administration and therefore know the right state of mind to have. transport, healthcare, energy, and financial services led the way.
This law pursues several measures, among which exemptions and
tax deductions, support for patent deposits, or the possibility of Islamic entrepreneurship is intended to convey goodness to
opening accounts in foreign currency. individuals and society, as an objective of Shariah (maximizing the
Maslahah (public interest)). Henceforth, with a segment market
Another key event in 2018 is the launching by the IDB of the Engage of two billion unbanked people worldwide, we assume that the
and Transform initiatives during the 43rd IDB annual meeting in Tunis, proliferation of blockchain business models that tackle the issue of
Tunisia. First, Engage hub offers innovators, SMEs, private sector financial inclusion mainly in countries where Islamic finance is not
companies, governments and NGOs three main services: (i) match developed yet. The blockchain empowers transparency, improves
making, (ii) technology transfer, and (iii) call for innovation. These efficiency, optimizes cost, and accordingly, meets the unbanked
stakeholders will benefit from tailored mentoring services that will help demand opportunity through a cashless and digitized economy
stimulate and improve their ideas and proposals to an internationally (cashless economy, borderless payments and remittances).
recognized standard. Second, linked to the Engage hub, the Transform
fund is designed to provide seed fund for start-ups and to finance them Lastly, from the regulatory aspect, some markets would consider setting
through partnerships between academics and entrepreneurs. up particular regulators and authorities to enforce the entrepreneurial
ecosystem.
Finally, in some countries (Turkey for example), women have begun
taking the lead whereby the number of women entrepreneurs is rising. Conclusion
For instance, the top three winners of Starup Istanbul are run by women
from Saudi Arabia, Indonesia, and Sweden. Entrepreneurship experienced an uptick in 2018, with mainly the efforts
to nurture and improve entrepreneurial ecosystems. These efforts are
expected to continue over the next few years mainly to prepare the fast
Preview of 2019
arrival of fintech entrepreneurship and in general blockchain-based
The 2019 World Bank’s “World Development Report” confirms that business models.
technology is blurring the boundaries of firms and is reshaping work
skills. Technology is changing the way we do business. Hence, it seems The views and opinions expressed in this article are those of the author
IoT (internet of things), AI (artificial intelligence), 3D printing, virtual and and do not necessarily reflect the official policy or position of his
augmented reality (VR/AR), drones, smart contracts and blockchain are institution.

16 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
December 2018
 sector report
Financial Institutions & Corporate Sukuk
Private sector Sukuk market: Are we there yet?
Bashar Al Natoor is the global head of Islamic
Finance at Fitch Ratings. He can be contacted at
bashar.alnatoor@fitchratings.com.
With the exception of Malaysia, which has a quite developed local
Sukuk market, 2018 Sukuk issuance by corporates and financial
institutions has been relatively small compared to its potential in
key Islamic finance markets such as the GCC region, Indonesia,
Turkey and Pakistan. However, a return to debt issuance in 2018
by most GCC governments could help encourage growth in the
private sector Sukuk market. This has been accompanied by
efforts to establish the basic Sukuk market ‘ecosystem’ and
enhance the infrastructure and processes for corporate debt
issuance, which could also make Sukuk more attractive for a
corporate and financial institutions issuers.
Review of 2018
In the GCC, banks continued to be the primary source of funding
for corporates. A country’s degree of bank versus capital markets
corporates funding is impacted by various factors, including historical
financial and economic regulations, policies and the type, size and
development of the domestic corporate base. Nevertheless, GCC
corporates are more likely to issue Sukuk than bonds because of the
wider local and regional investor base for Sukuk and also because
some companies are restricted to Shariah compliant borrowing by
their own rules or Islamic index inclusion.
For instance, in Saudi Arabia the bond and Sukuk Saudi riyal (SAR)
market stood at around SAR400 billion (US$106.58 billion) as of
June 2018, with around 50% coming from the sovereign, 24% from
corporates and 23% from financial institutions. A deeper look at
the numbers reveals that 55% of total issuance was in Sukuk, with
corporate Sukuk issuance representing 95% of total corporates
issuance. In contrast to the local market, Saudi corporate and
financial institution international bond and Sukuk issuance is very
limited still. Likewise in Malaysia, as at August 2018, Sukuk was
almost 60% of the outstanding bonds and Sukuk outstanding,
amounting to RM820 billion (US$195.79 billion).
In stark contrast, Indonesia outstanding Sukuk made up only 5%
of the local debt capital market and, in absolute terms, Indonesia’s
total outstanding corporate Sukuk was around a US$1.3 billion
while in Malaysia it exceeded US$116 billion. In Turkey the story
was not very different, due to the relatively recent introduction of the
regulatory framework for Sukuk (first regulation was introduced in
2010) and the still developing stage of the capital markets segment
for corporates, though we have seen banks issuing Sukuk and even
issuing tier II Sukuk locally and internationally.
In terms of border capital markets development, we have seen a
lot of progress in 2018 that could support the Sukuk market. For
instance, planned inclusion of the GCC in the prominent JP Morgan
Emerging Market Bond Index was an important milestone. Also in
October, the UAE issued public debt law to facilitate federal bond
issuance for the first time, and the inaugural meeting of the UAE’s
Higher Sharia Authority was held in 1Q18. Furthermore, in May,
the IMF endorsed a proposal on the use of the Core Principles for
Islamic Finance Regulation, developed by the Islamic Financial
Services Board with the participation of the Basel Committee on
Banking Supervision.
Preview of 2019
Fitch believes there is ample room for growth in most of the Islamic
finance active markets for corporate and financial institutions Sukuk
December 2018
because it remains underutilised relative to in countries like Malaysia
and other developing capital markets countries.
In the GCC, banks are primarily funded by deposits from customers
and the government. Two years ago, against a backdrop of falling
oil prices, the governments tapped into their reserves, withdrawing
some of the liquidity from the banking system. Most of this money
has now been replenished and banks still mostly rely on deposits for
their funding, rather than capital markets and we do not expect that
to change in the medium term.
The corporate Sukuk market in many Islamic finance markets is still
in the early stages of development. For example, the first corporate
Sukuk in Indonesia was in 2002, compared with 1990 in Malaysia.
Many potential issuers also perceive that the economics for issuing
corporate Sukuk are less favourable than taking a bank loan. In
addition, the extensive documentation and disclosure requirements,
regulatory filings and shareholder communications all require
additional resources, contributing to less attractive economics of
issuance. Market distortions may have emerged for various reasons,
but low creditworthiness of the private sector could also act as a
key limiting factor.
When considering the future, as markets become more efficient and
better-functioning, diversifying funding from banks can help lower the
cost of capital, especially for longer-tenured debt. Furthermore, as
regulations such as Basel III place demands on banks to have higher
liquidity-coverage ratios, extending long-term loans may become
less viable for banks and hence more expensive for businesses to
attain. This could also foster increased issuer participation and even
could encourage the development not only of senior unsecured
debt, but also for hybrid, exchangeable Sukuk.
Conclusion
The private sector Sukuk market will grow as investors and issuers
become more familiar with the benefits and risks related to Sukuk as
a debt instrument. Capital market development is a long-term,
complex process that requires an unrelenting pledge from policy-
makers to drive debt capital markets transformation. This includes
optimizing the issuance process and costs, increasing issuer
education about Sukuk, developing an effective and efficient
process for settling disputes and strengthening the regulatory and
legal framework to offer credible investor protection. These factors
could result in changing the economics of issuing corporate and
financial institution Sukuk, which could help such markets achieve
their potential in terms of capital market development. Conversely, a
sharp recovery in oil prices could also reduce the impetus for Sukuk
issuance by reducing the potential for capital market reforms and
decreasing sovereign debt issuance.
T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
17
 sector report
FINTECH

The other side of fear – the profitable new world

awaiting banks

Ashar Nazim is group CEO of Waqfe. He can be

contacted at ashar@waqfe.com.

Tayyaba Ahsan is the head of Strategic Alliances

at Finocracy. She can be contacted at tayyaba@
finocracy.com.

The financial services market on the whole is committed

to transformation. It is fair to say that implementation of
digitalization is off the drawing board and in the expansion
phase in most banks. However, we are seeing two streams of
transformation. Both streams when executed well have met
with success. The first stream is banks whose digital efforts are
focused on improving operational excellence and efficiencies
of its current activities and aspirations. This is not a lack of
vision. This is a pragmatic focus and an extremely complex and
challenging set of endeavors. This stream is primarily owned by
the CFO, COO and CIO.
Preview of 2019
The second stream is where banks are at war with their own culture More banks will stop trying to be everything for everyone. They will
and moving the needle from a product focused approach to a find their niches and strengths. 2019 will be a year for specialization
customer focused approach. This stream is often led by business and differentiation. Bank CEO’s will be forced to put speed as one
unit heads with the aggressive backing of the CEO. These are often a of the centerpieces of strategy. Human resources will be challenged
suite of rapid project-based initiatives that have heavy learnings and heavily to invest into workforce, organizational structure and
feedback loops from customers and market before launch of product processes to enable that. Technology, partnerships and acquisitions
or initiative. These projects are data driven and change approaches will be external manifestations of this same desire for agility. Open
as they get validated or do not get response. In some cases we see banking and retail will be inseparable in 2019 as banks innovate to
the business as the owner of the full front-to-end process, including differentiate in that space. The fear of diminishing transaction fees
back offices and even IT. The first stream is thinking of platforms that will lead banks to diversify creating new sources of revenue like
deliver extra value. The second stream is thinking of marketplaces marketplaces. Predictive analytics success stories will start to trickle
that entice customers. Often you see hybrid approaches between out with cross sell and upsell as the metrics that have improved.
these two streams as well.
We will see a trend toward ‘personal financial experience’ powered
Review of 2018 by various tools where banks start obsessing over their customer’s
financial wellbeing and start taking ownership of it. More and more
In 2018, banks continued to feel the heat to their business models banking products will use gamification to engage with customers. As
from fintechs and non-industry players offering payments and mobility becomes the foundational experience and technology layer
financial services; while customer centric companies from social of digital for banks, more and more banks will explore function as
media giants to ride-sharing companies kept setting the bar of a service or serverless computing. We will see some breakthrough
customer experience higher than what banks have historically been hits from banks which have gotten the mercurial alchemy right, of
able to achieve. Open banking gained significant traction despite building a product customers needed but didn’t know they did.
lingering concerns on regulatory response. A move to cloud and Banks will continue to suffer from not getting the digital talent they
SaaS models continued to develop. Blockchain initiatives especially need to successfully implement their transformations.
around trade finance have stepped out of the realm of fantasy and
into mainstream. Mobile apps added features and technologies with
Conclusion
mixed results, but there was growing realization that mobile is not
just another channel, it’s a lifestyle that banks must permanently The major hurdle to digital for banks will continue to be their own
build around. culture which is product centric and siloed. Smart banks will partner
with fintechs for innovation while embarking on a heavy training/
It was also encouraging to see the banks eschew the fight or ignore retraining program internally to create a workforce that can be more
stance with relation to fintechs. For us, 2018 was the tipping point customer obsessed and always switched on to respond. Banks that
year when banks understood that by partnering with fintechs they can inculcate this agility, combine it with listening to create customer
can hack innovation and respond to market dynamics successfully. centric products, obsessively make mobile the center of the
A classic example is where we witnessed the readiness of banks customer experience and use all that experience to create
to partner with Waqfe to implement its revolutionary digital banking marketplaces that offer customers personalization, choice,
platform. This Platform-as-a-Service concept is relatively new convenience and delight will become runaway leaders. Their rise will
to the region and only for the bold, but with great benefits. Just be powered by younger customers who bank with them because of
earlier this year, we implemented the platform for a leading Islamic a painstakingly crafted personal finance experience using tools that
bank in Bahrain in less than four months and at a fraction of the generate rich data sets for future product roadmaps. All of this will
capital expenditure that they had budgeted for. And this is only the be wrapped in a mobile experience that is intuitive but not dumb, is
beginning of what Waqfe offers to banks in the region. fast and always works.

18 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
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 sector report
GOLD

Gold in Islamic finance

Andrew Naylor is a director of Central Banks and

Public Policy at the World Gold Council. He can be
contacted at andrew.naylor@gold.org.

The AAOIFI Shariah Standard on Gold developed in collaboration

with the World Gold Council was a pivotal moment for Islamic
finance and the gold industry. For the first time the Shariah
rules for trading gold were clarified and set out in a way that
allows Islamic banks to structure gold products that meet the
contemporary financial needs of savers and investors. No longer
are gold ETFs, investment accounts, savings plans and spot
contracts the preserve of participants in conventional finance.
The Standard, launched in 2016, has enabled Islamic financial
institutions to develop Shariah compliant equivalents of these
modern investment products, ensuring Muslim investors can
benefit from all the wealth preservation, diversification and safe
haven properties of gold.

As Dr Mark Mobius, Chairman, Mobius Capital Partners, said:

“Given its history and reputation, the opportunity for the use of gold
in Islamic finance is clear… This Standard will enable the foundation
of what could be the most significant event for Shariah finance in
modern times.”
Given its history and
reputation, the opportunity
for the use of gold in Islamic
finance is clear
Review of 2018
The Standard is only useful if Islamic financial institutions use it to
develop new and innovative Islamic gold products and 2018 has
seen the launch of a number of new Islamic gold products catering
to both retail savers and sophisticated investors. A spot contract
was launched in Dubai in March, an international gold fund received
Shariah certification in February, and various investment accounts
were launched worldwide, including in the UAE and in Malaysia.
There are now products to suit all consumer types in each of the
major markets of Islamic finance. More products are in the pipeline
for launch in the final quarter and next year.
Collaboration with the International Islamic Finance Market
(IIFM)
Laying the foundation for further product development, the IIFM and
World Gold Council announced earlier this year a collaboration to
explore the development of standardised documentation for gold
products and transactions. Standardized documentation will make
it easier for Islamic banks to develop gold products and participate
in the international gold market. As part of a consultation and fact
finding process an industry hearing was held in March at Borsa
Istanbul. Participants included leading Shariah scholars, Islamic
bankers, bullion banks and lawyers. Documents under consideration
include Shariah compliant allocated gold account agreements, gold
consignment agreements, and guidelines for gold Sukuk and gold
ETFs.
Preview of 2019
A range of new products will be launched in 2019, and the World
Gold Council will continue to provide support to Islamic banks
wishing to develop a gold offering. Market research conducted by
the World Gold Council in 2018 suggests a strong outlook for Islamic
finance — 61% of the people we surveyed that are open to Islamic
finance stated they will start investing or increase their investments
in Islamic assets over the next 12 months. Two-thirds of the people
surveyed by the World Gold Council prefer some exposure to Islamic
finance and almost half of the people surveyed prefer to invest in
Islamic instruments only. The healthy pipeline of new products will
help to ensure that gold plays a full role in meeting this investment
demand. (The World Gold Council conducted market research on
attitudes to Islamic finance and gold in Malaysia, UAE, Saudi Arabia
and Turkey. The fieldwork was conducted in June and July 2018
and the results were launched at the 2018 World Islamic Banking
Conference in Bahrain).
Conclusion
Gold brings a number of benefits to Islamic finance. It is one of the
most effective diversifiers (even more important in a market which
is sometimes hindered by a lack of diverse assets), and it protects
wealth. Gold has also delivered impressive returns over the last
decade with a 10 year average annual return of 8.35%. Over the
same period the DJ Islamic index and the FTSE World Shariah index
rose annually by an average of 5.43% and 4.02%.
Gold products, such as gold savings plans, are also helping to
improve financial inclusion in markets with a large population without
access to bank accounts or traditional financial products.
As Dr Hamed Hassen Merah, former AAOIFI secretary-general, said:
“The reasons for developing the Standard were to ensure that
appropriate products are available to provide investment solutions
to customers” and Shariah compliant liquidity management options
are available for Islamic financial institutions. The products launched
in 2018 and in the pipeline for 2019 will ensure that the Standard can
live up to these expectations, helping to power the growth of Islamic
finance.

December 2018
T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
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 sector report
HALAL

Global Halal industry: An overview of current

developments and future perspectives
Table 1: Action plan for relevant stakeholders
Dr Muhammad Ashfaq is the director and CEO
at Amanah Institute of Islamic Banking & Finance Governments Facilitate Facilitate Facilatate
(Amanah Halal Research Centre is brand of the ‘Tayyab’/‘ethical’ ethical finance ‘ethical’ related
company). He can be reached at muhammad. related standards/ standards/
ashfaq@amanahiife.com. standards/ regulations, regulations,
regulations incentive incentive
industry industry
The purpose of this article is to shed light on the current status
of the global Halal industry and provide a preview of 2019 and Industry Expand into Expand Expand into
‘Tayyab’/‘ethical’ into ethical/ ‘ethical’
highlight the future direction of this important segment of
products and social finance products and
the Islamic economy. The Halal industry has become one of
services products and services
the important business segments due to the growing Muslim services
population, rapid digitalization, high demand of Halal products
and an integrated global economy. Both Muslims and non- Consumers Demand Demand social Demand ‘ethical
Muslim producers are tapping the substantial potential in the ‘Tayyab’/‘ethical’ impact/ethical products and
global Halal industry. The Halal ecosystem consists of different producvts and financial services
segments including Halal food, Halal travel, modest fashion, services services/
attributes
Muslim-friendly tourism and Halal cosmetics/pharmaceutical.
The current Muslim population is approximately 1.8 billion (24% Investors Invest in Invest in high Invest in ethical
of the world population) and is expected to increase to 2.2 billion ‘Tayyab’/‘ethical’ social impact lifestyle products
(26%) in 2030 and 2.6 billion (30%) in 2050 respectively. halal products companies/ and services
and services funds (with
The global Halal industry has attracted the attention of major mix of high
conventional multinational companies and organizations in several to mediacal
segments of the Halal industry including Macy’s in the US, Marks & financial
Spencer in the UK, H&M through its stores, organization of MFest returns)
(maiden Muslim literature and cultural event) in the UK. Despite recent Source: State of the Global Islamic Economy 2018-19 (Thomson
developments of the Halal industry in Muslim-minority countries in the Reuters & Dinar Standard)
West and ASEAN, the majority of the Muslim consumers in Islamic
countries believe that the products they consume are Halal by default.
However, with the increased complexities in global supply chain and mark of US$3 trillion by the end of 2023. In 2017, Muslims spent
production processes, the product ingredients certification is still a almost US$2.1 trillion in these three segments. It is worth to mention
major challenge. It is a matter of fact that the OIC exhibits relatively that most of the spending i.e. US$1.3 trillion was in the food and
poorer public awareness toward Halal products and services. beverage segment. It is expected that Muslim-friendly travel which
includes recreational, religious and cultural will expand in 2019.
Muslims are expected to spend over US$274 billion by the end of
Review of 2018 2023. Pakistan with a population of over 220 million is experiencing an
increase in domestic tourism due to the generally improved security
The year 2018 has witnessed an increasing demand of Halal situation in the last few years. Indonesia, home of one of the largest
products from consumers around the world (this applies primarily Muslim populations, has made it compulsory from October 2019
to the Muslim population). Brazil, one of the largest exporters of for all products to comply with Halal standards and a government-
meat products to OIC countries, is facing a lack of compliance established Halal Certification Agency will take over the role of Halal
with Halal standards and is trying to revise its existing Halal certification from the existing Indonesian Ulema Council.
certification procedures. As many companies source several
ingredients from non-Muslim countries, the necessity of certified
Halal ingredients has also increased. Many countries including
Malaysia, the UAE, Saudi Arabia and Turkey have taken key steps The Halal segment should
in strengthening regulatory oversight in 2018. Recently Malaysia
established the International Halal Authority Board with the main seek ways to implement the
purpose to regulate Halal certification bodies. By establishing the
Halal Accreditation Authority, Turkey is also emerging as a serious different principles of Industry 4.0
contender in the Halal industry. Thailand and the Philippines are
also making inroads in tapping the Halal potential and providing and artificial intelligence
a variety of facilities to investors, manufactures and researchers.
The government of Brunei has taken serious steps and aspires to
use the Halal industry toward achieving its 2035 National Vision.
This year the government organized a global Halal forum and a Overall the industry is poised to witness a steady growth and it is
trade expo to highlight the potential of the country in the food expected that manufacturers and retailers will focus on Halal supply
and beverage, cosmetics, pharmaceuticals, modest fashion, Halal chain streamlining by using some of the latest technologies. For
media and recreation sectors. The purpose of this initiative is to instance, blockchain technology could have two-fold applications:
portray the country as an important Halal hub in the region. firstly to support swift confirmation of payments and secondly it
can ensure Halal compliance in different manufacturing stages and
Preview of 2019 streamline the supply chain management. This would be an important
development to further build consumer trust in the idea of ‘farm to
According to the State of the Global Economy Report 2018-19, the
the fork’.
size of Halal food, beverages and lifestyle spending will cross the

20 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
December 2018
 sector report
HALAL
The global Halal industry also faces a number of challenges and
opportunities in future. The Halal segment should seek ways to
implement the different principles of Industry 4.0 and artificial
intelligence. We have seen an upward trend in demand of organic and
bio-products and the producers should also focus in these areas to
meet the demand.
Conclusion
The Halal industry could also play an important role in achieving
some of the UN Sustainable Development Goals including poverty
eradication, zero hunger, responsible consumption and better nutrition
particularly in Muslim-majority countries and in general globally.
There is a much greater potential for OIC countries to participate in all
sectors of the global Halal industry.
It is interesting to reckon that China is keen to even diversify its exports
and tap the multi-trillion-dollar Halal segment. For instance, China-
based companies have made investments into Wuhui Shuanghai
Food and Dubai Halal Food Park, just to mention a few.
Despite the huge potential of the Halal industry globally, in order to
drive it into the next stage, the role of all relevant stakeholders is very
important as depicted in Table 1. It would be extremely difficult for the
industry to grow in isolation, instead the development of international
Halal brands rests on the synergies among governments, investors,
consumers and the industry. The role of governments in providing
a conducive and enabling environment for standard-setting and
regulations is indispensable.
December 2018
There is a need to tackle
opportunities and
challenges through a cohesive
approach using a common
platform to spur the growth and
further accelerate the expansion of
the global Halal industry
Hitherto, the industry has failed to produce a single set of standards
of globally-accepted Halal certification. The industry needs to take
proactive initiatives to broaden its product offerings and include
ethical products. Islamic financial institutions, supposed to have
ample liquidity, could invest in new business ventures and facilitate
the social and economic development. It has become increasingly
essential for the producers, manufacturers and marketers to provide
transparent product information to consumers. In short, there is a
need to tackle opportunities and challenges through a cohesive
approach using a common platform to spur the growth and further
accelerate the expansion of the global Halal industry.
T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
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 sector report
Human Capital
Human capital in the global finance industry
This article is contributed by the Strategy and Policy Department
at the Islamic Corporation for the Development of the Private
Sector (ICD) of the IDB Group.
In Islamic finance, human capital plays an integral role in the
competitiveness, growth and sustainability of the industry.
Developing and investing in human capital requires the creation
of necessary environments where one can learn better, acquire
knowledge and new competencies as well as apply innovative
ideas that will drive industry growth and overall competitiveness.
While efforts have been made to shed light on the importance
of proper education and training, the global Islamic finance
industry still suffers from talent and competency gaps,
especially in positions that require more technical expertise and
innovation.
Review of 2018
To combat the problem, some countries and institutions have been
more active and at the forefront of the actions. For example, the
Malaysian central bank, Bank Negara Malaysia, introduced a series
of reforms which were centered not just on increasing technical
expertise but also ensuring industry relevance and a high-caliber
talent pool to drive and sustain the industry’s future growth. To
this end, the International Center for Education in Islamic Finance
(INCEIF) piloted an action-based learning approach in its modules
as a precursor to its full adoption in the Master of Science in Islamic
Finance program in January 2018.
Positively, more institutional collaborations were witnessed during
the year, where in July 2018, the Islamic Research and Training
Institute (IRTI) of the IDB) Group and Bahrain Institute of Banking
and Finance signed an MoU to explore areas of cooperation in
human resource development for Islamic banking and finance. Both
parties will collaborate to undertake joint programs and activities
aimed to develop human capital for the Islamic banking and finance
sector globally.
In addition, IRTI also signed a partnership agreement with Universitas
Hasanuddin (UNHAS) of Indonesia in early October 2018 as part of
its initiative to develop Islamic finance as an academic discipline.
Under the partnership, IRTI will support UNHAS to develop Islamic
finance academic programs focusing on the areas of Shariah,
financial technology (fintech) and microfinance, and joint research
programs will also be conducted in Shariah-based microfinance and
fintech.
October 2018 saw the introduction of the International Shari’ah
Research Academy for Islamic Finance’s new and improved version
of its Islamic Finance Knowledge Repository Portal (I-FIKR) FIKR
2.0. In line with technological digitization, the revamp was aimed
at meeting the growing demand for reference material in Islamic
finance, serving as an interactive one-stop resource portal for all
authentic Islamic financing references such as financial fatwas and
research papers. In the same month, Sharjah University in Saudi
Arabia and Malaysia’s INCEIF agreed to work on encouraging
regional and international cooperation in areas of post-graduate
studies, scientific research, and dissemination of knowledge.
The partnership also aims to support excellence in education
and professional training to develop working human resources in
scientific and academic fields through knowledge exchange.
In keeping up with the digital age, the African Development Bank
(AfDB) and the International Islamic Trade Finance Corporation
(ITFC), a member of the IDB Group, teamed up with the International
Chamber of Commerce to launch a Joint AfDB-ITFC Trade Finance
22 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
E-Learning Program for African Financial Institutions. The three-
year program will provide online post-training to an estimated 500
trade finance staff of 200 local partner banks in more than 35 African
countries.
Preview of 2019
2019 will most likely witness similar initiatives undertaken by
existing Islamic finance education and training providers across
the globe, which focus on collaborations and partnerships on
an institutional level. However, what is missing is not so much
general Islamic finance training and development programs,
which are readily available in many countries. In contrast, it is
imperative to focus on increasing the availability of specialized
Islamic finance programs that center on niche areas such as
risk and wealth management, accounting, auditing, corporate
finance, Shariah advisory and treasury operations, in order to
build a strong human capital base.
The establishment of a professional body that is tasked to enrich
and re-energize the Islamic finance talent ecosystem in order
to encourage greater innovation and dynamism of the industry
is a sound solution. The institution can spearhead efforts on a
global scale to minimize the mismatch between Islamic finance
graduates and the technical competencies required by the
industry, especially seeing that acute skills shortage remains an
issue commonly highlighted by Islamic finance practitioners. This
can be achieved by setting global benchmark guidelines for the
design and execution of world-class Islamic finance curriculum
and capacity building programs that are aligned with specific
needs of the industry. Standardization of Islamic finance learning
standards is critical in contributing towards industry efficiency
and growth.
The global institution can also serve as an accreditation agency,
where a rigorous accreditation process gives educational
institutions across the globe a structured mechanism to assess,
evaluate, and improve the quality of their Islamic finance
programs. Indeed, accreditation can help address the absence of
a universal measurable performance standard between academia
and the industry.
Increasing cross-border education and training opportunities
can also close the talent gap, allowing future leaders of Islamic
finance to gain exposure thus equipping them with subject
matter expertise that transcends across banking, Islamic banking
and Shariah compliance. One also cannot underestimate the
significance of applied research in Islamic finance as a catalyst
for greater innovation, and moving forward, more joint-research
initiatives should take place to foster idea generation and
knowledge exchange.
Conclusion
While commendable, one must take a look back and question: are the
current human capital investments enough to cater to the dynamic
needs of the global Islamic finance industry? Will maintaining status
quo churn out enough talents that can chart the future direction of
the industry with cutting-edge ideas that can take it to the next level
of its development?
Overall, the shortage of well-rounded industry talent serves as one
of the weakest links in the global Islamic finance industry.
Comprehensive efforts need to be undertaken on a global scale to
allow learning standardization and talent upscaling in order to create
a strong and dynamic talent pool to steer the Islamic finance industry
to greater heights.
December 2018
 sector report
Institutional Asset Management
Islamic institutional asset management making
developments but more to do
Fara Mohammad is the legal director at Clyde &
Co. She can be contacted at fara.mohammad@
clydeco.com.
The Islamic institutional asset management industry has
traditionally involved countries like Malaysia and Saudi Arabia
and with minimal participation from the institutional side. The
industry is developing as significant global geopolitical events
occur, keeping industry players focussed closely on monitoring
market, performances and industry trends. The industry is now
becoming increasingly accessible to institutional investors,
including non-Muslim institutional investors, as they begin to
venture into new ways to diversify investments or to put surplus
funds into alternative investment opportunities. Global funds
and asset managers are noticing the emerging development
and potential opportunities in this sector. Overall, the industry
continues to grow, albeit at a measured pace, with growing
penetration in non-Muslim majority countries like the UK and
the US. There is more involvement from funds and invested
assets particularly, in money market funds, equity funds, Sukuk,
real estate and mixed assets.
Review of 2018
Growth continues to concentrate in Southeast Asia, with Malaysia
remaining at the forefront and Indonesia following closely behind.
This is largely due to the supportive government policies and
regulations domestically put in place. Pension schemes such as
Malaysia’s Employees Provident Fund has a dedicated Shariah
savings scheme while Kumpulan Wang Persaraan has said IFIS
looking to make its entire portfolio Shariah compliant and recently
invested into the UK student accommodation sector. In Indonesia,
the Hajj Financial Management Board (BPKH) is anticipated to add
more progress to the asset management industry as it gears up its
activities.
The Islamic fund and asset management industry is also seeing
structural and behavioral changes happening in the Middle East,
driving the growth of the sector as many asset management firms
seize opportunities. Those opportunities arise from the low oil
price and the unclear future demand as the global energy sector
is undergoing fundamental changes. Hence, the investment
preferences of investors are changing and expanding. There were
several cross-border Shariah compliant investment transactions in
Europe including the purchase of a commercial building in Scotland
December 2018
by Gulf Islamic Investments and the pre-leasing of two office
properties in the Netherlands to ASICS and Danone. SEDCO Capital
recently made its first investment into France which formed part of
its investments into Europe.
The industry has been affected by the rise of fintech which has
played a role in slowly closing the competitive field by lowering
Islamic institutions’ administrative costs and enhancing security.
Initiatives by several institutions in areas such as crowdfunding
enable retail customers to invest in Sukuk and other Shariah
compliant instruments and assets that deliver better returns. Other
innovations include Shariah compliant robo-advisor platforms that
provide financial services to retail investors. Wahed Invest launched
Shariah compliant index-tracking funds. Blossom Finance launched
a digital Sukuk investment platform where retail investors can invest
in Sukuk, which will then use the proceeds to fund Shariah compliant
microfinance initiatives in Indonesia.
Preview of 2019
It is predicted that the asset management industry will move toward
a gradual transition from absolute financial return to a ‘social,
responsible and environmental’ impact; and from compliance to
impact leading. Investments will be gearing toward being more
sustainable, particularly in the case of institutional pension funds.
The impact investment industry will require collaboration between
asset owners, asset managers, demand-side players and supply-
side service providers. There will be emphasis on value-based
investment structures through which investors can participate
in projects and transactions with an underlying moral purpose.
Malaysia is already leading the pack on this, with support from its
regulators.
Islamic investment asset management will continue to be affected by
the rise of fintech to attract more customers, reduce costs, increase
efficiency and offer a wider range of products, aiding the sector to
become more competitive without compromising on profit margins.
We expect to see further growth in the development of pension and
institutional schemes, particularly with the concept of Waqf, more
participation from sovereign wealth funds/state-owned institutions
and an increase in the number of Shariah compliant products made
available in the market, particularly in the Takaful space.
Conclusion
There is a long way to go in expanding the reach of Islamic institutional
asset management globally. In line with the growing market, it
is hoped that activities will expand to newer asset classes and
geographic coverage in line with investor demand and opportunities.
The asset management sector in particular has potential for this
through the provision of automated investment platforms and digital
financial advisory services. The growth in the sector brings a need
for appropriate asset management tools, including the development
and enhancement of benchmark indices that are Shariah compliant
and the range of products and asset classes available. There is
still a clear gap from a product offering perspective, and this exists
particularly, in the Takaful space. If leveraged correctly, this can set
the sector on a path toward rapid development.
It is important that industry players, regulators and government
bodies continue to collaborate toward pushing these priorities
forward. As Islamic finance further grows, it will remain key that
investors continue to be educated so that knowing and understanding
the fundamentals of Shariah compliant investing become the market
norm. By doing so, we will see exponential growth of Islamic assets
globally.
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 sector report
Islamic Accounting

Islamic accounting: A fundamental element in

the growing industry
Samer Hijazi is the lead partner, head of Financial
Services and Islamic Finance at Grant Thornton
UAE.

Mazin Khalil is the manager of Advisory Services

and deputy head of Islamic finance in the same firm.
They can be contacted at samer.hijazi@ae.gt.com
and mazin.khalil@ae.gt.com respectively.

Since its inception in the 1970s, the Islamic finance industry

continues to flourish into new horizons, the ethical-based
concept was founded to meet the demand of a select group
(yet a large population) of consumers and investors and is
now recognized as a leading global segment within the global
financial services industry. Islamic banking has driven much of
this growth, due to the advancement and enabling infrastructure
of the banking system, in addition to the collective efforts of
bankers and scholars.

AAOIFI pioneered the steps towards accounting for Islamic financial

institutions, which addressed the specific Shariah compliant
structures utilized by the subject entities. The broader definition
of Islamic accounting is: “Accounting process which provides
appropriate information, not necessarily limited to financial data,
to stakeholders of an entity which will enable them to ensure that
entity is continuously operating within the boundaries of Shariah and
delivering on its socioeconomic objectives.” (AAOIFI Conceptual standard-setters and regulators in the relevant areas. AAOIFI has
Framework). initiated dialogue with International Accounting Standards Board
(IASB) in the recent years, with the outcome of a much larger work is
Review of 2018 completed. Going forward, harmonization will be critical. Accounting
standards and GAAP are ultimately a means of communicating
The year 2018 saw several events which directly and indirectly performance and it is important that everyone can do this in the
impact the state of Islamic accounting. As the industry continued its same language whether in established markets such as the GCC
growth pace within the year, with an expected year-on-year growth and Malaysia or in emerging markets in Central Asia and Africa.
exceeding 30% according to the State of Global Islamic Economy
Report 2018, initiatives from several global stakeholders influenced Another significant element pertaining to the 2019 preview on
the direction toward the development of Islamic accounting. The Islamic accounting, is the adaptation of the newly-issued global
AAOIFI accounting standards issued from 1991 and onwards standards (IFRS 9 Financial Instruments, IFRS 15 Revenue from
remain the sole benchmark for best practice in Islamic accounting. Contracts with Customers and IFRS 16 Leases to particular). While
An example of recent developments in 2018 would be AAOIFI’s own the synchronization between such standards and Shariah compliant
“IFRS and the Shari’ah Based Reporting: A Conceptual Study”, a rulings remains to be a priority to the relevant standard-setting
significant attempt in reviewing the Islamic-based reporting with bodies, the element of complying with the Islamic principles in the
the globally-recognized standard-setting bodies. One of the main case in hand remains to be the precedent factor. The Islamic Finance
obstacles that stood in the way of Islamic accounting increasing its Consultative Group containing key stakeholders from Islamic finance
reach is potential reporting discrepancies with globally-recognized standard-setting bodies (AAOIFI and IFSB) in addition to major
standards (such as IFRS and GAAP). The efforts of AAOIFI aim to Islamic financial institutions concluded that such an implementation
bring forward an Islamic conceptual framework that will integrate a must take place on case-to-case basis, depending on the relevant
designated reporting methodology by Islamic financial institutions. contract, in addition to setting up the upcoming progressive meeting
in the first quarter of 2019.
An indirect motion by AAOIFI as well, was the introduction by the
UAE on the requirement of all Islamic financial institutions to comply Conclusion
with AAOIFI Shariah standards starting in 2019. While such a motion
does not address the accounting standards per se, but it may be a The progression of Islamic accounting maybe on a slower pace in
door opener for a global Islamic finance pioneer such as the UAE comparison to the overall industry, nevertheless, the collective
to address the financial reporting element on a harmonized level for efforts on individual and institutional bodies provide the necessary
Islamic financial institutions. push for the field to prosper and compliment the missions and
visions of global Islamic finance. Embracing the challenges and
Preview of 2019 adapting to progression is key, while maintaining the authentic
infrastructure of Shariah governance and compliance. Whether the
The future of Islamic accounting demonstrates promising potential application takes place on a fully-fledged Islamic financial institution
and this will see the light when the current efforts taken by the subject or an Islamic window operation within a conventional entity, the
matter experts are translated into deliverables on a corporate and unification of Islamic accounting methodologies is of crucial
sovereign level. As stated by the conceptual framework; AAOIFI necessity for the craft to move forward, and we look forward to
has always been open to dialogue and collaboration with global further developments. Watch this space.

24 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
December 2018
 sector report
Islamic Crowdfunding

Exciting year ahead for Islamic crowdfunding

Craig Moore is the founder and CEO of Beehive.

He can be contacted at craig@beehive.ae.

Crowdfunding, the process of asking a large number of

individuals or investors to provide relatively small investments
(or donations) to fund a business, project or venture, continues
to prove a popular form of alternative finance globally. While
market estimates regarding future growth can vary, some
predict a slight softening of the market while other frequently
referenced sources, such as the World Bank, suggest continued
growth, no one can underestimate the potential this industry
has for development.

Within the wider crowdfunding industry, there are some particularly

exciting segments, such as Islamic crowdfunding, which show
strong future potential for growth. Crowdfunding has a natural fit
with Islamic principles, being based around the idea of promoting
entrepreneurialism and sharing risk and many crowdfunding
ventures ultimately benefit the community. The natural combination
of crowdfunding and Islam, plus an increasingly young, tech-savvy
and growing Muslim population who expect an array of convenient,
Islamic finance products, makes for interesting times. Crowdfunding
is recognized as an important area of the growing fintech (financial
technology) industry. Advancements in technology continue to drive
the way consumers behave and equally the way businesses deliver
products and services. This influence opens exciting new prospects
for Islamic fintech and its relative sub-sectors, such as Islamic
crowdfunding.
Review of 2018
In 2017, we saw a notable step in many markets where regulatory
infrastructures began to establish. This began to mature in 2018,
encouraging collaboration between crowdfunding platforms and
other key parties such as banks, funds and authorities proving quite
successful.
Authoritative bodies across Southeast Asia and the Middle East have
identified the critical role of robust yet flexible regulatory frameworks
in facilitating the development of a globally competitive fintech
industry. As a result, they have moved quickly to encourage fintech
players to collaborate in the development and implementation
of regulation that supports the growth and advancement of
this important new industry while laying a strong foundation for
progressive fintech pioneers.
As collaboration and regulation became more prevalent banks,
funds and authorities became interested in learning the importance
of outlining clear guidelines for the establishment and how the
future prosperity of fintech-based businesses could benefit the
entire ecosystem. Through this we’ve seen alliances begin to form
between Islamic banks and fintech companies providing agility and
speed so that traditional financial institutions can make significant
progress in a new world of enhanced tech-based finance.
As the industry evolves and markets move quickly to implement
comprehensive regulation, this will undoubtedly drive greater
participation overall as investors and businesses take comfort in a
more regulated and inclusive industry, no longer the domain of only
the early innovators.
Other forms of collaboration have also prospered, with new cross-
country collaboration frequently being reported in the media as
different markets recognize that pooling resources and sharing
knowledge and learnings can be of significant mutual benefit in
developing their respective fintech industries. This cross-country
collaboration will be key to defining the most globally competitive
and ultimately successful markets in the race to be a global fintech
capital.
Preview of 2019
Technology underpins the future development of Islamic
crowdfunding, as well as the wider Islamic finance industry. The
benefit of technology is that it opens Islamic finance to a far broader
audience than has historically been the case. Now, more than ever,
Islamic finance, including fintech based businesses such as Islamic
crowdfunding and robo-advisory, is generating a mass appeal to
both Muslim and non-Muslim investors and businesses attracted by
fair business finance terms, healthy returns and an ethical, alternative
asset class. All these attributes drive the interest and involvement of
a wider audience base and are key to accelerating growth. Clear
communication of these advantages and opportunities available will
be imperative in driving adoption, collaboration, implementation and
market execution.
Conclusion
2018 has demonstrated exciting indications for the imminent
future and prosperity of the fintech industry and with it, Islamic
crowdfunding. Technology plays a key role in broadening the appeal
of Islamic finance (traditional and alternative forms) to both Muslim
and non-Muslim customers and across borders.
Next year looks set to be an exciting year for Islamic crowdfunding.
Already hot on the heels of conventional crowdfunding it has an
engaged and growing audience to satisfy. Expect to see Islamic
banks taking a serious interest in the new breed of Islamic fintech
players and Islamic crowdfunding platforms offer an attractive
opportunity to access and finance more Shariah compliant
businesses, projects and ventures. With so many countries vying to
take the title of Islamic fintech capital, the race is on to establish the
most accessible regulatory frameworks, the most beneficial cross
market collaborations and the most attractive destination for fintech
entrepreneurs to establish themselves — 2019 could well be the
most important year for Islamic crowdfunding we’ve seen so far!

December 2018
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 sector report
Islamic Leasing

Diversification needed as Islamic leasing looks

toward global markets
In the end, most predictions came true and there’s a consensus
Shoeb M Sharieff is the president and CEO of that the growth rate for the Islamic leasing industry stabilized
Ijara Community Development Corp. He can be at around 5% in 2018. To put this in perspective, this rate is
contacted at shoeb@ijaracdc.com. lower than the average over the last 10 years even though there
are some recent countries entering the industry like Oman and
Morocco.
The Islamic leasing sector reports might look dim for 2018
when based on some Reuters polls. This form of Shariah However, they weren’t large and powerful enough to make a
compliant financial tool is actually linked with more traditional lasting difference.
Western economies, whereby the trade tensions that are
mounting between the US and China have had an influence Preview of 2019
over this year. In fact, recent indicators show that as the US As 2018 draws to a close and the last 12 months of relative
Federal Reserve raises interest rates to cool off an expanding stability but slow growth is behind us, there are some positive
American economy, the effect on the global Islamic leasing financial rays of sunshine on the horizon for next year. Industry
sector will continue to have a cooling off effect. The reason is analysts are interested in fintech and what this modern innovation
simple — the policy options of some countries that practice can do for Islamic leasing specifically and the Islamic finance
Islamic leasing are constrained by the American move. industry generally.

However, these international trade winds are not the whole story. On the positive side, this modern innovation can enhance the
In fact, the IFSB’s Islamic Financial Services Industry Stability security of financial transactions and unlock new pathways to
Report 6th edition, paints the entire picture with a semi-positive growth. For example, crowdfunding is one of the possibilities that
color. Overall, there was an uptick in commodity prices across Islamic leasing start-ups can use when more traditional banking
the countries that favor Islamic leasing in 2018 that started the won’t provide financing.
ball rolling forward.
More trends predicted for 2019 are a continued push for regulation
Still, the overarching theme for this year is a market share and standardization across the world. Where Islamic leasing is
and corresponding emphases on Islamic finance and leasing concerned, the market bump of 2017 of Sukuk will continue on as
underlining the need for strong frameworks and the appropriate it has through this year and well into 2019. This will force countries
regulations. The overarching theme for 2018 is that Islamic leasing worldwide to look at the legal documentation and standardization
will continue to move forward regardless of the macroclimate that’s necessary where Islamic leasing is concerned.
although at a staggered pace of around 5%.
As far as the overall predictions go, there needs to be strong
Review of 2018 bolstering of the Sukuk market to foster the consensus of 5%
S&P Global Ratings is one of the most respected benchmarks to expansion into 2019 for Islamic leasing. One of the things that
use when engaging Islamic leasing for 2018. The noted authority needs to be considered is the role that innovation can play as
predicted a momentum loss this year and even noted a few trends both a disruptor and a spark for further growth.
that they said would further the damage done by trade tensions.
However, there are some other factors pushing against growth
These included fluctuations that only stabilized for short periods including the general market’s emphasis on more strict
of time in the year that’s almost past. This in turn caused several applications of profit and loss sharing. This could result in lower
core Islamic finance countries to have less than optimal economic Islamic leasing ratings and further stall forward momentum.
growth. One of the most interesting headwinds against the growth
of this industry was the continuing debate about standardization. Conclusion
In conclusion, there are several trends that Islamic leasing should
Interestingly enough, S&P also mentions that differences be aware of and a few others to prop up its expansion. First off,
in business verticals and distances in geography make it’s obvious there needs to be some kind of diversification as
standardization a difficult venture that further slowed growth Islamic leasing looks toward global markets. To offset some of the
in 2018. This has caused the proliferation of Islamic leasing to uncertainty in the West, they can look to some of the emerging
remain focused in certain oil exporting countries. These include places in the East. These markets are from a Shariah compliance
those of the GCC as well as Iran and Malaysia. It’s worth noting standpoint much more sustainable since well does not remain in
that in 2018 these countries alone represented 80% of Islamic a closed loop there.
leasing assets worldwide.
There are some other positive movements toward innovative
There’s another factor that needs to be considered when you’re Islamic leasing that can offset market fluctuations to some extent
looking at the big picture globally for Islamic leasing in 2018. like the FinTech Hive. This was forwarded by the Dubai
Stunted growth in several economies was the result of the International Financial Centre recently and shows a real effort to
evaluation and depreciation of currencies in places like Egypt, take on fintech technologies and make them part of the Islamic
Turkey, Malaysia and Iran. As the US economy continues to gain leasing toolkit.
momentum, most experts saw this trend amplify.

26 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
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 sector report
ISLAMIC MICROFINANCE

Islamic microfinance: Ready for takeoff?

Dr Mohammed R Kroessin is the head of Islamic

microfinance at Islamic Relief. He can be contacted
at mohammed.kroessin@irworldwide.org.

Today, an estimated 300 financial services providers, mainly

NGOs and cooperatives, are offering Shariah compliant
microfinance products, serving around 2.5 million customers of
which over 85% are living in Bangladesh, Indonesia, Pakistan
and Sudan. Despite some 400 million people in Muslim
majority countries living in poverty and without access to
financial services, Islamic microfinance is still struggling to
make a difference, despite some progress especially with new
technology, new markets and new customers. But growth is
constrained by an over-reliance on Qard Hasan and Murabahah
which means that outreach to poor people remains challenging
in terms of cost-recovery let alone profitability.

For the coming year the question is whether Islamic microfinance

can live up to the challenge and record a healthy growth rate required
to reach take off and, ultimately, scale.

Review of 2018
Looking back over the past 12 months, the big players in the industry,
the Islami Bank Bangladesh’s Rural Development Scheme and
Akhuwat in Pakistan are now touching the one-million client mark
each respectively. With Akhuwat, Islamic microfinance is in Pakistan
no longer a fringe phenomenon but it has entered the mainstream.
The question remains whether Akhuwat’s funding reliance on the
public coffers and by charging only a small application fee for their
financial products can be sustainable in the long-term and, more
importantly for the industry, can act as a global blueprint after
branching out into Uganda the previous year.
An important event has also been the Global Islamic Microfinance
Forum in Dubai, now in its 8th edition. This has been a critical
annual occurrence for both industry leaders and also new market
entrants to understand key technical issues and review progress.
However the forum has not yet reached the point where it can
support harmonization of a sector that is still quite disparate and
act as a unified voice advocating for product standards, regulator
understanding or funder support. The Frankfurt School of Finance &
Management, one of the leading European bank training academies,
remains also at the forefront of delivering professionals for the sector
with its certified Islamic microfinance online course, although the
course is currently in English only.
Preview of 2019
Reaching scale will be critical for the Shariah compliant sector since
it currently accounts for less than 1% of the global microfinance
portfolio. Large sections in emerging Islamic finance market such
as North Africa, East Africa and Central Asia will be have to be
catered for after attracting new donors and social investors to this
unique value proposition. The role of the IDB Group, refocused on
sustainable development under the new leadership of President
Bandar Al Hajjar, will be critical. It is particularly welcome that the IDB
Group members, the Islamic Solidarity Fund for Development and
the Islamic Corporation for the Development of the Private Sector
are now appreciating the relative immaturity of the micro sector and
are more focusing on grant funding and technical assistance. This
should be instrumental in getting the sector investment ready.
Intermediaries such as AAOIFI will also be important since the micro
sector is currently not well regulated, especially as far as Islamic
financial products are concerned. Given the sector relies heavily on
Qard Hasan – which doesn’t allow for sustainability under the current
AAOIFI product standard that is tailored to financial institutions
providing benevolent loans in addition to a suite of revenue
generating products – an adjustment would be important. This
would allow Islamic microfinance institutions to develop and grow
sustainably rather than being destined to remain charity projects,
which erode their operating capital if actual cost recovery stays
Shariah non-compliant. The challenge in re-writing the standard,
however, lies in ensuring that cost-recovery doesn’t exceed the
permissible. The Islamic microfinance sector eagerly awaits the
AAOIFI Standards Committee’s proposal to achieve such harmony.
A new market also has to be explored in form of Islamic microfinance
to the large Syrian refugee community in countries such as Turkey,
Jordan and Lebanon. Currently the refugee client segment remains
underserved due to a lack appropriate short-term products, but
blockchain technology could both enhance transparency and Know-
Your-Customer requirements, plus speed up the financing cycle.
Enabling business development among refugees could also support
the eventual resettlement to and rehabilitation of their devastated
homeland. The Islamic microfinance industry is eagerly awaiting a
paradigm shift in traditional Muslim institutional donors from, for
example, the GCC to support this important transition from relief to
economic recovery.
Conclusion
Takeoff for the Islamic microfinance sector as a significant and
materially sizeable poverty reduction stratagem for the Muslim world
is possible for 2019 and beyond but it requires substantive input
from intermediary bodies such as the IDB and AAOIFI to create an
environment where Islamic microfinance institutions are well-funded
to create financial inclusion solutions that are Shariah compliant and
sustainable.

December 2018
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 sector report
Islamic Social Finance

Sustainable development in Islamic social

finance
in the year, BAZNAS (Indonesia’s national Zakat collection agency)
Aamir A Rehman is a senior advisor at the United and UNDP released a report entitled ‘Unlocking the Potential of
Nations Development Programme (UNDP). He can Zakat and Other Forms of Islamic Finance to Achieve the SDGs
be contacted at aamir.rehman@undp.org. in Indonesia’. In addition to conceptual analysis on Islamic social
finance and the SDGs, the report provided statistical analysis on
Zakat and its impact: for example, the average monthly impact of a
Zakat recipient rose by 27% after participating in a Zakat-enabled
The term ‘Islamic Social Finance’ refers to modes of finance
assistance program.
that are rooted in Islamic ethics and intended for social benefit.
These include Zakat (almsgiving), Waqf (endowments), Sadaqah
In February, the International Federation of Red Cross and Red
(charity) as well as other modes such as Qard Hasan (interest-
Crescent Societies (IFRC) was recognized in a global Islamic
free loans).
finance competition for an innovative blockchain application for
Zakat. Developed in partnership between IFRC and AidTech, the
When one defines ‘Islamic finance’, it is vitally important that Islamic
application enables individuals and organizations to track Zakat
social finance be included. Doing so achieves three crucial benefits.
contributions even in the most complex humanitarian settings. This
First, it expands the sector’s scale: the IDB Group estimates the
represents an important breakthrough in enhancing transparency
potential of Zakat alone to be as much as US$1 trillion per year. The
and donor trust.
value of endowment assets — which include countless landmarks
such as the Taj Mahal — likely far exceeds the US$2.5 trillion assets
of the commercial Islamic finance sector (banks, capital markets, Preview of 2019
and such). The momentum in aligning Islamic social finance with the SDGs is
strong and can be expected to continue in 2019 and beyond.
Second, social finance is far more inclusive and widely-adopted. In
Egypt, for example, the market share of Islamic banking is 9%, as One key trend is enhanced governance and transparency among
per the IFSB. The percentage of Muslims who report engaging in Islamic social finance institutions. Donor expectations in these areas
Zakat, by contrast, is 70% as per the Pew Research Institute. Similar are rising, especially as donors have numerous options in choosing
patterns are seen across Muslim-majority countries. where to give their social finance. The standards outlined in the
International Waqf Core Principles are applicable across a wide
Third, social finance embodies key values — such as generosity and range of institutions and regions.
concern for others — that illustrate clear differentiation and positive
impact. Another key trend is the increased use of digital technology. For
donors, digital technology makes it easier to identify, evaluate, and
Review of 2018 fund causes. For organizations collecting social finance, technology
provides greater access to donors, lowers costs, and allows for
In 2018, Islamic social finance stakeholders achieved numerous
greater reporting and communication. For institutions implementing
milestones in aligning their work with the UN Sustainable
projects, technology enhances project management, workflows,
Development Goals (SDGs).
and monitoring. Perhaps most importantly, digital technology can
help recipients of social finance and their communities by making
At the Annual Meetings of the IMF and World Bank, held in Bali in
resources more accessible and distribution more efficient.
October, the International Waqf Core Principles were announced.
These principles, developed in partnership between Badan Waqf
Third, explicit alignment with the SDGs is a powerful trend that
Indonesia and UNDP, offer important standards on disclosure and
continues to grow. Organizations like UNDP can help social finance
transparency. UNDP also announced that it is working with Badan
stakeholders identify the specific SDGs they wish to support and
Waqf on the first blockchain enhanced digital platform to increase
then design programs in support of these goals. They can likewise
Waqf collections and enhance the effective use of Waqf land. Earlier
support the implementation of projects, and – importantly – in the
impact assessment and measurement of what was achieved.

Islamic social finance has been financing sustainable development

for centuries. More explicit alignment with the SDGs – including
impact assessment – can help the sector better engage with other
stakeholders in the global development community. Doing so
demonstrates the relevance and contributions of Islamic finance to
these important global goals.

Conclusion
Social finance is vitally important due to its scale, inclusiveness, and
differentiation. Key milestones achieved in 2018 reflect increasing
enthusiasm – across a wide range of stakeholders – to enhance the
impact, governance, and transparency of the sector.

Social finance has long been a means for Islamic finance to

contribute to the world. Embracing new technologies, enhanced
governance practices, and international partnerships can help the
sector both (1) expand its contributions and (2) communicate these
contributions as part of a common global cause.

28 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
December 2018
 sector report
ISLAMIC Treasury

Volatility returns
Aziz-Ur-Rehman Zia is the vice-president and
head of structured investment products with
Dubai Islamic Bank, Dubai. He can be contacted at
azizzia@yahoo.com

Careful what you wish for! Until quite recently, the trading
community was complaining about the persistent, one
directional market. A large number of hedge funds and nearly all
active strategy traders were being proven wrong year after year
as passive and long-only strategies were yielding double-digit
returns. We recently experienced one of the longest bull markets
and as we say goodbye to 2018, we witness the start of the new
more polarized political environment which seems destined to
become more fragmented and restrictive. The financial markets
are but a reflection of the chaos that surrounds us today and
asset prices are signaling that the party is coming to an end. We
have been here before so it is nothing new, just something that
markets have not experienced in a long time.

Review of 2018
A quick glance at the global neighborhood reveals the ‘might of
the right’ is the dominant political theme in the US and in most of
Europe. Be it Brexit or the US-led trade-war, the political situation
is very uncertain and the global economy is becoming more and
more fragile because of the changing economic policies influenced
by populism. It seems the world would continue to grow distant from
the free-trade and free movement environment each day and fall
more toward political and trade blocks of the bygone decades.
Financial institutions were cozying up to the low volatility
environment so much so that the banks were letting go of the fixed
income traders in droves but now it is time to reignite the trading
floor activity as the bond yields announce the changing tides with a
flood of widening corporate bond spreads and uncertain returns. As
the US Federal Reserve raised rates, other forces at play laid ground
for a very uneven economic road ahead as was evident in the recent
oil prices.
valuations should be considered. Sovereign and corporate Sukuk,
issued by strong and stable institutions, would provide a safe haven
as buy-and-hold investments but secondary market may continue
to discount the fixed income assets until the end of the rate-hike
cycle. Therefore, for the near-term investment horizon, shorter term
Islamic deposits and short duration instruments would offer a better
investment strategy.
Oil price volatility is expected to continue due to many factors but oil
politics would remain the major price uncertainty factor with global
politics directly influencing this key energy source. Given the lower
global GDP estimates for 2019, it is likely that oil would trade in a
lower price band in the next year.
Gold and other precious metal prices are expected to be more
stable and may progressively gain more ground at the expense of
other assets as investors seek safety. Production metals however
are likely to be weaker, faced with lower global demand.

Islamic markets faced challenges of their own. Asia, the home
of Islamic finance, is going through many changes. As Malaysia
reorganizes under a proven leadership, Pakistan has elected a new
prime minister to lead the Islamic Republic, while Turkey tries to find
its footing in the new geopolitical scenario unfolding all around it.
These three powerhouses of Islamic finance are expected to focus
more on politics while economic growth is expected to recover and
gain pace in 2019.
The Middle Eastern regional situation continues to add pressure on
the regional economy. The global economic cycle is expected to
influence the region as well as this is the universal reality so profits
are expected to readjust in line with the other emerging markets.
However, the risks are well managed. Mergers and acquisitions
activity has already picked up in the region which would add
immediate strength and resilience to the economy. Governments are
coming up with policies to attract skill and capital to enable longer
term growth and government spending is likely to maintain growth at
a reasonable pace for the foreseeable future. Once the dust settles,
the region would be best suited to continue its role as the trade hub
for Asia, Africa and Europe.
Real estate is expected to be on a softer trend globally with a few
exceptions off course; again, the coming year is likely to present
some good investment opportunities. Food and agricultural demand
is expected to keep pace with the growing population.
More unconventional areas for value seekers are fintech and
healthcare technology as advances in both fields are likely to
continue but there would be greater competition among the project
sponsors to seek funding in a more adverse investment environment.
Conclusion
The investment strategy for the next year should be positioning for
market uncertainty while carefully hunting for longer term value.
Look to invest with good active strategists as hedge funds are
finally going to earn their management fee from a good day’s work.
It is high time to seek alpha as very soon there would be unique
opportunities in many asset classes for investors with a healthy risk
appetite. Caution to the wise: avoid unforeseen geopolitical risks
due to uncertain geopolitical environment and invest closer to home,
within the familiar and friendly territory.

As we find ourselves in the uncharted waters once again, may the

Preview of 2019
Looking ahead among the Islamic asset classes, most assets are
expected to adjust to more favorable buying levels. Middle Eastern
equities are expected to perform in line with the global environment
with increased volatility but buying opportunities at attractive
tides favor the brave.
Any public opinion or media appearance is the author’s independent
personal opinion and should not be construed to represent any
institution with whom the author is affliated.

December 2018
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29
 sector report
Law

Laws of attraction and finding common ground

Paul McViety is a partner at DLA Piper Middle East.

He can be contacted at paul.mcviety@dlapiper.com.

Effective law and regulation continues to aid the global expansion

of the Islamic finance industry by providing frameworks within
which religious beliefs can influence the shape of financial
transactions. The constant push on a global scale for legal and
regulatory reform has certainly helped to create opportunities
for Islamic finance, particularly in emerging markets. However,
that same kind of reform also plays a very important role in
ensuring that Islamic products — which are carefully structured
within a prescriptive framework — are less susceptible to any
form of legal challenge.

Review of 2018
The last year has seen a number of very encouraging developments
for Islamic finance: some specific to the industry, but also a number
of more general changes which have been positive for the wider
financial services industry. Against the backdrop of global economic
uncertainty and the prospect of a hard Brexit, it has been all too
easy (at times) for commentators to focus on negative press and to
overlook some of the clear opportunities.
In the US, the regulatory stance of the Trump administration is
In the UAE and Saudi Arabia, significant progress has been made in also having an impact on the Islamic finance industry: restrictive in
developing the bankruptcy regimes and asset security frameworks the case of Iran, but still managing to attract a degree of Shariah
within each of those countries. compliant investment into the US through growth in sectors that
appeal to some of the GCC’s Islamic investors.
There is still some work to be done, but (by way of example) the
establishment of the Emirates Moveable Collateral Registry in Preview of 2019
respect of UAE Federal Law No 20 of 2016 (on Mortgages of
More of the same?
Moveable Assets as Security for Debts) has been welcomed by
the banking community for the confidence it has introduced into
One would certainly expect as much, based on current trends. The
the UAE market. It is now possible to take effective security over
industry can expect a further push by some countries to develop
a number of different types of moveable assets, and also to benefit
better Islamic standards and guidelines, as a means of reducing
from self-help remedies which are normally only seen outside of
costs within an increasingly competitive market-place. These kind of
the GCC region. The UAE also recently introduced its long-awaited
standards have for a long time played an important role in Malaysia
netting law, joining that elite group of countries where a more
— the most standardized market in Islamic finance — but a number
positive legal outcome can be achieved in any close-out netting of
of other countries have only just begun to follow in Malaysia’s
Islamic derivatives products.
footsteps. For example, the UAE itself recently adopted AAOIFI
standards as the benchmark that should be adhered to for Islamic
Further afield in Morocco, additional legislative changes were
financial services.
introduced in order to further encourage the development of the
Sukuk and broader Islamic finance market in North Africa. The
Progress should also hopefully be made in terms of recognition
progress to-date in Morocco has been measured, but these latest
by market players and regulators of the Core Principles for Islamic
developments have been welcomed by market participants and the
Finance Regulation (CPIFR), as developed by the IFSB in conjunction
country’s first sovereign Sukuk was finally issued in October this
with the Basel Committee. The implementation of CPIFR and IFRS9
year.
will undoubtedly have its impact on global Islamic financial markets
— and this may check growth within certain parts of the industry (at
The industry also continues to grapple with the challenges of
least in the short term).
digital transformation and, in particular, the appropriate regulatory
treatment of crypto currencies. For example, Bank Negara Malaysia
continues to monitor developments closely through its regulatory Conclusion
oversight, whereas scholars and practitioners continue to debate The continuing trend of tighter regulation for global financial services
whether or not these ‘new’ currencies can (or should) have more also creates a potentially unique opportunity for Islamic finance.
of a role to play in the digital transformation of the Islamic finance Funds and other investment vehicles operating in the ‘shadow
industry. banking’ industry are increasingly likely to fill some of the void left by
those banks which are perhaps less able to deploy their balance
Europe’s General Data Protection Regulation finally came into force sheets. Mezzanine and other specialist Islamic debt funds benefiting
and drew a clear line in the sand for end customers of Islamic banking from less stringent regulation should become more visible during
services, ensuring that individuals have greater rights over how their 2019. Similarly, the market is also likely to see further consolidation
personal information can be processed — including requirements with the possibility of key mergers between some of the Islamic
on consent and the ultimate right to have personal data erased or banks on the draft agenda for the next year.
destroyed.

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 sector report
LEADERSHIP

Leadership in Islamic finance: Fortune favors the

just and the bold
Kavilash Chawla is a partner at Baton Global and
a visiting scholar as well as facilitator at the Drake
University Executive Education Center. He can be
contacted at kavi@batonglobal.com.

By all accounts, 2018 was an interesting year that can perhaps

best be summed up by the words of the great English author
Charles Dickens:

“It was the best of times, it was the worst of times, it was the age
of wisdom, it was the age of foolishness, it was the epoch of belief,
it was the epoch of incredulity, it was the season of light, it was the
season of darkness, it was the spring of hope, it was the winter of
despair.”

Volatility, uncertainty, progress, and success are all apt descriptors

for 2018, so let’s look back at the role of leadership and leaders in
creating the year that was. When we look back at leadership in the
Islamic finance industry for 2018 two closely related themes emerge
dominant: ethics and reflection.

Review of 2018
The predominant leadership theme we saw in 2018 was ethics.
Specifically, this refers to both leadership within the industry itself
as well as to leadership in the broader operating environment in
which the industry operates. For example, when we look at ASEAN,
we have seen changes in political leadership and stewardship of
the regulatory and operating environment toward ensuring a more
transparent operating environment and a shift toward ensuring
financial services, inclusive of Islamic finance, deliver more just and
equitable outcomes. This has enabled the rise of ethically-led and
mission-focused Islamic finance organizations like EthisCrowd and
Blossom Finance, and refocused the activities of industry leaders
like CIMB, BIMB, and others on the needs of the average consumer.
In the MENA region we continue to see the flourishing of ethically
focused platforms and activity in Islamic finance. LaunchGood
continues to create oversized positive impact across the world
by mobilizing philanthropic capital to solve some of the most
intractable problems, and the newly-established Falcon Network
has mobilized close to US$2 million toward angel investing in social
impact-focused Islamic start-ups. In 2018 leaders within Islamic
finance exhibited leadership that aptly reflects the underlying ethical
foundations of the industry.
The second leadership theme that best describes 2018 is reflective.
While closely related to the ethical leadership theme, the reflective
leadership theme we observed in 2018 represents the uncertainty,
volatility, and change that 2018 delivered. Specifically, leaders within
the industry saw 2018 as an opportunity to reflect more on the
operational elements of their organizations rather than the big picture
strategic elements. This was a sound leadership strategy. It enabled
organizations to focus on improving financial performance through
levers within their control and offered opportunity to mitigate some
of the risks posed by external forces. This translated to a focus on
employees, customers, and on the recognition and integration of the
‘experience’ of those who engage in the Islamic finance industry.
Preview of 2019
If 2018 was a year for ethical and reflective leadership, the emerging
leadership themes we see in 2019 are service and boldness. In
cascading down from our 2018 themes, service is well aligned to
both the ethical leadership and the reflective leadership. Specifically,
we see 2019 as a year where industry leaders continue to challenge
the status quo and ethical value propositions of the Islamic finance
industry. This will take the form of more aggressively investigating
the synergies and convergence between Islamic finance and
the broader ethical finance industry. It will also take the form of
increased investment in understanding the Islamic finance customer
and moving beyond a process orientation towards an experience
orientation for the customer experience journey. While we do not
see the service leadership theme fully extending itself into the
internal operations of Islamic finance institutions, there may yet
emerge some bold leaders within the industry who seek to better
empower and embolden their staff by exhibiting the best of the
servant leadership philosophy.
The second leadership theme we see dominating the Islamic
finance industry in 2019 is boldness. As technology continues to
disrupt, evolve and empower the industry, 2019 is going to offer
tremendous opportunity for industry players to engage with data
and technology solutions to deliver outsized impact and create
competitive differentiation in the marketplace. That being said, the
Islamic finance industry is not known to be innovative. It tends to lag
both its conventional counterpart as well as other industries within
the Islamic economy space. The leaders that will thrive in 2019 will
buck the trend and will display courage of spirit and boldness of
action. The reflection on 2018 will pair well with the boldness of
2019 to offer some true potential for innovation in the Islamic finance
industry in 2019.
Conclusion
If 2018 was the best of times and the worst of times, we can perhaps
turn to the words of a visionary leader, Sheikh Mohammed Rashid Al
Maktoum, the vice-president and prime minister of the UAE and the
ruler of Dubai, for a concluding thought on what 2019 will hold. In
laying out the vision for the UAE Centennial 2071 project, Sheikh
Mohammed tweeted that the vision is “…for future generations to
live a happier life in a better environment, with bigger opportunities
and stronger communication with the world...” In 2019, fortune will
favor the visionary and the bold.

December 2018
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 sector report
Legal Frameworks

More than just Dana Gas

Shakeel Adli is a partner and global head of Islamic

finance.
Shayan Maladwala is an associate at CMS. They
can be contacted at shakeel.adli@cms-cmno.
com and Shayan.Maladwala@cms-cmno.com
respectively. Zain Akhtar, a trainee solicitor in the
same firm assisted in authoring this report.

2018 has been another positive year for the Islamic finance
industry with continued global growth including an upsurge
in Islamic retail banking and Sukuk issuance activity in the UK
alongside important legislative and regulatory changes in the
Middle East and Asia enhancing the industry’s prospects for
the future. This year has also seen the impact of an impending
Brexit and one of the largest litigation sagas to rock the Islamic
finance industry come to an end with the successful refinancing compliant instruments relative to the conventional market. The UK is
of the infamous US$700 million Dana Gas Sukuk. certainly aware of this and most recently the Financial Services and
Markets Act 2000 (Regulated Activities) (Amendment) Order 2018
amended the definition of ‘Alternative Finance Investment Bonds’
Review of 2018 (AFIBs) in the Financial Services and Markets Act 2000 (Regulated
Dana Gas Sukuk Activities) Order 2001. As a result, AFIBs, such as Sukuk, can trade
Dana Gas, the Middle East’s largest regional private sector natural on multilateral trading facilities and AFIBs will now be treated in the
gas company, presented an offer to their Sukukholders to restructure same way as conventional bonds for trading purposes; therefore
the Sukuk as well as declaring that the Sukuk was no longer Shariah providing a level playing field for Shariah compliant instruments.
compliant and therefore unlawful under UAE law. The Sukukholders
declined this offer sparking a major cross-jurisdictional litigation Developments in Kenya and Pakistan
battle center in large part on the mismatch in governing law across Another jurisdiction that has looked to improve its legislative
the documentation suite for the Sukuk. framework is Kenya, which is set to introduce new regulations
on Takaful following The Insurance (Amendment) Act 2016. The
The English High Court order blocked Dana Gas from making regulation is currently in draft form and the Insurance Regulatory
dividend payments unless it also set aside money to redeem the Authority (IRA) aims to publish it in early 2019. The goal is to
Sukuk. Conversely, the Federal Court of First Instance in the Emirate stimulate issuance of Sukuk, increase the Takaful offering in Kenya
of Sharjah ordered Dana Gas to suspend enforcement of the English and help boost international investment.
court’s ban on paying dividends. This conflict between rulings has
sparked debate on whether the English court’s dividend ban was On the 2nd November 2018, the Securities and Exchange Commission
indeed enforceable in the UAE — the outcome of which was not of Pakistan enforced the Shariah Governance Regulations 2018
resolved. In May 2018 all parties agreed a deal to restructure the which govern Shariah compliant companies, entities and Islamic
Sukuk and legal proceedings finally came to an end across all financial institutions. This is a major breakthrough as it is the first time
jurisdictions. Alongside Dana Gas shareholders, an overwhelming a regulator has defined comprehensive requirements for companies
94% of Sukukholders approved of the refinancing. that deem themselves to be Shariah compliant, rather than the
popular focus taken by regulators in the Middle East and Asia on
Whilst presenting challenges for the industry as a whole, the case banks and insurance firms. This aims to bring standardization and
serves to reinforce that Sukuk can withstand legal and public transparency in Shariah compliant business practices by aligning
scrutiny, with Sukukholders remaining invested in the company with the Shariah standards of AAOIFI.
which now aims to develop its global asset portfolio. The crucial
lessons to be learned include: the need for consistency in the suite Preview of 2019
of transaction documents on choice of law provisions, to clearly
allocate the risk of invalidity of the Sukuk by ensuring that non- The global Islamic finance industry continues to flourish following
Shariah compliance is not a ground to make payment obligations the successful refinancing of the Dana Gas Sukuk and the ground-
void, and to ensure harmonization of cross-border judgments to breaking UK issuance of a true asset-backed Sukuk. Islamic finance
bolster the enforceability of obligations. as an industry is dynamic and constantly evolving, not least from
a legal perspective, with 2019 set to continue this trend. As the
UK — Brexit boom for the Islamic finance industry industry continues to adapt to the evolving political landscape and
Brexit could send the Islamic finance industry on an upward trajectory take advantage of new opportunities, such as the rise of fintech start-
in the UK as the government looks to build economic links with the ups and the potential of blockchain, in particular, to limit exposure to
Middle East and Asia to bolster foreign direct investment including risks on transaction security, the future looks bright.
from Shariah compliant sources. In early 2018, AlRayan Bank issued
the UK’s first asset-backed Sukuk in the sum of GBP250 million Conclusion
(US$318.69 million) (the largest ever sterling denominated Sukuk To continue to grow and take market share from conventional
issuance), becoming the first bank in the world to issue a public banking, the Islamic finance industry needs to be at the forefront of
Sukuk in a non-Muslim country and enhancing the UK’s position as anticipating legal and regulatory developments. It is a challenge
the western hub for Islamic finance. which it is meeting in part but there is much work to do and 2019
will, we hope, see some significant legislative developments helping
The growth of Islamic finance is dependent in many respects on to push the industry ever forward.
the creation of regulatory frameworks that do not prejudice Shariah

32 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
December 2018
 sector report
Liquidity Management

Novel liquidity instruments need of the hour for

Islamic financial institutions
Raghu Mandagolathur is the managing director
of Marmore MENA Intelligence, a research house
focused on conducting MENA-specific business,
economic and capital market research. He can be
contacted at rmandagolathur@markaz.com.

Islamic finance is still a relatively small part of the broader

financial services industry. Compared to the conventional
industry, Islamic finance lacks adequate liquidity instruments as
Shariah restrictions limit the number of instruments that could
be used for liquidity management. Islamic interbank and money
markets also lack the volume and diversification of conventional
markets leading to a sectoral disadvantage from the outset.

Review of 2018
Since 2015, there has been a reduction of liquidity in the banking
systems in the Middle Eastern region, mainly due to reduced
deposit inflows because of low oil prices and a high dependence on
deposits from governments and their related entities. This situation
has improved in 2018 after oil prices stabilized and governments
issued large bonds and injected liquidity locally. However, the dearth
of Islamic liquidity management instruments has been a challenge
in Islamic banking ever since its inception. The instruments that
meet both the industry’s needs and the stakeholders’ expectations
are relatively few. The excess liquidity of Islamic banks limit their could also provide investment funds with additional fixed-income
profitability potential and therefore their long-term viability, it also revenue, and encourage a shift toward more profit-and-loss sharing
dampens the effect of monetary policy interventions in the financial instruments. In addition, Islamic banks could start offering Takaful
markets by central banks. products more systematically if the relevant regulation is in place.

The onset of Basel III liquidity coverage requirements is likely to
exacerbate the problem as Islamic banks will need to maintain high-
quality short-term liquid assets. As a result, Islamic banks, which are
concentrated in the Middle East, hold 8.8% of their assets in cash
and equivalents and 9.8% of their assets in placements at other
financial institutions. Currently, Islamic banks place liquid funds
through short-term instruments such as commodity Murabahah
that are non-tradable on secondary markets — Shariah rules
prohibit trading on receivables. Moreover, stakeholders typically
view these inflexible instruments as artificial replications of interest-
based transactions. Alternative instruments are gauged against
three criteria: whether they are as cost-effective as commodity
Murabahah, whether they offer the same or enhanced flexibility and
liquidity, and whether they offer sufficient scale to meet the current
and anticipated future needs.
Preview of 2019
New strategies to meet the liquidity management needs of Islamic
banks and Islamic windows at conventional banks are being
developed. These products — including National Bonds’ Sukuk
Trading Platform addresses both the operational needs of Islamic
banks and preferences of their customers and external stakeholders.
In liquidity management, it has the potential to be both flexible and
authentic, offering an investment destination for surplus funds or a
tool with which financial institutions and central banks can look to
as a model for providing liquidity to banks when needed. Islamic
banks will shift toward Islamic liquidity management instruments
that increase their ability to place more of their surplus liquidity with
other banks or with the central bank.
Closer integration may also lead to increasing Sukuk issuance,
which could reduce Takaful operators’ exposure to riskier real estate
and equities investments or help banks manage their liquidity. Sukuk
Standalone Islamic banks will have to look to government Islamic
T-bills, or other instruments to place most of their surplus liquidity.
Some of the remainder will be held on balance sheets as cash in
order to manage unexpected shocks because of a smaller set of
central bank instruments. A portion of the assets they hold today
as cash will be shifted to interbank placements in order to generate
yields. However, given the cyclicality of excess liquidity in GCC
banks, there will probably be a continued reliance on commodity
Murabahah, which amounts to an effective outsourcing of some of
the cash management responsibilities at Islamic banks to Islamic
windows, which have a deeper set of options and more access to
international liquidity management instruments.
Conclusion
Islamic liquidity management instruments are still at their infancy,
and the main challenge is in providing liquidity management tools
that can compete with conventional ones. Therefore, Islamic financial
institutions should invest more in product development. In particular,
as Islamic finance grows, the problem of liquidity will grow bigger,
as central bank support would become expensive particularly for
larger institutions.
Although a variety of approaches have been adopted in different
jurisdictions, much work remains to be done to diversify the mix of
available options for Islamic banks to manage their short to medium-
term liquidity. Further, the divergence in Shariah interpretations
across different jurisdictions has so far stifled a truly global approach
toward tackling this issue. In this regard, the setting up of
organizations providing Shariah standards such as AAOIFI and the
IFSB are playing an important role in bridging this gap. Liquidity
management continues to remain at the core of the issue that
regulators need to address to ensure the healthy growth and
development of the Islamic banking sector.

December 2018
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33
 sector report
Mergers & Acquisitions

Banks’ consolidation moves to determine the

performance of M&A sector

Burak Gencoglu is the co-founder of Gencoglu

& Ergun Law Firm. He can be contacted at
bgencoglu@gencogluergun.av.tr.

Mergers and acquisitions (M&A) transactions have shown an

increase both in value and volume following the regulatory
changes and support for privatization by the countries
particularly in the MENA region. In addition to the effort of the
governments to improve the investment climate and its positive
effect on the M&A market in general; low oil prices have made
banks, especially in GCC countries, to look for consolidation
options in order to better position themselves in the financial
markets. The consolidation trend among the region’s lenders
is expected to continue in 2019 and to determine the M&A
market’s performance in the coming year.

Review of 2018
According to the investment banking analysis for Middle East
prepared by Refinitiv, the financial division of Thomson Reuters, the
value of M&A transactions with any MENA involvement within the first
nine months of 2018 has reached US$45.1 billion, which indicates a
65% increase compared to the same period last year and reaching
an eight-year high. In addition to the successful performance of the
market on M&A transactions involving any MENA involvement, deals
having a target in the region also reached an all-time high rising to
US$27.1 billion, which is 89% higher than the same period in 2017.

As a result of the Saudi British Bank (SAAB)’s acquisition of the

whole share capital of Saudi Arabia’s Alawwal Bank for US$5 billion,
inbound M&A value in the MENA region was more than doubled
and hit an all-time high rising to US$13.1 billion, whereas outbound
M&A increased from US$8.5 billion in the first nine months of 2017
to US$12 billion in 2018. Preview of 2019
The overall expectation for 2019 is for the MENA and GCC market
In terms of sector-specific M&A transactions carried out in the to maintain the momentum gained in 2018. Investment climate
MENA region, energy and power deals accounted for 28.9% in and the low oil prices seem to be the two main points which will
value, followed by the financial sector with a 24.5% market share. determine the consolidation trend among the region banks and
The financial sector witnessed 91 transactions which is 32 deals the performance of the M&A sector in 2019. If the investor-friendly
more than the energy sector’s 59 deals. climate and low oil prices do not change in the first months of 2019,
the trend will probably continue in favor of M&A deals.
On the other hand, M&A activity within the GCC is more focused
on consolidation opportunities among the lenders. Due to lower oil M&A transactions involving financial institutions of the region may
prices and shrinking margins, GCC banks are looking to consolidate have a huge impact on the value and volume figures on the overall
which seems like an effective option to establish financial institutions M&A market even if these transactions are not considered as mega
with higher pricing power and less pressure on funding costs, while deals and do not create giant lenders. It is expected to see more
helping banks to increase their scale and revenue base. banks within these types of transactions particularly in the UAE
where the financial market is too crowded and needs to create more
Some consolidation examples among GCC lenders include Alawwal competitive financial institutions. However, the UAE’s M&A activity
Bank’s merger with Saudi British Bank (SAAB), which is 40% owned may also be extended to cover a range of sectors, including financial
by HSBC. Once the deal is closed, expected to happen within the services, transportation and logistics, and retail as a result of the
first half of 2019, they will form the county’s third-largest bank, with country’s digitization agenda for 2021.
more than US$70 billion in assets. Other examples are Bank Dhofar
and National Bank of Oman which would create Oman’s second- Conclusion
largest bank, with US$20 billion in combined assets. Merger talks
are also underway between Bahrain’s Ahli United Bank and Kuwait To sum up, the general expectation on the M&A sector is positive for
Finance House to create the Gulf’s sixth-largest bank, with US$92 2019. As more bank mergers announced only a year after National
billion in combined assets. Bank of Abu Dhabi and First Gulf Bank came together to create the
US$183 billion First Abu Dhabi Bank, it is quite possible to witness
Competition among the UAE banks is particularly intense, where more in the coming years. It is possible to see more deals among
more than 50 banks serve a population of only nine million. As a Islamic banks unfold in the near future and create more competitive
consequence, the competition makes the banks to consider M&A Islamic banks which will be active in the global financial arena
options in order to survive as a profitable financial institution. competing with conventional banks.

34 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
December 2018
 sector report
Private Equity & Venture Capital

Private equity and venture capital

James R Stull is a partner at King & Spalding. He

can be contacted at jstull@kslaw.com.

The Islamic private equity and venture capital sectors witnessed

an up and down year in 2018. The year started off strong but due
to certain political and industry events, the markets struggled
during the middle portion of the year — although the venture
capital and tech industries had strong performances throughout
the year. However, the fundraising and investment environment
has been strong in the final quarter and have included some
exciting flows of capital across borders heading into the US,
Middle East and Africa. The strong end to 2018 bodes well and
expectations are high for a strong 2019.

Review of 2018
The year began with exciting news that Arcapita Bank, the Bahrain-
based Shariah compliant investment firm, acquired a controlling
interest in MC Sign Company, a US-based provider of signage and
lighting services. This was Arcapita’s first US investment in nearly
five years and was exciting for the market as it appeared Arcapita
(which had previously made numerous international private equity
investments) had completed its return from its Chapter 11 filing
at the beginning of the decade. Arcapita continued its heightened
activity during the year, making investments in NuYu, a chain of
women’s fitness centers in Saudi Arabia, and several real estate
private equity investments in the US.
The first month of the year also saw Khazanah Nasional, the
Malaysian government-owned fund, acquire a 3% stake in GEMS
Education, the Dubai-based school operator. Khazanah already held
an indirect stake in GEMS through Fajr Capital. This was a strategic
transaction for both Khazanah and the company as GEMS has
announced its intention to list on the London Stock Exchange in
2018. However, due to regulatory considerations in the education
sector in the UAE, GEMS later announced it would postpone its
IPO. This was one of several high profile public offerings which were
postponed or shelved completely during the year.
However, the most negative news in the sector was the stunning
collapse of Abraaj. At the beginning of the year it was announced
that several investors (having contributed over US$100 million)
accused Abraaj of misappropriating approximately US$200 million
of capital contributed to Abraaj Growth Markets Health Fund, a US$1
billion fund which had since deployed capital in countries such as
Pakistan, India and Nigeria. While Abraaj admitted no wrongdoing,
the situation escalated quickly and Abraaj filed for liquidation in the
Cayman Islands by summer.
The Abraaj collapse coupled with various geopolitical events and
government crackdowns on fraud and corruption led to a difficult
fundraising environment for the first three quarters of the year —
particularly in the summer. However, certain sectors continued to
thrive despite the tumultuous environment.
The venture capital space was marked with numerous success
stories. Riyad TAQNIA Fund, a Shariah compliant venture capital
fund (jointly backed by Riyad Capital and TAQNIA, an affiliate
of the Saudi Arabian Public Investment Fund), was very active
and completed investments in the transportation, fintech, cloud
computing and information technology sectors (among others).
In November, it was announced that HolidayME, an online portal
offering customized travel solutions in the Middle East, had
raised US$16 million in a Series C round led by Singapore-based
Gobi Partners which also included India’s Accel Partners, Dubai’s
Global Ventures, Egypt’s Algebra Ventures and Lebanon’s B&Y
Venture Partners. The investment was announced at Gobi’s event,
TaqwaTech: Empowering Muslims in the Tech World, which was held
at co-working space DOJO KL.
Government funding has also spurred the venture capital space
as the Economic Development Board of Bahrain announced it will
launch a US$100 million fund of funds to attract venture capitalists
and entrepreneurs to Bahrain. This comes on the back of similar
funds of funds announced in Dubai by the Mohammed Bin Rashid
Fund for SMEs and in Saudi Arabia by both the Public Investment
Fund and the SME Authority.
Government reforms to various regulations also played a key role
in the strong end to year. Saudi Arabia began to loosen certain
foreign ownership restrictions, particularly in healthcare, education
and transport. The UAE also announced it will open up a number of
activities to foreign ownership and issued the new Foreign Direct
Investment Law. This opening of the market has spurred interest
from foreign investors into both countries.
Preview of 2019
We expect venture capital, tech and fintech to continue to be strong
sectors in 2019. We also expect to see a large bounce back for
private equity as the fundraising environment has showed signs
of improvement. There has been substantial interest in investment
into sectors in jurisdictions which were previously closed to foreign
investment (eg healthcare in Saudi Arabia). At the same point, we
expect to continue to see outbound investment from the Middle
East to Europe and the US, which are seen as less volatile markets.
We are also seeing capital from Asia into the Middle East and Africa
(both North Africa and sub-Saharan Africa) as well as capital from
the Middle East into North Africa and certain key jurisdictions such
as Kenya, Ghana and Nigeria. We expect a substantial growth of
African-focused Shariah compliant venture capital and private credit
funds.
Conclusion
2018 has had a strong finish, capping what was an unpredictable
and surprising year for many. It is expected that the positive
sentiment will continue into 2019 through Ramadan. It is hoped that
strong markets will continue throughout the year. Based on the
fourth quarter, the strongest sectors will continue to be venture
capital, private credit and real estate. The market is also set for the
bounce back of private equity on the back of government initiatives
and the rebound of capital markets.

December 2018
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35
 sector report
Project & Infrastructure Finance

Islamic project and infrastructure finance market

Shibeer Ahmed is a partner and global head of

Islamic Finance at Winston & Strawn.

Shaheer Momeni is an associate at the same firm.

They can be contacted at sahmed@winston.com
and smomeni@winston.com respectively.

According to the OECD, US$71 trillion is required globally by

2030 to fund infrastructure projects, including road, rail, telecom,
power and water infrastructure. A significant proportion of these
projects will require private sector finance and, therefore, offer
opportunities for Islamic investors and financial institutions
globally. While economic fluctuations, including low oil prices,
have had an impact on the implementation of infrastructure
projects, most governments have maintained their commitment
to infrastructure development. This has led to greater incentive
for many governments to tap into private sector financing,
including through Islamic project finance, for developing large-
scale infrastructure projects.

Review of 2018 Africa, which could offer ample opportunities for the use of Islamic
In recent years, most large-scale projects, particularly in the GCC, project finance to fund PPP projects.
have featured one or more Islamic tranches alongside conventional
debt finance. The most frequently used Islamic project finance Preview of 2019
structures have been based on Istisnah-Ijarah and, in some cases in While there have been some predictions of a likely slowdown in
Saudi Arabia, Wakalah-Ijarah structures. This has been particularly Islamic finance during 2018, the growth momentum of Islamic
the case for power, petrochemical and industrial projects, such as finance has remained positive. According to the IFSB Stability
the US$20 billion SADARA petrochemical complex, the US$2.5 Report 2018, the Islamic finance industry has returned to a robust
billion Shuaibah independent water and power project and Phase II growth of 8.3%, following two years of marginal increases, with the
of the US$10.2 billion Emirates Aluminium smelter project. industry’s aggregate value now surpassing US$2 trillion. Islamic
banking continues to be the largest driver of the growth of the sector,
While a more robust pipeline of infrastructure projects to be funded with Malaysia, Saudi Arabia and the UAE in particular catalyzing this
through Islamic project finance remains to be developed, there is growth.
wide market recognition that Islamic project finance can deepen the
available capital pool for funding infrastructure projects through the There is a large pipeline of infrastructure projects in the Middle
inclusion of one or more Islamic tranches in a multi-sourced financing East, Asia and Africa (including the projects in Saudi Arabia as
structure. Although multi-sourced project finance arrangements lead part of Vision 2030) for which Islamic project finance could offer a
to certain intercreditor issues between Islamic finance providers and viable financing option alongside conventional modes of finance.
conventional financiers, the success of various recent Islamic project Moreover, it is expected that projects comprised in the multibillion
financings has demonstrated that such issues can be overcome. dollar Belt & Road Initiative and infrastructure projects in Africa
will offer ample opportunities for Islamic project finance. However,
Notable projects recently financed through Islamic project finance questions remain as to whether Islamic financial institutions have
alongside conventional finance sources include the AED1.2 billion the requisite capital-base to meet the increasing demand for Islamic
(US$326.7 million) 200 MW Phase II of the Mohammed bin Rashid facilities multi-sourced financings and, more determinatively for the
Al Maktoum Solar Park in Dubai (March 2017), the 800-MW Phase sector, to independently finance large-scale projects. To ensure the
III of the Mohammed bin Rashid Al Maktoum Solar Park in Dubai sustained development of the sector, reconsideration and adaptation
(June 2017), the EUR2.3 billion (US$2.6 billion) financing for the of existing Islamic project finance structures to meet the current and
construction of Canakkale 1915 Bridge in Turkey (March 2018) developing needs of the project finance sector and the enhanced
and the US$4.61 billion Duqm Refinery project in Oman (October regulation of the Islamic finance industry continue to be desired.
2018). In addition, there has been an increasing focus on the Islamic
financing of infrastructure projects in Africa and development
Conclusion
finance institutions are taking a more active role in supporting
Islamic project finance as illustrated by the IDB’s intended US$300 The future of Islamic project finance looks promising and its
million co-financing of a power plant in Bangladesh. continued development is a testament to its suitability for financing
infrastructure projects. The position of Islamic project finance is
Islamic finance has largely been an untapped source of finance for expected to be further bolstered globally by the extensive pipeline of
public-private partnership (PPP) projects and traditionally Islamic infrastructure projects which could be financed through Islamic
project finance has not been considered as a source of finance project finance, the development of Islamic finance in traditional
for such projects. This has elicited interest from governments and hubs and non-traditional markets, the increasing progress toward
development finance institutions to mobilize Islamic project finance standardization and enhanced regulation of the Islamic finance
for PPP infrastructure projects. According to MEED, approximately industry and the growing interest of development finance institutions
151 PPP infrastructure projects, with a total value of approximately in promoting the use of Islamic project finance in the infrastructure
US$185 billion, are planned or underway in the Middle East and development space.

36 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
December 2018
 sector report
RATINGS
Islamic ratings require an overhaul in approach
Mohammad Aamir is a former IIRA (International
Islamic Rating Agency) senior financial analyst and
at present he is an independent Islamic finance
practitioner and advisor. He can be contacted at
aamirifs@yahoo.com.
The Islamic finance industry is growing at a rapid pace in
jurisdictions where it is adopted as an alternative to the
conventional financial system. However, the industry is yet
to make its mark on the global financial landscape that is
fundamentally different. Credit ratings of financial institutions
and corporates play an important role to disseminate information
about risk profile and strength to the wide range users from
general public to regulators. However, ratings assigned on
the basis of Islamic principles have yet to create their distinct
identity and value. This may require an overhaul of the existing
rating methodologies by rating agencies in consultation with
platforms like IFSB and AAOIFI.
Review of 2018
Credit ratings’ focus has been on Islamic financial institutions and
mainly on Islamic banks. The corporate sector does not seem
to be a priority area for Islamic rating firms. The crux of Islamic
finance philosophy is on the real economy which in today’s world is
represented by the corporate sector of any economy. If the Islamic
finance industry is to make a difference and build a case for itself
as a solution to global economic challenges, then Islamic rating
agencies have to come forward and demonstrate a distinct value
of their rating approach and value to the broad range of users to
benefit in their decision-making process.
On the other hand, the other area of ratings on Islamic principles has
been Sukuk issuances that are again dominated by Islamic financial
institutions and sovereigns. Sukuk issuance volume globally is
expected to reach US$90-100 billion in 2018, a trend similar to 2017.
These are expected from sovereigns and corporates in Malaysia and
Indonesia. Further boost is also expected from initiatives such as
the introduction of primary dealership for government Sukuk issues
in Saudi Arabia and the Sukuk trading initiative on the Turkish Stock
Exchange in August 2018. Other GCC states may join the Sukuk
market in order to diversify their funding sources.
Another aspect in the overall ratings landscape is the stance of
world-leading credit rating agencies that their ratings are neutral to
any religious-specific conventions and they take into consideration
their own rating parameters as per their conventional credit rating
methodologies. Perhaps it may be an outcome of still invisible
substantial difference in the way Islamic financial institutions and
their conventional counterparts operate. Islamic financial institutions
take financial exposure effectively in a similar manner as their
conventional counterparts do.
Otherwise leading credit rating agencies may by themselves find
it imperative to adjust their rating methodologies for the Islamic
finance sector. However, before looking into these aspects, rating
agencies should resolve a few key issues in the existing rating
methodologies. Deciding on these issues can provide a roadmap
for further refinement in rating methodologies. These are discussed
hereunder.
Preview of 2019
As per current ratings practices Islamic windows of conventional
banks or insurance companies are not rated on a standalone
basis, rather their rating strength is taken as the credit rating of the
conventional entity that they are part of. There are examples where
December 2018
Islamic window business operations are of such size that if they are
spun off into an independent entity they will become a fully fledge
organization right from day one. By any standard if Islamic windows
are not rated separately, their credit, operational and governance
risk profile will remain unknown to their customers and regulators
which carries with it a hidden risk that can cause a challenge to the
stability of a financial sector of an economy when all such windows
are taken together. It has all the potential of creating a systemic risk
to the financial sector and would remain unnoticed by regulators
which otherwise could be tackled by assigning separate ratings.
Islamic banks’ deposits are generally on a Mudarabah basis and
there is no deposit protection guarantee from banks and central
banks to the depositors in case of bank failure. However, there is
no representation of deposits holders to safeguard their interest.
Banks’ boards of directors are composed of directors representing
shareholders/sponsors or are independent directors who are
not actively involved in day-to-day affairs like sponsors through
management.
Rating agencies should take this factor into account as there
is hardly an example in the world where an institution is running
mainly on depositors’ money but depositors do not have any explicit
guarantee or protection or any kind of voting rights.
The flip side of this is that if depositors are carrying risk on a
Mudarabah basis with Islamic financial institutions then they
should have active representation in the business affairs of
Islamic financial institutions. The representation can be made in
any suitable form without disturbing the existing organizational
structure, regulatory framework or business affairs of a given
institution.
Comparable examples are available in the financial sector. In
the absence of any such solution, Islamic financial institutions
will continue to pose a higher risk to the financial sector as they
directly affect the sufficiency of risk buffers and capital adequacy
levels at each individual Islamic financial institution and at a
sector level as a whole.
Rating agencies should have access to data of historical records
covering sufficient number of years/periods of at least corporates
and Islamic financial institutions operating in countries which have
adopted Islamic finance as a serious option. By having the access,
rating agencies will be able to develop a database of each industry
sector to enable them to make more informed assessment and
analysis.
Finally, the form over substance issue in accounting treatment is
also important for better risk profile assessment of Islamic financial
institutions and corporates. There are timing differences in recognition
of revenue or a transaction is classified based on its Shariah-based
contractual form rather than actual underlying substance. This may
result in overstatement or understatement of financial performance
and accompanying risk on the books of Islamic financial institutions.
This should also be resolved to help rating agencies do their work
more meaningfully.
Conclusion
Fixing some fundamental issues in the rating methodology first can
enable Islamic ratings and the firms assigning these to create their
own distinct value and meaning for the users. By recognizing that
Islamic finance has fundamental differences than the conventional
finance industry and developing rating methodologies reflecting
those fundamentals accordingly is the only way forward for rating
agencies and Islamic finance to remain relevant in the future.
T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
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 sector report
REAL ESTATE

Real estate: Recognizing global quality

Philip Churchill is the founder and managing

partner of 90 North Real Estate Partners. He can be
contacted at pchurchill@90northgroup.com.

Shariah compliant real estate investment has long been an

established product offering for Islamic investment managers.
The allure of bricks and mortar remains, frequently with an
attractive income component compared to equities or Sukuk.

While tenant use of course needs to be monitored, the basics of

real estate investment suit Shariah principles well, with a genuine
business being undertaken, either to build and let or sell new
property or hold existing properties for their rental income.

Broadly speaking, where Islamic investors want to buy real estate

there is now the necessary critical mass of professionals able to
assist. What remains lacking is a scale to Islamic banks outside of the
Middle East and Southeast Asia able to provide Shariah compliant
finance for larger transactions, with conventional finance and a
structure to insulate investors from the non-compliant payment of
interest required in a pragmatic approach to allowing transactions
to occur.

Review of 2018 fundraising for at least one major fund initiative where quality assets
Political events in the US and the UK, historically the most favored can be owned for the long term, and investors offered some form of
markets for cross-border Islamic real estate investment, failed to liquidity should they wish. Fingers crossed that 2019 is the year that
dampen investor appetite. Whilst hard data is hard to come by, the this gets delivered.
falling value of the sterling seems to have led to a record-year for
investment into the UK, with investors taking a longer-term view There is a growing voice of recognition that Islamic investment has
beyond Brexit negotiations. As the US economy accelerates, US many similarities to socially responsible investment in the non-
President Donald Trump’s words and actions have not negatively Shariah investment world. Whilst there is nothing stopping non-
impacted sentiment, but the diminishing gap between purchase Islamic investors coming into Shariah compliant transactions, the
yields and reference finance rates has somewhat limited activity. marketing and positioning of the offering often dissuades a wider
audience from considering the opportunity. As fintech initiatives
Elsewhere Europe remained in favor, and while most were priced out positively disrupt the status quo, their approach may be adopted by
of Germany, the Netherlands offered relative value with investment others wanting to be more inclusive.
activity through the year. Australia also returned as a destination,
with investors drawn by the strength of the economy, itself fuelled The squeeze on levels of dividend to investors will continue, and
by strong population growth. I see the market for investment managers more clearly separating
between those chasing yield through sacrificing quality and those
Within the Middle East, building on their success during 2017, Saudi maintaining a focus on positive real estate attributes and properties
Arabia stole most of the headlines with growing issuance of REITs delivering a fair dividend to investors, even if this is lower than was
on their public markets. Whilst they remain largely domestically available previously.
focused, they have delivered what many others have not.
As in previous years, I see little change in the size of Islamic
Among all this there is a fear that quality is being compromised bank balance sheets, which would otherwise allow direct Shariah
in return for maintaining, or even increasing, the net cash yield to compliant finance to be sourced on larger mainly commercial real
investors that was previously being offered. World economies are estate investments. On a positive note, syndication of such facilities
doing well, global appetite for real estate acquisition is increasing among banks is increasing, and I hope will continue in 2019.
and in most markets reference finance rates are increasing.
Something has to give. Voters rarely shed a tear worried about the fortunes of real estate
investors, and so regrettably I can’t rule out further tax increases
Preview of 2019 impacting both Islamic and non-Islamic investors alike. These tend
to come with some warning though.
Save for any major political event, I don’t see any change in investor
appetite during 2019, with cross-border investment remaining Conclusion
the focus for many and literally a world of opportunities available.
However, these will remain largely on a transaction by transaction With sound economic fundamentals and a wider variety of Shariah
basis. real estate investment opportunities available, 2019 should be
a great year, but I would encourage all investors to focus on the
The benefits of diversification through fund strategies, perhaps with strength of the underlying real estate and not solely the projected
lower leverage and longer-term holds have not been communicated dividend distributions.
well to investors. Or better, no-one has sought to achieve this on
a significant scale yet. Combined with purchase and holding taxes To quote Henry Royce of Rolls-Royce fame: “The quality will remain
continuing to rise, it feels like we should be on the verge of successful long after the price is forgotten.”

38 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
December 2018
 sector report
Responsible Finance

Action must follow intention: The growth of

responsible finance
Blake Goud is CEO of the Responsible Finance &
Investment (RFI) Foundation. He can be contacted
at blake.goud@rfi-foundation.org.
with the former including projects financed with Sukuk as well as
bonds. These frameworks are designed to provide support for
issuers to understand which projects will qualify with the widest
investor base, to encourage the greatest volume of successful
issuance.

CIMB Islamic has been involved in most of the green Sukuk

At this time last year, there was a lot of discussion about
issuance taking place to date, including Indonesia’s sovereign
how 2017 was the year of the sovereign green bond and in
green Sukuk. In line with the developments in CIMB Islamic, CIMB
that light it could be said that 2018 was the year that Islamic
Group has increased its broader commitment to responsible
finance broke into responsible finance in a big way. These
finance by becoming a signatory to the UN Environment
developments build on earlier efforts by some leading
Program-Finance Initiative and the Principles for Responsible
institutions to integrate responsible finance into their Islamic
Banking, which will provide a vision linked to the SDGs that offers
finance practice. For example, SEDCO Capital, Arabesque
a “framework for hardwiring sustainability into the bank’s DNA at
and DDCAP Group have been signatories to the Principles
all levels – strategic, portfolio and transactional – and across all
for Responsible Investment, Khazanah Nasional joined in
business areas”.
2017 and Malaysia’s government pension fund KWAP joined
in early 2018.
Fellow VBI Community of Practitioners member HSBC Amanah
has taken its own strides in responsible finance through the
The efforts of leading institutions in Islamic finance were the
issuance of an SDG Sukuk where the financing raised through
basis for the formation of the Responsible Finance & Investment
the Sukuk will be applied to finance activities in line with the
Foundation (RFI), which has a mission to promote the convergence
SDGs. Earlier in the year Arabesque and BIMB joined forces to
of responsible finance practices within Islamic finance. What
announce and launch the world’s first ESG Sukuk Fund, which
we’ve seen in 2018 is the efforts of many institutions from across
applies environmental, social and governance factors to evaluate
Islamic finance to accelerate the pace of change to drive a wider,
the return and credit risk profile.
wholesale change to the way Islamic finance embeds responsible
finance practices into its core operations.
Preview of 2019
Review of 2018 The breadth of action to begin the process of adopting responsible
finance practices is supportive of a rising awareness level about
No summary of responsible finance in 2018 would be complete
the importance of environmental and social impact on ethical
without focusing on Indonesia’s sovereign green Sukuk which
and business grounds for Islamic finance. A survey conducted by
raised US$1.25 billion in February and priced equally with the
the RFI Foundation earlier in 2018 found near unanimity among
conventional Sukuk that were issued simultaneously. For better
the surveyed institutions that sustainable finance principles
or worse, capital markets is where most of the attention is paid
(encompassing environmental and social issues) were aligned
to Islamic finance, and the sovereign green Sukuk from Indonesia
with Islamic finance principles. However, just about one-third said
was notable because it was one of the first sovereign green
they had policies to address their direct and indirect exposure.
issuances globally, not just one of the first green Sukuk.
The breadth of environmental and social issues, and the ways in
The transition this represents for the industry is important – with a
which different financial institutions around the world integrate
growing responsible finance proposition, Islamic capital markets
consideration of these issues into their day-to-day business
and Islamic financial institutions are able to keep pace with
does introduce a barrier to wider adoption. In September at an
innovation in the financial industry. Indonesia’s Sukuk was the
event on the sideline of the G20, the RFI Foundation announced
start of a year of dynamic developments which all lead toward the
the CDIT Initiative to introduce a blockchain-secured system
other major development which came as Bank Negara Malaysia
for financial institutions of all kinds to track, monitor and report
released the implementation guide and guidance documents for
their own approach. This will also create a current source of data
the value-based intermediation (VBI) efforts including a scorecard
about what others are doing to create a real-time, crowdsourced
for Islamic banks to measure their progress on implementation.
reference to expand adoption of responsible finance practices.
The approach contained within VBI encourages Islamic banks
to develop an entrepreneurial mindset, promote community Conclusion
empowerment, manage their actions through self-governance As more Islamic financial institutions become engaged on
and commit to building a culture that leads to best conduct. The responsible finance other technology-based solutions are likely
initial members of the Community of Practitioners, supported to emerge to help them translate intentions into actions. One
by the network institutions and others who have supported such forum for action is the recently launched Global Islamic &
VBI, will use the scorecard first for internal development of their Sustainable FinTech Center specifically focused on the application
value-based strategies. They will later make these scorecards of technology to responsible finance.
public to spur greater engagement between the banks and their
stakeholders, including non-governmental organizations. Although signs are promising in the responsible finance sector
that interest is developing at a much more rapid pace than we
Meanwhile at the ASEAN level, the ASEAN Capital Market Forum have seen in previous years, the industry is still in early days.
(ACMF) issued last November regional standards covering the Responsible finance practices are valuable to financial institutions,
issuer qualifications and use of proceeds for a green bond, which their customers and society at large, but intention must be
included an explicit mention of the possibility that some issuance followed by action and in order for action to inspire others it has
would be in the form of a Sukuk. In October 2018, the ACMF to be communicated in a way that builds confidence in its
followed this with a framework for social and sustainability bonds effectiveness and its value on many levels.

December 2018
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39
 sector report
Risk Management

Tumultuous times ahead in managing risks

play out in English courts only, and not in another jurisdiction as
Dr Natalie Schoon, is the principal consultant at well. General uncertainty in the global markets continued in 2018,
Formabb. She can be contacted at mail@formabb. and is not looking to improve any time soon. The current issue
co.uk. playing out in Saudi Arabia in relation to the missing journalist not
only negatively impacts Saudi Arabia, but has an impact – it also
strengthens the generally negative perception the world has of Islam
and therefore directly impacting Islamic finance.
Together with compliance, the subject of risk is perhaps the
most unloved in any financial institution, and Islamic financial
institutions are no exception. It is, however, a necessary evil, Preview of 2019
particularly in times when Islamic financial institutions are Looking forward to 2019, the general uncertainty in the markets
faced with excess liquidity and only relatively limited options is unlikely to ease up in the near future, and will continue in 2019
for investment. The temptation to just enter into a transaction and beyond. There are a number of reasons for this including,
because the funds are available can be high. Particularly when but not restricted to, the exit of the UK from the EU and the fact
chasing ever increasing demands for shareholder value and that there is still no sign of an agreement, the store nationalistic
profits for clients. Over the years following the financial crisis, sentiment of the current president of the US, and the ongoing
Islamic financial institutions have been particularly prone to this unrest in the Middle East. In this regard, the risk for Islamic
risk given the thin secondary markets in Sukuk and the excess financial institutions is no different from that faced by other
of liquid funds available. players in the financial industry.

Review of 2018 In times of uncertainty liquidity and credit risk are highest on their
list of concerns. Liquidity risk will remain particularly pressing for
The year 2018 was no different from any other year in the recent
Islamic financial institutions given the thin markets and highly illiquid
past. Notwithstanding the efforts to boost secondary markets and
nature of the instruments. Bar some drastic change, this is expected
the asset side of Islamic finance, it will still take longer to develop.
to continue well into the next decade. In addition, specifically for
In part due to the fact that the growth of Islamic financial institutions
Islamic financial institutions, Shariah compliance risk is rising, and
is mainly focused on the deposits side, not on the assets side,
there is still a significant concentration in property-based assets. As
but equally due to higher cost associated with new markets and
Dana Gas and Dar Investment have shown, a company in financial
products, and a lack of standardization. Not only do these issues
difficulties will try anything to reduce their obligations and stay
impact the development of secondary markets and help resolve the
afloat. In the case of Dana Gas, claiming non-compliance with the
liquidity issue, they are key areas in day-to-day operations of an
principles of Shariah turned out to be a viable avenue, one which
Islamic financial institution. Those issues are not new, and will still
will no doubt be exploited by others largely due to the interpretative
take time to resolve.
nature of the rules, in combination with the fact that standardization of
products remains a distant goal. In addition country risk is expected
One of the main emerging risks, however, comes from a different
to increase with the ongoing global uncertainty. Any reduction in
field. It’s not new, but has certainly gained prominence. Shariah
country ratings will heavily impact sovereign debt as well as the cost
compliance risk has, courtesy of Dana Gas and Dar Investment
of borrowing for companies incorporated in a country. All in all, a
Bank, has the makings of a major risk category for Islamic financial
year to carefully consider all possible risks.
institutions. The Dana Gas case has finally been settled in 2018
with both sides claiming victory. The basic premise of the case,
however, will linger on for a while longer. Can an issuer or other Conclusion
financial institution just claim non-compliance with Shariah in order The Islamic finance industry will continue to face risks in relation to
to prevent having to repay a loan? An additional legal risk surfaced uncertain market conditions, but new risks in the form of Shariah
with courts in two jurisdictions, England and Sharjah, overruling compliance risk and reputational risk following behaviors exhibited
each other causing further unease. The contract was written under by Muslim countries are emerging and need to be considered
English law, therefore, the case could reasonably be expected to carefully.

40 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
December 2018
 sector report
SRI ETHICAL & GREEN

SRI, ethical and green: A momentum to be

maintained

Dr Mohamed Wail Aaminou is the general manager

of Al Maali Consulting Group. He can be contacted
at w.aaminou@almaaligroup.com.

There is an increasing acceptance of the need for finance to

address vital environmental, economic and social issues.
Particular areas requiring finance include renewable energy,
health, education and sustainable food consumption to name a
few. Given the centrality of ethics in the core values of Islamic
finance, Islamic financial institutions have the potential to
play a leading role in bridging the gap between finance and
sustainable development. While 2017 was the year of maiden
green Sukuk issuance, the momentum accelerated in 2018 with
new innovative instruments and initiatives at industry level.
Nonetheless, we have just scratched the surface of this field
and more achievements are expected in the coming years.

Review of 2018
By all measures, Malaysia is leading the Islamic finance industry in
catalyzing Islamic finance investing toward sustainable development.
After the 2017 green Sukuk, Malaysia marked again history by
issuing the world’s first UN Sustainable Development Goals (SDGs)
Sukuk. The Sukuk proceeds will be utilized for working capital in
the ordinary course of HSBC Amanah’s Islamic banking business,
to finance eligible businesses and projects in accordance with the
HSBC SDG bond framework.
On the regulatory side, Bank Negara Malaysia continued its efforts
to implement the value-based intermediation (VBI) framework
along with leading Islamic banks in Malaysia. VBI is defined as an
intermediation function that aims to deliver the intended outcomes
of Shariah through practices, conduct and offerings that generate
positive and sustainable impact to the economy, community and
environment, consistent with the shareholders’ sustainable returns
and long-term interests. The main idea of VBI is that it is possible
to improve profitability while addressing social, economic and
environmental issues. From that perspective, VBI creates value
not only for Islamic finance institutions, but also for governments,
regulators, customers and communities. There are obviously
many common grounds between VBI and the concepts of shared
value, impact investing and environmental, social and corporate
governance. However, VBI uniqueness stems from its reliance on
Shariah as a reference frame.
Other countries are following the Malaysian experience. In March
2018, the government of Indonesia issued the very first sovereign
green Sukuk, raising an amount of US$1.25 billion. In October 2018,
Brunei declared that it envisages becoming a platform for socially
responsible investments and green finance, in order to support the
achievement of the UN SDGs.
At the international institutions level, the Global Islamic Finance and
Impact Investing Platform, which was launched in 2016 by the UN
Development Program and the IDB to position Islamic finance impact
investing as an enabler of SDG implementation, announced some
structural initiatives. These included promotion and implementation
of green Sukuk across the globe, the creation of an SDG label for
Islamic finance investments, and the start of a new research aiming
at not only mapping Islamic finance with impact investment in the
OIC region but also at identifying demand and opportunities for key
SDG sectors.
Finally, 2018 witnessed increased interest in building synergies
between Waqf and Islamic finance institutions. For example, Bank
Indonesia announced that it will issue a cash Waqf Sukuk. Proceeds
will be channeled to public or private social projects.
Preview of 2019
Malaysia should continue to lead the Islamic impact finance
momentum through innovative Sukuk structures and new initiatives
by Islamic banking institutions driven by VBI implementation. Other
OIC countries should also contribute to the Islamic impact finance
trend especially in Southeast Asia, the Middle East and Turkey.
I believe that the commitment of existing players to internationally
accepted standards and frameworks as well as to international
initiatives will strengthen trust and contribute to continued growth
of Islamic Impact finance and increased funds for sustainability
friendly projects. One example of such international initiatives is
the Principles for Responsible Banking by the Finance Initiative of
UN Environmental Program, which provides a framework for the
sustainable banking system of the future. These principles, which
will be officially launched in 2019, seek to align the banking industry
with society’s goals as expressed in the SDGs and the Paris Climate
Agreement.
Finally, it is hard to imagine the emergence of Islamic impact finance
without a strong focus on technology. Today, technology provides
tremendous possibilities to make financial services affordable,
scalable, customizable and effective (smartphones, peer-to-peer
platforms, blockchain, artificial intelligence). It is not unreasonable
to bet that technology will be an important part of the next Islamic
impact initiatives in 2019.
Conclusion
The Islamic finance industry is slowly shifting gears toward
embedding sustainability into its core business model.
Undeniably, expectations from the private and public spheres are
high with respect to sustainability challenges. The industry has no
choice but to hasten the pace and leverage impact as a
competitive advantage.

December 2018
T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
41
 sector report
Shariah & Corporate Governance

Bright future outlook for Shariah governance

Prof Dr Mohamad Akram Laldin is the executive
director of the International Shari’ah Research
Academy for Islamic Finance. He can be contacted
at akram@isra.my.

The global Islamic finance industry has seen remarkable

progress over the last decade. According to the Islamic
Financial Development Report 2017, Islamic financial assets had
grown to a total of US$2.2 trillion at the end of 2016, with global
assets expected to surpass US$3.7 trillion by 2022. Indeed, 2018
witnessed many developments in the Islamic financial industry.
This report highlights the most important Shariah-related
developments and initiatives of the Islamic financial industry in
2018 and what is expected in 2019.

Review of 2018
In Malaysia, Bank Negara Malaysia (BNM) has officially issued and
published 12 Shariah standards, seven of which come into effect
this year. These include contracts such as Ijarah, Kafalah, Qard,
Wakalah, Wadiah and Hibah, as well as Waad (promise), which is
not a contract but is used in contracts to achieve the objectives
of the contracting parties. In addition, exposure drafts on two new
standards, namely Rahn and Bai Al Sarf, were also published for
industry consultation, with a view to finalizing the standards at the AAOIFI, its Shariah board and committees have issued and
end of 2018. These Shariah standards outline the principles, pillars published 58 Shariah standards so far, and they are currently working
and conditions of specific Shariah contracts to ensure end-to-end on the completion of at least 12 draft standards, four of which are
compliance with Shariah rulings in the structuring of Islamic financial considered the most important. These include the Shariah Standard
products and services. on Special Purpose Vehicles (SPVs), the Shariah Standard on Debt
(Al Duyun), the Shariah Standard on the Right of Intifa’ (Beneficial
The inaugural Roundtable Meeting of Centralised Shariah Advisory Ownership) of Real Estate, and the Shariah Standard on Muzara’ah
Authorities in Islamic finance hosted by BNM in Kuala Lumpur (a type of sharecropping contract).
on the 2nd October 2018 was attended by more than 30 senior
Shariah advisory authorities and supervisory authorities from seven
jurisdictions: Malaysia, the UAE, Bahrain, Sudan, Nigeria, Brunei and
Preview of 2019
the Maldives. The objective of the roundtable meeting was to foster 2019 will be a challenging year and it is expected that there will be
greater connectivity and collaboration among Shariah scholars and more integration and harmonization of Shariah and legal opinions as
financial supervisory authorities to unlock the full value proposition well as interaction between scholars in different parts of the world.
of Islamic finance. The meeting also discussed experiences and This is expected especially after the Dana Gas fiasco, which had a
exchanged views on the challenges faced by each jurisdiction in significant impact on the Shariah and legal fraternity.
the operations and decision-making processes of their respective
centralized Shariah bodies. For Malaysia the revised Shariah Governance framework which
is still being worked out by BNM is expected to further enhance
In addition, BNM is studying the feedback to the Shariah Governance Shariah governance practices in Malaysia. Among the significant
Exposure Draft released on the 7th November 2017. This proposed enhancement is that the framework spells out a clear demarcation
regulation aims at strengthening the effectiveness of Shariah between the role of the Shariah committee and the board of directors
governance implementation within Islamic financial institutions, of banks.
primarily through enhanced oversight accountability over Shariah
governance and improvements to the quality of internal control Another initiative worth mentioning is the declaration of the deputy
functions. governor of the Central Bank of Algeria, during his speech at the
Algerian conference on Islamic insurance and banking held on the
The establishment of the Higher Shariah Authority (HSA) at the 24th–25th November 2018, of the new legal system and regulations
Central Bank of the UAE follows the examples of Malaysia, to be applied to ‘participatory finance’ (the local name for Islamic
Indonesia, Pakistan, Bahrain, and Oman. The role of the HSA is to finance). The new legal system and regulation will be released next
oversee the UAE’s Islamic financial industry and to supervise Islamic year after being approved by the Board of Loans and the Monetary
banks, financial institutions and investment companies. It is worth System.
mentioning that the HSA has adopted AAOIFI’s Shariah standards
and is making them mandatory for all institutions offering Islamic Conclusion
financial services.
To conclude, with the aforementioned initiatives, it is expected that
The issuance of Shariah supervisory governance (SSG) for Kuwaiti there will be further developments in Islamic banking and finance
Islamic banks by the Central Bank of Kuwait (CBK) took place globally. These efforts will also strengthen the quality and accuracy
effectively on the 1st January 2018. The issuance of SSG is in line of Shariah decisions and advice within Islamic financial institutions
with the continuing efforts exerted by the CBK to promote Islamic and will promote stakeholder confidence and the integrity of the
banking activities and develop Shariah supervisory regulations for Islamic financial industry, thereby contributing toward maintaining
Islamic banks. financial growth and stability.

42 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
December 2018
 sector report
StandardS
Standards in Islamic finance
Ammar Ahmed is the head of product development
and training at Dar Al Sharia. He can be contacted at
ammar.ahmed@daralsharia.ae.
Three key institutions are torchbearers of standardization in
the Islamic finance industry with each playing a key role in a
particular domain.
AAOIFI has pioneered the work to codify the Shariah rules and
guidelines for widely used contract structures in Islamic finance
through the Shariah standards which are now available in
numerous languages. In addition to the Shariah standards, AAOIFI
has also published 39 standards on accounting which provide
framework guidelines to record transactions under Islamic finance
contract structures and 10 standards on Shariah governance and
ethics. Currently 19 jurisdictions have fully or partially adopted
AAOIFI standards, the latest being the UAE which made it
mandatory for all Islamic financial institutions to comply with the
Shariah standards, and an additional six jurisdictions have AAOIFI
standards as recommended guidelines. We observe this trend of
growing acceptability of AAOIFI by regulators.
The Islamic Financial Services Board (IFSB) was established in
2002 and currently has 180 members which include 78 regulatory
and supervisory authorities across 57 jurisdictions. The IFSB is
geared toward and has played a key role in formulating guidelines
for central banks and regulators to regulate and monitor Islamic
financial institutions. Some of the key standards issued by the IFSB
are in the areas of risk management, disclosure, capital adequacy
and governance for banks, Takaful and capital market institutions
and transactions. Currently compliance with the IFSB is not
mandatory in most of its member jurisdictions however regulators
have benefited from guidelines provided in some of the standards
to formulate their own rules. Additionally, the annual IFSB Islamic
Finance Stability Report is now one of the most awaited resources
which provide an in-depth assessment of the global Islamic finance
industry.
The International Islamic Financial Market (IIFM) has successfully
filled the gap of providing standardized contract documentation,
terms and conditions for various interbank, money market and
capital market transactions. To date, 10 standards have been
published on key areas such as interbank placements, risk
participation, repos, swaps, and FX forwards. IIFM standard
contracts are focused toward Islamic financial institutions and are
helpful to reduce the negotiation time for each transaction and
create a robust secondary market for the instruments.
Review of 2018
During 2018 we observed that these three apex standard-setting
bodies have started to collaborate in some form which is expected
AAOIFI IFSB
58 published Shariah standards 22 published standards
39 accounting standards
10 governance standards
December 2018
to positively impact the Islamic finance industry. AAOIFI has signed
a collaboration agreement with both the IFSB and IIFM during the
year 2018.
AAOIFI has not issued any new standards in the year 2018,
however two Shariah standards are in the pipeline — Sale of Debt
and Waqf. On the governance and accounting front AAOIFI is
currently working on six standards each. Some key standards in
the pipeline include accounting standards for Sukuk and a revision
of Ijarah and on Waqf governance and Sukuk governance.
IFSB issued three new standards in December 2018 which have
taken its tally to 22:
• IFSB-20: Key Elements in the Supervisory Review Process of
Takaful / Retakaful Undertakings [Islamic Insurance Segment];
• IFSB-21: Core Principles for Islamic Finance Regulation
[Islamic Capital Market Segment]; and
• IFSB-22: Revised Standard on Disclosures to Promote
Transparency and Market Discipline for Institutions Offering
Islamic Financial Services (IIFS) [Banking Segment].
The risk participation standard documentation was extensively
discussed and finalized by the IIFM during the year in addition to
a regulator-supported awareness drive across various markets for
adoption of standards published by the IIFM.
Preview of 2019
AAOIFI has embarked on an ambitious program to have the
standards widely available in various languages across the world
and as part of this effort we will see Shariah standards in Mandarin
and Turkish. A fully revamped Certified Shariah Advisor and Auditor
program is expected to be unveiled in 2019. This is in addition to
the issuance of the standards in the pipeline.
The IFSB has formulated key strategy goals for 2019 and beyond,
key goals include the facilitation for implementation and capacity
development. We expect more efforts and outcome on this front as
key regulators seems to have increased the level of engagement
with the IFSB.
The standard on risk participation is expected to be released
soon by the IIFM. Further, the year 2019 will also see industry
engagement on the Sukuk standards which are already under
review by key industry stakeholders. The IIFM has also announced
that it will commence work on standardized documentation for
gold. Further, the IIFM has also planned to initiate capacity-building
and awareness programs in addition to translation of the standards
into French, Bahasa Indonesia and Turkish.
Conclusion
The Islamic finance industry has become a systemically important
industry in some key jurisdictions and the regulators and industry
players are encouraging standardization. It is expected that more
jurisdictions will increase engagement with these standard-setting
bodies to benefit from the exemplary work done.
IIFM
(Two technical notes and six guidance notes)
One standard in draft circulation
T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
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 sector report
Standardization

Absolute standardization not possible as it

discourages innovation
Chart 1: Types of assets in various jurisdictions
Muhammad Kashif Zafar is the head of finance at
Sohar Islamic. He can be contacted at kashif.zafar@ 100%
hotmail.com. 80%
60%
40%
The growth of the Islamic finance industry has been hampered 20%
by the lack of consensus. This has resulted in doubts in the 0%
mind of the public and puts a question mark on the legitimacy

Afghanistan

Indonesia

Kuwait

Malaysia

Oman

Pakistan

Saudi Arabia

Sudan

UAE

UK

Palestine
of Islamic finance. Standardization is defined as: “establishing
universal Shariah standards which would eliminate the shortage
and the divergence of Shariah interpretation”.
Murabahah Musharakah Istisnah
Considering the history, it is a tall order and has divided the industry Wakalah
Salam Mudarabah
on whether to push for standardization or not. Supporters of
Ijarah Tawarruq Diminishing Musharakah
standardization quote the following benefits:
• Simplification of product development process. Source: Author’s own

• Discourages Fatwa shopping on part of Islamic institutions,

banks and customers. Chart 2: Product types used in financing on average in Islamic
• Economies of scale could be achieved and will establish Islamic banking by key players
finance as a more dominant player in the market.
Others
10% Murabahah
The biggest concern of opponents of Shariah harmonization is that Wakalah
20%
standardization would discourage innovation. Innovation has been 4%
the key to bring the Islamic finance in the limelight. They are of the
opinion that sufficient standardization has already been achieved
and institutions like AAOIFI and the IFSB are working to establish
Tawarruq
broad level guidelines. It’s up to individual institution and jurisdiction
8%
to establish the operational level guidelines.

McMillian (2010) defended standardization as establishing universal

Shariah standards possibly through a “flexible ‘codification’ of the Salam
Shariah principles and precepts”, which would eliminate the need 2%
for individual decisions by Shariah scholars, thus reducing the Diminishing
Istisnah
problems of the shortage of Shariah scholars and the divergence of Musharakah
3%
Shariah interpretation. 26%

Oakley (2010) noted that the Islamic finance industry is not currently
codified and individual transactions need approval by Shariah Musharakah
Ijarah/Ijarah Muntahia
scholars. Still Islamic finance professionals seek Shariah approvals 6%
Bittamlik
Mudarabah
for individual transactions. Oakley has pointed to a serious issue 20%
Source: IFSB 1%
which is big challenge for daily operation in Islamic finance. The
absence of a unified operational level standard has led to cost
increase in Islamic banking and risk of non-compliance. In the case of structured products, things get more confusing like
in the case of derivatives where they are immediately classified as
Gharar. The complexity of structured products makes it difficult for
Review of 2018
people to accept financial innovation.
If we look at the types of assets in various jurisdictions, the
selection of products tells a story about the need and scope of Preview of 2019
standardization. Murabahah remains the favorite product followed
by Ijarah. This trend is the same among established jurisdictions as The voice for standardization is growing stronger. We are seeing
well in countries where Islamic finance is new. We see more product industry experts coming together to close the gaps and developing
variety in jurisdictions like Pakistan and Malaysia. In Saudi Arabia new roads to consensus. The secretary-general of AAOIFI once
Tawwaruq makes up 46% of the financing base whereas in many stated that AAOIFI does not have the enforcement power to bring
jurisdictions, it is impermissible. standardization (Reuters 2011); the same sentiment was mentioned
by the IFSB. I believe that improving the quality of standards and
Except for Murabahah and Ijarah, which are executed in their pure increased awareness of standards issued by AAOIFI and the IFSB
form, transactions are structured by a combination of various can play a key role in standardization in Islamic finance.
product types. It not only complicates the execution but also makes
acceptability difficult among customer. For example, a house Conclusion
finance transaction has following the types of contracts/products Absolute standardization will never be achieved as it is
engineered into a typical housing finance product: agency, Ijarah impracticable; it will discourage innovation. Conflicts to an extent
and diminishing Musharakah, whereas some banks do Murabahah would spark debate and drive new ideas, lead to research and
to finance a house and some use Tawarruq. find new solutions.

44 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
December 2018
 sector report
Structured Finance
Structured financing ­‑ harbinger of a new era
Tayyaba Rasheed is the head of the Investment
Banking Group at Faysal Bank. She can be reached
at tayyabasana2001@yahoo.com.
The global Islamic finance industry now has surpassed the
US$2 trillion-mark in assets across its three main sectors
(Islamic Financial Services Industry Stability Report 2018):
banking, capital markets and Takaful. Total assets were valued
at US$2.05 trillion as of the end of 2017. Approximately 92%
of the market share of the Islamic assets are concentrated in
Islamic countries like Iran, Saudi Arabia, the UAE, Malaysia,
Kuwait and Qatar. The world`s first green Sukuk facility was
issued by Indonesia in February 2018 for a total issue size of
US$1.25 billion. This could also be termed as a new milestone
reached in structured financing in Islamic banking.
It is clearly understood that Islamic finance based on its very
disposition entails that it is used for generation of resources/assets
and not merely for consumption. Islamic finance inherently rests on
an asset creation principal thus undermining the risks associated with
leverage. To accentuate the principal of fairness Islamic financing
also entails recovery of profit only upon establishment of a usufruct.
It is a unique concept whereby until the asset being financed turns
into an economically useable state, the Islamic financier may not
demand or charge profits.
Review of 2018
When it comes to structured financing, it clearly implies substantial
real and tangible asset creation hence infrastructure projects
inherently make to an excellent case for structured Islamic financing.
Complexities arise based on the nature of such projects and
determining the ability to charge profits as projects take considerable
time to achieve completion and generate revenue. Another
complexity arises when the asset or infrastructure is created for
primarily the public and social use and may not eventually generate
enough cash flow by themselves to pay for the profit and buy back
the Musharakah units over the course of financing.
Intricacies also arise when in certain projects the underlying asset
is not owned by the obligor; the obligor is merely responsible for
building up the support infrastructure and is entitled to tariff by
way of an underlying concession agreement. The spending will
not translate to saleable real assets for instance the building of a
motorway under the BOOT (build, own, operate and transfer) model,
the land provided for the development of the road is owned by the
government.
Interestingly over the past year notable transactions were closed
under the ambit of Islamic structured financing. Below are
descriptions for two such transactions closed in Asia. A road project
was designed under a concession agreement where the land was
owned by the government; the Shariah structure was devised on
the basis of a legal ruling that that the immovable and detachable
assets which were not permanently fixed to the land will be owned
by the concessionaire.
A diminishing Musharakah was devised as financing in tranches
was required. Some of the underlying Musharakah assets such
as solar energy fog lights, weigh stations, generators, signboards,
traffic control center, toll booth equipment which had already been
procured by the project company were used for Shariah structuring.
The structure was successfully implemented and financing granted.
Another insightful structured project financing real life case study is of
a mining project where a significant chunk of the capital expenditure
December 2018
is incurred in overburden removal and the development of the mine.
There are no tangible assets being created in a mine development
project. In one such transaction the structure was devised using the
principles of Istisnah and Ijarah. Certain project assets with a useful
life of over four years were identified. These assets were to be used
for the development of the mine to extract coal while the mine was
to be in the development phase for the period of four years. The
project company was supposed to undertake either Istisnah (in case
of non-existent assets) or sale (in case of assets being available).
In the case of an Istisnah transaction, upon the availability of assets,
a company would declare the assets to the Islamic bank through an
asset delivery note with details and value of the assets delivered.
After the asset delivery, Ijarah will be commenced on the assets.
At the end of the fourth or fifth year the company may undertake
to puchase the Ijarah assets upon completion of the Ijarah contract
at face value. In order to avoid a buyback, the last delivery of the
Istisnah asset and the last asset purchase form is to be executed at
least one year prior to the Ijarah termination date, ie up to three years
only. In the case of more financing being required in the fourth year
then their disbursements are to be made under a Salam transaction
for future delivery of the mine output.
Preview of 2019
2019 will see more of such transactions happening as China is
stimulating infrastructure spending around the world under its ‘One
Belt, One Road’ initiative. However, to facilitate deeper the use of
structured Islamic financing the possible steps which should be
taken include developing institutional investors, regulatory and legal
framework to encourage asset-based finance. Going forward, there
is a need for reforms in taxation, duties and capital gains tax. The
government’s patronage will remain crucial to developing strategic
long-term planning and promote Islamic finance.
Conclusion
Undoubtedly Islamic banking is likely to reach new heights and
cover new grounds quite rapidly going forward. The fast-changing
global and economic dynamics entail that suitable Shariah compliant
innovative solutions are provided by Islamic financiers to tap
structured finance opportunities. These opportunities typically being
much larger in size will substantially add to the Islamic asset portfolio
across the globe. The need of the hour is to overcome the challenges
of Islamic structured products to broadly access the market and
come up with standardized solutions which can be fast adopted.
T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
45
 sector report
Takaful & re-Takaful (Asia)

Need to differentiate for Takaful to succeed in

Asia
In Indonesia, Family Takaful posted the largest growth of over 30%
Marcel Omar Papp is the head of Swiss Re while General Takaful remained stagnant compared to 2017. The
Retakaful. He can be contacted at Marcel_Papp@ number of re/Takaful companies has also increased to 63, however
swissre.com. a big majority are still window operations which is not helpful to the
growth of the industry given that they cannot put in resources to
develop their Takaful business.
In this report I am doing a short analysis of the performance
The Islamic Financial Roadmap for 2017-19 launched by the
of the Takaful industry in Asia in 2018 and looking ahead at the
Indonesian regulator Otoritas Jasa Keuangan in June 2017 has also
challenges next year.
not really given the industry any notable boost. There is also an
overreliance on investment-linked products on the Family side and
Review of 2018 the banking and multi-finance channel on the General side which
2018 has been another challenging year for Takaful in Asia where it could have a negative effect in future if customers turn away due to
is still struggling to compete with conventional insurance which is lower investment income.
dominant even in the key Takaful markets of Malaysia and Indonesia.
While Takaful is growing in these markets, conventional insurance is The other Takaful markets in Asia remain small and are unlikely to
also growing at a similar pace, resulting in a similar market share and grow to a significant size in the near future.
penetration of Takaful compared to 2017.
Looking finally at re-Takaful, operators face the same challenges
In Malaysia, contribution income for both Family and General Takaful as conventional reinsurers, namely a very soft market caused by
increased, particularly with the latter growing by almost 3% to overcapacity. In addition, a lot of re-Takaful operators still struggle to
RM1.35 billion (US$325.37 million) compared to the first half year reach the necessary scale to make their operation viable.
of 2017. One of the noteworthy events this year was the splitting of
composite license in July, affecting particularly the General Takaful Preview of 2019
landscape where four of the smallest companies (combined market
Looking ahead to next year the challenges for the Takaful industry
share less than 10%) returned the General Takaful license, resulting
will remain similar.
in only four companies left in Malaysia writing the business.
In Malaysia, several new guidelines will be introduced and likely
The election in May was also significant as it led not only to a change
have a significant impact on the industry. For instance the new
in government but also to the appointment of a new Bank Negara
Family Takaful framework taking effect on the 1st January 2019
Malaysia (BNM) governor: Nor Shamsiah Mohd Yunus. It is still too
is already seeing effects today as companies have to prepare for
early to tell if this would result in regulatory changes, but at least until
the imminent implementation by developing new strategies and
now BNM has continued with its planned changes like the issuance
products with a focus on moving away from investment-linked to
of the exposure draft for several new guidelines such as the Shariah
protection products.
Governance Framework and Takaful Operational Framework. Both
guidelines pose challenges to the Takaful industry and industry
The four remaining General Takaful companies in the country are
players have been reminded to not expect favorable tax or regulatory
expected to focus more on commercial business, especially the
treatment against conventional insurance when the final guidelines
Halal industry (such as through provision of trade credit Takaful) as
are issued in the coming months.
this is one of the focus areas of the new government.

In Indonesia, the upcoming general elections will be the key topic.

It would also be good for Takaful companies to consider microTakaful

as a prominent tool in reducing the protection gap across Asia. And
lastly, the application of IFRS 17 to Takaful will become a key issue
which will need to be addressed in the near future.

Conclusion
Embracing new technologies and focusing more on consumer
needs will be key to bring Takaful to the next level, a common point
highlighted by industry proponents at recent market events.

The chairman of the Malaysian Takaful Association Fikri Rawi

mentioned that the Takaful industry needs to reinvent its approach
to promoting Takaful for it to remain sustainable, particularly with
digitalization to deliver Takaful products in a more effective and
cost-efficient way. Accelerating research and development efforts to
broaden product and services offerings, he mentioned, should also
lead to value creation in the long run.

Nor Shamsiah had a similar message for the Takaful industry — to

have a different value proposition from conventional insurance and
to concentrate on highlighting the advantages of Takaful.

46 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
December 2018
 sector report
Takaful & re-Takaful (EUROPE)

Takaful & re-Takaful in the European region

Ezzedine Ghlamallah is the executive director
of SAAFI which specializes in Islamic finance and
Takaful solutions. He can be contacted at ezzedine.
ghlamallah@saafi.fr.

In Europe there are legal statutes of mutual insurance

companies provided by the law of insurance that allow to
practice both Family and General Takaful while remaining
faithful to the principles of mutualism and philanthropy. Mutual
insurance companies fulfill the conditions of the Takaful
cooperative model (non-profit, solidarity, variable contributions,
recall and contribution rebates) and they are also essentially
in keeping with the spirit of Waqf. This specificity is conducive
to considering the possibility of creating a Takaful institution
in the European legal framework of mutual insurance, with a
fund established in the form of a Waqf. Thanks to the European
passport, the company once created could offer its cover those who are looking for an alternative model closer to the values
throughout the European continent. of solidarity, sharing and responsibility.

By creating a Takaful institution that invests its assets in accordance
with the rules of Islamic finance, having a Shariah supervisory
board as recommended by the AAOIFI and IFSB standards in force,
produces a model allowing to obtain a consensus on its compliance,
and in which consumers can have greater confidence.
The term ‘sustainable’ development was first mentioned in 1987,
as defined by the UN World Commission on Environment and
Development in the Brundtland Report: “Forms of development that
meet the needs of the present without compromising the ability of
future generations to meet theirs.”. This concept is reminiscent of the
Maqasid Shariah that seek to promote everything that contributes to
the preservation of creation.
In addition to being
certified as compliant
with European law and Shariah, it
will also need to ensure that the
recommendations of ISO 26000,
which specifies the integration of
social responsibility, governance
and ethics standards, are
implemented
In this respect, the Takaful institution, which wishes to perfect its
implementation in Europe, will also have to apply these principles
and be at the forefront of corporate social responsibility (CSR). In
addition to being certified as compliant with European law and
Shariah, it will also need to ensure that the recommendations of
ISO 26000, which specifies the integration of social responsibility,
governance and ethics standards, are implemented within
organizations. To be at the forefront of CSR, this Takaful company
of European law will also have to make investments that are both
in accordance with the rules of Islamic finance but also those of
socially responsible investment, in a way that to respect the letter
of Islamic law but especially to embody the spirit. This will entice
people who are attracted by Muslim ethical compliance but also
Review of 2018
In a context where the needs of the Muslim population are numerous
and where there are many compulsory assurances, Takaful in Europe
is still embryonic. In 2018, Takaful insurance offerings in continental
Europe only concern life and health insurance and mainly life
insurance products, ie savings-investment products.
SAAFI, a pioneer in Takaful in Europe, continued its development and
worked on the satisfaction of other needs including financing funeral
coverage. There is a great need among the Muslim community in
Europe. There are many Muslims who wish to be buried in their
home countries or in Europe according to the Islamic law.
Preview of 2019
SAAFI has therefore worked at the request of various non-profit
associations and Muslim funeral societies to structure SAKINA
Takaful, a financing funeral coverage adapted to these needs.
Shariah certification has been awarded to the International Shari’ah
Research Academy for Islamic Finance in Malaysia. SAAFI and its
distribution network composed by financial advisors, insurance
brokers, non-profit associations and funeral companies in the first
quarter of 2019 will distribute this solution.
SAKINA Takaful is based on a Wakalah model, through membership
in an underwriting non-profit association. The participants join a
non-profit association called Bayt Al Mel and pay a membership fee
to this association and a contribution to the Takaful fund which is
managed by MUTAC a mutual insurance company. The association
Bayt Al Mel will take out a contract on behalf of these members
with MUTAC. The Wakalah fee will be known in advance and the
Takaful Fund managed separately from the other assets of MUTAC.
The claims will be settled from the Takaful fund and the surpluses
donated to Bayt Al Mel’s social action fund for use in solidarity
actions.
Conclusion
In Europe, Muslims represent more than 16 million inhabitants with a
banking and insurance equipment rate to be among the highest in
the world. They are therefore in the world among those who have the
largest number of banking services and insurance coverage
compared to Muslims in other countries where banking and
insurance services are significantly less developed. This high level of
insurance penetration can contribute to the rise of Takaful institution
in Europe if start-ups in the sector are able to develop themselves in
order to become a major player.

December 2018
T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
47
 sector report
Takaful & re-Takaful (Middle East)

Room for enhancing Takaful in the Middle East

Dr Sutan Emir Hidayat is the associate professor
and head of the Business Administration Department
at the University College of Bahrain. He can be
contacted at sutan@ucb.edu.bh.

The developments in the Takaful segment will absolutely

influence the overall development of the Islamic financial
industry. Therefore, it is very important to periodically evaluate
the performance of this segment especially in its largest market,
the Middle Eastern region which holds more than 60% of the
market share and have continuously recorded double-digit
growth rates in the last decade.

Review of 2018
The following are old issues and challenges which still have not been
addressed in 2018:

a. Low insurance penetration rate address a low insurance penetration rate. Takaful operators
Despite the improvement in some countries, overall the should identify the different needs of society and come up with
insurance penetration rate is still relatively low in the region products and services that fulfill those different needs. Product
as compared to other regions. For example, the insurance development based on Maqasid Shariah should be applied
penetration rate in Southeast Asian region is still much higher since religion is still the most important selection criteria for
than the Middle Eastern region. Takaful scheme.
b. Over-reliance on General Takaful businesses b. Introduction of agency distribution channels for Family Takaful
It is well known that 80% of the operators’ businesses in the as implemented in other countries should be considered in
region come from General Takaful businesses. The Family order to address the issue of over-reliance on General Takaful
Takaful businesses in the region are still much below their businesses. Individuals and companies can be the agents
potential. Low oil prices have impacted the segment since for Family Takaful businesses which will also reduce the
many government’ engineering projects have been cancelled or unemployment rate. In addition, the subsidies implemented
delayed and more customers are opting for the lowest category in most GCC countries mean less benefits provided by the
of mandatory insurance policy. governments and indicate potential businesses for private
pension and annuity plans for insurance and Takaful companies.
c. Lack of comprehensive and robust regulatory framework
c. Enhancement in regulations should be conducted to counteract
There are differences in the levels of regulatory framework for
the lack of comprehensive and robust regulatory frameworks.
Takaful among Middle Eastern countries. Certain countries such
Introducing specific laws for Takaful in countries that still
as Bahrain and the UAE have specific Takaful regulations while
don’t have such laws need to be sped up. Takaful regulations
others do not.
must not only be investor-friendly but also ensure customer
d. Overcrowded market protection, and conduct more aggressive research and
In some countries like the UAE, there are too many Takaful development on Shariah compliant alternatives.
operators competing for the same market. This situation will d. To address the issue of an overcrowded market, consolidation
leave small size operators with two options, namely to exit the still needs to take place until the optimum number of Takaful
business or consolidate. operators is achieved.
e. For the issue of competition from blockchain technology-
The following are relatively new issues and challenges that have based companies, Takaful operators in the region should
attracted the attention of Takaful stakeholders during 2018: consider using the technology in their operations. Integrating
the blockchain technology into Takaful businesses is expected
a. The competition from blockchain technology-based companies to bring a better degree of simplicity and transparency to the
In 2018, blockchain technology-based companies either underwriting process and reduce fraud.
introduced or plan to introduce smart digital Takaful. This f. As for the issue of risk management and internal controls,
business model can be a threat to Takaful operators in the effective and sound risk management as well as internal
region if the wrong strategy is taken by the operators. controls must be in place for Takaful operators in the region
and others to successfully face the unprecedented regulatory
b. Risk management and internal controls pressures put on them by their respective regulators.
During 2017-18, many new insurance and Takaful rules were
implemented in most jurisdictions in the Middle East. Surely, in Conclusion
order to comply with the new imposed rules, Takaful operators
The Middle East has been the biggest market for the Takaful segment
need to enhance their risk management systems.
in the last decade. Despite its leading status, there are old as well as
new issues and challenges that need to be addressed by Takaful
Preview of 2019 stakeholders in the region to bring the sector into a higher phase of
development. Since there is always room for improvement, the
The following are solutions recommended to tackle the above issues identification of the issues and challenges and solutions is very
and challenges in 2019: crucial for the sustainable development of the segment and the
a. Consumer-based innovative products are the best solution to overall Islamic financial industry.

48 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
December 2018
 sector report
Trade Finance

Islamic trade finance: A viable alternative solution

Shamzani Hussain is the head of global Islamic

banking at FAB Siraj. He can be contacted at
shamzani.hussain@bankfab.com.

Since the turn of the 21st century, Islamic finance has evolved at
a remarkable pace in terms of innovation and growth patterns.
The dynamic mechanism, modalities and features of the
Islamic financial industry has attracted the interest of different
stakeholders across various jurisdictions. By catering to the
financial needs of diverse economic sectors within the realm of
ethical and value-based financial infrastructure, Islamic finance
is well-poised to increasingly capture a larger clientele base
globally.
As an alternative financial system, Islamic finance is gaining
momentum; worldwide in general, and within the GCC and Southeast
Asia in particular. Consistently growing at an average double-digit
compounded annual growth rate, the Islamic financial industry has
emerged to become a crucial market force to be reckoned with. By
the end of 2017, the cumulative assets falling under Islamic finance
industry were estimated to exceed US$2.4 trillion. Considering
some conservative estimation, the industry is expected to hit the
mark of US$4 trillion within the next six years. To meet the ever-
growing demand for Shariah compliant financial instruments, the
Islamic finance industry is strengthening its footprints through its
core propositions — particularly trade finance.
Review of 2018
At the current global financial spectrum, the Islamic trade finance
segment is at the center of a plethora of regional initiatives. For
instance, the UAE-EXPO 2020, Saudi-Vision 2030, Pakistan-CPEC
and One Belt One Road (OBOR) initiatives are set to open-up new
avenues for Islamic trade finance. It is believed that by strategically
positioning itself, Islamic finance, in general, and the Islamic trade
finance segment, in particular, can provide a viable solution from a
liquidity and working capital provision perspective.
During the year, the Islamic trade finance industry embraced new
dimensions of financing by launching new solutions and harmonizing
standards particularly on product structures and documentation.
Moved by the strong demand and a resilient growth trajectory of
Islamic trade finance, the industry has started looking at new markets
with alternative trade finance solutions. On this note, 2018 also saw
a strong push by Islamic financial institutions toward embracing
digital technologies such as blockchain and smart contracts as the
means toward financial inclusion, enhancing efficiencies, facilitating
transparency, lowering operational and transactional cost as well as
tools for de-risking.
Preview of 2019
As a niche but burgeoning industry, Islamic finance is consistently
expanding its outreach within the global landscape. The Shariah
compliant propositions and alternatives are being received across
Muslim and non-Muslim countries with equal warmth and interest.
Given its significant growth pattern and increasing penetration into
non-traditional Islamic markets and segments, the overall prospect
of the Islamic finance sector is highly promising. Hence, at this
juncture, it is critical that the industry adopts a futuristic approach,
embrace disruptive technology, entertain the requisites of innovation
and sharpen its focus in meeting the competitive demands and
sophistication of the market.
Since trade finance represents an asset-based financial mechanism
which entails real economic activities, it naturally fits with the
guidelines and ethos of Islamic finance. However, the industry is yet
to claim its fair share from the global trade finance market. While
the published aggregate figure for global export and import stands
at approximately US$33 trillion, the estimation for intra-OIC trade
finance is not more than US$5 trillion. In view of the mammoth size
of the liquidity requirement for global trade finance, it is evident
that there is a growing gap between the aggregate demands of
investment in trade finance and its supply; an opportunity that the
Islamic finance industry can potentially grab and benefit from.
The significance of Islamic trade finance is bound to magnify,
particularly, in the context of China’s OBOR initiative. This initiative
is to construct and develop a transcontinental unified market. For
the initiative to culminate there is a sizeable funding gap. Islamic
finance can cater to this gap by deploying its investment through
Shariah compliant trade financing structures and propositions. As
per the World Pensions Council report, it is estimated that for the
infrastructure development of Asian countries with reference to
OBOR, there is a need of a US$900 billion investment each year for
many years in continuation. According to the Asian Development
Bank (ADB) estimation, the 32 ADB member states alone will require
over US$8 trillion for infrastructure development within the next two
years in order to meet their infrastructure development needs.
In this context, the OBOR initiative which binds 70 plus countries
and exhibits a funding gap of approximately US$49 trillion till 2030,
offers a lucrative opportunity for the Islamic trade finance segment to
engage in the initiative and secure the underlying financial and non-
financial benefits. Remarkably, since the Islamic finance industry
provides preference to infrastructure financing, the OBOR initiative
seems aligned with the underlying principles of the industry.
Conclusion
The Islamic trade finance segment enjoys a massive potential to
offer various viable Shariah compliant financial solutions to not only
intra-OIC trade activities but globally. Islamic trade finance can be
a catalyst of change for infrastructure development and project
finance; boosting the economic growth across the regions. With a
fair recognition of its potentials, the Islamic trade finance segment
can immensely contribute in new markets including traditional
and non-traditional Islamic markets. A uniform framework for
implementation of Islamic trade finance mechanics and propositions
can help the Islamic financial industry to deploy its resources in a
desirably efficient manner.
From an inter-regional perspective, the Islamic trade finance
propositions can be deployed to cater to the many opportunities
available to the Islamic finance industry such as the OBOR initiative.
The potential contribution in OBOR initiative is remarkably enormous,
which if properly tapped into and materialized, should result in a
win-win strategy for the stakeholders of Islamic finance as well as of
OBOR.

December 2018
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 sector report
WOMEN

The new ‘normals’: Women as principal drivers

in Islamic finance
Aziza Ebrahim is the senior advisor at OASIS
Crescent Group. She has also made it to top 50
influential women in Islamic Finance for 2018. She
can be contacted at aziza@oasiscrescent.com.

We are living in an interesting period in history, where the new

ordinary is being created, where a random twitter post can affect
financial markets, and data leaks can expose millions of people,
where banks no longer require a physical office while instead
a grocery shop, insurance company or a chat application is
a bank. Yet, women are still substantially underrepresented
in leadership roles. As a US presidential election candidate,
Hillary Clinton once said: “There’s still this built-in questioning
about women’s executive ability, whether it is in the corporate
boardroom or in the political sphere.” Only 14.6% of executive
officers, 8.1% of top earners, and 4.6% of Fortune 500 CEOs are
women. At this rate, it is estimated that women will not achieve
leadership parity until 2085 (Forbes 2018).

Review of 2018
While gender equality has been on the global agenda for some time,
2018 is indeed a remarkable year for the push for gender parity,
providing a spotlight to issues ordinary women face in their careers
through movements like #MeToo, #TimesUp, and others. The
Islamic finance industry has also seen a significant progress in this
regard. We have seen women in this decade becoming governors
and regulators of major Islamic financial markets, we have seen a
few women as CEOs of Islamic financial institutions, Islamic asset which I closely monitor is the global trade: we could either see an
management firms, and Takaful companies. escalation or resolution of the trade wars, in which case if there is a
settlement it will have a massive boost to the global economy and
Nevertheless, I still find myself often as the only women in the riskier assets need to point the financial market, however, if the trade
room on a committee meeting or among very few female speakers wars continue to escalate we could potentially see headwinds for
at conferences. Indeed we have made progress. However reality financial markets.
dictates that we have a long way yet ahead of us in reaching genuine
equality for women at the workplace in the Islamic finance sector. This all puts a lot of pressure on people watching the financial
In my opinion, not all barriers facing women in Islamic finance markets. On a positive note for 2019, we have some of the great
can be attributed to the stereotypes imposed by the industry or a women in power to negotiate those deals, with a greater focus on
workplace. Women often hold themselves back from advancement diversity being placed in various sectors of the economy and Islamic
with self-imposed barriers. finance.

The last 12 months have been interesting for the Islamic finance As a result of the #MeToo movement and a greater focus on the
sector, where more and more focus has been placed on technology, disparity of remuneration between males and females, we will start
which could potentially give the sector a new breath while it could seeing a great focus on improving gender diversity in the workplace.
expand its business in markets where traditional customers may not
have had physical access to services earlier, I would like to highlight This in its place will encourage people to have a long-term view
that to my pleasant surprise I have had an opportunity to meet and for women in Islamic finance business, identifying for instance
work with a number of very active and technically well-equipped mentors to guide women, which would result in unlocking more
ladies who are positioning themselves at the forefront of the Islamic female leaders and role models within the Islamic finance sector.
fintech industry development in hubs like Bahrain and Malaysia. I am sure with women adopting more and more leadership roles,
This, to me, is a great example of what women can achieve when the Islamic finance industry benefits with them contributing a unique
they believe in themselves, their competence and ability to achieve set of skills, ideas and life experiences that can broaden the entire
success (just as their male peers). industry’s insight and strategies.

I am inspired to see women in those Islamic fintech hubs being not Conclusion
only a part of but rather the principal anchors of the fourth industrial
revolution momentum in Islamic finance. A sustainable gender-driven environment will facilitate further
dissemination and growth of Islamic finance, as we open up to new
Preview of 2019 challenges of the world, and in 2019 I do see technology being the
greatest challenge and opportunity for the Islamic finance sector,
As we are approaching 2019, from the financial markets side, we where women’s roles should certainly not be underestimated.
do foresee an impact of tighter monetary policies, and a rising
interest rate resulting in less liquidity in the market, which will result I am very enthusiastic about the opportunities and roles that women
in central banks scaling back their balance sheets. Another area take in Islamic finance.

50 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
December 2018
 sector report
ZAKAT

Harnessing fintech in Zakat management

Mezbah Uddin Ahmed is a researcher at the
International Shari’ah Research Academy for Islamic
Finance (ISRA), Malaysia and a fellow of ACCA. He
can be contacted at mezbah@isra.my.

Estimates suggest that every year Muslims around the world

contribute tens of billions of dollars as Zakat through formal
channels. If the informal channels are considered, then the
amount could be in the hundreds of billions of dollars. Despite
this large contribution, many argue that the present Zakat
management system fails to achieve the desired results. The
current fragmented distributions at the individual level are
identified as one of the main reasons for this failure as they
lack any identified objective. The traditional institutional Zakat
management also faces distrust as there is a lack of transparency
in the use of the money. The advancement of fintech and
increased tech literacy among the masses provides new hope
for addressing these problems. Fintech has already begun to
be harnessed in Zakat management, and its applications in this
field can be expected to increase.

Review of 2018
This year witnessed the successful launch of several online platforms
for Zakat collection and distribution.

The United Nations High Commission for Refugees (UNHCR)

unveiled its online Zakat platform on the 1st May 2018. This is a
further development from its September 2016 launch of an initiative
to collect Zakat funds. Anyone can donate Zakat using this online
platform. The donor only needs to have a valid debit card, credit card
or PayPal account. Donors can also use the traditional bank transfer
alternative to donate their Zakat. Even though there is nothing new
about this collection process, the disbursement process is intriguing.
UNHCR disburses the collected Zakat funds to thousands of Syrian
refugee families in Jordan who are living below the extreme poverty
line. The eligible refugees receive a text message when funds are
made available to their account. They access the funds by scanning
their iris at ATM machines. They do not need to carry a bank card or
remember a pin number. This provides a simple, cost-effective, and
fraud-proof identification process.
UNHCR does not charge any overhead on the collected Zakat
amount; 100% goes to the refugee families. The operating expenses
and wages are covered by other sources of funding or by volunteer
labor. UNHCR received endorsements from five reputed Shariah
authorities in establishing their acceptability as an intermediary
to collect and redistribute Zakat. They have adopted the views of
the Hanafi School of Islamic jurisprudence as they deemed the
requirements of this school to be more beneficial to Zakat recipients
and easier to implement in the given context.
Global Sadaqah is another impressive initiative launched in July
2018. This is a crowdfunding platform for Zakat as well as Sadaqah
(non-obligatory charity) that matches donors with recipients. The
platform hosts different fund collection campaigns and invites the
public to donate their charity in the form of Zakat or Sadaqah. The
donors can choose any campaign according to their individual
preference. The contribution of many toward specifically targeted
campaigns provides an assurance that the funding requirements will
be met and that the campaigns will be a success. Each campaign’s
vetting prior to being hosted on the platform and the disclosures
made by the platform, including on funding status, provide high
assurance to the donors.
Preview of 2019
More innovative initiatives are expected to be realized or to make
further progress in 2019.
The idea of leveraging on blockchain in bringing transparency to
Zakat management may see further progress this year. A team at
the International Centre for Education in Islamic Finance is already
working on this. However, Dr Aznan Hasan, a prominent Malaysian
Shariah scholar, advised caution in applying yet-to-be-widely
accepted technologies for Islamic social finance as it cannot afford
the further diminishing of public trust.
Researchers at the International Shari’ah Research Academy for
Islamic Finance (ISRA) have called for standardized practices and
more disclosures by Islamic financial institutions regarding their
Zakat calculations. They have identified varied practices for Zakat
calculation among the Islamic financial institutions in Malaysia.
A research team at ISRA also called for digitalization of Zakat
calculation for corporate entities. They argue that Zakat
contributions could be amplified if corporate entities also pay Zakat.
This requires immediate attention as there is increased pressure on
finding sources of funding to support a large number of refugees in
several Muslim-majority countries. The research team proposes a
Zakat calculation software that will enable any corporate entity to
easily calculate its Zakat obligation on behalf of its shareholders in
an acceptable manner. The software would overcome the limitation
of corporate entities not having a Shariah committee to advise
on Zakat calculation. The software could also be adopted by the
Islamic financial institutions.
Conclusion
Zakat as one of the five pillars of Islam is relevant to all affluent
Muslims wherever they live. The use of fintech will bring ease in
Zakat contribution as well as transparency. An added benefit of this
might be successful negotiation with the tax authorities in securing
tax rebates for the amounts paid as Zakat.

December 2018
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 INTERVIEW

Interview with Dr Adnan Chilwan, group

CEO of Dubai Islamic Bank
IFN brings you an exclusive interview with Dr Adnan Chilwan, the group CEO of Dubai
Islamic Bank (DIB), in which he talks about DIB and shares his views on issues like the
changing banking landscape, the unstoppable pace of digitalization and the ensuing
explosion of fintech companies, among others.

DIB has been in growth mode – both on the profitability front, as

well as on the geographical footprint front. How has expansion
into Kenya and Indonesia worked out for the bank? Are they
already contributing to the bank’s bottom line?

Since we entered into a growth mode about five years ago, the
UAE franchise has become one of the fastest-growing banks in
the region, if not the fastest. The strategy we put forward vis-a-via
preemptive capacity creation, both capital and liquidity, as well as an
approach that I would call ‘measured aggressiveness’ has allowed
us to expand across the market in what many deem as difficult and
volatile times. Clearly with the bank’s market share doubling in the
UAE to nearly 10% now, the plans have worked.

With that in mind, we decided to replicate some of our strategy

across our other key markets where we want to expand – Pakistan,
Indonesia, Kenya (PIK). The PIK strategy is developed to connect
the dots from the Far East to South Asia to East Africa with Dubai
as the hub – a triangle that forms an integral part of China’s ‘One
Belt, One Road’ initiative. DIB Pakistan has been fully aligned with
the group strategic plans and is already yielding strong results with
nearly an 80% jump in profitability in the last couple of years.
Indonesia operations have now been beefed up with personnel,
systems and products and 2019 will be the year in which the newly
rebranded Panin Dubai Syariah Bank sets itself on the growth
roadmap, aligned to the group strategy.
DIB Kenya, a greenfield operation with the license granted mid of last
year by the Central Bank of Kenya, has been established as a fully-
fledged commercial bank offering exclusively Shariah banking services
to individuals, SMEs and corporate customers with branches in Nairobi
and Mombasa. As with any new setup, we expect the business to pick
up in the coming years and contribute to the bottom line of the bank
soon. That said, Kenya also forms an entry point for us into East Africa
with further plans to expand to other markets in the region.
Is DIB looking at expanding into other markets? Is India still on
the table?
As mentioned earlier, we have established our presence in Indonesia
and Kenya recently and we have plans to further expand in the East
African belt.
At DIB, we are not limited by a particular approach to growth. Both
organic and inorganic growth options are always on the table. So
far, the former approach has been more dominant, but if there is
an acquisition opportunity, we are open and willing. What is critical
though is the impact on our returns. We will not sacrifice profitability
or risk dilution just for the sake of growth – the money spent has to
enhance the returns to us. We also want to use our strategy that has
worked so well in the UAE and now in Pakistan in all key markets
and expect the new franchises to fund themselves as business
grows. Finally, we want to control the entity and therefore you
may see us divest from some current holdings where we do not
have management control and therefore, are not strategic from our
perspective.
Dr Adnan Chilwan
For us, expansion isn’t merely something we must do; our end goal
is to take actions that create value for the overall franchise – that’s
the most important consideration. Having said that, we will remain
interested if we spot an opportunity and it makes sound business
sense. As it stands, the GCC, ASEAN, India and East Africa continue
to remain exciting potential geographies for us and, depending upon
the opportunity and economic feasibility, you could see DIB expand
in these markets.
Looking back at 2018, what have been the biggest achievements
of DIB?
Being a global pioneer in Islamic banking, DIB has decisively
established Islamic finance as a viable alternative to conventional
banking, placing the UAE as the focal point of this transformation.
Throughout 2018, we achieved several significant milestones that
reiterate our position as a leader in the global Islamic financial
industry.
Earlier this year, we partnered with Emirates Skywards to launch the
new Emirates Skywards DIB credit cards, which offer tremendous
value to the growing community of frequent flyers. We also expanded
our presence in the home finance sector with the launch of ‘First
Step’ as part of our MyHome solutions. It addresses key customer
needs early on in the home-buying journey with an easy-to-use, self-
service platform.
Additionally, we further enhanced our digital banking services with
a new AI-powered ‘DIB Chat Bot’ and a new mobile banking app to
enable DIB customers to manage their finances with greater ease
and efficiency.

52 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
December 2018
 INTERVIEW
We continue to be an active leader in the Islamic capital markets space
with nearly US$8 billion of Sukuk and syndicated deals completed
during the quarter for various issuers including corporates, financial
institutions and supranationals. During the quarter, we assumed the
role of joint lead manager/bookrunner on several Sukuk issuances
along with a co-dealer manager role for the liability management
exercises for corporates, which were conducted concurrently with
the new issuances.
It’s therefore no surprise that DIB ranks among the top two Islamic
banks in the world and is one of the fastest-growing franchises in
the region.
At the local level, the UAE is witnessing potential major
consolidation in the banking sector. How will this change the
dynamics of the banking landscape and will DIB also look at
potential acquisition opportunities in the UAE?
In my opinion, the current wave of consolidation, and possibly more
in the coming days, will not really change DIB’s positioning in the
market. The top four may become top three and would continue to
control around 65% of the market and it’s these large banks that will
continue to dominate the sector in the foreseeable future. However,
it is worth noting that DIB remains the only fully-fledged Islamic bank
in this category.
The myth of Shariah
compliant banking being
limited to Muslims has been
completely dissipated and DIB has
played a huge role in that.
Banks, both Islamic and conventional, are strongly pushing for
digital and fintech developments. Could you share with us DIB’s
fintech initiatives and strategy please?
The global fintech industry is growing at a staggering pace and
is expected to treble its current size in the next five years to over
US$150 billion, so no financial institution can afford to ignore it. That
said, it’s the approach that matters. As financial institutions, we are
at a crossroads – we need fintech start-ups just as much as they
need us. It is about complementing rather than competing.
For us, the main focus of anything we do is the overall customer
experience. It may sound like a simplistic strategy but, trust me,
this is all you need. In my view, digitalization strategy has to be
informed by customer experience and should be crafted to deliver
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December 2018
a convenient, fast and pleasant experience across all touch points.
Another opportunity that fintech provides that the bricks and mortar
banks do not is the significant efficiencies in the cost of doing
business. I foresee a bright future for partnerships between fintech
companies and banks, which in turn will accelerate the evolution to
an unimaginable degree.
All our digital innovations such as our Smart Bank launch and
our new website have been designed with the ultimate customer
experience in mind. And even as we continue to roll out further
exciting digital innovations throughout 2018, our endgame is always
superior customer service.
What are your growth targets for 2019? What areas will you be
focusing on? What challenges do you foresee?
The banking sector is crowded in the UAE, so we are operating
in a highly competitive space. This challenge has been there for a
long time and will continue to exist. Global economic volatility will
continue to pose a challenge along with the geopolitical situation. We
are cognizant of these but have also shown tremendous resilience
over the last five years which everyone agrees were not the easiest
of times.
But what do we do next? To navigate the complexities of the market,
banks are turning to technology, which is the right course of action.
On a broader level, I believe customer experience remains key for
growth, and technology and continuous innovation to achieve that
are paramount. For DIB, digital transformation continues to be a
fundamental element within our client-centric strategy. When we
launched our Smart Bank initiative, we were clear that this shouldn’t
be just a slogan, but a philosophy that is reflected in every interaction
with our customers. And 2019 will be the starting point of our new
growth agenda which will primarily be driven by digitalization.
What is your market outlook for 2019?
I truly believe that Islamic finance is fast becoming a norm in the
financial world. The trends are positive across the world and not
just in the traditional markets, which, combined with the high level
of liquidity among investors in the GCC and other predominantly
Muslim markets, indicate that the sector will continue to flourish.
More importantly though, the myth of Shariah compliant banking
being limited to Muslims has been completely dissipated and DIB
has played a huge role in that.
Banks and financial institutions offering Shariah compliant services
will see a further boost as the Dubai government continues its efforts
to attract investments in areas of Halal healthcare, fashion, cosmetics
and related products. With the country being one of the least
dependent on hydrocarbons in the region, UAE growth forecasts
have already been revised upwards for 2019. With the nation’s
diversification plans moving full steam ahead, and while global
expansion and penetration continue to excite us, we are perhaps
even more excited about what our home location has in store for us
in the years to come.
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53
 country report
AFGHANISTAN

Expecting more in 2019 following the first fully-

fledged Islamic bank in Afghanistan

Manezha Sukhanyar is the former chief of Islamic

banking at Maiwand Bank. She can be contacted at
sukhanyarm@gmail.com.

A healthy banking system is considered as the heart to the

economic system of a nation. Due to the lack of an advanced
banking system, a great portion of capital still remains idle in
Afghanistan.

While it’s more than three decades since the practice of Islamic
banking around the world, this system is at its initial stage in
Afghanistan and is considered a new concept. In a country with
more than 99% Muslim population, Islamic banking is practised
daily but not in a systematic manner. For instance, when people
deal with each other they are concerned about the involvement
of Riba and mostly they lend money based on Qard Hasan, they
practice Mudarabah and Murabahah but their practice is not as per
the banking system.

With regards to the practice of Islamic banking in Afghanistan which Achievements

started in 2009, only seven banks offer Islamic products and services Despite difficulties, the Islamic banking sector has seen some
via window system. As per the World Bank, only 10% of Afghans success and achievements during 2018. After a few years of struggle,
hold an account with financial institution and one of the main reason Islamic Bank of Afghanistan (which formerly known as Bakhtar Bank)
received its license from the Central Bank of Afghanistan in April
for low participation is the presence of interest in the conventional
2018, after the completion of its conversion process from an Islamic
system; this indicates there is a huge market for Islamic banking in
window to fully-fledged bank. This is considered as a milestone in
Afghanistan.
the banking sector of Afghanistan.
In view of the rapid growth of global Islamic banking over the last few
In addition, to boost women’s financial inclusion, in April 2018,
decades, sophisticated products and services have been designed FINCA launched its women-only bank branch in Afghanistan which
which to some extent are compatible with the conventional system. serves exclusively women. This branch offers a full range of financial
However, the products which are utilized by banks in Afghanistan products and services. To attract more customers and overcome
are Musharakah, Murabahah, Mudarabah and Ijarah. But, due to the issue of Riba involvement, this branch offers Shariah compliant
the lack of risk management tools some financial institutions are products and services besides conventional services. Yet another
reluctant to use Musharakah and Mudarabah for financing. positive movement toward financial inclusion.

Review of 2018 Preview of 2019

Challenges Despite many challenges faced by Islamic banking in Afghanistan,
During 2018, Afghanistan’s economic situation remains difficult. there are reasons to remain optimistic. One of them is the dedication
Security instability held back growth and employment. As per a of the people of Afghanistan in avoiding the conventional system
World Bank report, while confidence in the banking sector is yet to due to the involvement of Riba and seeking interest-free banking
recover from the Kabul Bank crisis, profitability of the private bank services.
remains marginal. In addition, financial inclusion is still a challenge.
As reported by the World Bank, more than 90% of adults are As per the Asian Development Bank (ADB) report, due to the
financially excluded which is mostly due to the lack of access to challenging political and security condition, the economic growth is
digital banking services. expected to remain the same for 2019 at 2.5%.

Furthermore, the lack of money market instruments continues to be However, the impact of the parliamentary elections scheduled for
a serious challenge for Islamic banks and Islamic banking windows. 2018 and a presidential election in 2019, should be considered and
Most of the banks with Islamic operations have surplus liquidity in as per the ADB it may compel businesses to adopt a wait and see
view of the existence of a strong market for Islamic banking. Sukuk, approach.
particularly sovereign Sukuk, can play an effective role in absorbing
the liquidity from banks. Conclusion
Long conversion procedure (from window to fully-fledged bank) is Despite many challenges such as political instability, 2018 can be
yet another challenge for banks. It took a few years for Bakhtar Bank considered as a successful year for Islamic banking as the first fully-
to convert from a window system to a fully-fledged Islamic bank as it fledged Islamic bank, which is Islamic Bank of Afghanistan, received
was the first. There were many factors which caused the delay such its license. We can hope to achieve more in 2019. People have
as lack of experience and expertise, software development, staff welcomed the new bank and demand for Islamic products and
training, creating public awareness and implementing for the first services is increasing day by day. Besides praying for a peaceful
time the regulatory framework of the central bank for conversion etc. year for Afghanistan, we are looking forward to a fruitful and
productive year for Islamic banking.

54 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
December 2018
 country report
AUSTRALIA

Australia: Islamic finance needs to punch well

above its weight
Christopher Aylward is a partner of Madison
Marcus Law Firm based in Sydney and is the national
head of banking and finance. He can be contacted
at christopher.aylward@madisonmarcus.co.

Islamic finance currently comprises a miniscule portion of the

Australian financial market. This is due in part to the small
Muslim population (about 4%) but also because the Australian
financial market is disproportionately large by comparison to
the country’s population and GDP – it is the third-biggest funds
market and the fourth biggest pension funds market in the
world.

In Australia, the growth of the Islamic finance market over the past
two decades has been driven solely by market needs. During the
post-global financial crisis short boom in Australian Islamic finance,
there were institutional and regulatory responses seeking to tap into
a growing regional market of Shariah compliant financial institutions
and investors looking for safe havens.

Austrade released its 2008 paper on Australia as a hub for Islamic

finance and in 2010 the assistant treasurer announced that the
Board of Taxation will review Australia’s tax laws to ensure that
they do not inhibit the expansion of Islamic finance, banking and
insurance products.

There appeared to be a regulatory champion for the growth of Islamic

finance. However, it was six years later that the Board of Taxation’s
report was released and in the intervening two years, there has been
no real progress. Put simply, the political will is now a political won’t.
Review of 2018
The highlight of the Islamic finance year was the return of the Islamic
Finance news roadshow – a roomful of energetic proponents of
Shariah financing with rousing calls to arms (figuratively) to work
together to make this thing work.
The event symbolized Islamic finance in Australia – free-flowing
ideas, passion and some very clever people spanning banks, service
providers, lawyers, accountants and academics. What stands in the
way of a booming Islamic finance market? Yet there is still a fixation
on the reasons we cannot grow rather than championing what we
can do. This was a key takeaway from the presentation of Chaaban
Omran of the Islamic Finance Services Council of Australia.
As for developments, I think it is fairly accurate to say that the year
was one of consolidation rather than striking growth or innovation.
The NAB Shariah compliant financing product continues to provide
a unique local bank product for Shariah compliant borrowers.
A number of offshore lenders were seen lending into the local
property development and commercial real estate asset classes – this
provides greater flexibility in Shariah compliant finance structuring
by using Tawarruq where the commodity trade is performed offshore
thus avoiding Australian taxation issues.
In the fund space, the year saw Crescent Wealth tie up with CIMB
Principal Islamic in Malaysia to manage its cash fund. This is a move
expected to forge greater links with Malaysia and also to provide a
nexus for investors into the Australian property and equity funds.
Real estate investment firm 90 North made its inaugural acquisition
of the Quest Apartment Hotel in Brisbane for US$24.3 million in
conjunction with Saudi Arabia’s Sidra Capital.
Preview of 2019
To some extent, the trajectory of Islamic finance in 2019 may be
linked with politics. The current government will do nothing to
support Islamic finance by putting into effect the necessary tax
changes to facilitate growth and innovation. A general election in
2019 may well see a change in government and depending on their
majority, real change may be possible. But it will not be fast and it
is not assured.
As previously mentioned, we cannot wait for the government to
provide the impetus for Islamic finance. Greater collaboration within
the Islamic finance sector is necessary to drive the sector forward
with new offerings, new market segments and new services. The
Islamic finance space in Australia is made up of sufficient human
capital to make significant strides in the year ahead. The key is to
get all the parts working together.
We also need to build more links to Southeast Asia and the Middle
East to encourage the inflow of Shariah capital and at the same
time, use our world-class funds market to push further into Islamic
investment funds which are marketable to regional investors.
On the financing front, at the commercial level we desperately need
to develop further financing structures within the existing regulatory
and tax frameworks in order to provide products which are simpler
and cheaper (from a transaction sense) to the end-user.
Conclusion
At the outset, I touched on a few relevant numbers reflecting the
disproportionate size of the Australian finance market. For Islamic
finance to make a sizeable dent in those numbers, it would be
required to punch well above its weight – by attracting regional
Shariah compliant funds, by having a market regime which attracts
Shariah compliant financing and investing and by having a tax
system which delivers neutrality in application to conventional and
Islamic finance.

December 2018
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55
 country report
BAHRAIN

Bahrain embraces financial digital transformation

Dr Hatim El Tahir is the director of the Islamic Chart 1: Year-on-year growth for key sectors in Bahrain in Q1 of 2018
Finance Group and the leader of the Deloitte Middle 4.1%
East Islamic Finance Knowledge Center at Deloitte -6.8% Crude petroleum gas &
& Touche – Middle East. He can be contacted at 3.9% Natural gas
heltahir@deloitte.com. Manufacturing
0% 4.3% Construction
Trade
The Kingdom of Bahrain continues to strive diversifying its economy 3.4% Hotel & Restaurants
Transportation &
which reported a real GDP of US$35.3 billion in 2017, according to
Communication
the Central Bank of Bahrain. More noticeably, the overall annual real Social & Personal services
3.6%
growth rate rebounded to 2.4% from a YoY contraction of 1.2% in Real estate & Business
6.7%
the first quarter (Q1) the growth was observed in the construction activities
-0.3% Finance
sector — an annual expansion of 6.7%, almost exactly in line with
Government
Q1, reported the Economic Development Board (EDB). -1.7% Other
-9.5
Source: Economic Development Board, Bahrain Economic
Review of 2018 Quarterly Report, September 2018
The country growth continued to be led by the non-oil sector which
expanded by an annual 2.8% in the second quarter (Q2) of 2018. In
addition, the oil sector posted a small YoY real gain of 0.8%, which
compares to a 14.7% drop in Q1 (see EDB, Bahrain economic quarterly
report, September, 2018). The table below portrays the main economic Islamic banking sector
indicators which shows somewhat increasing inflation rates, expectedly Islamic banks account for 14% of total banking assets (US$27.1
according to the Bahrain Economic Development Board Quarterly billion), and increase of 3% since 2008. The CBB reported that the
report, September 2018. In addition Chart 1 highlights the growth in capital adequacy ratio of Islamic retail banks decreased from 18.2%
key sectors of the economy. Finance, construction and oil are the lead in September 2017 to 18.0% in March 2018 (see CBB, financial
players and fair balanced share of other sectors is seen here. stability report, September 2018, issue no 25). This could be
attributed to the fact that more deployment of capital in the sector
Table 1: Bahrain’s economic outlook of economies.
2016 2017e 2018f 2019f
Earnings slightly improved for both Islamic retail and wholesale
Real GDP growth, % 3.5% 3.7% 3.1% 3.0% banks. Islamic retail banks’ liquidity positions showed an increase
Non-hydrocarbon sector 4.3% 4.8% 3.8% 3.6% in liquid assets and in facilities to deposit ratio. Islamic wholesale’s
experienced slight changes in its liquidity position as the facilities to
Hydrocarbon sector -0.1% -0.7% -0.5% 0.0%
deposits ratio increased while the liquid asset ratio decreased.
Nominal GDP growth, % 3.5% 9.6% 8.5% 5.6%
Inflation (CPI %) 2.8% 1.4% 2.7% 3.3% Financial technology (fintech)
The Kingdom is repositioning itself to be a financial technology
Current account (% of GDP) -4.6% -3.8% -1.5% -1.2%
(fintech) hub of the region by embracing and encouraging digital
Fiscal balance (% of GDP) -13.5% -10.1% -7.2% -5.4% transformation and the adoption of innovative technology and by
Crude oil Brent (US$) 44 53 73 73 combining conventional and Shariah compliant fintech solutions.
Offering low cost, convenient and instant payments, fintech has
Source: Bahrain Economic Development Board, Bahrain Economic been of great interest to the regulators that were posed with the
Quarterly Report, September 2018
challenges of regulating, overseeing and ensuring safety and
efficiency of those new payment methods. The CBB seeks to make
Financial sector
the Kingdom of Bahrain a key player in fintech through the availability
The financial sector has played a significant role in economy and
of (1) innovative financial solutions, (2) highly qualified national talent
employment creation, with Bahrainis representing over 66% of
in finance and banking, and (3) access to supportive policies (see
the work force. It contributes 16.7% of Bahrain’s GDP as of 2017,
CBB, Financial Stability Report, September 2018).
making it one of the key drivers of growth in the country.

Banking sector Preview of 2019

The banking sector is currently the largest non-oil contributor to The widely expected introduction of the value-added tax in the
GDP representing 16.8% of real GDP as of Q1 2018, according to Kingdom of Bahrain has been confirmed by the parliament which
CBB Financial Stability Report, 2018. The chart below provides an will be made effective January 2019 at the expected standard rate of
account of banks operating in Bahrain. 5%. For largely non-tax environment as in the case of Bahrain, there
is a significant requirement of cultural change and the change of the
Table 2: Banks operating in Bahrain mindset of practitioners and customers involved.
Banking institutions in Bahrain FY 2018 No. of Banks
Conclusion
Retail banks 23
Bahrain’s position in the financial services sector will enable it to
Islamic retail banks 6
become a strategic leader in international financial technology as it
Wholesale banks 58 provides many of the features that will support the development of a
Islamic wholesale banks 16 conducive environment for financial technology, including a CBB
regulator, innovative human capital, and an advanced ICT
Total banking institutions 100
infrastructure. The fin-tech space is seen as a key player for financial
Source: Author’s own inclusion and economic stimulator in the years to come.

56 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
December 2018
 country report
BANGLADESH

Bangladesh: More training and research needed

in Islamic banking
AKM Mizanur Rahman is the senior vice-president
and head of Islamic Banking of the Islamic Banking
Division at Bank Asia. He can be contacted at mizan.
rahman@bankasia-bd.com.

Bangladesh having a population of almost 90% of Muslims

is marching on the path of Islamic banking rapidly. Started in
1983, it became a popular banking system not only for Shariah
reasons, but also for its inherent asset-based financing model
which ultimately contributes to the growth of the economy.
Besides Islamic banking, Takaful, non-bank financial institutions
and Islamic mutual funds are also doing well. At present
Bangladesh has eight fully-fledged Islamic banks, 19 banks
with fully-fledged Islamic branches and six banks with Islamic
windows.

Review of 2018
In the 2018 fiscal year, the Islamic banking sector of Bangladesh
posted growth in all indicators such as deposits, investments and
remittances. At the end of June 2018, total deposits for Islamic
banks stood at BDT2.25 trillion (US$26.59 billion) from BDT1.99
trillion (US$23.52 billion) in the same period of 2017 — depicting
a growth of 23%. Investments made a growth of 24% at the end
of June 2018 with total investments at BDT2.17 trillion (US$25.64
billion) against BDT1.85 trillion (US$21.86 billion) in June 2017.
Remittances posted a growth of 26.79% at the end of June 2018
with total remittances at BDT1.15 trillion (US$13.59 billion) from
BDT886 billion (US$10.47 billion) at the end of June 2017. Although
there were growth in almost these indicators, liquidity decreased Takaful
about 18.01% in 2018. However, Islamic banking windows (IBW) are There are 11 Islamic insurance companies in Bangladesh — eight
performing far better than the fully-fledged Islamic banks in certain life insurance and three general insurance as shown in Table 1.
cases. For example, fully-fledged Islamic banks posted 12.7%
growth in deposits while IBW posted 25.21%. For investments, fully- Islamic mutual funds
fledged Islamic banks posted 17.05% while IBWs posted 26.79%
growth. Although the overall industry in Bangladesh experienced an Table 2: Islamic mutual funds in Bangladesh
18.01% negative growth in liquidity, IBWs showed a 33.89% growth Name Total asset value as of June
in liquidity. IBWs are expanding their businesses by creating virtual 2018 (in BDT million)
windows from their conventional channels. Islamic agent banking
AIBL 1st Islamic Mutual Fund 1,200
also plays a vital role in this regard.
CAPM IBBL Islamic Mutual Fund 668.37

Table 1: Islamic insurance companies in Bangladesh

EXIM Bank 1st Mutual Fund 1,656.5
Name Total asset value as at
the 31st December 2017 IFIL Islamic Mutual Fund-1 958.2
(in BDT million)
SEML IBBL Shariah Fund 670
Padma Islami Life Insurance 2,597.99
Total 5,153.07
Fareast Islamic Life Insurance 41,344.16
Source: Half yearly Financial Published at Mutual fund website
Prime Islami Life Insurance 9,177.63
Alpha Islami life Insurance 198.48 Training
Trust Islami Life Insurance 33.98 To develop skilled manpower for Islamic banking, training/workshop/
seminars were arranged by different banks and institutions. Islami
Mercantile Islami life Insurance 209.02
Bank Bangladesh (IBBL) and General Council for Islamic Banks
Proactive Islami life Insurance 173.78 and Financial Institution (CIBAFI) arranged a two-day international
Zenith Islami life Insurance 78.08 seminar on liquidity management tools for Islamic banking. Islamic
Banks Consultative Forum (IBCF) also arranged a seminar where
Islami Insurance Bangladesh 956.55
about 300 participants attended including government and central
Takaful Islami Insurance 951.07 bank high officials.
Islami Commercial Insurance 878.91
Islamic credit card
Source: Financial Institution Report 2017-18, Ministry of Finance,
Although credit card is gaining popularity in Bangladesh, Islamic
government of Bangladesh
operators are lagging behind in this regard. Some Islamic banks

December 2018
T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
57
 country report
BANGLADESH

have introduced Islamic credit cards on a limited scale. The banks

Chart 1: Islamic banking activities compared with all banks in
which introduced credit cards are Al-Arafah Islamic Banks (La Riba),
Bangladesh (June 2018)
Islami Banks Bangladesh (Khidmah), Exim Bank (Exim Islamic
Investment Card), Prime Bank (Hasanah) Social Islami Bank (SIBL
All Banks
Visa Islamic Credit Card), Standard Chartered Bank (Saadiq) and
Islamic Banks
Bank Asia (Salamah). Total Deposits: Total Credit:
9,683.04 9,059.37 Total Excess
Agent banking Remittances: Liquidity:
In Bangladesh 18 out of 58 commercial banks operate agent banking 351.60 64.66
operations under a financial inclusion program. Out of which, five
Total Deposits: Total Credit:
banks operate Islamic banking activities. 2247.58 Remittances: Total Excess
2168.27 114.62 Liquidity:
Table 3: Network of agent banking as of 30th September 2018 974.73

Numbers Source: Author’s own

Total agents 3,902

Islamic agents 299 Chart 2: Market share of Islamic banks among all other banks in
Bangladesh (June 2018)
Total outlets 5,791

Islamic outlets 416 2.15 SERIES 1

11.64 2% 23.21 Total Deposits
Total number of accounts 20, 28,864 12% 23%
Total Credit
Islamic accounts 2,10,843 Remittances
6.63
Source: Bangladesh Bank Web Site 7% Total Excess Liquidity
Total Number of Bank
Branches
But surprisingly in the case of deposit, Islamic agent banking
captured 45% of total deposits at BDT11.63 billion (US$137.44 Total Agricultural
Credit
million) against total deposit of all agents at BDT25.77 billion
(US$304.55 million). If all Islamic banking operators adopt this
model, it is expected that they will be the market leader.
23.93
32.59 24%
Table 4: Islamic banking activities compared with all banks in 32%
Bangladesh Source: Author’s own
June 2018 (Amount in BDT billions)

All banks Islamic banks Share of

Islamic banks
among all regulatory support is provided in Bangladesh, Islamic banks will
banks (%) be mainstream banks within 10 years.

Total deposit 9683.04 2247.58 23.21 Although Islamic banking is growing in Bangladesh, Sukuk which
is a vital development financial tool, has yet to be introduced.
Total credit 9059.37 2168.27 23.93
Although IBBL did introduce a Mudarabah bond which is not
Remittances 351.60 114.61 32.59 Sukuk in true sense. Islamic scholars like Abdul Awal Sharker, the
general manager of Bangladesh Bank, started to design Sukuk in
Total excess 974.73 64.65 6.63 Bangladesh under the central bank’s initiatives. In 2019 Bangladesh
liquidity will also see a tremendous growth in Islamic agent banking as most
Total agricultural 406.01 8.73 2.15 of the banks are going to introduce it within a short span of time.
credit IBBL, Al-Arafah Islami Bank, Social Islami Bank and Bank Asia have
already started Islamic agent banking operations. It may be noted
Total number of 10,114 1178 11.64 that Bank Asia is the pioneer of agent banking in Bangladesh and its
bank branches president and managing director Md Arfan Ali is the father of agent
banking in Bangladesh.
Source: Statistics Department, DOS & BRPD, Bangladesh

Conclusion
Preview of 2019
Islamic banking sectors in Bangladesh now account for more than
For 2019, Bangladesh is expecting more growth in Islamic 20% of the entire banking sector. According to a Bank Bangladesh
finance. After a long gap, the central bank, Bank Bangladesh, report, Islamic banks play a vital role in mobilizing deposits and
has started to give permission to open Islamic windows under financing different sectors of the economy. But they are only
conventional banking. Sonali Bank, Pubali Bank, Janata Bank, emphasizing trade-based and rent-based modes of financing.
Agrani Bank and Trust Bank have already obtained permission Equity financing modes like Mudarabah and Musharakah capture
to open new windows. More banks are contemplating to open only 1.78% of total investment. To compete with their conventional
Islamic windows. Moreover, a good number of conventional banks counterparts, they should have some products for project financing,
are ready to be converted into fully-fledged Islamic banks if the import and export etc. The scholars have yet to find a suitable mode
central bank allows them. It is expected that in 2019 Bangladesh of finance for service sectors. The debate on meeting cash
requirements continues. The Islamic banking sector has a scarcity
will see more fully-fledged Islamic banks. M Azizul Huq, the
of talent. There must be more training and research to grow the
main architect of Islamic banking in Bangladesh, opined that if
Islamic banking industry.

58 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
December 2018
 country report
BOSNIA & HERZEGOVINA

Bosnia & Herzegovina: Creating impact through

Halal economy value chain

Admir Meškovic is the assistant to CEO for

Business Strategy and Investments in Bosna Bank
International.

Aida Hadžic is the corporate associate in the same

bank. They can be contacted at admir.meskovic@
bbi.ba and aida.hadzic@bbi.ba respectively.

As a country with the largest Muslim population in Southeastern

Europe, Bosnia and Herzegovina (BiH) holds the largest potential
to develop as a hub for Islamic finance in this region. Bosna Bank
International (BBI) is the only bank operating in accordance with
Islamic principles in BiH. Its major shareholder is the IDB, while
the other two shareholders are Abu Dhabi Islamic Bank (ADIB)
and the Dubai Islamic Bank (DIB).

Review of 2018
BBI continued to play an important role in the development of the
country, representing a bright example of an Islamic bank working on
economic development missions in addition to the standard Islamic
banking business. In 2018 the bank started offering new financing
lines for SMEs at a 0% rate and for this purpose the bank dedicated
more than BAM50 million (US$29.15 million). In total, for low-cost
subsidized financing lines the bank dedicated BAM185 million
(US$107.85 million). BBI regularly stresses that the contribution to
the economy is the best contribution that a bank can give to society.
This year BBI recorded a 10% growth in general loans and an
asset increase of 9%, while client deposits have risen by 14%.
The growth rates are lower than in previous years since the bank
faced enormous competition this year. Large European banks
which have excess liquidity provided their daughter-institutions in
BiH with extra-cheap deposits enabling them to bring down their
lending rates to an unprecedented level. At the same time, BBI has
opened two more branches in the country, wherein one of them is
predominantly social-impact oriented.
This was an exciting year on Sarajevo Stock Exchange as well.
The SASX-BBI Islamic Index has grown by 17.36% in the first 10
months of 2018. Its conventional peer SASX-10 increased its value
by 12.05% during the same time.
In addition to the Sarajevo Business Forum, in 2018 BBI launched
another huge CSR project which is supposed to foster the
development of BiH and to promote the Halal economy — the
Sarajevo Halal Fair (SHF). The Sarajevo Business Forum is a high-
impact investors conference that is used as a platform to promote
Islamic banking and finance, especially in popularizing the use of
Musharakah and Mudarabah structures.
The SHF has been initiated by BBI and the IDB to serve as key
instrument for public education about the Halal industry in the region.
With over 10,000 visitors, 600+ participants from the business world,
and 91 exhibitors from 13 countries (among which there were five
Islamic banks), the event was deemed extremely successful. Huge
interest shows that producers and exporters understand the Halal
opportunity. The SHF has opened a new era for the Islamic economy
in Southeast Europe and will contribute to further growth of Islamic
finance in BiH as part of the Halal economy value chain.
The SHF was used as an opportunity for special promotion of Islamic
finance by hosting the 8th Global Islamic Finance Awards (GIFA). The
GIFA Awards Committee presented the GIFA Leadership Award
2018 to Bakir Izetbegoviċ, the chairman of Presidency of Bosnia and
Herzegovina, in recognition of his many contributions for advancing
ethical finance in BiH. At the same event, BBI was awarded with the
GIFA Special Award 2018 for the contribution to Islamic banking in
Southeast Europe.
The University of Sarajevo continued to support the promotion of
Islamic finance through the annual Sarajevo Islamic Finance and
Economics Conference – SIFEC, as well as Sarajevo Islamic Finance
Summer School, both held in June.
Preview of 2019
BiH represents a fruitful soil for the development of the Halal
economy in general which shall pave the way for the spread of Islamic
finance in BiH. With the help of regular public education and projects
aimed at contributing to the development of BiH, Islamic finance
enjoys increasing appreciation in the country. Being recognized
as the potential driver for development through Islamic principles,
BBI proves constant growth. Furthermore, the recently launched
SHF has shown that the Halal economy is being recognized as a
key opportunity for not only BiH, but also the region with BiH as a
potential Halal hub for Europe.
The next SIFEC conference will be held in October 2019, titled as
‘Financial inclusion and social impact of ethical finance’ — a theme
that is highly cultivated and emphasized in the practice of Islamic
finance in this region.
Conclusion
Islamic banking per se still faces challenges of an inadequate
regulatory environment in BiH. The organization of the SHF is a
promising move toward the development of a comprehensive
ecosystem to create a strong and sustainable Halal structure in
which Islamic finance can flourish and trigger even higher interest.
Current milestones prove the competitiveness of Islamic finance is
parallel to its potential to contribute to development which creates a
positive image of the overall Islamic economy.

December 2018
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59
 country report
BRAZIL

Agribusiness to increase Shariah compliant

assets in Brazil
Mudabala Group also joined Snam SpA and EIG Global Energy
Fabio Amaral Figueira is a partner at Veirano Partners to place an US$8 billion bid for a pipeline owned by a
Advogados. He can be contacted at fabio.figueira@ branch of Petrobrás named Transportadora Associada de Gás,
veirano.com.br. which operates about 2,750 miles of gas pipelines in the less-
developed north and northeast regions of Brazil. The pipeline sales
negotiations are currently suspended, but are expected to resume
Brazil has always been one of the most traditional business in the next year.
partners in the Islamic market, particularly MENA countries,
and is the leading Halal meat exporter with over two million Rasmala Group, which describes itself as a leading alternative
tons per year and figuring as one of the most important Halal investment group, located in the UK, recently reported its
poultry exporters. The economic relationship between Brazil participation in a short-term financing facility for a listed Brazilian
and MENA countries is currently on the rise, with Brazilian agribusiness to fund the purchase of agricultural inputs secured
exports of beef to these countries amounting to US$189.75 against a crop, which has been pre-sold to a US$40 billion-plus
million just in the first quarter of this year, a growth of 37.6% global agribusiness and food company.
compared to the results observed in the same period in 2017.
All these transactions show that Shariah compliant funds and MENA
In correlation with the increasing volume of operations involving region sovereign funds are very interested in investment opportunities
beef, poultry and other commodities produced in Brazil, it is in Brazilian assets, especially those related to commodities and
perceived that there will be an increase in the number and volume infrastructure related to these products. Nevertheless, although
of investments made by Shariah compliant and sovereign funds numbers provided are impressive, in billions of dollars, Islamic
in infrastructure and crop financing, cattle fattening and other investments are still very incipient in comparison to other foreign
financial products offered by Brazilian entities. Most of these investments.
investments were conducted by sovereign funds in publicly-
traded companies or through other commodities specialized Preview of 2019
funds. One of these funds was launched by Banco do Brasil, the One of the main difficulties hampering the full development
largest bank in Latin America by assets, and it focuses on shares of Islamic finance in Brazil is that the banking and insurance
of Brazilian commodity, energy, mining, oil and gas companies. industries regulations contain several dispositions that may
restrain the operationalization of a Shariah compliant contract.
Review of 2018
Although several financial operations could be reported, there were For instance, a bank cannot acquire and/or sell goods in general as
three Shariah compliant funds that captained investments in Brazil: part of its corporate purpose. This would be a direct impediment to
SALIC (Saudi Agricultural and Livestock Investment Company), a a Murabahah contract of sale, in which the bank acquires goods for
sovereign fund owned by the Saudi Arabian government; Mubadala the client and then sets the cost and profit margin of the said goods
Investment Company, another sovereign fund, owned by the Abu in the contract, without Riba. A Brazilian bank would not be allowed
Dhabi government in the UAE; and the Rasmalla group, which was to buy a certain good abroad (an equipment, for example) and sell it
originally incorporated to serve GCC investors. to its client (the final purchaser) with an agreed profit. Banking laws
and regulations should be modified to fully accommodate Shariah
SALIC currently owns 21.4% of Minerva Foods, one of the leading compliant agreements.
exponents of cattle fattening and meat processing in Brazil, which
owns assets valuated at BRL11 billion (US$2.8 billion) by B3 (the Considering that it would be necessary to have several
Brazilian Stock Exchange3). There were some rumors, in the amendments made to our banking and insurance legislation,
beginning of this second semester, about the possibility of SALIC Brazil should include Islamic finance in the political and economic
acquiring the entirety of shares available, converting Minerva agenda. However, there are some measures that can already be
into a closed company, but, at the time of writing this article, this taken to incentivize the introduction of Islamic finance in Brazil.
transaction was not confirmed. One of them is reducing the number of restrictions imposed
on foreign banks while carrying out activities in Brazil through
In the past few years, Mubadala has invested in infrastructure, branches or subsidiaries or authorizing Brazilian investment
commodities and renewable energy assets available in Brazil. banks to offer Shariah compliant investments in their portfolio,
One of its main investments was made through a joint venture through its foreign branches, backed by Brazilian assets.
entered into by Mubadala and the Impala Company (a subsidiary
of the Trafigura Group), which holds the share equity control of Conclusion
Porto Sudeste, a maritime terminal focused on iron ore exporting. Being among the 10 largest world economies, Brazil, despite its
According to Eugenio Mamede, CEO of Porto Sudeste, the current economic issues, is and will remain a very attractive market to
guidance and financial support of Mubadala has been crucial to foreign investors in general. Such investors could come for Islamic
the establishment of Porto Sudeste in Brazil and the realization of finance products, but in certain cases, amendments to Brazilian laws
its mission to support Brazil’s iron ore mining sector. According and regulations would have to be made. In consideration of Brazil’s
to his projections, the investments provided by the controlling strong position as a leader in commodities exportation, we can expect
joint venture will allow Porto Sudeste to double its capacity (from to see in the coming years an exponential growth in Shariah compliant
the current 50 million tons of ore per year to 100 million tons) and funding in agribusiness, which is expected to lead to an increase in
expand into handling different products. general Shariah compliant assets offered in Brazil.

60 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
December 2018
 country report
CANADA
Canada: New platforms for Islamic
financial services
Rehan Huda is the director of Amana Canada
Holdings. He can be contacted at rhuda@
amanacanada.com.
The Canadian Islamic finance industry is still underdeveloped
compared to other western jurisdictions such as the UK or US,
thus offering opportunities for growth. The Muslims remain as
one of the fastest-growing communities in Canada with a current
population estimated to be near 1.6 million. Approximately
half of the country’s Muslim population resides in the Greater
Toronto area and most of the large cities have experienced
continued growth in Muslim immigration over the year. Canada
has taken a large number of refugees from Muslim countries
as well as Muslim immigrants who reunited with their Canada-
based families, professionals with skills in demand as well as
entrepreneurs and investors. The growth in size and affluence
of the Muslim community in Canada has been accompanied
by growth in the demand for Islamic financial products and
services.
Review of 2018
Investment banking
Manzil Capital established the first Islamic investment banking
platform in Canada. Manzil acquired Robson Capital Partners Corp,
an investment firm operating across a number of major Canadian
cities. This platform allows Manzil to deliver a broad array of Shariah
compliant financial products from mortgages, investment funds
and private placements. The firm’s vision is to create a complete
ecosystem of products that will fulfill the needs of the Islamic
community.
In addition to investment banking services, Robson will serve retail
and institutional clients in connection to private equity and debt
investments. Robson’s approach will be sector-agnostic as it aims
to bring forth investment opportunities that provide the lowest risk
and greatest return for its clients.
Wealth management
Two of the largest banks in Canada offer Shariah compliant
wealth management platforms. Canadian investors in general
have increasingly started to look beyond the basic return on
their investments to the ethics and impact of the underlying
companies that drive their returns. Therefore, many Canadians have
implemented responsible investing plans that mirror their personal
ethical or religious values. CIBC Wood Gundy is one of Canada’s
largest wealth management platforms and it views Halal investing
as a subset of socially responsible and ethical investing based on
investments that adhere to Islamic principles.
Focusing on Shariah compliant investing based in London and
Ontario – the Canadian city with one of the highest concentrations
of Muslims – CIBC Wood Gundy was the first Shariah compliant
wealth management platform to be initiated in Canada. Criteria used
in screening out non-compliant vehicles include those outlined by
the Shariah supervisory boards of the Dow Jones Islamic Market
Index and S&P Shariah Indices.
December 2018
Another similar platform was launched in 2018 under RBC Dominion
Securities, Canada’s leading full-service investment service and
wealth management firm with over US$300 billion in assets under
administration. The platform uses AAOIFI principles and S&P, Dow
Jones and MSCI Islamic Rulebooks. In addition, it uses ethical
guidelines for an extra layer of screening for environmental, social
and corporate governance from data provided by Sustainalytics,
one of the global leaders in socially responsible investing. The
investment focus also includes financial sustainability, corporate
sustainability, social sustainability and environmental sustainability.
Investment products
In terms of Shariah compliant investment funds in Canada, the
largest one is the mutual fund under Bullion Management Group,
a firm specializing in investing in storing physical gold, silver and
platinum bars. The only other mutual fund is the Global Iman Fund
which is owned by Global Growth Assets and is managed by UBS
and based on the Dow Jones Islamic Index.
The Everest Group of Companies continues its success in the
Canadian real estate sector. The company has completed a number
of residential and commercial real estate projects across the country
using Shariah compliant financing and is currently managing several
hundred millions of dollars of real estate assets in major metropolitan
centers in Canada. Everest is now launching the Grand Medina
Beach and Spa Resorts, which will be establishing itself as the first
of its kind resort company in the Americas to offer premier vacation
spots with a Muslim family-friendly environment. The first resort will
be built in the Dominican Republic with a Shariah compliant offering
for Muslim investors.
Preview of 2019
It is expected that more wealth management-related Shariah
compliant products such as exchange-traded funds will be
developed in 2019. With some of the large Canadian financial
institutions supporting financial advisors that offer Shariah compliant
investment services, there is always the possibility of retail mortgage
and car financing products being launched with some of these
institutions. As the Canadian Muslim market grows and demands
for more Shariah compliant financial products and services, it is
expected that some of the other large players in the industry will
also participate with their own product offerings. Though the focus
now is on domestic retail investors, these types of institutions could
offer products to global Islamic as well as conventional financial
institutions that seek to diversify their assets and their investment
risk.
Conclusion
2018 was an interesting and productive year for Islamic finance
firms. The combination of innovative platforms as well as additional
investment products provided growth to the Islamic finance industry
as a whole. However, much remains to be done as Muslim retail
consumers are demanding Shariah compliant mortgages and other
financing products to meet their needs. The rapid population growth
of the Muslim community in Canada continues to put pressure on
Islamic finance companies to create such products. The successful
firms in this space will likely be the ones that are first to distribution
and capture market share early.
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 country report
CHINA

China, the sleeping giant of global Islamic

finance space, needs prompt action

Wafee Yeung is the managing partner of Allalah

Consulting. He can be contacted at wafee@allalah.
com.

Being the second-largest economic superpower in the world

and one of the fastest GDP growth economies during the
previous two decades, China is always undoubtedly regarded
as an important but long-awaited player in the Islamic finance
field. With a 27 million Muslim population, mainly located in
the northwestern part of China, including Gansu, Ningxia and
Xinjiang, there is no question on the potential and feasibility
of developing an Islamic banking sector in the region, since a
relatively large number of residents there are unbanked and
long for Shariah compliant financial products and services for
their personal daily life and commercial purposes.

On the other hand, China’s national initiative ‘One Belt One

Road’ (OBOR) and its establishment and leadership of the Asian
Infrastructure Investment Bank (AIIB) during these few years,
provides a very clear indication that China and the Muslim world,
particularly those countries in Asia and MENA, are eager to build up
stronger economic ties with each other than ever before, in which
Islamic finance is believed to be critical to cultivating this closer
relationship.
Shariah compliant branches, or at least an Islamic banking window
Review of 2018 with a local partner bank, in China’s provinces where the Muslim
2018 was another quiet period of Islamic finance development for population is concentrated as well as coastal cities with more
China: not much has been concretely accomplished, both internal acceptance and demand for Islamic finance products and services.
and external, in terms of governmental support, regulatory, legal and Green finance has been emphasized frequently and in great detail in
tax framework refinement as well as financial deals. The sluggish the 13th Five-Year Plan of China (2016-20) by President Xi Jinping. It
phenomenon is believed to be brought by a lack of government is widely recognized by global and Chinese investors that there is a
tailor-made policies and measures, declining oil price, conservative very high correlation in the development processes between green
view of investors and some other non-economic factors. finance and Islamic finance.

Since a series of remarkable milestones were achieved in the past While China is endeavoring in her sustainable economic development,
decade, including the opening of the first Islamic banking window green energy technicalities and related infrastructure facilities are
(Bank Muamalat Malaysia in Ningxia), the operation of several highly in demand but often lacking funds to make them happen.
Islamic funds backed by China real estate by international financial There is a great opportunity for China to proactively establish her
institutions (Bahrain-based Shamil China Realty Mudarabah US$100 local Sukuk market, coupled with green Sukuk issuance capabilities,
million) and the Chinese company listings of Sukuk (Country Garden in view to attracting the oil-rich Muslim countries to invest in these
Real Estate’s Sukuk RM1.5 billion (US$363.95 million) in Malaysia) Shariah compliant securities. In such cases, green finance should
and green Sukuk (Tadau Energy’s green Sukuk US$58.36 million in be regarded as a crucial catalyst to boost Islamic finance in China.
Malaysia) in overseas capital markets for their offshore infrastructure
projects, etc, very little momentum was left for further development Conclusion
of the Islamic finance sector of the Orient Dragon. It is not a matter
Looking forward, apart from local or inbound Islamic finance
of being optimistic or pessimistic, but indeed a matter of time, the
development, cross-border and outbound collaborations are also
waiting time for the Chinese government’s action and openness,
very vital for China under the new era of OBOR. China-Pakistan
given the global trend of Islamic finance dynamic growth as well
Economic Corridor is an excellent example to show the deepening
with as both internal and external demand existing there.
economic ties between China and OBOR countries, particularly
Islamic countries where Shariah compliant models such as Istisnah
Preview of 2019 can be given the room for its appplication to the greatest extent in
To expedite the process of Islamic finance development in China, some promising infrastructure projects.
governmental support is of prime importance and the only key to
success. Similar to other countries which have already succeeded Following the China-UAE relationship which strengthened
or still in the course of developing their Islamic finance sector, comprehensively in 2018, more Shariah compliant trading and
Islamic banking is always the core and fundamental segment that investment deals will be expected between the two nations in
one country should build up before proliferating to other related subsequent years. The recent Saudi Arabia-led IDB-AIIB strategic
areas such as Sukuk and Takaful, etc. collaboration also marks the stronger bond between China and the
Gulf states, thereby enhancing China’s Islamic finance development
Renowned Islamic banks around the world should be granted to take off, making use of both traditional and creative ways to tap
permission from the Chinese authority to open their fully-fledged into this unprecedented golden opportunity.

62 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
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 country report
EGYPT

Islamic finance in Egypt:

Renewed opportunities

Dr Walid Hegazy is the managing partner at Hegazy

& Partners in cooperation with Crowell & Moring. He
can be contacted at whegazy@hegazylaw.com

The Islamic financial sector in Egypt is divided into two fields:

Islamic banking and Sukuk. Shariah compliant banks continue
to coexist with their conventional counterparts, while the
fledgling Sukuk industry is poised for a breakthrough. From
a foreign policy perspective, Islamic finance organizations
provide significant amounts of funding for goods and services,
while financing sector-specific development projects.

The Sukuk market in Egypt is an underutilized possibility, with

untapped potential as a tool for social development and economic
growth. Although the legislative framework has recently been
established, in the form of amendments to Capital Markets Law No.
95/1992, both private and public entities have been slow to organize
new Sukuk issuances this year. Unfortunately, Sukuk issuances in
Egypt are almost non-existent, compared to other Muslim-majority
countries. This is because regulatory policy is insufficient to ensure
a robust market; rather, the consumer and investment culture must
reflect confidence in Sukuk as an investment tool.

Review of 2018
Dr Mohamed El-Beltagy, the head of the Egyptian Islamic Finance
Association (EIFA), is optimistic about the growth of domestic
Islamic financing opportunities, citing a significant increase of 29.4%
between the second quarter (Q2) of 2017 and Q2 2018.
Furthermore, Islamic banks have opened more branches, and
now serve one-fifth of the market. While the expansion of Shariah
compliant financial institutions is noteworthy, its relevance
would be augmented if these banks could develop a strategy
to attract unbanked Egyptians, who represent nearly two-thirds
of the population. One possibility might be to increase Islamic
microfinancing to underserved populations, especially those in rural
areas who have difficulty meeting the creditworthiness standards
demanded by conventional financial institutions.
Global Islamic development entities have continued to provide
substantial macro level funding to the Egyptian government.
Recently, the International Islamic Trade Finance Corporation, a
branch of the IDB, concluded US$3 billion in Murabahah financing
agreements with the Egyptian General Petroleum Corporation and
the Commodity Supply Authority. The US$8 billion loaned to Egypt by
the IMF in tranches since 2016 has been invested in developmental
PPI projects aimed at stimulating Egypt’s future economic revival
and attracting foreign direct investment (FDI). The IDB initiative will
aid Egypt in reaching its objectives through alleviating the burden
of imports, exacerbated by a weak Egyptian pound and a high
external debt ratio. Crucially, it could encourage the government to
actively seek Islamic financing opportunities that tend to have fewer
conditions than those imposed by the World Bank and the IMF.
Egypt’s regulatory framework for Islamic finance has improved
with the Sukuk amendments added to the Capital Markets Law,
yet the country awaits new legislation to adequately organize
Takaful insurance. Sukuk are now subject to the same guidelines
as other capital market instruments with regards to the issuance
and approval procedures. The law grants legal recognition to
four types of Sukuk: Mudarabah, Murabahah, Musharakah, and
Ijarah (of tangible assets and services). Most importantly, the new
amendments specify a set of criteria for characterizing Sukuk as
‘Islamic’ or ‘Shariah compliant’. These criteria include: a Shariah
supervisory board for the issuance, the project’s approval by the
supervisory board with respect to Shariah compliance, the Shariah
compliance of all underlying contracts and associated agreements,
and the supervisory board’s approval of the issuance of Sukuk in
the stock exchange. Ultimately, these changes could facilitate and
increase private and public Sukuk issuances.
Preview of 2019
The Egyptian government is expected to fully embrace Sukuk as a
financing method, with up to US$1 billion in issuances in the next
fiscal year. As for Islamic banking, it is expected that Islamic financial
institutions will expand access to financial technology (fintech) for
their customer base, as Egypt attempts to increase digital banking
and credit card use in a mostly cash-based economy. Furthermore,
the Insurance Federation of Egypt is encouraging Takaful reforms,
which could be approved by parliament and codified by late 2019.
Currently, Takaful fund operators receive commissions regardless
of the fund’s profits. An improved, more Shariah compliant system,
would be to link commissions to the performance of the fund, in
accordance with the Mudarabah financing method.
Finally, as Egypt continues to experience growth in key sectors,
such as natural gas production, Islamic development initiatives will
be better able to target and direct their funding to boost the weaker
sectors of the economy.
Conclusion
Ultimately, the viability of Islamic finance in Egypt cannot be determined
by legislative reforms and financing alone. Only the successful
application of large-scale Islamic finance transactions, led by a powerful
government, can truly engender the necessary market confidence to
support a strong Islamic finance industry. Once this occurs, Egypt can
hopefully turn to market innovation and become a regional center for
Shariah compliant financial initiatives.

December 2018
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 country report
FRANCE

Islamic finance finds a perfect

market in France

Jean-Baptiste Santelli is a partner at De Gaulle

Fleurance & Associes acting in banking and finance
law.

Racha Wylde is an associate in the same firm.

They can be contacted at jbsantelli@dgfla.com and
rwylde@dgfla.com respectively.

In 2008, the then French minister of the economy, Christine

Lagarde, announced that: “We wish to make Paris a better
market for Islamic finance, particularly in this background
of crisis, credit excess, volatility and cupidity.” Since then,
numerous transactions in France, in particular in the real estate
market, have been financed by Islamic products (generally
offered by foreign banks). However, for the time being most
of the investors, acting through Islamic finance products in
France, are not French residents.

Islamic finance emerged in France toward the end of the millennium

and, to date, no specific set of rules concerning Islamic finance has a purchase contract for example, the quantity or the quality of the
been issued. Nevertheless, the concepts of Islamic finance can be goods), which is a rule ad valitatem (a court would rule any such
implemented in France and foreign institutions may enter into the purchase contract which does not sufficiently determine the elements
banking, insurance or capital market services market provided they of the purchase to be null and void). All of the aforementioned
are licensed to operate. Indeed, the French legal system is quite principles have common values with Islamic finance rules, providing
Shariah-friendly. The concept of contractual freedom facilitates a foundation for Islamic transactions in France. More particularly,
the transfer of the core concepts of Islamic finance. Therefore, Mudarabah can be implemented under French law through a limited
no specific amendments to French law appear necessary to partnership, Musharakah through a joint venture type arrangement
accommodate Islamic finance transactions. However, the French tax or a partnership company, Ijarah through a leasing transaction and
regime still needs to be adapted to Islamic transactions, for instance a Wadiah can take the form of a deposit agreement governed by
with respect to transfer taxes incurred in Ijarah arrangements. the Civil Code. Murabahah, however, is treated under French law
as a credit transaction, and thus, Islamic financiers must comply
Review of 2018 with the regulations for financial institutions and credit transactions.
In April 2018, the French group La Française continued its efforts to Furthermore, Shariah funds make up a significant part of ethical
establish a long-term presence in the Middle East by launching its funds in France and the French government, as well as the Financial
first mandate dedicated to Shariah compliant real estate investment. Markets Authority, has promoted Sukuk type securities to attract
In France, Noorassur, a company which offers Takaful insurance Islamic investors.
products and Shariah compliant savings, continues expanding its
activities. Preview of 2019
With nearly six million French Muslim citizens, France is one of
Furthermore, in October 2018, Principal Real Estate Europe bought the European countries with the biggest growth potential in terms
its first asset for a Shariah compliant Saudi asset manager with of Islamic retail banking. Even though Islamic finance has been
the acquisition of a 9,800 sqm office building in Paris. Regarding further pursued by foreign investors in France and by French banks
academic activity, in September 2018, the 20th International in the Middle East, French residents are more and more active on
Conference on Islamic Banking, Finance and Investment was held the Islamic finance market, such as for instance ‘VIP-customers’
in Paris and Takaful products in Europe and France were discussed working in the sports or media industries. In view of this, various
during the 17th brokerage days event also organized in Paris. foreign Islamic banks are considering the establishment of a direct
subsidiary in France, more particularly in the context of Brexit.
The reform of French contract law (Decree n°2016-131 dated 10th
February 2016 reforming the French Civil Code), which entered into
force on the 1st October 2016, and was since ratified on the 20th
Conclusion
April 2018 (Law No. 2018-287), has reaffirmed and specified some Professionals of Islamic finance in France suggest implementing
of the core concepts of French civil law, such as good faith (‘bonne several reforms such as greater publicity, establishing legal and
foi’) and, similar to the Haram principle, the existing rule of ‘public fiscal certainty for Islamic finance instruments, a stock exchange
order’. This reform also introduced a new rule, in line with the Maysir index of Islamic funds created by NYSE Euronext similar to the US’s
principle, according to which a court can force the parties to an S&P Shariah Indices, or a strategy for the collection of savings,
agreement, the enforcement of which has become substantially making it easier for Islamic financial institutions to obtain banking
unaffordable for one of the parties, to renegotiate the agreement in licenses. The creation of such a welcoming Shariah business
order to find a new economic balance; otherwise, the parties can environment is still a challenge for the French market. The integration
agree to terminate the contract. of Islamic finance training in the French higher education system is
also crucial and is currently provided in particular by the prestigious
Also, the reform reasserts that any civil contract will need to have University Paris-Dauphine. With all this potential, there is no doubt
content that is certain or at least determinable (by indicating, for that the French market is a windfall for Islamic investors.

64 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
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 country report
GERMANY

Expansion drive in Germany’s

Islamic banking sector

Ahmet Kudsi Arslan is the chairman of the

management board at KT Bank. He can be
contacted at kudsi.arslan@kt-bank.de.

In 2018, the outstanding growth course of the Islamic banking

sector in Germany has been supported by a variety of factors,
including the introduction of new, leading-edge products and
services, the establishment of a scientific base as well as
market movement and advanced digitization. KT Bank, the first
and only bank in Germany and in the Eurozone with Islamic
financial products and services, has maintained its progress
following a five-year financing and deposit business target plan.

With a current balance sheet total of more than EUR300 million

(US$339.01 million), KT Bank’s performance remains dynamic in
volume and in the growth of a sustainable client base in the retail,
corporate and institutional area. Half of the Islamic banking clients in
Germany to date are estimated to be of Turkish descent, among them
many heads of SMEs on the corporate side, while around one-third
of clients are Arabic. A compelling effect of the acknowledgement
of the universally ethical SRI standards of Islamic banking in the
German market is an increase of the non-Muslim client market share.
The main pillar of the successful market establishment, from the
beginning of its Islamic banking operations in Germany in 2015
until today, is a unique, state-of-the-art and permanently updated
Islamic banking product and service portfolio which saw major
advancements in 2018.
Review of 2018
The highlight of the 2018 product extension from the Islamic side in
Germany was the introduction of a new, pioneer payment solution
named Jetzz Card. The automated instalment payment method
with easy and time-saving fund utilization which substantially
simplifies instalment shopping is based on the Debit Mastercard.
The innovative solution comes with ethical standards in line with
the interest-free and value-based Islamic business model. Whereas
conventional overdraft facilities and revolving credit cards are not
Islamic-compliant, Jetzz Card functions by fixed financing instead of
interest rates according to Murabahah financing for moveable goods
and Tawaruq for the purchase of services like flight tickets. Jetzz
Card focuses on unexpected expenses whilst offering an attractive
alternative to a conventional instalment credit – not only for Muslims,
but for all clients interested in a cost-effective and flexible solution.
Another focal point in the efforts for sustainable profitability in
2018 was the ongoing investment of the Islamic banking sector
into efficient digitization as fintechs, digital banks, and platform
providers were increasing the challenges for traditional banks by
disrupting their value chains, including a new Shariah compliant
fintech. As KT Bank had always been embracing the strive for digital
maturity based on the innovation-led approach of its mother bank
Kuveyt Turk, in 2018, it started a cooperation with a German fintech
to establish new investment products. Last year the bank launched
its mobile banking app.
2018 also saw an intensified cooperation with KT Bank’s mother
group. As Germany’s only fully-fledged bank in the Islamic sector
which is also wholly owned by a participation bank in Turkey,
Kuveyt Turk Participation Bank, whose main shareholder is Kuwait
Finance House, one of the leading Islamic banks in the world, this
strong background serves as an opportunity for transnational client
services and enhances the Islamic position in the German and
eurozone market. Among the services launched in 2018 were euro
account services for institutional clients as well as remittances to
accounts at the mother bank in Turkey for a service charge of only
EUR1 (US$1.13).
Due to the upward trend of the Islamic finance models and their
market share in Germany, the growing public, economic and
scientific demand for information on Islamic banking theories are on
the rise as well. In order to provide Islamic banking in a European
context with a scientific base for the first time, KT Bank contributed
to the organization of an interdisciplinary forum in May 2018. At
the 1st International Conference on Faith & Finance in Germany, an
international elite of scientists and economic experts, Muslim and
Christian economic representatives, globally renown professors and
bankers, legal professionals, ethics experts, as well as entrepreneurs
and representatives of regulatory authorities discussed the latest
developments in the faith-based banking sector. The main topic
was its enormous potential to foster the balance of profit motive and
social responsibilities to shape an alternative future of finance.
Preview of 2019
Pursuing its steady growth course in 2019, the Islamic banking
sector in Germany will continue to further advance its portfolio,
branch services and digital environment, like the enhancement of
the online direct banking structure. Product-wise, a new savings
account for monthly sums on the basis of the participation account
is to be introduced. Moreover, the Jetzz Card instalment payment
solution will be further developed whilst the mother group synergies
will be extended by the development of investment products for the
German market that resemble successful products of Kuveyt Turk
and Kuwait Finance House. By the same token, the gold banking
expertise that was transferred into the German market in 2018 by
KT Bank’s mother bank Kuveyt Turk will result in a significant focus
being placed on gold savings plans according to German national
regulations.
Conclusion
In 2019, like in the years before, KT Bank, as a key player in the
Islamic eurozone sector, will sustain its efforts as a first mover in an
increasingly important market share, cultivating a universally ethical
alternative to the conventional banking sector that can attract
Muslim and German SRI target audiences alike.

December 2018
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 country report
HONG KONG

Hong Kong should actively participate in the

golden era of Islamic finance with new means

Wafee Yeung is the managing partner of Allalah

Consulting. He can be contacted at wafee@allalah.
com.

2018 is the 11th year since Islamic finance was first mentioned
by the Hong Kong government. Aside from the amendments of
its tax legislation as well as three US$1 billion sovereign Sukuk
issuances, nothing much has been concretely done by the Hong
Kong government, market players and academics to boost
Islamic finance development in this international financial center
and freest economy. Positioning itself as the super-connector of
China and the rest of the world under the ‘One Belt, One Road’
regime, the Hong Kong government and relevant stakeholders
should be well aware and capture the huge potential provided
by Shariah trade and finance fields.

Encountering this golden era but lacking more realistic action, it is

therefore strongly advisable that Hong Kong should actively establish
the necessary institutions, train up the relevant professionals,
formulate feasible new ways and participate in the Islamic finance
space in due course to grab this promising opportunity.

Review of 2018
Islamic finance was very quiet in Hong Kong in 2018, except for
the collaboration of AAOIFI and Allalah Consulting, a leading
Islamic advisory firm based in Hong Kong and China, in the
form of educational partners since August 2018, endeavoring to
introduce the CIPA qualification examination into the Hong Kong
market, which is regarded as the first attempt and a remarkable the Islamic Financial Services Ordinance such that the introduction
milestone to open up Chinese professionals’ demand for Islamic of investment accounts by Islamic banks can be distinguished from
accountancy qualifications. On the other hand, since the Hong Islamic deposits. This differentiation allows customers to strengthen
Kong government issued its third Sukuk in February 2017, there their understanding of the product offerings by Islamic banks and
has been no further Sukuk issuance, either sovereign or corporate. enables them to make an informed decision on selecting the best
Given the commonalities in the areas of green finance and Islamic investment choices.
finance, and with the Hong Kong government once emphasizing its
new measures on boosting green finance in terms of green bonds, To further develop this sort of new product offering, the Hong Kong
there has been some hope among market players that green Sukuk Monetary Authority can work together with a few selected industry
will be launched sooner or later within the year. However, there has players in a Shariah compliant initiative in which an investment
not been any indication that either green bonds or green Sukuk will account platform can be established. The investment account
be listed in the remaining months of 2018. platform creates opportunities for investors to finance entrepreneurial
activities and develop viable SMEs. It can also act as a platform to
Preview of 2019 attract institutional and individual investors including high-net-worth
individuals to invest in the Islamic financial market.
Islamic wealth management has generated popularity among
customers in recent years as a means to effectively manage their
Conclusion
wealth and simultaneously generating favorable returns. In 2019, it
can be regarded as an innovation in the Hong Kong market. As Hong Due to the growing trend and demand for Islamic wealth
Kong is an international finance center and keen on developing itself management, Islamic banks in Hong Kong should continue their
as a global Islamic finance hub, there are a lot of things it can do in efforts to develop various types of Shariah investment instruments
the area of Islamic wealth management as well. Conventional banks to meet customers’ needs. The ethical values embedded in these
with Islamic banking windows, or more preferably Islamic banks, can products and services should be able to make them appealing to
assist clients achieve their goals in creating and maximizing their everyone, irrespective of race and religion. Moving forward, there is
wealth. Achieving these goals would need the right mix of products a foreseeable huge potential as well as opportunity for Hong Kong
and services under four key objectives of wealth management, to tap into and penetrate new markets for this high-end segment.
namely investment and wealth accumulation, retirement and Hong Kong should aim to be a leading center of Islamic banks that
retirement income, wealth and lifestyle protection as well as wealth can offer exclusive Shariah advisory, particularly to Islamic wealth
distribution. management clients, and provide business referrals for
comprehensive cross-border wealth accumulation offerings. Hong
The rapidly increasing number of high-net-worth individuals and Kong’s development of Islamic finance will always look bright as
the affluent in the global Muslim population of late means there is a long as the Hong Kong government and other stakeholders can
rising demand for wealth management services. Given this trend, it is inject more of their efforts, resources and creativity into this
suggested that the Hong Kong government should consider enacting promising field.

66 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
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 country report
INDONESIA
Indonesia: The future of Islamic capital market
Irwan Abdalloh is the head of the Islamic Capital
Market Division at the Indonesia Stock Exchange.
He can be contacted at irwan.abdalloh@idx.co.id.
The global Islamic financial market in 2018 experienced a
fluctuating development with a tendency to slow down. The
impact of the strengthening of the US dollar against many
currencies in the world, especially Malaysia, Turkey and
Indonesia are one of the causes. However, Indonesia, which
has consistently maintained its economic growth and has
the world’s largest Shariah retail market, has the tendency to
recover from this shock.
The Asian Shariah capital market, especially the Sukuk market, is a
catalyst for the development of global Shariah finance in 2018. With
all its potential and performance, Indonesia will be the future of the
Islamic capital market.
Review of 2018
During 2018, the performance of the Islamic capital market of
Indonesia showed significant growth driven by a focus on increasing
literacy, market deepening and use of appropriate strategic tools.
The number of Islamic mutual funds increased about 326% while
the net asset value increased 471% in the last seven years. In
2018, the number of Islamic mutual funds is expected to increase
by 20% and the net asset value is expected to increase by 15%.
As of September 2018, the Islamic capital market of Indonesia has
213 Islamic mutual funds with assets under management of almost
US$2.3 billion.
The Sukuk market of Indonesia has grown significantly, both in
terms of value and number of Sukuk issuance. The market share
of government Sukuk is still dominant against corporate Sukuk.
Indonesia is the biggest issuer of international sovereign Sukuk in
the world with total issuance of US$16.15 billion in 2018.
The retail Sukuk, which was first issued in 2009, is the most
significant type of Sukuk by the government: besides being the first
issuance and probably the only one in the world, the retail Sukuk
is issued specifically in small amounts, US$350 per unit with three
years tenor.
There are 10 series of retail Sukuk per 2018 with a total accumulated
value of US$9.8 billion. In 2018, Indonesia also issued the second
retail saving Sukuk with smaller denominations, US$75 per unit
and a shorter tenor of two years, benchmarked to the retail Sukuk.
This product is created as an intermediate product between Islamic
banking and Islamic investment products.
The Islamic stock market also performed well in 2018. All Islamic
stock market trading indicators dominated the stock market of
Indonesia by more than 50%. The growth of Islamic investors is
expected to increase by 70% benchmarked to the previous year,
while growth in September 2018 was 58%. The market share of the
Islamic capital market to total Indonesian Islamic finance assets
in 2018 reached approximately 56% while Islamic banking is only
36%, not including the market value of Islamic stocks. The assets
of the Islamic capital market has consistently increased in the last
five years.
Indonesia also received international recognition as the best
emerging Islamic capital market of 2018.
December 2018
Preview of 2019
The government’s commitment to support Islamic finance is
expected to continue in 2019. As of October 2018, the market share
of government Sukuk to total government securities reached 18%
and will certainly increase in 2019. Indonesia is still focusing on
developing infrastructure, meaning it will need large funds to finance
these projects.
Although the performance of the Indonesian Islamic capital market
has been significant over the last seven years but the coverage
of the existing Islamic capital market is still small compared to its
potential. The retail market is our competitive advantage therefore
retail-based Islamic investment products will be superior products
in 2019. The government will continue to issue retail Sukuk and
savings Sukuk, while the private sector will increase the market
share of retail Islamic products.
The Indonesia Stock Exchange (IDX) will continue to educate people
about investing in the Islamic capital market. Increasing the market
share of Islamic-based investors to total investors will be a priority;
it is currently around 4.7%. The Islamic stock saving program as a
campaign for increasing retail investor participation will continue in
2019.
The Indonesian government will continue to support the development
of the Islamic capital market by issuing several regulations regarding
Islamic investment products. The National Shariah Board (DSN-
MUI) will continue to issue Fatwas to support Islamic capital market
development. The DSN-MUI in collaboration with the IDX will also
actively increase Fatwa literacy.
Conclusion
There is still a huge Islamic capital market potential in Indonesia
for the next few years. The World Bank estimates that the growth
of the Indonesian economy is expected around 5% in 2019 and
it is relatively higher than other emerging countries. Also, the
development of infrastructure is still a main priority for 2019. The
government of Indonesia will increase the market share of Islamic-
based financing. There is a large room for increasing Islamic capital
market share in Indonesia.
But remember, young people are the biggest share of the retail
market in Indonesia. Therefore, fintech-based development for
investing in Shariah securities is an absolute priority.
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IRAN

Iran capital market: What was witnessed and will

be seen?

Majid Pireh is the head of the Islamic finance group

at the Securities and Exchange Organization of Iran.
He can be contacted at m.pireh@seo.ir.

There have been many upward as well as downward

trends in business among Iranian financial market players.
Notwithstanding, participants in the financial markets in Iran are
not permitted to conduct any activities that contradict Shariah
principles. In consideration of this fact, it may be fundamentally
concluded that Iran is tasting a wholly Shariah compliant
financial market.

The capital market sector in Iran welcomed the debut equity-based

Sukuk Ijarah and simultaneously other financial instruments such
as Islamic treasury notes, Sukuk Murabahah and a considerable
amount of sovereign Sukuk, all of which played a role in deepening
the market.

Review of 2018
Sovereign Sukuk issuance kept on providing new money for the
government to cover some parts of its financing needs. Ijarah,
Murabahah, Manfaat, Salam and Musharakah compose the five
underlying contracts which are being used to structure sovereign
Sukuk. During 2018, sovereign Sukuk accounted for more than 74% Introducing the Shariah compliant model of insurance-linked
of the Sukuk market value which exceeded IRR360 trillion (US$8.55 securities (ILS) is an important step whereby the structure might be
billion). Another 26% was dedicated to corporate Sukuk issued by finalized in 2019. The Iranian capital market will play a pioneering
Iranian corporations, raising IRR93.6 trillion (US$2.22 billion). role in introducing such a model to the Islamic securities markets.

Besides the Sukuk market, Islamic treasury bills were another piece Besides ILS, the Iranian financial market is planning to launch a
of the government’s financing instruments with their outstanding Shariah compliant model for warrant contracts. Warrants like option
value reaching around IRR358 trillion (US$8.5 billion). contracts are hedging instruments in which one party (such as the
warrant holder) receives the right to do a specific deal at or during
The issuance of equity-based Sukuk Ijarah was another notable a pre-agreed period of time. Warrants provide its holder a hedging
initiative in the Iranian capital market, after which the Shariah opportunity against specific risks such as price fluctuations and
board of the Securities and Exchange Organization (SEO) issued profit risks. The Shariah board of the SEO has released a resolution
a resolution that only certain types of Shariah compliant stocks which permits warrants with specific clauses.
might be leased. Holding and investment companies utilized the
permission for their fundraising, while financial institutions including While some hedging instruments may bring increased confidence
fixed/variable income funds, investment banks, brokerage firms, for market players, but more actions are needed in order to provide
investment companies, market makers and such were trying to do more stability in the market. Socially responsible investment (SRI)
their business. While there were no notable new types of institutions is a mechanism which still has a long way to be comprehensively
emerging in 2018, current models had experienced more depth. realized in Iran’s financial market.
Nevertheless, at the end of the third quarter of 2018, 193 funds were
actively engaged in providing services for their clients. These funds Another notable factor which may provide more stability is interaction
include 71 fixed-income, 20 mixed, 70 equity and 32 market-making with foreign financial markets. Notwithstanding the US withdrawal
funds. from the Joint Comprehensive Plan of Action (JCPOA), which
shocked many experts in the world, causing some negative effects
Additionally, the derivatives market was trending more toward on the internationalization of Iran’s financial system, there seems to
Shariah compliant option contract rather than futures contract and be great potential for realizing such a goal. Harmonizing procedures
by combining call with put options, many companies were able and adopting some international Islamic models for Sukuk issuance
to utilize the structure for their financing purposes. However, the besides other initiatives might facilitate this path.
Shariah compliant futures market value lost its weight as the market
witnessed some fluctuations in gold prices. Altogether, gold-related Conclusion
products and some agricultural products made up major parts of
Both negative and positive developments have been witnessed by
underlying assets in the futures market.
the market players in the Iran financial system in 2018. Positive
developments include new Shariah compliant financial products
Preview of 2019 such as equity-based Sukuk Ijarah, sovereign Sukuk issuance,
Usually market participants expect the market regulator to provide Islamic treasury notes and facilitation of fundraising for companies.
both stability and development. In this regard, the market regulator However, there is still a long way ahead to realize Islam’s objectives
has started some initiatives which may result in providing some in structuring the society and it looks like the financial system in Iran
levels of stability and development next year. is moving ahead toward that brilliant situation.

68 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
December 2018
 country report
IRELAND

Uncertain times and changes

ahead for Ireland

Simon O’Neill is a partner at Philip Lee. He can be

contacted at soneill@philiplee.ie .

Brexit continues to dominate the discussion in both the UK and

Ireland specifically in respect of the remaining Irish border issue.
However, Brexit uncertainty does not appear to have dampened
investment appetite in the UK from Asia and the GCC where
investors still appear to see opportunity in UK real estate.

Review of 2018
With regards to 2018, a number of substantial Brexit-related
developments have materialized. Most notably, the doubling of
Barclays’s Dublin operation from 250 to 500 people at its EU
headquarters along with Bank of America Merrill Lynch, asset
managers such as Aberdeen Standard Investments and the opening
of offices by a number of UK law firms including Pinsent Masons,
Simmons & Simmons and Lewis Silkin.

2018 saw the launch in Ireland by Community Finance Ireland

(CFI), an existing Irish finance provider to the Irish community and
social enterprise sector, of an alternative property finance product
designed specifically for the Muslim community. This non-interest
bearing structure modeled on a Murabahah structure enables
Muslim community groups and social enterprises to acquire property
assets to further their social or impact activities in a compliant
manner. Designed by commercial law firm Philip Lee specifically
for CFI and the Irish market, the product is the first such structure
to be made available to the Muslim community in Ireland. Offering
finance to community groups of up to EUR500,000 (US$562,851)
up to a seven-year term, the product is capable of being used in
conjunction with grants or other assistance offered in the community
sector. CFI is currently accepting applications for financial support
for this product.

The launch of the CFI product garnered substantial attention in 2018

and we have since received many enquiries from the community,
seeking home purchase plans or equivalent Shariah compliant
mortgages. However, because the CFI mandate is to support
community/social enterprise projects and cannot facilitate home
mortgages, there is still no available solution for the 63,000 Irish
Muslim community to finance home purchases.
In a significant signal of Ireland’s ambition to build a sustainable,
low-carbon society, the Irish government announced the issuance
of its first sovereign green bond and the publication of a sovereign
green bond framework in respect of the allocation of the proceeds
to eligible green projects. This has been independently reviewed in
compliance with the ICMA’s 2018 Green Bond Principles. A further
EUR1 billion (US$1.13 billion) green bond issuance is expected from
the National Treasury Management Agency in 2019 on the back of
the success of its EUR3 billion (US$3.38 billion) first issuance in
October 2018 which was heavily oversubscribed at a yield of 1.4%.
Preview of 2019
One key theme we see emerging in financial services in 2019 is a
focus on culture. Following a report undertaken by the Central Bank
of Ireland (CBI) in conjunction with DeNederlandsche Bank in 2018
into the culture existing in each of the five main banks in Ireland, the
CBI issued action plans to be implemented by each of the banks
to improve their culture. Part of the analysis and recommendations
noted that culture came from the top and needs to permeate
everything the bank does in relation to governance, product design,
marketing, systems and credit risk.
We expect a lot more focus on banking culture in 2019 as each of
the five main banks report back to the CBI on their individual culture
action plans. The CBI has brought forward recommendations for an
accountability framework similar to the ‘Senior Managers Regime’
in the UK to the minister of finance. While this will require amending
legislation to be brought forward, the CBI has indicated that this is
going to remain a high priority and focus in the near term.
Islamic finance offers many lessons in terms of the implementation
of a values-based culture into a bank’s operations in terms of how
it implements Shariah governance processes, internal Shariah
audit, product design and oversight and how this permeates all of
the activities of an Islamic financial institution’s operations. Many
of these principles and approaches resonate with the issues and
principles referred to in the CBI report.
Conclusion
We continue to work with a variety of interested parties in developing
Islamic finance in Ireland. Brexit and other growth opportunities may
yet deliver the establishment of Islamic finance by Islamic financial
institutions or investors in Ireland.

December 2018
T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
69

Time for the Ivory Coast to move up a level in
the Islamic finance industry
Abbas Cherif is the head of Islamic finance at
AN NOUR Consulting. He can be contacted at
an.nourwebsite@gmail.com.
The Ivorian financial sector is not up to its economy due to a
lack of diversified financial products and the exclusion of the
underprivileged population. This state of affairs favors the use
of alternative financing such as Islamic finance. This is why the
initiatives in favor of this participative finance have multiplied
during 2018 and should be even more accentuated in 2019.
Review of 2018
Table 1: Instructions published by BCEAO Central Bank of WAEMU
Dated Instruction
2nd March N ° 002-03-2018
2018
3rd March N ° 003-03-2018
2018
4th May 2018 N ° 004-05-2018
5th May 2018 N ° 005-05-2018
Source: Author’s own
The African Network for the Promotion of Islamic Finance (RAPFI)
was constituted by the following member countries: Benin, Burkina
Faso, Cameroon, Ivory Coast, Niger, Mali, Togo and Tunisia with
headquarters in Abidjan, Côte d’Ivoire.
The Regional Council for Public Savings and Financial Market
(CREPMF) co-organized with the IFSB, a workshop held in Abidjan
from the 24th to 27th June 2018. This workshop which brought together
Malaysian experts from IFSB and members of CREPMF aimed to
promote not only a better understanding and implementation of
the norms and principles of Islamic finance but also to show the
regulator and the actors, the opportunities it offers to the financial
market in general and in particular to issuers and investors.
Eleven Ivorian students completed the MBA program in Islamic
finance in October 2018 and became the first generation of Islamic
finance experts trained on the spot. These graduates will portray
a source of competency in addressing the problems in the local
industry of Islamic finance.
CIBAFI in partnership with CESAG African Center of Higher
Learning in Management in Senegal organized the first session
of Certified Islamic Banker in Abidjan at the Ivotel Hotel from the
3rd-8th September 2018. This session brought together about 15
professionals from the Islamic financial institutions in West Africa.
Following that, Making Finance Work for Africa and the African
Development Bank convened the ECOWAS Financial Sector Policy
70 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
country report
IVORY COAST
Details
Specific provisions applicable to
credit establishments exercising
Islamic finance activity.
Specific provisions applicable
to microfinance institutions
exercising Islamic finance
activity.
Technical characteristics of
Islamic finance operations
exercised by credit institutions
of the West African Monetary
Union (WAMU).
Technical characteristics of
Islamic finance operations
exercised by decentralized
financial systems of the WAMU.
Dialogue on the 27th and 28th September 2018 in the Abidjan Plateau.
Participants in the two-day dialogue took stock of ongoing reforms
and identified priority actions that will form the basis of a roadmap for
financial sector development initiatives within the ECOWAS region.
This dialogue focuses on identifying Islamic finance instruments
among others that have catalytic effects on the real economy of
member countries.
Preview of 2019
Taxation is the most immediate challenge to date because the
regulation must be accompanied by a tax adjustment to solve major
problems. An initiative is being developed between the General
Secretariat of FANAF, the Federation of African National Insurance
Companies, CIMA and the Inter-African Conference of Insurance
Markets for the development of a regulation framework for Takaful
in these member countries. This regulation is likely to be released
in 2019.
For this coming year, we should see a better organization of the
financial market to make it more attractive for investors with financial
institutions better structured in the country with the contribution of
some recent MBA holders in Islamic finance. Better deployment
of Islamic financial institutions to be closer to the people and
addressing their needs with suitable and competitive instruments.
A policy to promote Islamic finance throughout the country by
having a caravan led by a pool of Ivorian experts in Islamic finance.
The Ivorian government will probably be involved once again in
the capital market with a sovereign Sukuk two years after the last
issuance.
Conclusion
The potential of Ivory Coast is no longer to demonstrate it is time to
take a step in the development of the Islamic finance industry. This
will happen in the coming months through a strengthening of Islamic
financial institutions and a greater proximity with the Ivorian
population. The regulatory framework for Takaful will improve the
risk coverage generated by operations and ensure better product
competitiveness.
December 2018
 country report
JAPAN

Japan at the crossroads between growth and

stagnation

Dr Etsuaki Yoshida is the project associate

professor at Kyoto University. He can be contacted
at yetsuaki@gmail.com.

It is already a cliché that Islamic finance is seen in a Muslim-

minority country as well. Japan is not an exception. As a
researcher of Islamic finance domiciled in Japan, the author has
conveyed a lot of information on Islamic finance in the country
since the mid-2000s. All the three major Japaness banks, or
so-called mega banks, offer Islamic financial services, mainly
out of their Malaysian entities. The Japanese government
has modified several laws to accommodate Islamic financial
transactions, including Murabahah-based deals and Sukuk.
Japanese academicians are also quite active globally, including
myself.

These trends were outstanding until several years ago, but recently,
it looks rather quiet.

Review of 2018
The market has witnessed several deals this year, as well as past
years and some of those deals were discussed in IFN Correspondent
reports, including SMBC, MUFG Bank, Mizuho, SBI Gold, Sompo
Japan and Yamako. Those deals were not necessarily reported
in the Japanese media, but in other words, as Japanese financial
institutions and enterprises go global, Shariah compliant financial
transactions are done in an ‘out-out’ field.

This may be interpreted in two different ways. One is a positive

view that Japan’s Islamic finance, mainly led by Japanese financiers
in operations that are active mainly in overseas market, which is
considered to be the main market for them, with very little Muslim
populations in their home country. However, there may be an opposite
and negative view that not much is going on in Japan itself. In the
years before 2017, there were more developments in Islamic finance Readers of this article are strongly encouraged to consider issuing
in Japan, including financial institutions’ transactions, regulatory the Japanese Yen denominated Sukuk, for cheap funding costs,
developments, and cross-border engagements. 2018 might have currency diversification in funding, and advertising. The author is
shown a relatively quiet market if limited to the headquarter activities. happy to introduce relevant parties.

Preview of 2019
Given this situation as a starting point, the author has a view that
2019 will be an important year whether Japan’s Islamic finance will
grow for the next stage in a global context, or not.
One of the litmus tests will be the tax treatment for ‘J-Sukuk’. It is a
package of tax neutrality and legal clarification to make a Sukuk deal
possible under the Japanese legal system, which came into effect in
April 2012. Unfortunately, there is no track record so far.
The J-Sukuk system contains a sunset clause in a couple of tax
neutrality treatment, and the current due is the end of March 2019.
The key is whether or not the government will extend the tax
neutrality after the inter-ministerial discussion on the tax reform for
FY2019, which will become available shortly. The banking industry
and the authority have expressed their intention of request.
If there is an extension, it will be okay for the industry, but if not, it
will be a problem. The J-Sukuk system became available thanks to
huge amount of efforts by related people. If there is no extension, it
will be extremely difficult to re-establish the same/ similar system, as
it is considered to be an unnecessary system with no track record.
Another key point for Japan to continue growing in Islamic finance
is whether or not they can involve the wave of fintech in their
businesses. Although it is a very competitive area, fintech itself is
a conceptual trend and technology in general should provide high
efficiency for financial business. Islamic fintech should be a very
promising area, and Japanese financial institutions and technology
companies should have a possibility of global success.
As discussed previously, Japanese financial institutions will expand
their Islamic business overseas, slowly but surely, as the country
is facing the decreasing population, which means the decreasing
market, especially for retail banking and retail insurance.
Conclusion
Japan’s Islamic finance is at a crossroad. It may continue its
overseas business on a small scale, but we should wait for the
progress of the J-Sukuk treatment of extension, and involvement
with fintech, to see if it will succeed in later years or not. As the
normalization of global monetary easing goes on, except in Japan,
its low interest gets relatively even lower. More Japan-related Islamic
finance deals can be expected in the nearest future, including
collaboration with overseas players.

December 2018
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71
 country report
KAZAKHSTAN

Kazakh government should concentrate on

attracting cross-border Islamic financing

Shaimerden Chikanayev is a partner at Grata

Law Firm. He can be contacted at schikanayev@
gratanet.com.

Though Kazakhstan adopted relevant legislation for domestic

(such as the governed Kazakh law) Islamic banking transactions
more than seven years ago and has a Muslim population of
over 11 million, Islamic finance is still in the early stages of its
development and Islamic products are rarely used. According to
the National Bank of Kazakhstan (NBK), as of 2018, the share of
Islamic banking assets account for only 0.16% of total banking
sector assets in Kazakhstan.

Importantly, there is no unified Islamic finance law in Kazakhstan.

Instead, domestic Islamic finance transactions are regulated by
Kazakhstan’s general banking, securities, insurance and other
relevant legislation.

Review of 2018
So far 2018 has been a big year for Kazakhstan. Modeled on the
Dubai International Financial Centre, the Astana International
Financial Centre (AIFC) was officially launched on the 5th July this
year 2018. AIFC is established with the aim of bridging the gap
between the world’s major financial centers and a regional gateway
for capital and investments. One of the core pillars of the AIFC is
Islamic finance, as it aims to become an Islamic finance hub not
only for Kazakhstan, but for the whole of Central Asia, the Eurasian
Economic Union, the Caucasus, West China and Mongolia.

To date, already more than 50 companies have registered as Government tries to reduce the state’s role in the economy through
participants in the AIFC, including a representative office of the privatization and deregulation.
China Development Bank. Multiple IPOs are scheduled for the
next few years on the stock exchange of the AIFC, the Astana The Chinese Belt and Road Initiative’s (BRI) ever-increasing
International Exchange (AIX). The world’s biggest uranium producer investments in infrastructure of Kazakhstan will also provide in 2019
Kazatomprom, in particular, just made its stock market debut on the a unique opportunity for Kazakhstan to attract Chinese money and
13th November 2018 after raising US$450 million from investors in technology and become one of the largest transit hubs in Eurasia.
London and Astana. Placement of a debut sovereign Sukuk facility Worries over rising debt burdens on Chinese banks, however, are
is also expected to take place on the AIX’s platform by the end of lately driving calls in Central Asia to get other sources of finance
2018 or next 2019. for the BRI’s projects in the region. It is well known that the global
Islamic finance market size is estimated to exceed US$2 trillion in
The AIFC has its own English law based laws and regulations and 2018. Hence, Kazakh and Chinese companies involved in the BRI
even its own court and facility for arbitration (in effect, a ‘one country, shall explore Islamic finance to finance their projects in Kazakhstan
two systems’ arrangement has been introduced despite the fact that and other Central Asia countries along that route.
Kazakhstan is a unitary state). The AIFC’s court is headed by the
former lord chief justice, Lord Woolf, and judgments issued by this Conclusion
court will be directly enforceable in Kazakhstan.
Some experts are at strife as to why it is so difficult to bring Islamic
finance into gear in Kazakhstan. Some say that it is mostly because
Preview of 2019 there is still no proper legal and institutional framework to speak
As far as the overall economy is concerned, however, in 2018 of for the industry, while others believe there is simply not enough
Kazakhstan still suffers badly from the 2014 price decline in oil and mature demand for Islamic banking services in a country.
other commodities and a stagnant banking sector. As such, its future
economic growth in 2019 largely depends on attracting foreign We believe, however, that Islamic finance is too complex to
direct investment (FDI) flow into Kazakhstan for the development of understand and to be used by the general population and SMEs in
infrastructure and regional trade. Kazakhstan and, therefore, the Kazakh government, instead of
further developing a legal framework for the domestic Islamic
There is no doubt that ongoing global privatization of state-owned finance industry, should just concentrate its efforts on attracting
companies, including by way of IPOs on AIX and the issuance of through the AIFC cross-border Islamic financing from abroad (such
Islamic bonds by the Ministry of Finance of Kazakhstan would as the Arab states of the Persian Gulf and Malaysia) for the purposes
attract capital not only from western and Chinese investors, but also of implementation of big infrastructure and public-private partnership
from Muslim markets in the Middle East and Southeast Asia. That is projects that can already be easily done under the current legal
why in 2019 more IPOs shall be expected in Kazakhstan as Kazakh framework.

72 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
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 country report
KUWAIT
Kuwait: Mergers and acquisitions could be a key
source of value addition
Issam Altawari is the managing partner of Newbury
Economic Consulting. He can be contacted at
issam@newburyconsultancy.com.
It is important to mention the ‘New Kuwait’ 2035 vision as
a backdrop carried out by His Highness the Amir of Kuwait
in transforming the State of Kuwait into a free economy
state, and having it as an attractive business hub. By calling
for the elimination bureaucratic restrictions, imposing new
legislation to enhance, and drive the economy of the State
of Kuwait.
This phase I of the economy development has initiated on a
5-year-plan, are (1) transforming Kuwait into a cultural center,
(2) transforming the State as a financial and commercial hub to
encourage more investments within the country – enabling the
private sector to lead and drive the economy among its main
pillars.
Review of 2018
Lower oil prices has altered the fiscal landscape of Kuwait as the
prized fiscal surplus registered in recent years has flipped into
deficits. Over the last three years, GCC countries have posted
a fiscal deficit of around US$300 billion. This deficit will be met
partly with reserves and partly through borrowings (both domestic
and international). It is estimated that GCC governments to raise
between US$260-400 billion in debt cumulatively through 2020
by issuance of local and international debt/bonds conventional
and Islamic. This is a significant jump relative to US$72.1 billion
raised cumulatively during the period 2008-14. Kuwait’s debt is
still capped with the US$30 billion public debt law which is being
considered by the parliament for revision up to US$60 billion and
tenor up to 30 years.
With the onset of the financial crisis during the last 10 years,
Kuwait investment companies have faced enormous challenges.
This includes reduction in overall assets managed, difficulty to
recapitalize, lackluster stock market and increased regulatory
pressures. The traditional business model which emphasized
the more volatile investment income rather than the stable fee
income did not help matters as well. Notwithstanding this, it hard
to ignore the sector given the important role of intermediation
that it plays in the Kuwait economy alongside the banking sector.
While the banking sector, as the deposit taking institutions, play
the intermediary role to fund industrial development, investment
companies, as non-deposit taking institutions, can supplement
this process through various types of funding to include equity,
mezzanine, bonds, Sukuks, convertibles, etc. The sector is a key
stakeholder for Kuwait’s development process for ‘New Kuwait’
and hence it is imperative to take practical measures to restore
the sector back to health.
National Bank of Kuwait research estimates that there is a pipeline
of PPP projects with a total value of KWD10 billion (US$32.8
billion) in the tendering or pre-tendering stage in Kuwait. The
partnership with private sector through the government PPP
strategy in enhancing the economy, is a promising feature that
would encourage and advocate private investments. The capital
market activities act as second comfort indicator that government
of Kuwait is taking a solid move to strengthen the private sector.
This can be witnessed with the State’s investments taking part
in private sector’s PPP scheme setups, such as Phase II of Al-
December 2018
Zour North Refinery, Al-Khairan project and the Kuwait Stock
Exchange privatization, all considered part of IWPP portfolio of
projects.
Preview of 2019
The US$300 billion ‘Silk City and Islands’ 250km2 proposed area
project is expected to start rolling out next year with getting the
legislative approvals to attract foreign investments into Kuwait
and to develop alternative source of income for the country. This
will provide tremendous opportunities for logistics, banking and
investments sectors in Kuwait.
The financial technology (fintech) revolution that is sweeping
across the banking and financial services industry across the
world is likely to have an impact on the retail banking business in
the country. Central Bank of Kuwait has issued directives dealing
with fintech back in September.
Looking ahead, investment companies in Kuwait can do well to
configure a different business model that focuses on alternative
assets like debt, distressed assets, private equity and real
estate. 2019 can be a year of consolidation for the investment
companies (KAMCO & Global Investment House are already
underway) to continue and survive. Facilitating an orderly process
for consolidation whereby distressed companies merge with
stronger ones. The market place offers huge opportunities for
distressed asset pick up aided by Basel III. The probability of
good assets available at good price increases.
On the banking scene, Kuwait Finance House and AlAhli United
Bank merger will be put on the test in terms of obtaining
shareholders consent and realizing the merger benefits between
Islamic and conventional banking groups. The Investment Dar
future seems to be bleak with the lifting of the financial stability
protection and facing its creditors.
Conclusion
Banks in Kuwait are expected to witness strengthening of their
financial profiles and performance in 2018. As the macroeconomic
scenario improves with financial stability (relative to the rest of
GCC), new regulations in place, change in consumer behavior
and demographics, mergers and acquisitions could be a key
source of value addition at both the operational and strategic
levels.
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 country report
KYRGYZSTAN

Supervisory and Shariah framework reform

initiatives in Kyrgyzstan

Daniyar Mamyrov is the representative for Gateway

Islamic Advisory in Kyrgyzstan. He can be contacted
at mamyrov_d@auca.kg.

The introduction of Islamic banking in Kyrgyzstan faced

obstacles that were mainly due to initial apprehensions
concerning Islamic finance among the secular elite population
and government officials.

However after the presidential election in 2017 where political elite

was changed by Sooronbai Jeenbekov, Kyrgyzstan’s fifth elected
president, known for his tolerance, pluralism and statements about
the importance of determining the Islamic role in Kyrgyzstan, a
new stage of Islamic finance development can be expected.

Nevertheless, the success attained by Islamic finance principles for the Development of the Private Sector. An MoU envisages
in other Asian and Middle Eastern countries, particularly Malaysia, enhancing trade and investment opportunities in Kyrgyzstan
encouraged the government to introduce Islamic banking in the through Shariah compliant co-financing and co-investments
Kyrgyz Republic. There is a positive perception of Islamic banking focusing on the SME sector, as the RKDF, which was founded in
— almost 86% of Kyrgyzstan’s population follows Sunni Islam. 2014 in Bishkek, provides mainly specialized financing services
These and many other factors will force the further development to SMEs in Kyrgyzstan. It provides medium and long-term loans,
of the Islamic finance industry in the near future. The government through either partner banks or direct financing.
has made efforts to strengthen the regulatory environment by way
of amendments that laid down key principles of Islamic banking
in 2009, 2013 and 2016.
Preview of 2019
Obtaining Shariah compliant funds for working capital
Review of 2018 requirements has proven a challenge for Kyrgyz EcoIslamicBank,
and other Islamic financial institutions in Kyrgyzstan, since Islamic
2018 was significantly interesting in terms of events in the Islamic banks cannot use non-Shariah compliant funds. In this sense,
finance industry of Kyrgyzstan. OJSC Bakai Bank launched its 2019 is expected to be dedicated to the 2nd stage of development
first so-called ‘Islamic window’ named ‘Islamic Financial Centre’ of appropriate regulatory, supervisory and Shariah frameworks
aiming to provide financial services on Islamic principles. The IFC for Islamic banking and Islamic monetary policy tools in the
received a license from the national banking regulator in June Kyrgyz Republic. And the National Bank of the Kyrgyz Republic,
2018. Potential customers are mostly private businesses and with the support from the IDB, has initiated the project of general
retail customers, with their natural need for banking products, who procurement and invites eligible consultants to indicate their
generally seek to avoid the offerings and services of conventional interest in providing consulting services. These initiatives are
banks because they see paying interest as not being aligned with expected to be finalized and bring successful results in 2019
their values. for further regulatory development of the Kyrgyzstan’s Islamic
finance market.
Around 80% of the MSMEs surveyed expressed a desire to
borrow, or obtain financing, under the aegis of Islamic principles. Additionally, Kyrgyz banks and financial institutions find it difficult
This amounts to significant untapped potential, as there is just to hire qualified managers and staff with some level of expertise
one Islamic bank operating in the Kyrgyz Republic at present, in Islamic banking. In some instances, recruiting experts, such as
and it accounts for only 1.6% of all commercial bank lending. accountants and product managers, among others, is challenging
Considering this untapped potential, many conventional banks because such personnel are simply unavailable locally. That’s
in the country, such as Kyrgyzkommertsbank, RosinBank, why a number of state and private universities in Kyrgyzstan are
Commercial Bank Kyrgyzstan and Bai-Tushum Bank, had willing to launch in 2019 specialized Islamic finance programs for
expressed their interest in setting up Islamic banking operations in local managers.
the Kyrgyz Republic. In fact, these banks have already started the
process, conducting relevant feasibility studies and appointing
experts on regulatory compliance.
Conclusion
From a practitioners’ perspective, the Kyrgyz Republic is
Later in July 2018, BTA Bank and Al Baraka Group signed a accurately following the roadmap to building a robust Islamic
historical MoU in order to develop relationships and increase financing ecosystem. By looking at more developed Islamic
awareness as well as provide assistance on Islamic banking in finance economies, the Kyrgyz Republic can build on its existing
Kyrgyzstan. The document was signed by BTA Bank’s chairman Islamic banking and finance regulations and work closely with
and executive vice-presidents of Al Baraka Banking Group in banks in order to formalize the said ecosystem. With continued
Manama, Bahrain. The delegation also included representatives development and improvement in the regulatory and legislative
of the Shariah board of CJSC BTA Bank Ex-Mufti of the Muslim environment, and in strengthening institutional capacities to meet
Spiritual Authority of the Kyrgyz Republic. growing MSME demand, the Islamic financing market opportunity
is estimated to reach between US$342.2-456.3 million going
The Russian-Kyrgyz Development Fund (RKDF) started a forward and with deposit potential in the range of US$402.6-
feasibility study after signing an MoU with the Islamic Corporation 536.9 million.

74 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
December 2018
 country report
LEBANON
Stagnation of Islamic finance and
banking in Lebanon
Elias R Chedid is the managing partner of Chedid
Law Offices in association with Dentons in Beirut,
Lebanon.
Dr. Georgette Salamé is a senior associate at
Chedid Law Offices in association with Dentons.
They can be contacted at elias.chedid@chedidlaw.
com and georgette.salame@chedidlaw.com
respectively.
In 2004, Law No 575 introduced Islamic banking in Lebanon in
the context of a sound banking environment, which has since
continued to show resilience to financial and political crisis. By
providing a legal framework for Islamic banking, the Lebanese
legislator allowed banks to cater to an array of domestic
and foreign demands for services that complied with certain
religious standards or that offered investment and financing
tools driven by a logic that was different from the dynamic that
had, on numerous occasions, undermined the conventional
financial sector.
Review of 2018
Islamic banking appears — at least in theory — to have reached a
fairly advanced stage in terms of its penetration of the Lebanese
market. There are indeed a number of fully-fledged Islamic banks
licensed by the central cank (BdL) which operates in Lebanon.
Islamic banking has yet to witness an actual boom: there are today
only a handful of licensed Islamic banks and their share of the
market does not exceed 1%, according to Jamil Hammoud’s ‘The
challenges and opportunities of Islamic banking in Lebanon’ 2017.
The reason for the limited development of this segment of the
banking and financial industry is not related to the non-religious
nature of the Lebanese legal system: the UK or South Africa have
indeed become hubs for Islamic finance despite not being Muslim
states governed by the Shariah. Moreover, scholars have underlined
the fact that the idea that Islamic finance is not open to non-Muslims
is a misconception — refer to Usman Hayat and Adeel Malik’s
‘Islamic finance: ethics, concepts, finance’, CFA Research Institute
Foundation 2014. The reasons that explain such a failure to grow
do not lie in the global decline of Islamic finance either, as the pace
of development of this industry has reached a 10-12% growth in
the past decade, according to Abayomi Alawode’s ‘Islamic finance
brief’, World Bank Group 2015.
The stagnation of Islamic finance in Lebanon is partly due to the
absence of a genuine willingness to boost its development. For
instance, although there exists a legal and regulatory framework
that includes an asset securitization law (Law No 705/2005), as well
as regulations relating notably to Ijarah  and Musharakah as per BdL’s
Basic Decisions No.9042/2005 and No.8954/2005, which often support
the remuneration of Sukukholders, Lebanon has not issued sovereign
Sukuk, which could have opened an avenue for Islamic banks to invest
short-term excess liquidity — refer to Juan Solé’s ‘Introducing Islamic
Banks into Conventional Banking Systems’ IMF 2007.
Many obstacles continue to hinder any initiatives, including the
absence of a secondary market. Islamic bankers also acknowledge
that they have not succeeded in educating the general public in
Lebanon on the specifics of their products. Despite the many calls
for a strategic education campaign that could foster awareness
of their products, Islamic banks have not focused their efforts to
December 2018
promoting their approach to the banking and financial industry —
see Ghassan Chammas’s interview, ‘Why Islamic finance is failing in
Lebanon’, Albawada 2014.
Preview of 2019
Although Law No. 575/2004 sets the basis for Islamic banking
and while the BdL issued – subsequent to the enactment of this
law – a significant batch of regulations in an effort to facilitate its
implementation, the current legal and regulatory framework is not
sufficient to allow the full development of Islamic finance in Lebanon
in the immediate future. In the past decade, Islamic finance has not
ranked high on the BdL’s agenda, which was already taken up by many
challenging issues relating notably to exchanging tax information,
fighting criminal offences in the financial sector (cybercrime,
terrorism and money-laundering), electronic transactions and data
protection. As for the Capital Markets Authority, it has mainly taken
up the existing BdL regulations, which is only natural knowing that it
is chaired by the governor of the BdL.
The recent changes the regulatory framework made via a number
of regulations — Intermediate Decisions No.12497/2017 (practice
of Islamic banking), 12498/2017 (Murabahah) and 12499/2017
(Mudarabah), which respectively amended Basic Decisions
No.94/2004, 96/2004 and 100/2005 — amount to mere adjustments.
Supporting the growth of Islamic finance requires more than the
intervention of the banking and financial markets’ regulators as the
main hindrances to the development of Islamic finance can only be
lifted by parliament.
Currently, the legislator’s failure to take into account the mechanics
of Islamic finance does not place conventional and Islamic banks on
an equal footing. The prohibition of Riba makes it notably difficult
to offer competitive solutions to customers in a legal environment
that builds many banking services on and around the payment of
interest. Scholars have drawn attention to double taxation, which
applies to many Islamic transactions that purport to meet the same
financing needs that conventional banks also cater for via interest-
based loans. For instance, stamp duty (which was recently increased
to 4/1000) applies twice to the transfer of real property pursuant to
an Ijarah Muntahiya Bil Tamleek and valued-added tax (which was
recently increased to 11%) — see Law No.66/2017 — applies also
twice to the transfer of real property in the context of a Murabahah.
Conclusion
Where the BdL has supported the financing of individuals and
businesses in many sectors, such as agriculture and tourism, by
subsidizing interest payments on loans extended by Lebanese
banks, no equivalent facilities have been provided to Islamic banks,
whose financing instruments do not make room for the concept of
interest. It is also the prohibition of Riba that prevents Islamic banks
which, like conventional banks, are required to constitute a reserve
with the BdL, from receiving and incorporating interest on such
money in their profits — see Ghassan Chammas, ‘Islamic finance
industry in Lebanon: horizons, enhancements and projections’, ESA
2006. While the country is still trying to establish a new cabinet and
meet the challenge of launching large-scale infrastructure and
energy projects that could fuel economic growth, Islamic banking
could contribute to such efforts if proper state-of-the-art legal and
regulatory frameworks would allow it to develop. It is, however,
difficult to anticipate the future of this industry in the coming years
as neither the banking and financial markets’ regulators nor
parliament has announced any major reforms for the foreseeable
future.
T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
75
 country report
LUXEMBOURG

Coming year to be major test for Luxembourg as

Islamic finance center

Ali Khokha is the senior manager at PwC

Luxembourg.

Sabrine Habassi is the manager of PwC’s FS

advisory team. They can be contacted at ali.
khokha@lu.pwc.com and sabrine.habassi@lu.pwc.
com respectively.

Despite the fact that Luxembourg has one of the most attractive
and competitive ‘one-stop-shop’ financial sectors in Europe and
globally, the Islamic finance industry has not been growing at
the expected pace initially projected. During the last two years,
Islamic finance activity in Luxembourg has been flat and almost
nonexistent in 2018. While at the global level we saw more and 2018 has not seen any listing of Sukuk in the LuxSE compared to
more countries adapting their financial frameworks to integrate other EU jurisdictions (eg Dublin, London) where some considerable
Islamic finance as a strategic component for the development issuances have occurred (such as Saudi’s Sukuk and the IDB
of their local markets, it has been highlighted that Luxembourg Sukuk). This pattern from GCC issuers to go via the UK and Ireland,
financial players, for several reasons, were not very active in for their international issuances, has been observed since 2017 and
attracting and creating Islamic Finance initiatives and business seems to consolidate through 2018.
opportunities during the last years.
Regarding asset management, and despite the unavailability of the
Review of 2018 official figures for Luxembourg for 2018, it will be fair to anticipate
that all the indicators will remain flat, compared to 2017, in terms of
During 2018, Luxembourg has conserved its place as the leading
the number of Shariah compliant funds (including sovereign wealth
non-Muslim domicile for Shariah compliant investment structures
funds), AuM, type of investors, structures and strategies.
and issuance of Sukuk listed on its exchange. In terms of figures,
it is the largest Islamic investment fund domicile in non-Muslim
In terms of Islamic finance events and visibility to the market, with
countries with over EUR11 billion (US$12.55 billion) of assets
the exception of the LFF’s participation in IFN UK Islamic Finance
under management (AuM) and it is also the domicile of 49 Shariah
Week 2018, Luxembourg has not been very active in holding
compliant funds and has more than 20 Sukuk which are listed on the
conferences, events or roundtables on the topic of Islamic finance.
Luxembourg Stock Exchange (LuxSE) (almost the same level of key
However, major parts of the events during 2018 have been turned
performance indicators than 2017).
toward topics of ethical; environmental, social and governance; and
sustainable and responsible investments and green bonds.
However, the difficulty of the global context in 2018 (such as the
strengthening of the far right in EU governments, the protectionism
trend in the US and US President Donald Trump’s unexpected and Preview of 2019
hazardous policies and sanctions against several countries, China’s For 2019, we can see that Luxembourg is at a turning point regarding
economic slowdown, Brexit and tensions between the EU and the its positioning as a European center of excellence for Islamic finance.
UK, oil price volatility, tensions between GCC countries, tensions With Brexit entering into force in March 2019, especially with a ‘no
between Saudi Arabia and Iran and the war in Yemen), made it very deal’ situation, there will be fierce competition between the UK and
difficult for international investors, financial institutions and asset other EU jurisdictions to attract the maximum number of investors
owners to extend their business activities outside of their local from the GCC and Asia (both for Islamic and conventional finance).
markets. This difficult context has been an important factor affecting In such a situation, Luxembourg needs to review its strategic
Luxembourg’s capacity in attracting additional Islamic finance positioning toward Islamic finance by adapting its marketing channels
business to its financial place. and by taking advantage of Brexit which will limit the capacity of the
UK to target investors, financial institutions and asset owners in the
In terms of Islamic banking activities and while in theory we would EU. One possible way of differentiation, among others, could be the
expect to see a long list of waiting Islamic banks applying for licenses rising appetite for green Sukuk, where Luxembourg could play an
to operate their European business from Luxembourg, the market is important role due to its experience and green-friendly environment.
still waiting for such a strategic decision to happen. Indeed, such a Another way of developing Islamic finance could be to support the
decision would certainly benefit Islamic financial institutions (such financing of SMEs in Europe and asset owners/infrastructure using
as banks and insurance companies) and enable them to tackle Sukuk or using the newly established and easy to deploy Reserved
the hugely lucrative yet untapped market of Muslim residents in Alternative Investment Funds structure.
Western European countries. In addition, Luxembourg would be well
positioned to welcome the first fully-fledged Islamic bank aimed at
Conclusion
offering Shariah compliant retail, corporate, investment and private
banking services in the eurozone. Despite a difficult year for the development of Islamic finance in
Luxembourg, the coming year will be a major test of the capacity of
Regarding Sukuk listing, Luxembourg For Finance (LFF) and the Luxembourg to remain as a ‘real’ expertise center for Islamic finance.
LuxSE are continuously highlighting the quality of their service It is obvious that the Islamic finance market needs to be addressed
offerings including, and not limited to, listing in two possible markets in a more dynamic way to adapt to its highly evolving needs and
(Bourse de Luxembourg and Euro MTF), trading and EU passporting specifics and to adapt to the continuously changing global economic
and a high level of transparency/reporting to investors. However, and geopolitical environment.

76 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
December 2018
 country report
MALAYSIA

Public-private partnership thrust to support

Malaysia’s Sukuk market
Chart 1: Malaysia’s Sukuk issuance against total market issuance
Ruslena Ramli is the head of Islamic finance at
RAM Ratings. She can be contacted at ruslena@ % of total
ram.com.my. RM billion insurance
600 60%
500 50%
400 40%
RAM Ratings has revised its GDP growth projection for 2018 300 30%
to 4.9%, from the earlier 5.2%. The revision is premised on 200 20%
the challenges arising from a slew of global headwinds, the 100 10%
0 0%
rising prospect of a full-blown trade war between the US and 2014 2015 2016 2017 Oct-2018
China and the US Federal Reserve’s hawkish tone on monetary
policy. As an emerging economy, Malaysia will be exposed to Sukuk issuance
Conventional issuance
net outflows of foreign capital. That said, confidence in the Sukuk issuance (as % total)
Malaysian economy has remained stable, as evidenced by the Source: Bond Pricing Agency Malaysia (BPAM) and RAM Ratings
ringgit’s performance (as of end-October 2018) as the best-
performing emerging-market currency, as well as Malaysia’s
resilient equity market.
Chart 2: Malaysia’s quasi-government and corporate Sukuk
issuance by sector
Review of 2018
Consumer products
As at the end of October 2018, the domestic Sukuk market’s
issuance value had risen 5.2% y-o-y to RM145.9 billion (US$34.74 100% Industrial products
billion) (end October 2017: RM138.7 billion (US$33.02 billion). The 90% Mining and petroleum
corporate sector’s muted performance year to date (-29.7% y-o-y)
was cushioned by the revived issuance of Islamic debt securities by 80% Asset-backed securities
Bank Negara Malaysia (BNM), which summed up to RM25.5 billion
(US$6.07 billion) in 10M 2018. Additional Sukuk issuance by the 70% Trading and services
Government and BNM has helped fuel the country’s local-currency 60% Plantation and agriculture
(LCY) Sukuk market; the YTD issuance amount has already exceeded
RAM’s full-year projection of RM100-RM120 billion (US$23.81- 50% Property and real estate
28.57 billion). The corporate sector dominated the Sukuk market,
accounting for 44.5% of its issuance value as at the end of October 40% Construction and engineering
2018, followed by the government (38.1%) and BNM (17.5%). 30% Transportation
Historically, Malaysia’s LCY Sukuk market has benefited from a 20% Diversified holdings
sustainable flow of Islamic debt issuances by financial institutions
and the infrastructure sector’s sizeable funding requirements. 10% Infrastructure and utilities
DanaInfra Nasional, Edra Energy and Prasarana Malaysia led the 0% Financial services
domestic market’s top 10 Sukuk issuers as at the end of September
2016 2017 YTD-2018
2018.
Source: BPAM and RAM Ratings

Table 1: Top 10 issuers in Malaysian LCY Sukuk market (as at the
end of September 2018)
(RM billion)
1. Government of Malaysia
2. Bank Negara Malaysia
3. Sunway Treasury Sukuk
4. DanaInfra Nasional
5. Edra Energy
6. Prasarana Malaysia
7. Lembaga Pembiayaan
Perumahan Sektor Awam
8. Cagamas
9. Danga Capital
10. Tenaga Nasional
Top 10 issuers
Total LCY market
Source: BPAM
Preview of 2019
A key highlight of Malaysia’s Budget 2019 - announced in early
Amount Market share November 2018 — is the promotion of an entrepreneurial state.
The Malaysia Incorporated policy will be reintroduced to stimulate
51.5 36.2%
and encourage private sector participation in the economy as well
as overall development. Over the last 30 years, the private sector’s
19 13.4% solid support and active participation has become the tipping point
9.98 7% in the development of Malaysia’s bond market. Its bond market is
now the third-largest by percentage of GDP, after those of Japan
9.9 7%
and South Korea. Initiatives to revise public-private partnerships in
5.09 3.6% promoting investment and entrepreneurship are envisaged to have
4 2.8% spillover effects for the Sukuk market.
4 2.8%
Conclusion
3.97 2.8% Malaysia’s strong ecosystem for Islamic finance will continue to
3.5 2.5% underpin its Sukuk market leadership. The experience of professional
service providers (legal, accounting, credit rating, Shariah advisors)
3 2.1% has played a pivotal role in facilitating the growth of the Islamic
88.36 80.1% finance industry beyond the country’s borders. This, coupled with
119.99 100%
the regulators’ concerted efforts to strengthen the Islamic finance
industry’s core pillars, stands Malaysia in good stead to maintain its
global dominance in this arena.

December 2018
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77
 country report
MALDIVES

Islamic finance withstands the winds of political

change in the Maldives

Dr Aishath Muneeza is the chairperson of Maldives

Centre for Islamic Finance. She can be contacted at
muneeza.aishath@gmail.com.

The Maldives is a small island nation with a 100% Muslim

population that is exemplary in its attempt to develop a fully-
fledged Islamic finance industry. From only one Takaful company
operating in the Maldives in 2003 under a conventional license,
now in 2018, there are 13 institutions dealing with Islamic
financial services, proving the ever-growing demand for Islamic
finance in the Maldives.

The Maldives is among the top 15 developed nations in the Islamic

finance industry according to the ICD-Thomson Reuters Islamic
Finance Development Report 2016. It also came second to Pakistan
in terms of overall Islamic finance development in the South Asia
region in 2016.

With the establishment of the Maldives Finance Center in 2016,

President Yameen Abdul Gayoom announced the government’s
plan to create the Maldives as a hub for Islamic finance in South
Asia. With the new elected government in 2018, the probing
questions were about the continuity of this aim. The answer is found
in the manifesto of the newly elected president where it is stated
that in his administration he will strive to develop the Maldives
as an international Islamic finance center. This pledge of the new
government brings hope to the Maldives’s Islamic finance industry. industry. The president of WOB, Fathimath Shafeega, opines that
winners of the award will be role models for the younger generations
Review of 2018 as well as reflect women empowerment.

The opposition coalition that won the presidential election in the Preview of 2019
Maldives on the 23rd September 2018 has the first-ever political
manifesto containing a special agenda for the development of 2019 is a year of hope for the Islamic finance industry of the
Islamic finance in the Maldives. The central bank of the Maldives, Maldives. It is anticipated that for the first time the country report
the Maldives Monetary Authority (MMA), launched its strategic plan of the Maldives on Islamic finance will be released in 2019 and the
for 2018-22 in promoting the development of Islamic finance as an blueprint to develop the Maldives as an international center for
objective in Goal 6 under financial sector development and financial Islamic finance will be enacted. There is a possibility that sovereign
inclusion. Sukuk will be issued and the number of Islamic financial instruments
in the Maldives will increase. A new bill on insurance with a Takaful
The policy measures included creating an enabling policy clause which is currently being reviewed by the Attorney-General’s
environment for Islamic finance so as to ensure a level-playing field Office will hopefully be passed by the parliament and the central
vis-à-vis conventional finance; establish a comprehensive Shariah bank will soon have proper legal backing to license and regulate
governance and compliance framework; develop a comprehensive Takaful companies in the country.
liquidity management framework including the mechanisms and
short-term liquidity management instruments to assist Islamic There is also an ongoing reviewing process of capital market laws
financial institutions with their liquidity management needs; and and it is hoped that in 2019, Islamic capital market regulations will
establish an effective collaboration mechanism among all key be reviewed and revised to create a resilient Islamic capital market
stakeholders to ensure continued engagement on the multifaceted in the Maldives. Hopefully, Maldives Islamic Bank will be listed as
issues faced by the industry. a public company on the Maldives Stock Exchange next year and
the dream project to realize the first Shariah compliant resort will
The only fully-fledged Takaful company, Amana Takaful Maldives, materialize too at the same time.
introduced a new Takaful package in the name of 100K Shield and
distributed MVR5.8 million (US$369,345) as surplus for 2017. Conclusion
HDFC Amna, the Islamic window of Housing Development Finance Islamic finance is definitely a priority area for the new government of
Corporation (HDFC) reported that it currently holds approximately the Maldives. It is the first time ever in the history of the country that
22% of the loan portfolio of HDFC, which is over MVR1.4 billion a manifesto of a president has pledged to develop Islamic finance
(US$89.15 million). It is expected that HDFC Amna will dominate and this proves that the wind of political change in the Maldives will
the market by 2020, provided that the growth level remains steady. not blow away the Islamic finance industry of the Maldives. There
will be new opportunities and paths to develop Islamic finance in the
A non-government organization, Women on Boards (WOB), country and with political will and support, there is no reason why
introduced an annual international award for the first time to recognize the Maldives cannot become a superpower of the Islamic finance
the outstanding services provided by women in the Islamic finance industry by positioning as an international Islamic finance center.

78 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
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 country report
MALTA

Malta: Islamic finance opportunities at the

blockchain island

Reuben M Buttigieg is the managing director of

Erremme Business Advisors. He can be contacted
at rmb@erremme.com.mt.

Islamic finance in Malta is still in its infancy, where exposure

to the market is still being sought after to reach the levels it
merits. The potential and benefits that this will bring to the
European market are all the more apparent. While there has
been a slump over the past few years, with very little activity
for Islamic finance to actually embed its roots into the market,
2018 has been fruitful and Islamic finance is one step closer to
penetrating this market.

Review of 2018
As mentioned, 2018 has gone off tangent, compared to the previous
years. One of the most prominent news is the setting-up of the Malta
Islamic Finance Association (MIFA), back in June. The MoU was
signed by myself as the president of MIFA, and renowned scholar
Sheikh Bilal Khan as the secretary-general.
“The Malta Islamic Finance Association will liaise with governments,
quasi-governmental institutions, multilateral organizations,
standard-setting bodies, agencies and regulatory authorities. With
the input of the stakeholders, as a government, we will be looking
at drafting amendments to our legislation that will permit Islamic
financial institutions to benefit from stronger links with EU member
states, among other opportunities,” said Parliamentary Secretary
for Financial Services, Digital Economy and Innovation Silvio
Schembri, who was speaking at the Cryptocurrency Considerations
for Management conference, hosted by the Malta Institute of
Management.
Sheikh Bilal also commented that in view of Malta being a pioneer
in economic innovation, Malta could become an Islamic finance
hub. The reasoning behind such a statement lies in the fact
that due to Brexit coming in its final stages, Malta could indeed
position itself to be at the epicenter of Europe as an Islamic
finance hub, attracting the Islamic market from the UK, in order
to enjoy EU passporting rights. Furthermore, since Malta is a
member of the Commonwealth, this could serve as a bridge to
the global commonwealth markets.
In October at the Delta summit, Alberto G Brugnoni, the founder and
managing partner of ASSAIF, was one of the guest speakers talking
about Islamic finance to shed light on how this market could be in
consideration with respect to fintech.
At the panel titled ‘Islamic Finance and Blockchain’, it was
announced that a steering committee is evaluating various Islamic
finance products that can be made accessible through blockchain
technology and regulated under Maltese law.
Islamic microfinance products were one of the main items discussed.
This would see a revolution in the Islamic microfinance industry
which should sidestep the difficulties that microfinance posed in
various circumstances.
The project which is spearheaded by the MIFA and ASSAIF
Italia envisage the reduction in costs for subscribing to the
various financing contracts such as Murabahah, Mudarabah and
Musharakah. Through the mechanisms of instruments such as
smart contracts as well as algorithms that will be certified by Shariah
scholars, the project foresees the substantial reduction of costs
including continuous Shariah compliance.
OneGram Group also introduced the revolutionary Huulk project,
which is a crypto exchange that is known for being Shariah
compliant. This crypto exchange is headed to Malta and is currently
seeking the necessary licenses to operate. This platform plans to
secure more partnerships across Europe according to the CEO,
Ibrahim Mohammed.
Shifting the focus on education, both Sheikh Bilal and Brugnioni were
guest speakers at the University of Malta, giving students insight and
perspective, by shedding their knowledge on the subject, especially
since they deal with Islamic finance in practice, posing real world
scenarios, to assess how Islamic finance truly operates.
The annual introductory Islamic finance course hosted by the Malta
Stock Exchange Institute saw roughly a 50% increase in the turnout
of attendees compared to 2017.
Preview of 2019
In 2019, further opportunities will arise, and as mentioned with the
MIFA up and running, Malta will get better exposure to this type
of market, not only drawing the attention of international bodies,
but also helping to alleviate the interest within the national level,
assessing the importance and opportunities of such markets. Since
fintech and regtech will be developed further in the financial services
sector, Islamic finance has been put up to consideration as well in
order to make the Maltese financial sector more resilient to external
shocks. This may shed some light that in the not so distant future,
we may see amendments to legislation to facilitate Islamic finance,
which would be the next step for Malta to truly embrace Islamic
finance as a practice.
Conclusion
As a country, Malta is always striving to venture into new markets to
better itself, and 2018 was a successful year in innovative and
economic advancement. Among all the buzz and hype that
blockchain and virtual assets brought to Malta, it was an opportune
time for Islamic finance to get better exposure, as investors from all
over the globe already have their eyes set on the Maltese islands.
The setting-up of the MIFA has marked the start of what is yet to
come to the Maltese islands, with regards to Islamic finance.

December 2018
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79
 country report
MOROCCO

The ecosystem approach of Islamic finance in

Morocco
MAD1 billion (US$104.29 million) collected and a five-year maturity,
Dr Ahmed Tahiri Jouti is COO of Al Maali the subscription ratio exceeded three times the total amount of the
Consulting Group. He can be contacted at a.tahiri@ Sukuk.
almaaligroup.com.
Moreover, the rate of return of this issuance is equal to 2.66%. The
Sukuk structure is based on Ijarah providing an annual rental equal
to MAD216 million (US$22.53 million). The Sukuk SPV is entitled FT
2017 witnessed the start of Islamic banks in Morocco and the
Imperium Sukuk CI.
launch of a financing offer based mainly on Murabahah. Huge
efforts were made in order to harmonize the legal aspects with
The Islamic finance ecosystem and regulation
the Shariah requirements in order to offer price competitive
The process of implementing a comprehensive ecosystem for
products. 2018 served as a test year to adjust the different
Islamic finance in Morocco is ongoing. In 2018, many legal and
issues related to Islamic finance.
regulatory aspects were looked into such as:
Review of 2018 • A project law concerning crowdfunding
The first semester in numbers The financial authorities prepared a project law concerning
In its annual report, the banking supervisory department of Bank crowdfunding n° 15-18 that covers both conventional
Al Maghrib presented the main findings of the Islamic banking and Islamic platforms. The project law obliges the Islamic
experience during the first year. Indeed, until June 2018, the Islamic crowdfunding platforms to open accounts exclusively in Islamic
banking players granted MAD2.2 billion (US$229.44 million). banks and to subscribe, when needed, to Takaful contracts.
Moreover, the central bank declared that until June 2018, there Moreover, cash needs to be invested in Shariah compliant
were 82 branches of Islamic banks in the different regions of the instruments approved by the Higher Council of Ulemas.
Kingdom. This number includes the corners of Islamic windows.
However, it is important to note that some Islamic windows chose to
open dedicated branches instead of corners. • Other regulations
The Credit Guarantee Fund, the Guarantee Fund backing the
For the deposit side, until June 2018, Islamic banks collected clearing system and the Deposit Guarantee Scheme related to
MAD1.1 billion (US$114.72 million). In the absence of investment Islamic banks are working on Shariah compliant solutions to be
accounts, the amounts collected were very low and liquidity became approved by the Higher Council of Ulemas in order to reinforce
a real issue for all the Islamic banking institutions. the soundness of the whole ecosystem.

The liquidity issue for Islamic banks Preview of 2019

By the end of January 2018, seven out of the eight players licensed
to offer Islamic financial services in Morocco already started their 2018 was an occasion for banks to test their business model and to
activities. Based on the first few months of the activity, in spite of fine-tune the different aspects. In 2019, the adjustment efforts of the
the offer that is limited to Murabahah home financing and current business models are expected to continue.
accounts, the liquidity seems to be a real issue.
• Adjusting the strategic orientations
Indeed, the appetite for financing is more important than the appetite Most of the players will have more focus on their financial
for Shariah compliant current accounts that will create a treasury performance and on breaking even. To do so, many adjustments
gap for most — if not all of the players during 2018. would need to be made in terms of the business model in order
to optimize the costs.
In this context, the Higher Council of Ulemas approved a refinancing
contract, based on Wakalah mechanisms in order to get adequate
financing when needed. The contract is an MoU between two parts. • Launching new products
The first part is committed to providing amounts of financing every Islamic banks would need to launch new products in order
time the Islamic bank (second part) asks for it. The MoU defines the to reinforce their offerings such as investment accounts and
total amounts of financing to provide by the first part. The Wakalah Ijarah-based products. In addition to this, Islamic banks should
contract is a temporary solution that will provide necessary funding prepare appropriate services and products for corporations and
for the activity of Islamic banks and that will be replaced gradually companies.
by investment accounts, Islamic money market instruments and
Sukuk issuances.
• Launching Takaful products
Looking for a place in the car finance market From the Takaful perspective, the legal and regulatory
Five out of the eight Islamic banks have already started offering frameworks would need to be issued and the first licenses
Murabahah car financing and four of them participated in the Car would need to be granted before the launch of the first Takaful
Exhibition 2018 held in Casablanca. From the perspective of CEOs products.
of Islamic banks, the objectives of the exhibition were achieved
and the demand for Shariah compliant car financing products is Conclusion
significant and they are willing to keep developing their offerings in
order to have a share in this market. Implementing a comprehensive ecosystem could take many years
and require efficient coordination between different players. This
The first sovereign Sukuk issuance approach could influence the financial performance of Islamic banks
5th October 2018 was officially the date of issuance of the first if the efforts are not coordinated in a right way.
sovereign Sukuk in Morocco and North Africa. With a total amount of

80 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
December 2018
 country report
NIGERIA

Nigeria’s Islamic finance keeps getting better

Hajara Adeola is CEO and managing director
of Lotus Capital – the Pioneer Islamic Financial
Institution in Nigeria. She can be contacted at
hajara.adeola@lotuscapitallimited.com.

After the remarkable success of the country’s sovereign Sukuk

in 2017, there were high expectations of Nigeria’s Islamic finance
market at the turn of the new year. So far in 2018, the Nigerian
market has delivered on these expectations, with improved
investor awareness, increased regulatory development and
advances in pipeline transactions.

Review of 2018
In the first quarter of 2018, the Central Bank of Nigeria (CBN)
expanded its prominent Commercial Agriculture Credit Scheme
(CACS) to accommodate Islamic banks, nine years after the scheme
was first introduced. Under the new provisions, Nigeria’s Islamic
banks, through the intervention of the CBN, now provide agricultural
enterprises and small-scale farmers with Shariah compliant credit
facilities at concessionary rates.

Further in the first quarter, market tempo was elevated when the
Islamic Corporation for the Development of the Private Sector (ICD)
entered into an agreement with three local institutions to provide
Shariah compliant financing of US$50 million to SMEs in the country.
These developments expanded the scope and competitiveness of
Islamic banks and led them off to a good start in the year.
The positive sentiment rolled into the second quarter, when in
April, the governor of Nigeria’s largest sub national territory, Niger
State, announced plans for a NGN21.5 billion (US$59.5 million)
Sukuk facility to construct hospitals, roads and other social
infrastructure. Although the issuance was stalled by the state’s
legislature, it nevertheless served to confirm the growing appetite
for Islamic finance instruments. Soon after in the second quarter,
the appetite for Islamic finance instruments was further evidenced
when the National Pension Commission implemented its long-
awaited ‘multi-fund’ structure, allowing pension administrators more
flexibility to manage pension assets in line with contributors’ unique
circumstances. The multi-fund structure is widely considered as
a precursor to the eventual establishment of a Shariah compliant
pension fund in the near term.
An equally eventful third quarter sustained the momentum in
Nigeria’s Islamic finance space when the CBN took a shot at global
convergence of its Islamic banking guidelines. In September, the
CBN exposed draft guidelines for Islamic banks guided by IFSB
standards and Basel II/III. The draft document prescribes guidelines
for computing and determining capital adequacy, operating profit
equalization reserves (PER) and investment risk reserves (IRR) for
profit smoothing as well as disclosure requirements for contract-
specific risks and Shariah governance in Islamic banks.
Following an eventful nine months, the final quarter of 2018 did not
disappoint. In October, the federal government of Nigeria announced
plans to issue its second sovereign Sukuk, which would be used to
part fund its NGN1.95 trillion (circa US$5.4 billion) budget deficit.
Similar to the previous Sukuk, the federal government intends to
raise a NGN100 billion (circa US$274.71 million) Sukuk facility to
finance road construction and rehabilitation across the country. The
first sovereign Sukuk issuance was well received by the Nigerian
public largely due to the level of transparency in fund utilization and
the direct impact the funded roads had on improving travel safety
and reducing travel time. Ahead of the general elections in 2019,
the federal government is now pressed to complete several ongoing
infrastructure projects and has therefore looked once again towards
Sukuk issuance. With the proposed second issuance by the federal
government, Sukuk will no longer be a novelty in Nigeria but an
established means of infrastructure financing.
Preview of 2019
Nigerians head to the polls in the first quarter of 2019 and the
country is expected to continue its run of peaceful elections since
returning to democracy two decades earlier. A peaceful close to the
elections should usher in renewed consumer confidence and spur
demand for Shariah compliant savings and investment products
from domestic and foreign participants. Infrastructure investment by
the government and the private sector should create opportunities
for Sukuk issuance particularly in the recovering real estate sector.
There are also strong prospects for the creation of commodity-
linked Shariah compliant liquidity management products with the
growth of the agriculture sector and recent advancements by local
commodities exchanges. Industry participants are expected to
increase their adoption of financial technology to improve product
distribution particularly to the country’s remote and rural population.
While this is more than enough for an exciting 2019, should
the National Pension Commision approve the establishment of
an exclusive Shariah compliant pension fund, that would drive
compliant asset creation to new highs.
Conclusion
In the last two years, Nigeria’s Islamic finance momentum has
quickened. With the recent increase in awareness, acceptance and
operators’ capacity, the industry’s growth should become more
pronounced as there is still significant scope for customer acquisition
and product innovation.

December 2018
T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
81
 country report
OFFSHORE CENTERS

The use of offshore centers for

Sukuk issuances to continue
Manuela Belmontes is a partner at Maples and
Calder (Dubai). She can be contacted at manuela.
belmontes@maplesandcalder.com.
first reported use of an Irish SPV to issue Sukuk which availed of
bespoke provisions of Irish tax law that facilitate Shariah compliant
financing structures, thus bringing Ireland into the spotlight as a
viable domicile for Sukuk issuances.

Preview of 2019
As anticipated by many last year, Islamic finance has experienced We had anticipated greater activity in the global Sukuk markets
slow growth in 2018. The year commenced positively, with this year from the aviation industry. Emirates was the only issuer of
close to US$9.5 billion in global (non-domestic) public Sukuk Sukuk in 2018 despite others, such as Dubai Aerospace Enterprise
issuances taking place in the first quarter as reported by Islamic and Aviation Lease and Finance Company, announcing their
Finance news (IFN). However, global issuances stalled through consideration of the same. Nonetheless, we continue to expect
the second quarter and most of the third, before rebounding at growth for Islamic finance in this area. Airlines and aircraft lessors
the end of the third quarter with several sovereign and quasi- are very familiar with the benefits of offshore centers, with Irish and
sovereign issuers tapping into the Sukuk markets with large Cayman Islands companies being widely used in aircraft acquisition,
volumes, particularly out of Saudi. The vast majority of the leasing and Islamic and conventional financing structures. These
global Sukuk issuances during the year utilized SPVs domiciled companies are typically set up as orphan entities so that ownership
in popular offshore centers, such as the Cayman Islands and of the aircraft is kept independent from the operator/leasing
Jersey, and this is a trend that will certainly continue despite company, providing greater comfort to (and lower originator credit
the persistent slow growth predicted for 2019 by S&P Global risk exposure for) financiers. It was recently reported in IFN that
Ratings. an Abu Dhabi Global Market (ADGM) SPV had been used to hold
aircraft assets on trust to back a Sukuk facility. We anticipate greater
Review of 2018 traction from both the ADGM and the DIFC in this space.
The year witnessed large international Sukuk issuances by
This year, we again saw a significant number of GCC-based Islamic
sovereigns and quasi-sovereigns, including Indonesia, Saudi Arabia,
financial institutions forming Cayman Islands SPVs for hedging
the Emirate of Sharjah, Bahrain, Saudi Electricity Company (SEC)
transactions in order to take advantage of that country’s netting-
and the IDB. The majority of these issuers use an offshore SPV for
friendly legislation. We predict that this trend will continue in 2019.
their international Sukuk issuance programs. Saudi Arabia and the
Both the DIFC and the ADGM have introduced netting legislation
Emirate of Sharjah have successfully issued billions in US dollar
in 2014 and 2015 respectively, and as such these jurisdictions may
Sukuk under their programs through a wholly-owned and managed
provide a credible alternative to the Cayman Islands for those banks
Cayman Islands company. Similarly, SEC and the IDB have issued
situated in jurisdictions where local laws do not recognize set-off
Sukuk in billions of US dollars this year but through programs
and netting rights.
structured using the more typical ‘orphan’ issuer – an SPV (based
in the Cayman Islands and Jersey respectively) with its shares held
Another potential growth area for Islamic finance in 2019 is in fintech.
by a licensed trust company on trust for charity and managed by
In recent years, there has been much focus and investment in this
independent directors.
sector and we have witnessed the development of fintech hubs within
Islamic finance centers such as the DIFC, the ADGM and Malaysia.
The Cayman Islands has also featured prominently in global
As noted in S&P’s industry report, Islamic Finance Outlook (2019
issuances by banks and corporates throughout 2018. Several UAE-
edition), while it may threaten certain businesses, fintech can provide
based financial institutions returned to the capital markets in 2018,
potential growth for Islamic finance by facilitating greater access to
with each of Al Hilal Bank, Dubai Islamic Bank, First Abu Dhabi
Shariah compliant financial products through crowdfunding and
Bank (as the new merged entity), Noor Bank and Sharjah Islamic
mobile banking platforms and the use of blockchain technologies
Bank issuing under their existing (and updated) Sukuk issuance
to reduce transaction security risks. Offshore centers could be used
programs that use Cayman Islands SPV issuers. On the corporate
in the structuring of such products; investment vehicles and holding
side, we saw public issuances by companies based throughout the
companies could be established in cost-effective low tax offshore
GCC in an array of industry sectors. In aviation, Emirates issued its
jurisdictions that offer an effective regulatory framework.
much-anticipated Sukuk in March using a Cayman Islands orphan
SPV. Similarly, Cayman Islands issuers were used by real estate
Islamic finance could be further advanced with greater collaboration
developers, such as Aldar Properties, Dar Al Arkan and DAMAC, as
between offshore and Islamic finance centers. For example,
well as by DP World, in their 2018 issuances.
as reported by IFN earlier this year, Labuan, which remains a
popular choice for Shariah compliant financings in Malaysia, has
Two banks issued perpetual Tier 1 Sukuk in 2018 in an attempt to
been touring the GCC to actively showcase its Shariah compliant
satisfy Basel III requirements. In February, Albaraka Turk Katilim
structures and services, while Luxembourg has been working with
Bankasi (Albaraka Turk) issued US$205 million-worth of Tier 1
Malaysia to establish a joint business council to promote Islamic
capital certificates using a Cayman Islands issuing vehicle, reported
finance. Similar cooperation by other offshore centers would surely
as being the first Basel III compliant securities issuance out of
facilitate the growth of the sector.
Turkey. More recently in September, Abu Dhabi Islamic Bank floated
US$750 million-worth of perpetual Tier 1 Sukuk on Euronext Dublin
using a similar Cayman Islands orphan structure. Conclusion
The use of offshore centers for Sukuk issuances and other Islamic
While Cayman Islands SPVs were widely used in the aforementioned products will clearly continue. The political, social and economic
cases, special purpose companies formed in the Dubai International stability and English law-based legislative regimes that the popular
Financial Centre (DIFC) have in the past also been a popular centers offer, such as the Cayman Islands, Jersey, Ireland, the DIFC
alternative for issuers of Tier 1 capital certificates as well as and the ADGM, provide comfort to investors around the globe which
Sukuk generally. In addition, a recent article in IFN discussed the lays a robust foundation for the advancement of Islamic finance.

82 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
December 2018
 country report
OMAN

Islamic financing in Oman may accelerate with

the energy and utility projects

Dhana Pillai is the head of real estate, tax and

project finance at Al Hashmi Law Firm (Oman). She
can be contacted at dhana.pillai@ohlaw.net.

2018 showed a robust growth among the Islamic banks.  It

began with the promulgation of the Real Estate Investment
Fund (REIF) law which enables the units issued by the REIF to
be Shariah-based. According to Central Bank of Oman (CBO)
reports, the conventional loans that were replaced with Islamic
financing are in the region of 14% to 16% as against an average
of 20% in the GCC countries. The achievement is amidst the fall
and rise of the oil prices and increasing cost of funding in the
banking sector.

Some Islamic banks are continuing to suffer from the high cost
of funding, leading to huge tax losses or deferred tax assets.
Also, greater liquidity in Islamic banks is continuing to pose a
problem.  Central banks rely on short-term credit instruments such
as certificates of deposits, treasury bills and development bonds
apart from the reserve requirements to combat and inject liquidity
into the banking sector.  The Islamic banking sector is no different
and needs such efficient products that serve as a destination of individuals in their educational goals. Muzn Education Finance is
surplus funds.  However, at present, there does not seem to be based on the Islamic principle of Service Ijarah. Also, Bank Nizwa
many options available for Islamic banks in Oman. In other parts that opened its 13th fully-fledged branch in 2018 signed an MoU with
of the world, there are products such as Islamic credit cards, Salam 4Home, the premium home furniture retailer that enables 4Home
(forward financing transaction), sale and leaseback structures, and customers to purchase from 4Home under a Shariah compliant
advances against trade receivables. financing scheme.

Review of 2018
Doubtlessly, the growth trend of Islamic banking in Oman was
promising. The Islamic banks provided financing to the extent
of OMR3.4 billion (US$8.8 billion) as of the end of August 2018,
recording an increase of 17.2% over that a year ago. The total
deposits held with Islamic banks and windows also registered a
significant increase to OMR3.1 billion (US$8.1 billion) in August 2018
from OMR2.8 billion (US$7.28 billion) as of the end of August 2017.
The total assets of Islamic banks and windows combined amounted
to OMR4.2 billion (US$10.92 billion) as of the end of August 2018
increasing their share to 12.7% of the banking system assets.
The year saw the launch of an Islamic liquidity management project
which aims to develop effective tools and solutions for the liquidity
management of the Islamic banks; the solutions are said to be
developed to work within the Islamic Banking Regulatory Framework
(IBRF) of the Sultanate.
Following the announcement of merger talks between Oman Arab
Bank and Alizz Islamic Bank in early 2018 which if completed would
create an entity with total assets of OMR2.63 billion (US$6.8 billion),
the National Bank of Oman (NBO) and Bank Dhofar announced a
potential merger which would create an entity four times the size of
the two banks.
In 2018, Islamic housing finance based on Ijarah or diminishing
Musharakah was popular among customers. Earlier, many industrial
(asset-based) loans in Oman were advanced under diminishing
Musharakah contracts with banks’ representatives being part of the
board of directors of the borrower companies.
In the wake of introducing Shariah compliant short-term financing
products, Muzn, the Islamic banking window of the NBO established
in 2013 launched Muzn Education Finance to assist aspiring
Meethaq launched a mobile banking application which allows users
to log in in a safe and convenient manner by using their fingerprint
and face ID and the application has been made compatible with the
newer generation of smartphones.
Preview of 2019
Oman’s Duqm refinery as reported by the company availed a US$4.61
billion loan facility and a total of 29 Islamic financial institutions from
13 countries are to cover 56% of the costs of the project under
guarantees from three international trade credit agencies. News
reports reveal Islamic banks extended up to US$890 million of the
initial tranche. The country has also planned for many renewable
energy independent power producer projects, and studies are
underway. When the projects are announced, the developers may
turn to the market to fund the projects. The green energy projects
are a typical form of Shariah compliant ventures and to fund such
projects would be ideal for Islamic banks and institutions. The
region has seen some green Sukuk issues and it may be a trend
for Oman in 2019 or in the near future. The value-added tax is likely
to be introduced in the later part of the year and may have some
impact on the economy; however, an input credit mechanism should
help the new tax settle.
Conclusion
The positive developments of 2018 gives hope for 2019 when
Oman’s economy is expected to accelerate in growth. There is an
increased supply of real estate properties and that would likely bring
more investors and players into the market. The country has opened
its doors to foreign direct investments in many sectors including real
estate and energy, especially renewables. With more opportunities
for new projects, there will be more need for financing choices and
that can be a great advantage to Islamic banks and institutions.
Adapting to the trend is the key.

December 2018
T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
83
 country report
PAKISTAN

Islamic finance growing on sound footing in

Pakistan
Muhammad Shoaib Ibrahim is CEO of First
Habib Modaraba. He can be contacted at shoaib@
habibmodaraba.com.
part of a roadmap of Islamic banking for the next five years. In 2018,
the SBP issued a revised Shariah governance framework to provide
more effect to the role of Shariah compliance. For capacity-building
within Islamic banking, the SBP also issued a detailed circular about
training of human resources and for members of the Shariah board.

Similarly, the SECP, the regulator of the capital market, has also
Pakistan is a key market of the Islamic financial services industry
done a remarkable job for the further development and progress
within Asia, having the second-largest Muslim population after
of Islamic finance in non-banking segments. This year, the Islamic
Indonesia which provides huge opportunities to the industry.
Finance Department (IFD) has taken a number of measures on the
The Islamic financial services industry of Pakistan has made
regulatory front for effective regulation of Islamic non-bank financial
impressive progress within the past few years particularly in the
institutions (NBFIs). The IFD was established with a mandate for the
Islamic banking segment. Pakistan has remained in a leading
development of vibrant primary and secondary markets for Islamic
position to promote Islamic finance, being a key member of
financial products and services.
international Islamic finance institutions. The notable growth
of the Islamic financial services industry would not have been
The following are some of the notable contributions of the IFD:
possible without the committed and dedicated efforts of the
• Issuance of Shariah Advisors Regulations 2017.
State Bank of Pakistan (SBP) and the Securities & Exchange
Commission of Pakistan (SECP). • Adoption of a few AAOIFI Shariah standards.
• Adoption of a few IFSB standards.
Review of 2018 • Issuance of Shariah Governance Regulations 2018.
In Pakistan, the Islamic banking segment has a large share within
the overall Islamic financial services industry that continues to be The recent enforcement of a comprehensive Shariah governance
popular and has made impressive growth in the past few years. The framework was a major breakthrough in laying the foundation for
network of this industry consists of 21 Islamic banking institutions a true Islamic financial and economic system. The issuance of the
— five fully-fledged Islamic banks and 16 conventional banks having said regulation will greatly support the long-term and sustainable
stand-alone Islamic banking branches. Islamic banking continues development within the Islamic capital and debt market along with
to broaden its outreach and is able to compete effectively with other NBFIs such as Islamic mutual funds, Modarabas and Takaful.
conventional banks supported by a diversified range of products
and higher quality services. According to the SBP’s last update, the Preview of 2019
market share of Islamic banking assets and deposits in the overall
banking industry was recorded at 12.9% and 14.8% respectively. Islamic finance in Pakistan is expanding at an excellent growth
The branch network of Islamic banking is also growing at a rate both in the banking and non-banking segments. Both the SBP
satisfactory level spreading across Pakistan. Liquidity management and SECP are playing vital roles to bring this segment onto a solid
and funds mobilization are one of the key issues in Islamic banking footing through an effective regulatory regime and providing a better
and at present Islamic banking has an acute need of new sovereign operating environment in order to broaden the market for Islamic
Sukuk. finance products. The giant project of the China–Pakistan Economic
Corridor and the ‘One Belt, One Road’ project of China will also
So far the SBP has issued two five-year strategic plans in 2007 and bring great opportunities for Islamic banks to plug a sizeable funding
2014 and it is expected that the third plan will be issued in 2019 as gap in allied industries.

84 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
December 2018
 country report
PAKISTAN

Recently, the House of Senate of Pakistan passed a resolution

Chart 1: Growth of assets, Islamic banking and branches
recommending that the government should take the necessary
steps to abolish interest at the earliest and at least 30% of all new 2,685
government debts should be replaced with a Shariah compliant 3,000 2,581
2,322
mode. This was a significant development for the Islamic banking 2,500 2,075
sector and indicates that this implementation will create a positive
2,000 1,574
public perception and will also enhance financial inclusion within the 1,304
unbanked population. 1,500 1,097
886
1,000
Conclusion 500
The achievements made by the Islamic financial services industry in 0
Pakistan during the last decade are commendable. Both regulators 2011 2012 2013 2014 2015 2016 2017 2018
are continuously striving hard to establish a robust and sustainable Total assets
financial system particularly for financially excluded segments.
Overall, financial inclusion is very low within the country and lack Number of Islamic banking branches
of access to financial services is a direct barrier to many important Source: Islamic Banking Bulletin of SBP
financial services. In order to further increase the market share of
Islamic banks, concentrated efforts are much needed particularly to Chart 2: Growth in Modaraba sector in Pakistan
develop the demand side of the market to absorb the huge liquidity

52,670
available in Islamic banks particularly with regards to the issuance of million

44,015
Islamic debt and equity instruments. 60,000

36,806
30,736
30,549

30,212
50,000

28,320
25,191

22,712
Furthermore, due to digital advancement, it is now vital for the

21,835
20,439
40,000

15,894
14,488
Islamic financial services industry to leverage on technology to

13,824
13,186
12,421
30,000
increase its penetration to unserved areas and regions. At present,
there is high momentum in the transformation of services from 20,000
traditional to digital. With the support of fintech, the base of Shariah 10,000
compliant services can be expanded across the country particularly 0
2011

2012

2013

2014

2015

2016

2017

2018
in financially underserved segments. The SME sector plays a pivotal
role in economic growth and through fintech support, Islamic banks
can successfully deploy their funds by using blockchain-based Parity = PKR 134: 1 US$ Asset in PKR
fintech solutions in order to expand the number of SMEs within the Equity in PKR
financing portfolio. Fintech can enable Islamic finance to attract Source: NBFI & Modaraba Association of Pakistan
more customers, increase efficiency and reduce operational costs.

In light of the overall rising demand and the increasing acceptability phase and needs more collaborative efforts by all stakeholders
of Islamic finance among both providers and users, the growth particularly the regulators and practitioners to take it to the next level
prospects of the Islamic finance services industry in Pakistan are of growth and development.
very promising. However, the industry is still in the evolutionary

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December 2018
T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
85
 country report
PALESTINE

Islamic banking in Palestine

months of 2018, AIB achieved excellent growth with its market share
Hani Naser is the general manager of Arab Islamic increasing by 1.1%. The total market share reached 8.1% by the
Bank- Palestine. He can be contacted at aib@aibnk. end of September 2018. This growth was a result of the acquisition
com. of 43% of the total direct finances growth of the Palestinian banking
sector in the same period. AIB’s total growth reached about US$115
million, while the total growth in the banking sector amounted to
only US$268 million.
Islamic banks in Palestine began operation after the
establishment of the Palestinian Monetary Authority (PMA)
in 1995 following the 1993 Paris Economic Agreement which
allowed the PMA to grant licenses for the establishment of new
banks. Today, there are 15 banks in Palestine out of which seven
Islamic banking is a growing
are national banks while eight others are foreign banks. In total,
there are three Islamic banks in full operation in Palestine.
segment with a potential
Palestine’s Islamic banks aim to meet the economic and social needs
to reach a market share
in the field of banking, finance and investment on an Islamic basis
that avoids interest, by collecting deposits and savings and investing
of 25%
them in legitimate ways based on the principles of participation
in profit and loss. Islamic banks in Palestine also provide various Preview of 2019
banking services which do not conflict with the principles of Islam.
Based on the growth of AIB’s market share and its plan for financial
The market share of Islamic banking in Palestine is 14.3% noting inclusion, the bank will expand its branch network during 2018-20 in
that it is a growing segment with a potential to reach a market share order to cover all areas to reach new customers to serve and fulfill
of 25%. This indicates that there is a major opportunity for Islamic their needs. In addition, AIB is developing its services to become
banks to grow and expand in the near future which is the core of the more responsive to the needs and desires of customers. This stems
Islamic banks’ strategy to increase the market share in terms of the from the bank’s belief that customers need more technologically
number of branches and customers, customer deposits, cards and advanced services that will facilitate service delivery. Accordingly,
other services and products, in order to grow and maximize returns the bank will be launching a package of services including Mobi-
for all stakeholders. Bank, mobile and internet banking, an interactive website and a
remote booking service. All are designed to provide the best service
The strategic plan for 2012-17 placed Islamic banks in a new in the fastest time and from anywhere.
competitive position in the Palestinian banking market in general,
and in the Islamic financing market in particular. Conclusion
As one of the leading Islamic banking institutions in Palestine, AIB
Review of 2018 continues its role to realize its objectives laid out in its high-aiming
Arab Islamic Bank (AIB) achieved remarkable and significant strategic plan for 2012-16. 2018 witnessed a breakthrough in its
performance by the end of the third quarter of 2018 despite the objectives that led to the doubling of the size of the bank by the end
political and economic obstacles that exist until today in Palestine. of 2017 and 2018. AIB has achieved the envisaged growth for 2018
In terms of assets, AIB achieved a 6.6% market share in Palestine by improving and developing its spectrum of banking services. This
with total assets amounting to US$1.06 billion. In addition, AIB has been reflected in a larger client base and a bigger share in the
reached a 6.9% market share of customer deposits with a total Palestinian banking market.
deposit of US$844 million. On the financing side, in the first nine

86 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
December 2018
 country report
PHILIPPINES

Emerging legislative measures in the Philippines

for Islamic banking and finance

Rafael A Morales is the managing partner of

Morales & Justiniano. He can be contacted at
ramorales@primuslex.com.

The much-awaited general legislative framework for Islamic

banking and finance in the Philippines may soon come to
fruition. The framework initially will cover the Bangsamoro
Autonomous Region in southern Philippines. Eventually, a law
of national application will be passed by the Congress of the
Philippines to extend the coverage to the rest of the Philippines.

Review of 2018
The passage in 2018 of the Bangsamoro Organic Law (BOL) is a
watershed moment. Primarily enacted to be a cornerstone for an
enduring peace in southern Philippines, the BOL contains several
provisions pertaining to Islamic banking and finance within the
Bangsamoro Autonomous Region. First and foremost, the BOL
mandates the Bangsamoro parliament to “promote the development
of an Islamic banking and finance system” in coordination not only
with the Philippine central bank (namely, the Bangko Sentral ng
Pilipinas or BSP) but also with the Department of Finance and the
National Commission on Muslim Filipinos.

Under the BOL, the Bangsamoro parliament is “to encourage

the establishment of (a) banks and financial institutions and their
branches including an Islamic window in domestic and foreign
conventional banks; and (b) offshore banking units of foreign banks
within the Bangsamoro Autonomous Region, and in accordance
with the principles of [the] Islamic banking system.”
order for it to “service a broader market.” This underscores the
What is more, the BOL authorizes the Bangsamoro government to resolve of the Philippine government not to neglect the AIIBP. Al-
determine the latter’s participation or involvement in the Al-Amanah Amanah Bank, the AIIBP’s predecessor, was chartered more than
Islamic Investment Bank of the Philippines (AIIBP), the only existing 40 years ago thereby making the Philippines a pioneer in Islamic
Islamic bank in the country. banking within the Association of Southeast Asian Nations (ASEAN).
That said, BSP Governor Nestor Espenilla prefers to have a network
Preview of 2019 of Islamic banks “reinforcing one another” in the Philippines.

Hopefully, the proposed Philippine Islamic Financing Act will be
enacted in 2019, given that both the Senate and the House of
Representatives of the Congress of the Philippines are reportedly
keen on passing that law once and for all. This law, if passed, will
be nationwide in scope. It will apply not only to the Autonomous
Bangsamoro Region but also to the rest of the Philippines. The BSP,
as the primary regulator of the banking sector in the Philippines,
will be consulted by the Bangsamoro parliament and the Congress
of the Philippines in their law-making processes; hence, it is
presumed that the resulting regional and national legislations will
be consistent and congruent with each other. Moreover, since the
BSP is mandated by the BOL to establish an Islamic banking unit
within the BSP organizational set-up, it is expected that the BSP will
be focused on the formulation of a regulatory framework for Islamic
banking and finance in the country.
Pending the passage of the Philippine Islamic Financing Act,
however, the BSP can proceed in its desired task, based on the
General Banking Law of 2000, which appears to permit the
establishment of Islamic banks other than the AIIBP. Admittedly, in
the BSP Manual of Regulations for Banks, there is already a set of
provisions on the powers and functions of Islamic banks in general.
Still, the proposed Philippine Islamic Financing Act seeks to
strengthen the AIIBP by increasing its authorized capital stock in
On the side of the private sector, the absence of a general legislative
framework for Islamic banking and finance will not deter the Philippine
Stock Exchange (PSE) from regularly updating its quarterly list of
Shariah compliant securities, in line with the screening standards set
by AAOIFI. This list is published by the PSE on its website by the 5th
trading day of the month following each quarter.
Conclusion
The Philippine government is keen on issuing Sukuk to raise funds
for its various infrastructure projects under the Build-Build-Build
program of President Rodrigo Roa Duterte. Recently, the Philippine
Securities and Exchange Commission promulgated the guidelines
for the issuance of ASEAN Green Bonds including Sukuk issued for
green projects. These developments should prod the legislators to
expedite the passage of the Philippine Islamic Financing Act,
considering the important role of the banking and financial sector in
the issuance of bonds in the capital market. If this materializes, the
prospects for Islamic banking and finance in particular, and the
Philippine economy in general, will be promising. As noted by BSP
Deputy Governor Diwa Guinigundo: “If Congress will enact the
Islamic banking bill, the development of Islamic banking and finance
can promote financial inclusion, especially for our Muslim brothers,”
aside from triggering “inflows of foreign investments which can, in
turn, be deployed to building key infrastructures.”

December 2018
T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
87
 country report
QATAR

Qatar smoothly navigating turbulent waters

Amjad Hussain is a partner at K&L Gates. He can

be contacted at Amjad.Hussain@klgates.com.

The market in Qatar continues to be strong beyond expectations

and the economy continues to prosper despite the ongoing
geopolitical events in the region. The banking sector has
remained strong and stable and State entities are paving the
way for more diversification in the market.

The Qatari banking sector in general has found its feet more so this
year than last as local financial institutions reached out to secure
global capital to compensate for the impact of the blockade, which
saw regional banks pull back from Qatar. This has increased local
market liquidity.
the confirmation of the merger of the two banks to create a leading
Yousef Al-Jaida, CEO of the Qatar Financial Centre (QFC), confirmed Shariah compliant financial institution. The combined entity would
that Islamic financing remains a core focus area for both the State have total assets of QAR80 billion (US$21.86 billion). The deal is
of Qatar and the QFC. The Qatari authority continued to develop its pending approval from the bank’s shareholders and regulators. If
ties with Muslim countries in the Southeast Asian region, particularly successful, the enlarged entity would have a 6% share of Qatar’s
Pakistan and Bangladesh. The QFC is looking to spend a US$2 overall banking market.
billion to create a leading financial services hub that will rival any
in the region. This level of focus and drive on the Islamic finance Masraf Al Rayan announced earlier in the year that Al Rayan Bank
industry makes Doha a city to watch in 2019. UK, which is 68.84% owned by Masraf Al Rayan, will be completing
the first-ever issuance of a Sukuk facility valued at GBP250 million
Review of 2018 (US$319.45 million) utilizing residential mortgage-backed securities;
The performance of companies listed on the Qatar Stock Exchange making it the first bank to issue Sukuk outside an Islamic country.
(QSE) shows that liquidity and confidence have returned to the The Sukuk will be the largest-ever pound sterling issuance of a
markets. The combined net profit of all companies as of the 30th Sukuk by a UK entity.
September 2018 amounted to QAR31.1 billion (US$8.5 billion)
versus QAR29.1 billion (US$7.94 billion) for the corresponding Qatar Islamic Bank (QIB) sold its full stake of 60% in Asian Finance
period in 2017, an increase of 6.74%. Bank, an affiliate in Malaysia, to Malaysia Building Society with QIB
receiving cash proceeds of RM357.2 million (US$85.05 million). QIB
One of the most significant highlights of the year for the Qatari also increased the limit of foreign ownership of its share capital to
Islamic banking sector was the listing of Al Rayan Qatar ETF (stock 49% and this marked a significant step forward in the diversification
exchange ticker: QATR) on the QSE. This marked the listing of of ownership in the Qatari banking sector and financial markets. The
Qatar’s first Shariah compliant exchange-traded fund (ETF) and the bank’s financial strength rating went up in 2018 to ‘A’ with a stable
largest single-country Shariah compliant ETF in the world. outlook by Capital Intelligence Ratings and it has been recognized
as ‘Qatar’s Best Consumer Digital Bank of 2018’ by the Global
State spending continues to drive forward the economy and Qatar Finance Magazine.
issued a US$12 billion sovereign bond, which represents among
the largest placement by an emerging market sovereign in the year. Preview of 2019
That was followed by the acquisition of more shares in Credit Suisse It is our view that the Qatari economy will get stronger and busier in
by Qatar Investment Authority, the sovereign wealth fund of Qatar, 2019 as the World Cup nears and projects reach completion. Many
making the authority the largest investor with a 5.21% stake. of the infrastuture development that was earmarked for completion
before the 2022 deadline has made good progress and is likely to
It is encouraging to see that confidence in the local market is on the be delivered before the critical deadlines. The Metro is one such
rise. Moody’s Investors Service upgraded the Qatari banking sector example.
outlook to stable from negative. The sector reported a 3.5% growth
in credit year-on-year and a rise in deposits from non-residents and The delivery of infrastructure will free up further liquidity in the
the private sector. This demonstrates the strong performance of the banking sector and local family offices and businesses will benefit
banks in Qatar despite the ongoing regional geopolitical tension. from this. This sector previously had to compete with mammoth,
low-risk government projects for bank attention.
The Islamic banking sector in the State received a further boost from
the IFSB as their data showed that Qatari Islamic banks are growing
despite the Gulf crisis. Qatar Islamic Bank, Masraf Al Rayan, Qatar
Conclusion
International Islamic Bank and Barwa Bank held a combined The blockade of Qatar by some of its regional neighbors has had a
QAR358.6 billion (US$97.98 billion) in assets in the first quarter of massive silver lining for the State as it has been forced to forge new
the year, an 8.8% increase from 2017. alliances globally. This has improved Qatar’s internal efficiencies and
also meant that local institutions have started to gain traction
Negotiations concerning the much-talked-about tripartite merger globally. This can only be good for Islamic finance in Qatar next year.
between Masraf Al Rayan, Barwa Bank and International Bank of We are optimistic that 2019 will bring greater opportunity for Islamic
Qatar came to a dead end in 2018. However, toward the third quarter banks in the State who are looking to deploy capital in the country
of the year, Barwa Bank and International Bank of Qatar announced and abroad.

88 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
December 2018
 country report
RUSSIA
Islamic finance in Russia – slow but steady
development
Dr Ilyas Zaripov is a member of the Participating
Banking Working Group of the Central Bank of the
Russian Federation and the head of the Islamic
Finance Educational Program of the Plekhanov
Russian University of Economics. He can be
contacted at iliyas888@yandex.ru.
Islamic finance in the Russian Federation is still at the initial
stage and during 2018 there were no breakthroughs. However,
they were some signs of continuation of efforts for developing
Islamic finance. Islamic finance in banking, insurance and the
stock market have got strong demand especially as alternative
instruments of attracting and managing assets under the
conditions of financial sanctions of western countries (US
and European states) on Russia. Despite this, real movement
of Islamic finance in Russia is very slow reflecting the limited
possibilities made by local legislation and small-scale initiatives
by Islamic financial institutions in Russia.
Review of 2018
Halal business and Islamic finance are attractive sectors in Russia
which have good potential for growth and are still popular among
topics discussed by state authorities and the business and academic
circles.
At the regulatory and legal support level, the Participating Banking
Working Group of the Central Bank of the Russian Federation
continued its work according to the new Road Map of Islamic
Finance Development in Russia for 2018-19. In 2018, the Russian
regulator focused on cooperation with the Advisory Council
on Islamic Finance Legislation of the State Duma (Parliament)
Committee on Economic Policy, Industry, Innovative Development
and Entrepreneurship on the implementation of Islamic finance
instruments in Russian legal practice and revising Russian legal Acts
for making related adjustments.
Regional governmental support of Islamic finance is traditionally
strong in the Muslim regions — Tatarstan, Baskorkostan, Dagestan
and Chechnya. The Republic of Tatarstan opened the Russian Center
of Islamic Economics (RCIE) in May 2018, which focuses on Halal
medicine, Halal tourism, Halal food, Halal information technology
and Islamic economics and finance.
Being a universal international institution, the RCIE will also
support expanding the good practice in the Halal as well as Islamic
economics and finance sectors to other regions in Russia. The
government of Tatarstan, Sberbank and the IDB have an equal
share on the authorized capital. The RCIE is the third center opened
in Russia under full governmental support apart from the first two
centers that specialize in education and Shariah expertise. All the
aforementioned regions included Islamic finance promotion as one
of the points in regional programs of economic development.
Islamic finance is still a point of interest to the biggest Russian state
banking corporations, which continued to realize some projects in the
Halal segment. Vnesheconombank announced that it had prepared
a number of large investment projects which should be realized via
its branch in Abu Dhabi (UAE). Sberbank organized its first federal
seminar together with the IDB related to Islamic finance development
in Russia. Following the first deal using Mudarabah and Ijarah for
financing customers of a leasing company in Tatarstan, Sberbank is
preparing other deals using Shariah compliant instruments.
December 2018
Russian federal and regional universities continued to expand
and improve educational programs in Islamic finance, making
new projects oriented to requirements of Islamic businessmen.
Russian associations of Islamic businessmen became partners and
customers of such programs. The Plekhanov Russian University
of Economics together with the International Association of
Islamic Business prepared a specialized project for Islamic finance
education for businessmen. These events prove that Islamic finance
development in Russia continues to grow and we can foresee that
Islamic finance will expand in 2019.
Preview of 2019
The Halal way of doing business attracts more businessmen in
Russia. Two key associations of Muslim businesses – International
Association of Islamic Business (IAIB) and Russian Association of
Muslim Businessmen (RAMB) united efforts of Islamic entrepreneurs
to conduct business in the Halal sector, including Islamic finance.
The members of IAIB and RAMB are very active participants
of different working groups of the Central Bank of the Russian
Federation and State Duma (Parliament) of the Russian Federation;
they will continue to push regulatory and legal authorities of Russia
to provide real legal support for the steady development of Islamic
finance in Russia. Islamic finance purveyors will participate in major
events of 2019 such as the annual Halal Expo in Moscow, Kaspiy
Expo in Mahachkala and KazanSummit 2019, which are the key
Russian grounds for discussion of Islamic finance issues.
In 2019, more educational programs in Islamic banking, insurance
and the stock market will be offered to students and they will be
more specialized.
Meanwhile, real growth can be reached only if Russian Islamic
businessmen show practical financial results, attracting Russian
customers to the Halal sector and moving together with Russian
authorities to speed up the development of Halal activity in Russia.
Conclusion
In 2018, Halal business activity moved forward but it was
unsatisfactorily slow without any breakthroughs. The main reasons
include the absence of friendly legislation, the low interest of the
majority of the population in the Shariah compliant business and the
absence of strong support of key policymakers for the Halal sector
in Russia. But the Islamic finance initiative cannot be stopped.
Islamic finance in Russia is like a creek now but we hope that soon
it will be a wide river uniting millions of business units and competing
with the conventional finance system in Russia.
T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
89
 country report
SAUDI ARABIA

Saudi Arabia: Sweeping change in regulatory

environment to attract investors
• Foreign ownership in the education sector: On the 24th October
2018, the governor of SAGIA announced that foreign investors
will be permitted to wholly own companies in the education
Nabil A Issa is a partner and Hamzeh M Al Rasheed sector in Saudi Arabia. Historically, ownership of education
is the associate at King & Spalding. They can be facilities in Saudi Arabia has been restricted to Saudi and GCC
contacted at nissa@kslaw.com and halrasheed@ nationals. Further announcement on regulatory changes are
kslaw.com respectively. yet awaited.

• M&A regulations: On the 19th October 2017, Saudi Arabia’s

market regulator, the Capital Market Authority (CMA), approved
The Kingdom of Saudi Arabia (Saudi Arabia) has continued updated regulations for mergers and acquisitions (M&A) for
to witness an increasing drive toward liberalization of certain Saudi-listed companies, effective upon publication. The M&A
market sectors. Such sectors now include entertainment, rules have assisted in stimulating public M&A transactions.
healthcare, land transportation, courier services, education Public M&A is expected to continue flourishing over the next
and recruitment. The primary objective of such a drive is to two years.
diversify the country’s historically oil-dependent economy.
To this effect, Saudi Arabia has taken considerable steps to
• Slowdown in REITS: After an exponential growth in the number
reinforce investors’ confidence by increasing public spending
of REITs that have been launched in Saudi Arabia in 2016 and
and reforming the legislative infrastructure in the country.
2017, the REITs market has finally witnessed some slowdown
in the second quarter of 2018. The slowdown is likely due to
Review of 2018 the lack of quality assets that can be attractive to investors.
Set out in the following is a high-level overview of some of the Nonetheless, we are aware of certain fund managers seeking
primary developments that were introduced in Saudi Arabia in to launch new REITs in the first half of 2019.
2018:
• New amendment to the Companies Regulations: On the 10th • Increasing interest in the holy cities of Mecca and Medina: 2018
April 2018, the Saudi Council of Ministers approved certain witnessed increasing interest by investors in the real estate
amendments to the Companies Regulations. Material changes sector in the holy cities of Mecca and Medina. A number of large
relate specifically to limited liability companies and include: transactions were publicly announced, such as an agreement
(i) the requirement for the constitutional documents to be between Jabal Omar Development Company and Al Bilad Capital
in writing; (ii) transactions with interested board members; for the sale of residential units in Mecca in an aggregate amount
(iii) non-compete duties on board members of joint stock of SAR1.2 billion (US$319.76 million). We understand the Saudi
companies; and (iv) extending the notice period required for Arabian government is actively exploring the ability of attracting
general assembly meetings. capital to Mecca and Medina.

• Saudi Arabian General Investment Authority (SAGIA): SAGIA • Venture capital: Saudi Arabia is working to harness its large
has streamlined its approval process and is now regularly youthful population and has launched a number of new funds
issuing licenses to non-GCC investors within 48 hours and is and matching programs to encourage innovation and the
only requiring the license of the foreign entity and its audited development of the SME sector.
financial statements.

Preview of 2019
• Foreign ownership in the healthcare sector: On the 4th
November 2018, an instruction was issued to amend the • Record budget: Saudi Arabia has announced a record budget
Private Healthcare Institutions Regulations by removing the for 2019 at SAR1.1 trillion (US$295.77 billion). Compared with
requirement that foreigners can only invest in hospitals. Earlier, 2018, it is expected that public spending will increase by 7%,
in October 2018, SAGIA announced that foreigners can now, deficit will decrease by 34% and overall growth will reach
for the first time, invest in hospitals of all sizes. It is expected 2.3%. Public spending is expected to stimulate economic
the Private Healthcare Regulations will be officially amended in growth and foreign direct investment into Saudi Arabia.
early 2019 to provide for foreign ownership of medical clinics • Privatization: The Kingdom is preparing for multiple
and pharmacies. privatizations in sectors including grain silos, hospitals, school
buildings, industrial facilities, and the power and waters
sectors. A number of mega-projects are also expected to
• New Commercial Mortgage Law and Pledge Law: On the
commence including a specific focus on the tourism sector.
24th April 2018, the Saudi Council of Ministers approved a
new law on commercial mortgage (the Mortgage Law). The • New Companies Law: It is widely expected that the Companies
Mortgage Law paved the way for the creation of possessory Law will be further revised to create more enforceable joint
and non-possessory security over commercial assets, such venture structures.
as inventory, stock, cash and receivables. The Mortgage Law
is particularly beneficial for security structures for working Conclusion
capital financing. Moreover, the new Pledge Law will create a
new center to record pledges, including over interests in Saudi The sweeping change in the regulatory environment signals the
limited liability companies. It appears a pledge can be in favor Kingdom’s intention to attract investors. Therefore, investors
of a non-licensed lender. We note the laws contemplate that seeking a Shariah compliant environment are advised to monitor
any financing will be on a Shariah compliant basis. the emerging market status of the Kingdom.

90 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
December 2018
 country report
SINGAPORE
Islamic finance in Singapore
— A promising niche
Fazrihan Duriat is an Islamic finance faculty
member of PÙle Universitaire Euclide. He can be
contacted at duriat@euclidfaculty.net. Muhammad
Halim is currently pursuing CIFE with Ethica
Institute of Islamic Finance. He can be contacted
at m.halimzain@u.nus.edu. Shahirah Mohamed
Salleh, previously attached to the Financial
Shariah Advisory & Consultancy affiliated to the
Singapore Islamic Scholars and Religious Teachers
Association, assisted in authoring this report.
Review of 2018
A review of the first half of 2018 can be found in the report,
‘Staying positive for Islamic Finance in Singapore’ published in
IFN Volume 15 Issue 27 dated the 4th July 2018.
Singapore’s Budget 2018 announced that a new financial
education curriculum will be piloted at polytechnics and
Institute of Technical Education colleges. This should mitigate
problems of debt that are growing within the Muslim community.
Meanwhile, the Islamic Religious Council of Singapore (MUIS)
has incorporated Islamic finance courses for Asatizah under their
Continuous Professional Education program. More mosques and
Islamic religious centrers are conducting Islamic finance courses.
While social media has put Singapore-based Ethis Crowd in the
international arena due to the social impact it made to the community
and the global accolades it received, there were other initiatives
made by other players as per Table 1.
December 2018
There were several representations from Singapore at international
conferences, including Darul Quran Singapura, Masjid Kampung
Siglap, Kapital Boost, MasterTheCrypto, Abdul Rahman Law
Corporation, Singapore Islamic Finance Academy / SSA Academy
and Warees Investment.
Preview of 2019
Linkage to sustainability
In July 2018, an SDG Index & Dashboard Report gave Singapore
a ranking of 43, showing how the country performed vis-à-vis 156
countries in following the Millennium Development Goals, ie to
end poverty, tackle inequality, protect the planet, promote peace
and ensure prosperity for all. In September 2018, the UNDP, the
government of Malaysia and the IDB discussed about unleashing
the potential of Islamic finance for sustainable development.
While Bank Negara Malaysia (BNM) refined its value-based
intermediation policies, the UNDP released its framework relating
to responsible banking. Hence, Islamic finance players should
remove institutional and corporate limitations. As millennials
are generally attracted to companies that adhere to corporate
social responsiblility, sustainable and responsible investment
and environmental, social and governance, hiring of local fresh
graduates with new perspectives, social entrepreneurial skills and
Islamic finance knowledge is the way to go.
Personal finance infrastructure
Reducing debt takes priority. Banks in Singapore, such as
Maybank and CIMB, can complement the government’s financial
education curriculum by realizing the importance of leveraging
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 country report
SINGAPORE

Table 1: Islamic finance activities in Singapore

Entities Activity
Islamic Religious Council of Organized a Muslim Law Practice course relating to historical overview, sources and contextual development of
Singapore (MUIS) Islamic law, jointly organized by the Syariah Court Singapore and National University of Singapore (law faculty).
Fiqh of Planned Giving: Wealth Planning & Distribution In Islam.
Released a religious guidance pertaining to the permissibility of Careshield Life Scheme to plan finances for the
family.
Provided an advisory on multi-level marketing (MLM) and Asatizah published a detailed write-up in Academia.
edu.
PERGAS / Financial Shariah Advisory Organized a FSAC Cryptocurrency Focus Group session (under Chatham house rules) comprising several local
& Consultancy and foreign Islamic finance academics, practitioners and scholars.
Malaysia-based International Shari’ah Research Academy For Islamic Finance (ISRA) interviewed a local Islamic
finance practitioner from Financial Shariah Advisory & Consultancy (Pergas Investment Holdings) and published
in i-FIKR Digest magazine.
Published an online article titled ‘Blind Pursuit in Islamic Banking and Finance: Al-Wasat (Middle Path) Between
Socially Responsible And Maximisation of Wealth’ to emphasize the unique feature of Islamic finance in serving
the community and reaching long-term goals.
Association of Muslim Professionals Islamic finance practitioners speak in the ‘Out of the Box’ Fintech conference.
CIMB Spoke during IFN Singapore Forum at SGX Centre, mentioning financing opportunities overseas (eg near the
‘One Belt, One Road’), using Singapore as a base with efficient regulations.
FTSE ST Singapore Shariah Index The index was developed by FTSE Russell, SPH and SGX, paving the way for low-cost Shariah compliant passive
investing products such as index funds and exchange-traded funds to be created.
Halal Universe Course on Guide to Investing in Shariah compliant Shares under School of Usury-Free Finance & Investment
Madrasah Alumni Collective Network Seminar held in Madrasah Aljunied on prospects of Islamic finance for students by two local Asatizah who are in
the Islamic finance industry.
Maybank Singapore Head of group wealth management and community financial services announced plans to focus on Islamic-style
wealth management in Singapore.
Singapore Management University Gathered students and public to visit two prominent Islamic finance players – Ethis Crowd (Umar Munshi and
Maritz Mansor) and Financial Alliance (Sani Hamid and Haron Mas). Organized by Muslim Society and Islamic
Business & Finance Society.
Public Gold Conducted several seminars to educate the public about Shariah compliant investments with gold in Singapore.
It has been certified Shariah compliant by Amanie Advisors.
Nanyang Technological University Rajaratnam School of International Studies published an article concerning the relationship between
(NTU) cryptocurrencies and terrorism.
RHB Bank Singapore In July 2018, real estate firm Royal Group sought SG$300 million (US$221.3 million) financing for a property
involving hotel assets, one of the largest Islamic finance deals in Southeast Asia using commodity Murabahah.
The law firm was Rajah & Tann Asia.
Source: Author’s own

behavioral psychology to help the Muslim community build a have been interesting developments in Singapore by Crescent
sustainable personal finance infrastructure. One way is through Rating, HAO Halal Hub and Have Halal, Will Travel. Haladeen.
the incorporation of ‘sub-accounts’ for their Shariah compliant com is a multi-vendor e-commerce platform for Halal products
accounts. This motivates savings and reduces debt, developing and services and it has expanded businesses to Japan, Malaysia,
investment habits. China and South Korea with plans to penetrate more countries in
the near future.
Financial education and legal support
A national financial education program, such as MoneySense, Conclusion
should complement the MUIS initiative in Islamic finance
education. Singapore’s success in Islamic finance is possible (Refer to the
report titled ‘Critical success factors for Islamic finance growth
Future lawyers in Singapore need expertise in specific practice in Singapore’ published in IFN Annual Guide 2018). There is
areas, market knowledge and even leadership and business skills. a need to create a deep awareness about the importance of
Common law, just like Shariah law, also emphasizes on contractual Islamic financial literacy at the grassroots level. Islamic finance
certainty and hence, there should be more commonalities rather practitioners should act as fiduciaries to synergize and grow,
than differences between the two. Hence, lawyers generally have rather than compete and become fragmented.
an inherent advantage over Islamic finance practitioners.
Innovation (eg robo-advisory) within Islamic finance through
Contemporary matters artificial intelligence can facilitate the growth of Islamic finance.
There are public queries about Shariah compliant foreign There should be a focus on the ethical dimensions of Islamic
exchange trading centers, cryptocurrencies and initial coin financial products rather than simply replicating the conventional.
offerings operating in the country. With more pressing issues More creative options can be created for consumers such as
coming (eg purchases by Instagram followers to boost sales), peer-to-peer crowdfunding, social entrepreneurship, online
Asatizah must come in to scrutinize and guide the public about microfinance and Shariah compliant blockchain tokens.
Halal income and sustenance.
Lastly, our local religious teachers under the Asatizah Recognition
Alternatives to Islamic finance Scheme must be early adopters of Islamic finance and educate
Business and job opportunities for Islamic finance are limited in the Muslim community. They understand the broader social
Singapore. Hence, the Halal economy is the next alternative for context and should continue to support the government’s efforts
those inspiring to do any Shariah compliant businesses. There to build common ground for the future of the nation.

92 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
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 country report
SOUTH AFRICA
Islamic finance and post-apartheid South Africa:
A match made in heaven?
Marvin RR Cole is the founder of Ovamba. He can
be contacted at marvin.cole@ovamba.com.
South Africa is rapidly emerging as one of Islamic finance’s
hotspots — outpacing all except Muslim-majority countries
in Islamic banking assets and broad-based acceptance/
offerings by the leading major banks. This broad evolution and
acceptance has tracked larger wealth and influence in the post-
apartheid era’s Black Economic Empowerment (known locally
as the BEE program).
BEE is a law designed to assist the groups historically
disadvantaged under apartheid through a variety of economic and
social preferences to reverse an imbalance where the white minority
(~ 8% of the country’s population) held roughly 100% of all the
assets/businesses/land. Among the groups that benefited was the
Muslim community comprising descendants of Indian, Pakistani and
Malay slaves, indentured laborers and political prisoners. Recent
converts and immigration from South Asia have pushed the Muslim
community to approximately 2% of the country’s population.
According to a former private wealth manager — self-identified
Muslims represent one of the leading groups of US dollar millionaires
in South Africa — growing to represent approximately 17% of high-
net-worth individuals. This explosion of wealth within both the
business and high-earning professional communities has led to
South Africa being one of the few Muslim-dominant countries where
the faithful can access Shariah compliant finance from banks and
asset managers on an almost universal basis.
Review of 2018
South Africa’s ‘Big Four’ banks — FNB, Absa, Standard Bank and
Nedbank — all offer full-service Islamic windows across the nation.
Additionally, specialty SME and trade finance firms such as Ovamba
Solutions are focused on expanding Shariah and ethical finance
options to the growing community of believers.
This success has been a result of a conscious policy by the South
African Reserve Bank to make South Africa a regional/Pan-African
hub for Shariah compliant finance — including the country issuing its
first Sukuk earlier this decade. Unfortunately, corporate South Africa
has not followed the national example of issuing Sukuk in the capital
markets; nor have the established exchange and indices been quick
to offer Shariah compliant or ethical finance products. Traditional
interest-based debt finance still dominates leading companies.
For Muslims seeking to grow beyond South Africa’s borders —
the regulatory/market environment is less encouraging for Shariah
compliant offerings. Distribution and retail firms expanding into
neighboring Southern African countries find that despite being with
the same bank, they are often unable to passport their Shariah
compliant accounts/offers into neighboring countries — even as
they are asked to interface with the local country units for support/
finance. FNB – a leading South African bank — has been a leader
in trying to resolve this challenge, leading to it winning international
awards for ‘Best Islamic Bank Offering 2018’.
Informal communications with executives of Minara – the South
African Islamic Chamber of Commerce — highlight the frustration
of expanding firms with the ability of banks with Islamic windows
to support the needs of growing businesses due to inadequate
December 2018
knowledge and expertise among bankers who are often not cross-
trained on both industry requirements and Islamic finance. These
frustrations have led a number of business owners to work with
pure-play South African branches of leading global Islamic banks
— notably Al Baraka, Habib Overseas Bank and HBZ (each of
which experienced an average 400% growth in assets over the past
decade). Unlike the Islamic windows at the national champions —
where retail deposits and Islamic consumer lending account for
more than 65% of all activity — the pure-play banks are typically
more than 58%+ exposed to commercial accounts and deposits.
Furthermore, these pure-play Islamic banks typically have a full
Southern African enterprise trade and SME finance mandate.
Preview of 2019
Unfortunately, while banking is a bright spot, the insurance sector
has significantly lagged the banking sector — both in marketing and
regulatory acceptance of Takaful products. Leading insurers have
instead funneled Muslim clients to the asset management divisions
for high-net-worth individuals or cut pilot Takaful offerings after
limited take-up by the independent agencies which are the major
sales channels driving policy sales.
To grow the industry beyond its niche within a small and affluent
Muslim community – concentrated within a few urban centers —
there is a need for greater coordination by regional regulators to
educate non-Muslims regarding the benefits of participatory vs.
interest-based banking. Furthermore, a dedicated push by insurers
where Takaful offerings are offered as an equal product with
traditional insurance offerings could break Takaful out of its niche
and enable both consumer and commercial clients to choose the
product based on its benefits vs. solely faith.
Conclusion
South Africa has emerged as Africa’s Islamic banking leader
thanks to a combination of preferential commercial policies within
Africa’s most sophisticated economy, and regulatory changes
that explicitly sought to position the country as the gateway for
Islamic investment in Africa. As Islamic capital grows in
importance within Africa, and as the success of Shariah finance
innovators demonstrate the commercial viability of Shariah-
based financial services, Shariah finance offerings will become as
normal and as universal as the Halal food offerings within the
South African food services sector — one whose sheer universality
allows non-Muslims to enjoy the benefits and Muslims to remain
true to the disciplines of their faith.
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 country report
SPAIN

Spain: Growing concern and first initiatives

Jose Antonio Rodriguez is a partner in the
Commercial Law Department specializing in
financing and M&A projects, mainly in the energy
sector at Marimon Abogados. He can be contacted
at jarodriguez@marimon-abogados.com.

In Spain, Islamic finance has not yet developed in its practical

aspect, although the interest it raises is growing, and the
degree of knowledge in relation to it is expanding, covering
a growing circle of professionals familiar with its main
characteristics.

Review of 2018
In 2018, many institutions, public and private, were working in
Spain in the dissemination of knowledge of Islamic finance. At the
university level, there is a consolidated offer of courses, seminars
and Master’s degrees in Islamic economics and finance (to name
a few, those organized by the Autonomous University of Madrid,
Autonomous University of Barcelona, ​​University of Almeria,
Pontifical University of Comillas, Juan Carlos I University I, etc).
The Islamic Financing Observatory, promoted by Casa Árabe
(Ministry of Foreign Affairs) and SCIEF (Saudi-Spanish Center
for Islamic Economics and Finance, a private center promoted
by the Instituto de Empresa Business School and King Abdulaziz
University) has continued its work during 2018. Some of the main
Spanish banks, such as Banco Santander or BBVA, participate
in this observatory, as do public entities such as CESCE, the
Spanish export credit insurance agency. An example of the
activities developed by the observatory was the conference held
by the deputy secretary-general of AAOIFI which was attended by,
among others, representatives of the Spanish National Securities
Market Commission.
focused on Takaful. At that seminar, the first Takaful insurance
experience developed in Spain was explained, promoted by
SCIEF has developed other initiatives, such as the first edition of
CoopHalal, an Islamic financial services cooperative, which is
the Fintech Islamic Finance Challenge, organized together with
also developing the first Islamic microfinance projects in Spain.
the IDB, a project contest focused on Islamic finance and fintech
in which more than 90 candidates participated from more than
It should be noted that Catalonia, whose capital is Barcelona,
20 countries. Other notable initiatives of SCIEF in 2018 included
is the Spanish region where there is a greater development of
the fourth edition of the Islamic Finance Executive Program and
private initiatives related to Islamic finance, such as those carried
a recent conference in which the work of the International Islamic
out by CoopHalal. In this regard, it must be noted that the largest
Trade Corporation was presented, attended by the vice-president
part of the immigrants coming from the Maghreb live in Catalonia,
of the ICEX (Spanish Institute of Foreign Trade, dependent
where they constitute a relevant population nucleus, which aims
of the Ministry of Industry, Commerce and Tourism). The ICEX
to find Islamic financial products on the market.
also organized some events to encourage the development of
economic relations with Islamic countries, especially in the
Maghreb area and North Africa (eg the seminar that took place Conclusion
in June 2018 focused on Morocco, Algeria, Tunisia and Egypt). Thus, it can be concluded that 2018 was a year of development
and expansion of knowledge of Islamic finance in Spain. Thanks
Many other events took place throughout the year, whose success to initiatives such as those previously summarized, the breeding
shows the clear interest in the market in relation to the Islamic ground has been created, whose existence is a prerequisite for
economy. Noteworthy are the number of exhibitors and massive the development of Shariah compliant projects in our country.
attendance at Expo-Halal Alimentaria 2018, whose third edition
took place in Barcelona in April 2018. The final push to make these projects possible must come hand
in hand with legislative reforms, especially in tax and registration
Preview of 2019 law, which make it possible for these projects to be competitive
compared to traditional financing formulas. It is uncertain when
Along with all these major events and activities, it should be noted
these reforms will take place, but what is certain is that the
that there is a growing number of small private initiatives that
greater the knowledge of Islamic financing among Spaniards in
are being developed throughout Spain, promoting knowledge of
general and economic operators in particular, the closer we will
Islamic culture and economy. To give an example, the Center for
be to such reforms. In this sense, 2018 has brought us closer to
Studies and Research in Islamic Economy and Finance organized
the goal.
in Barcelona the second Islamic Finance Scientific Congress,

94 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
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 country report
SRI LANKA

Islamic finance in Sri Lanka here to stay

Suresh R I Perera is the principal of tax and

regulatory at KPMG Sri Lanka. He can be contacted
at sperera@kpmg.com.

The Islamic finance and banking industry in Sri Lanka is

navigating through a timeline with a moderate tax and legal
framework. The fact that the tax and legal framework has
witnessed specific modifications to facilitate Islamic finance
is a salutary feature taking into consideration Sri Lanka is a
multiethnic country compared to other similar jurisdictions.
However, there is much room for improvement even in the
areas that have already been modified in addition to the other
areas that warrant modifications in order to ensure Islamic
finance would flourish in the country. Though the call for further
modifications has been looming in the air in the recent past,
with submissions being made to the relevant authorities, such
calls have not resulted in the desired outcome to date.

Review of 2018
2018 was not the best year for Sri Lanka’s economy and commerce
due to turbulence in the global markets as well as natural disasters.
These conditions also had an impact on the slowing down of the
momentum of Islamic finance in Sri Lanka.

Nevertheless, Islamic finance has made its presence felt in the Sri
Lankan banking and finance arena. The fact the Islamic Finance
Forum and awards ceremony of South Asia took place in October
2018, bringing together a gathering of speakers and participants
from India, Pakistan, Bangladesh and the Maldives, demonstrates
the integration of the Sri Lankan Islamic finance industry into the
region. The 10th edition of the Sri Lanka IBF Industry Conference
focused primarily on the concept of social impact investing. A survey
conducted at the conference was the basis of a research report on
the Islamic finance industry during 2018.
The developments in the arena in the recent past essentially
encompassed the extension and adaptation of the Islamic finance
product portfolio in the country. This includes the developments in
the Takaful industry as well. Product variations of the Takaful industry
extend to the arrangement of Takaful for existing customers for the
duration of their financing facility with the Islamic finance institutions
as well as Takaful facilities for cattle farmers. Perhaps these are two
of the developments in Takaful worthy of being on record.
The development of products also reflects the needs in the market.
As Sri Lanka is witnessing a boom in the construction industry with
a multitude of high, medium and low-end condominiums under
construction, the Sri Lankan market also offers Islamic financing
facilities for acquisition opportunities through products based
on Istisnah cum diminishing Musharakah principles. Mudarabah
and Ijarah continue to be the products most commonly issued in
Sri Lanka followed by diminishing Musharakah and Murabahah.
This highlights that the Sri Lanka Islamic finance market is still
concentrated on primary products while secondary products such
as Sukuk and Islamic treasury bills have not had much success in
Sri Lanka so far despite the liquidity of the industry being the need
of the hour.
Seylan Bank is the latest entrant bank into the Islamic finance
industry of the country. The bank commenced limited commercial
operations and project financing. It is fascinating to note that
although commerce is concentrated in Colombo, the spread of
Islamic finance is not restricted to Colombo. Islamic finance activity
takes place outside Colombo especially in the districts of Ampara
and Trincomalee in the Eastern Province as well as in the Southern
and Central Provinces.
Preview of 2019
2019 may bring many interesting prospects to the Islamic finance
industry in Sri Lanka. There may be developments with regards to
quandaries in relation to ‘recovery’ encountered by Islamic financial
institutions. Product standardization was much discussed in 2018
and it is expected that some progress will be made in devising and
implementing standardized agreements during 2019. Furthermore,
a revised income tax manual with the inclusion of detailed product
descriptions in relation to Islamic finance products may be issued
in the near future. It is interesting to note that although the initial
draft manual contained detailed explanations in relation to Islamic
finance products, the same were not included in the revised draft
manual issued. The issuance of detailed guidelines to complement
the existing provision in relation to value-added tax, economic
service charge and nation-building tax as well as developments in
accounting standards to further accommodate the growing Islamic
finance industry in Sri Lanka would augur well for the industry.
Conclusion
The rate of growth of Islamic finance is a debatable issue. Some
have pointed out the growth is far below the desired levels. Sri
Lanka’s multiethnic background and sociopolitical developments
are key barriers to growth. The demystification of Islamic finance
principles has not taken place with vigor in the country, hence this
has resulted in the hurdles stemming from sociopolitical
developments to stymie progress. Key government authorities and
officers continue to be ignorant of the fundamentals of Islamic
finance with no programs to clear the gray areas in the foreseeable
future. The availability of opportunities for aspiring Islamic finance
professionals to enhance their skill set is also restricted as
curriculums in many prominent educational and academic
institutions are devoid of Islamic finance studies. However, Islamic
finance in Sri Lanka is here to stay due to the diverse trade patterns
in the country.

December 2018
T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
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 country report
SUDAN

Financial markets in Sudan

Professor Rifaat Ahmed Abdel Karim is the
visiting professor of the ICMA Centre at the Henley
Business School of the University of Reading in the
UK. He can be contacted at rifaatahmed@gmail.
com.

Sudan is, by declaration, an Islamic country. Hence, its financial

markets cannot accept any instruments that do not comply
with the Shariah rules and principles. This means that the only
financial instruments it has are shares or stocks and Sukuk,
ie no bonds or warrants. Sukuk are a form of Islamic security
based on Shariah contracts. On the basis of the contract which
governs the Sukuk financial instrument, eg Mudarabah (a
contract in which those who have savings [provider of funds]
can make them available to those who can invest them [Mudarib
or ‘entrepreneur’, ie investment manager]), Ijarah (leasing) or
Murabahah (sale at cost plus profit), the returns of the Sukuk
are dependent on the income generated by the underlying
investments.

In the case of Mudarabah, this income is shared between the

providers of funds (Sukukholders) and the entrepreneur (originator
and investment manager) in a ratio set out in the contract. In the
cases of Ijarah and Murabahah, the payments of returns by the
lessee (to the Sukukholders as the lessor) or the purchaser (to
the Sukukholders as the sellers) are known in advance, which is
preferred by many as the cash flows can be predicted.

Review of 2018
2018 was probably the worst year for the Sudanese currency which
lost its value by more than 50%. This affected almost every sector of
the economy, including the financial sector, by depriving the citizens
of the value of their funds whether in current, savings or investment
accounts (also known as profit-sharing investment accounts) in the
banks, which led to a lack of trust in them.
(FMRA), which is intended, inter alia, to encourage investment in
the Khartoum Stock Market (KSM) and other financial markets in
The government of Sudan is now mainly dependent on gold, among
accordance with the government’s development plans and general
other things. The government lost a major source of oil revenue
policies, and to protect those that deal with or invest in the KSM,
when South Sudan, now the Republic of South Sudan, opted for
other financial markets and the general public from cheating and
secession from Sudan following a referendum on the 9th July 2011.
deception.
Gold in Sudan, which in 2012 accounted for nearly 2% of the world’s
gold production, jumped from 15 tons in 2009 to 73 tons in 2014,
and its prices rose from US$1,000/oz. in 2009 to US$1,300/oz. in Preview of 2019
2014. Unless there are drastic changes in the way that the government
manages the economy of Sudan, it is hard to see how the country
The government has launched Sukuk backed by gold possibly to will improve. Although the government has established the FMRA, it
support its weakening currency. The Sukuk issuance, which was is difficult without adequate backing for this new organization to be
undersubscribed, amounted to US$165.37 million. Apparently, the able to improve transparency, which is badly needed, in all products
country is undermined by a shortage of foreign currencies and its that are listed in the stock exchanges that are under its supervision.
economy is struggling to recover from 20 years of US sanctions.
In addition, the government needs to be careful about issuing
One of the objectives of the Five-Year Economic Reform Program Sukuk which are undersubscribed, as this may result in giving an
(2015-19) of Sudan was to position the mining sector as an engine impression of a lack of confidence.
of growth by increasing gold production from 76 tons in 2015 to 103
tons in 2019.
Conclusion
However, in early 2017, the Central Bank of Sudan’s gold purchase Although Sudan is an ideal place to practice financial dealings that
and export monopoly was relaxed to allow private companies are compliant with Shariah, it is aggrieved by adverse management.
to export gold. In 2018, the government returned to the central The deterioration in the value of the country’s currency and its
bank the sole right to buy gold and to make it available for export. consequence in depriving people of the value of their funds are
Although Sudan was expected to produce 100 tons of gold in 2016, good examples. This has led to a lack of confidence in the banking
it currently ranks third in gold production in Africa behind South system.
Africa and Ghana (it targeted to move to first place in 2018).
Although the government has lost a major source of the oil revenue
Knowing its importance, in 2016 the government promulgated a when South Sudan separated from the main country, it is now
law that established the Financial Markets Regulatory Authority dependent mainly on gold, inter alia, for development growth.

96 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
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 country report
TUNISIA

Islamic finance in Tunisia: What’s next?

Mohamed Araar is the deputy director of external Chart 1: Islamic banking in Tunisia
private financing and international relations at
the General Directorate of External Financing and 200
150 Wifak
Settlements at the Central Bank of Tunisia. He can 100
50 Al Baraka
be contacted at med.araar@yahoo.fr.
0 Zitouna
-50
Tunisia’s political landscape was marked by local elections held 2015 2016 2017 2015 2016 2017
in 2018, paving the way to the general elections in 2019, so as Net income Net banking revenue
to rebuild the democratic nation, but in the meantime Tunisia’s Source: Author’s own
economy looks to be headed toward a social setback leaving
hundreds of thousands of young people, particularly those who Chart 2: Individual performance of Islamic banks in Tunisia (million TND)
have a university degree, with nothing but unemployment. That’s

128.4
why a report titled ‘Ambitious Reform Is Key To The Revival Of Net income 2015 Net banking revenue 2015
140

101.7
The Tunisian Banking Sector’ and released by S&P in December Net income 2016 Net banking revenue 2016
2017 mentioned incentives which could help boost job creation 120
Net income 2017 Net banking revenue 2017
100

78.4
in the country by lending to productive sectors and small and
midsized companies rather than the current focus on retail and 80

51.1
42.2
60

38.1
real estate lending. Tunisia’s banking sector is still considered

16.6
as a weakness in its economy. 40

16.2
12.4
20
12.6

8.5
9.5
20

Furthermore, Moody’s Investors Service downgraded the sovereign
rating in August 2017 and again in March 2018, and further changed
the sovereign rating outlook from stable to negative in October.
Correspondently, Moody’s lowered Tunisia’s Banking Macro Profile
to ‘Very Weak +’ from ‘Weak –’, downgraded twice the banks and
changed their rating outlook from stable to negative, reflecting the
increased challenges in the operating environment of the banks,
with diminishing buffers to sustain resilience. In addition to the
impact of the deterioration on the government’s capacity of support
and the weakening operating environment for both conventional and
Islamic banks’credit and funding conditions, the three Islamic banks
(Zitouna Bank, Al Baraka Bank and Wifack International Bank (WIB))
are also in a weak position, compared to conventional banks, in
terms of liquidity management and deposit facility solutions. In fact,
Islamic banks are in dire need of these solutions to be integrated into
the central bank’s existing system.
Review of 2018
Even though it is important to stress the new rules set by the
Central Bank of Tunisia in terms of the management of displaced
commercial risk related to profit-sharing investment accounts, this
prudential approach related to the capital adequacy ratio leaves a
narrow space to the profit equalization reserve and investment risk
reserve to absorb risk, which is reflected by an of 80% which is
close to one.
Major developments in Islamic banking were led by Zitouna Bank’s
consecutive local and international acquisitions by:
- Triki Group in July of shareholdings held by the IDB which
represent 20.9% of the capital priced at TND102.8 million
(US$34.73 million) (TND4.1 (US$1.39)/share).
- Majda Group in October of shareholdings held by Al Karama
Holding, which represent 69.15% of the capital together with
70% of the capital of Zitouna Takaful priced at TND370 million
(US$125.01 million).
However, this successful transaction should not hide the fact that
the two other banks are lagging behind Zitouna Bank. In fact, the
2017 income statements, published in 2018, showed warning signs
of regression in the Islamic banking sector’s net income as a whole,
since both WIB and Al Baraka realized losses of TND1.7 million
(US$574,353) and TND4.1 million (US$1.39 million) respectively,
despite the sharp increase in Zitouna Bank’s net income (up 58.5%).
Moreover, participation certificates (a hybrid title with a fixed part
of its yield and a variable part) should not hide the Sukuk potential
and the fact that there have been only five local issuances in small
December 2018
5.1
5.1
-1.7
-4.1
3.2
0
-20
Zitouna Al Baraka Wifak
Source: Author’s own
amounts including two issuances in 2018:
• two issuances concluded by Zitouna Bank in 2015 and 2017
• two issuances concluded by Best Lease in 2017 and 2018
(a TND7 million (US$2.36 million) issuance concluded in
September 2018), and
• the first issuance of TND15.4 million (US$5.2 million) concluded
by WIB in August.
As a primary focus on financing for development, Tunisia, which
held the 43rd IDB Group annual meeting in April 2018, has only
received approval from the board of directors to finance a number
of development projects related to construction of hospitals and
transfer of electrical energy for an amount of US$184 million.
Preview of 2019
It is so essential to give another chance to a quick recovery of the Tunisian
economy using Islamic finance as an alternative which relies on:
- the development of the Islamic banking activities of all three
Islamic banks to gradually get more of the marketplace
- a much more proactive role to be played by authorities to
provide all the necessary regulations for Islamic banking and
also to promote the review of a legal framework related to
project finance and asset securitization which will encourage
both investors and entrepreneurs, and
- an IDB program for the next few years to meet government
funding needs beyond conventional financing.
Conclusion
As a matter of consequence, Sukuk potential should be considered
as this could provide a useful instrument for project finance assets,
securitization and liquid holdings of Islamic banks; while their
conventional competitors gain from such products, it seems that
this process has taken too much time for the authorities and
investors before showing tangible results.
Any public opinion or media appearance is the author’s independent
personal opinion and should not be construed to represent any
institution with whom the author is affiliated.
T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
97
 country report
TURKEY

Participation banking can be key feature in

Turkish financial system
Derin Altan is a partner and Eren Ayanlar is an
associate at GKC Partners in association with White
& Case. They can be contacted at derin.altan@
gkcpartners.com and eren.ayanlar@whitecase.com
respectively.
counterparts. Compared to YE 2017, participation banks’ deposited
funds increased by 33%, and the funds provided by them increased
by 29% as of the third quarter (Q3) of 2018. Within the same period,
participation banks’ total assets increased by 32.8% and equity
increased by 16.7%. Furthermore, compared to Q3 2017, net profits
of participation banks increased by 62.2%. For a comparison, the
net profit increase of conventional Turkish banks for the same period
was 13.4%, according to data from the Turkish Participation Banks’
Association (TPBA).

Despite its unique geostrategic position as the bridge between In January 2017, a new law was enacted obliging certain public and
Europe, the Middle East and Asia and its Muslim-majority private sector employers to enroll their employees to the Automatic
demographics, Islamic finance activities in Turkey only began Pension Fund Participation System. Prior to the enactment of this
in 1984 through the establishment of special finance houses. In system, participation in private pension schemes was based on an
2005, the new Banking Law was enacted and these special finance opt-in system. According to a statement of the TPBA chairman,
houses were transformed into Shariah compliant participation interest-free funds that are being managed by Turkish participation
banks. Participation banks have been and still are the pioneers of banks attracted a very strong interest following the enactment of
the Islamic finance industry in Turkey; however, unlike in the 1980s the system, and the share of interest-free funds in this system was
or 1990s, the Islamic finance industry is also being supported and almost 58%. According to the TBPA chairman, 1.8 million out of 2.8
fostered by the Turkish government. In particular, within the last million obligatory participants to the system preferred interest-free
five years, significant regulatory and infrastructural reforms were funds, which is a proof of increasing interest toward Islamic finance
made to support the Islamic finance sector, paving the pathway products.
for Sukuk issuances both on sovereign and private-sector levels.
In 2018, despite the unfavorable macroeconomic environment,
In its previous medium-term program (2016-18), the Turkish Turkish issuers pursued Sukuk issuances. During the period between
government had announced its intentions to continue to strengthen January 2018 and September 2018, Sukuk issuance certificates
the corporate and legal infrastructure for the Islamic finance industry worth of TRY23.6 billion (US$4.49 billion) and US$1.15 billion were
to foster a more diversified range for interest-free financial products. approved by the Capital Markets Board allowing the issuance of
In September 2018, the Turkish government’s new economy program Sukuk by Turkish issuers, predominantly by participation banks,
(2019-21) was announced. In this program, the Turkish government up to this amount. In addition, within the same period the Turkish
announced that necessary actions will be taken to strengthen and Treasury issued TRY18.7 billion (US$3.56 billion) of sovereign Sukuk.
popularize participation banking in Turkey. This is also in line with In addition in 2017, the Turkish Treasury successfully completed its
the Turkish government’s previous approach to triple the share of initial gold-denominated Sukuk Ijarah sold to domestic individual
participation banking in Turkey from 5% to 15% by 2025. investors with a maturity of 728 days and an annual return of 2.4%.
Following its success, the Turkish Treasury performed a second
Currently, there are five active participation banks in Turkey, namely, issuance in 2018.
Albaraka Turk Katilim Bankasi (Albaraka), Kuveyt Turk Katilim Bankasi
(Kuveyt Turk), Turkiye Finans Katilim Bankasi (Turkiye Finans), Vakif Preview of 2019
Katilim Bankasi (Vakif Katilim) and Ziraat Katilim Bankasi (Ziraat
According to S&P Global Ratings’ Islamic Finance Outlook 2019, the
Katilim). Vakif Katilim and Ziraat Katilim are state-owned banks
global Islamic finance industry is expected to expand slowly in 2019
with the remainder being private banks. Albaraka, Kuveyt Turk and
with a low-single digit growth rate. Accordingly, Turkey is expected
Turkiye Finans are active in both domestic and international Sukuk
to more-or-less mimic this global trend with a risk of underperforming
markets and are prominent issuers in Turkey, whereas Vakif Katilim
as compared to its peers as Turkey is revising its economic program
and Ziraat Katilim are active in domestic issuances.
to overcome the burdens of the economic downturn which started
in August 2018. The municipal elections set for the 31st March 2019
Review of 2018 also adds another component to the list of uncertainties that keep
Similar to the other emerging market economies, 2018 was a challenging away investors – at least before the elections are over.
year for the Turkish economy during which the Turkish government
had to counter the already existing problems in its economy, including Nevertheless, the Turkish Treasury is keeping its hopes high. The
currency volatility, running inflation and current account deficit. During external financing program of the Treasury hints at a total issuance
the first nine months of 2018, the Turkish banking sector also suffered, of up to US$8 billion in debt securities in 2019. This is also expected
primarily due to the approximately 59% plunge in the Turkish lira to include Islamic products, such as the conventional Sukuk Ijarah
against the US dollar which resulted in a pressure on performance, as well as the gold indexed Sukuk, which it started issuing in 2017.
asset quality, capitalization, liquidity and funding profiles of Turkish Regardless of any projections or estimates, there is one prophecy
banks. As a result, Fitch Ratings downgraded the long-term foreign- that is almost certain to be true: 2019 will bring new developments
on various fronts at macroeconomic and political levels.
currency issuer default ratings (LTFC IDR) on 20 Turkish banks with a
negative outlook and lowered 12 Turkish banks’ viability rating. Among
these 20 Turkish banks, four participation banks (Kuveyt Turk, Turkiye Conclusion
Finans, Vakif Katilim and Ziraat Katilim)’s LTFC IDRs were downgraded. Economic challenges in 2018 have proven that the Turkish economy,
Fitch also announced that it plans to resolve the outstanding Rating particularly the Turkish banking system, is in need of further
Watch Negatives on the viability ratings of smaller foreign-owned and resilience, diversification of financial products, and most importantly,
participation banks in a further review. reestablishment of individuals’ and investors’ trust in the Turkish
financial system. In particular, savings of Turkish individuals must be
Despite this negative outlook, Turkish participation banks have reintegrated to the financial system where Islamic finance and
proven resilient, in particular compared to their conventional participation banking can be a key feature.

98 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
December 2018
 AUSTRALIA
B AHR AIN
INDONESIA
JAPAN
JORDAN
KENYA
KUWAIT
MALAYSIA
MOROCCO

NIGERIA

OMAN

SAUDI ARABIA
SINGAPORE

SOUTH AFR ICA

SUDAN

TURKEY

UNITED ARAB E MIRATE S

UNITED KINGDOM

UN ITE D STATE S
 country report
UAE

Stellar growth in Sukuk issuance

Anita Yadav is the senior director and the head of

fixed income research at Emirates NBD Bank. She
can be contacted at anitay@emiratesnbd.com.

With the establishment of the first commercial Islamic bank,

Dubai Islamic Bank, in 1975 and the issuance of federal law
regarding Islamic banks, financial institutions and investment
companies in 1985, today the UAE has six Islamic banks with
total assets of circa AED579 billion (US$157.61 billion) as at the
third quarter (Q3) of 2018, representing circa 20% of the total
system assets. Validating the government’s efforts to make
Dubai the hub of Islamic finance, the Islamic economy accounts
for an increasingly larger share of the country’s GDP. Besides
Islamic finance, contribution to the GDP from the Islamic
economy is boosted by the growth of key Shariah compliant
sectors such as Halal food and modest fashion.

Review of 2018
After rapid growth in 2010-14, Islamic banking growth slowed a little in Another development was the approval of the Federal Debt Law
2018 in response to the slowing economy. Total asset growth as at Q3 which is expected to see the issuance of AED-denominated Sukuk in
2018 for Islamic banks was circa 7.2% year-on-year, slightly lower than the country. As announced by the Ministry of Finance, under the new
the 7.4% recorded by the conventional banks in the country. That said, law, the government will establish a Public Debt Management Office
Sukuk issuance increased materially during the year. to oversee new federal-level borrowings. The government plans to
seek a sovereign rating and sell bonds once the law gets enacted.
Sukuk issuance reached its highest level on record for any given We expect a substantial part of the federal government debt to be
year. Total year-to-date (YTD) issuance as at the 15th November in the Sukuk format, particularly as it will provide instruments for
crossed the US$9.1 billion mark. This compares with total issuance Islamic banks to comply with their Basel III requirements.
of only US$3.6 billion in all of 2017 and circa US$9 billion in 2016.
The stellar growth in Sukuk issuance was contributed by issuers The subject of cryptocurrencies is one of the most-talked about
from varied sectors — transport & logistics (DP world), real estate themes in banking today and the UAE Islamic finance arena has not
(Aldar & DAMAC), banks (Dubai Islamic Bank, Noor, Al Hilal and First remained unscathed. While Islamic scholars are still unenthusiastic
Abu Dhabi Bank), airlines (Emirates), energy (Dana Gas), utilities about bitcoin, some scholars recently concluded that a blockchain
(Tabreed) and sovereign (Sharjah). Maturity tenors remained below management system can conform with the prohibition of Riba
10 years with a dominance of the five-year section. (usury) and incorporate the principles of Maslahah (social benefits of
positive externalities) and mutual risk-sharing (as opposed to risk-
Most Sukuk offerings were well oversubscribed. The issue of default shifting). That said, the central bank is yet to provide its thoughts on
by Dana Gas in 2017 was quickly forgotten by the market as investors cryptocurrencies.
embraced even the new Sukuk issued by the same issuers as part of
the resolution of the dispute about the legality of the original Sukuk. The UAE is leading the progress of Islamic finance even in non-
While most new Sukuk fared well in the secondary market, the overall Islamic regions. Recently, the Hamdan bin Mohammed Smart
performance of Islamic finance securities suffered in tandem with University, HBMSU, reaffirmed its commitment to building bridges
the other financial products, particularly the ones from the emerging of knowledge, cultural and economic exchange with China by
market economies. The YTD loss on the Emirates NBD Markit iBoxx organizing the China-UAE Conference on Islamic Banking and
USD Sukuk index was circa -0.89%. However, this compares very Finance, CUCIBF III, held in November 2018. The conference is
favorably with the YTD loss of circa -3.6% on the Barclays EM USD strategically important as the first such event to consolidate the
bond index. efforts of the UAE and China to support the global Islamic economy.

Much like their conventional counterparts, Islamic banks in the Preview of 2019
country reported minimal increase in non-performing loans and
Currently, there is circa US$167 billion worth of local currency debt
reflected stable capital adequacy ratios during the year. The
securities outstanding in the GCC region of which less than 1% is
introduction of the value-added tax was well absorbed by the UAE
denominated in the UAE dirham. Once the UAE government yield
Islamic banks.
curve is established we expect rapid growth in the dirham local
currency market, particularly in the Sukuk space.
One of the key developments during the year was on the regulatory
front. In the UAE, the Higher Shariah Authority (HSA) was approved
On the regulatory front, we expect positive developments and
and activated in 2016 whose role is to set standards across the
ongoing improvements in standardization/homogenization in Islamic
Islamic financial services industry. Earlier in 2018, the Central Bank
finance and further growth in the overall Islamic economy in the UAE.
of the UAE, after receiving recommendation from the HSA, mandated
that all fully-fledged Islamic banks, Islamic windows of conventional
banks and finance companies offering Shariah compliant products Conclusion
and services in the UAE need to comply with the AAOIFI standards The Dubai government continues to put diligent efforts in positioning
with effect from the 1st September 2018. The existing products and itself as the global hub for Islamic finance and Sukuk listing. Some
services of these institutions will also need to be revised to be in milestones were achieved in 2018 and 2019 is expected to continue
compliance with AAOIFI standards. to show progress on this agenda.

100 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
December 2018
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 country report
UK

A record year for the UK’s Islamic finance

by several prominent organizations and is committed to supporting
Suhail Ahmad is a partner at Gateway Islamic early-stage companies with access to multidisciplinary professional
Advisory. He can be contacted at suhail.ahmad@ services provided by partner firms at lower than market cost as well
gatewayllp.com. as workspace, education and business development support.

Preview of 2019
The UK’s Islamic finance sector continued to grow in 2018 The outlook for the sector remains strong as Brexit appears to be
despite the economic uncertainty posed by the lack of a trade having little impact on dethroning the UK or London in particular as
deal with the EU in the aftermath of the Brexit vote. The country the western center for Islamic finance. We can expect more activity
witnessed its largest-ever corporate Sukuk issuance and the in the UK Sukuk market which on the heels of the Al-Rayan corporate
launch of several new initiatives such as the Islamic Fintech Panel issuance will be able to attract more capital. This was highlighted
and the iE5 Islamic economy accelerator which encouraged the by the statement of Dr Bandar M H Hajjar, the president of the
growth and success of start-ups such as Insure Halal which in IDB, at the London Sukuk Summit: “We have a real opportunity to
2018 launched the country’s first Takaful product for building recognize the potential of Islamic finance here in the UK. Both the
and contents home insurance. Additionally, the industry is UK government and the IDB are actively promoting this objective.”
supported by improving local demand for Islamic banking and Considering Jeddah-based IDB has a capital of US$33 billion, it
government-supported initiatives such as a Shariah compliant could definitely help support Islamic project funding in the UK.
liquidity tool for UK Islamic financial institutions.
The Takaful sector in the UK is also expected to get a much-needed
Review of 2018 boost in 2019 as the Islamic Insurance Association of London
(IIAL) is seeking Shariah scholars’ approval for London’s standards
The highlight of the year was the record-breaking corporate Sukuk
for transaction of Islamic commercial insurance to be rolled out
issuance by the country’s largest Islamic bank, Al-Rayan Bank
coinciding with the UK’s departure from the EU on the 29th March.
which successfully raised GBP250 million (US$319.45 million) via a
The IIAL, which counts Lloyd’s of London as a founding member, is
residential mortgage-backed securitization Sukuk. The Sukuk would
seeking both legal and Shariah advice on the standards framework
help fund the bank’s ongoing efforts to expand into commercial real
it has developed with London market associations.
estate, private banking and small business financing. Rating agency
Moody’s Investors Service assigned an ‘A’ rating to the Sukuk
The Bank of England (BoE)’s plans for the launch of a Shariah
which would consist of a portfolio of first lien Home Purchase Plans
compliant facility to support the UK’s Islamic finance sector under
secured by residential properties.
a new BoE subsidiary named the ‘Alternative Liquidity Facility’ will
offer a non-interest-based source of liquidity. This will be the first
Islamic fintechs continued to grow with Yielders, the first Financial
such facility offered by a major western central bank and improve
Conduct Authority-registered Islamic crowd investing platform,
access to capital for the UK’s Islamic financial institutions.
completing a pre-Series A investment round as it plans to expand
in selective European markets. Fintech IslamicBanker rebranded to
IslamicMarkets.com with an expanded offering of Islamic finance Conclusion
and training solutions for a broader Islamic economy. Start-up The resilience of Islamic finance will be tested over the coming
Ummah Finance also rebranded to MoneeMint repositioning itself as year as Brexit is undoubtedly going to be disruptive to the UK
‘ethical’ digital banking and announced an undisclosed amount of economy. However, given the sector growing from strength to
funding from a strategic investor enabling it to launch in early 2019. strength in 2018 and continued innovation and government
support, Islamic finance in the UK is expected to survive Brexit
In addition to the launch of the Islamic Fintech Panel, an Islamic without any significant slowdown. Additional Sukuk offerings,
economy accelerator, iE5, was formed to support the growth of improved liquidity and potential digital bank offerings will keep
companies operating in the Islamic market either based in the UK the UK Islamic finance sector an interesting marketplace for
or desiring a presence in the UK. The accelerator is being supported industry observers worldwide.

102 T h e Wo r l d ’ s L e a d i n g I s l a m i c F i n a n c e N e w s P r ov i d e r
December 2018
 country report
WEST AFRICA

WAEMU a growing market

Table 1: Types of Islamic financial institutions in West Africa
Kinda Compaore Sore Sylvie is the head of Islamic Name Country TYPE
finance at Coris Bank. Coris Bank InternationalBJ Benin Windows
CBI Baraka
Abass Cheriff is the head of Islamic finance at Caisse LIDG Baore Burkina Faso Microfinance
An Nour Consulting. They can be contacted at Coris Bank International SA Burkina Faso Windows
scompaore@coris-bank.com and an.nourwebsite@ CBI Baraka
gmail.com respectively. Raouda Cote D’ivoire Microfinance
Afriland Cote D’ivoire Windows
Coris Bank International CI Cote D’ivoire Windows
The Islamic financial market in the West African Economic and CBI Baraka
Monetary Union (WAEMU) zone is gradually developing with the
Caisse Islamique De Mali Microfinance
creation of national associations and financial institutions in all
Development
regions. Indeed, the macroeconomic and social indicators are Amanah Finance
extremely favorable. For many reasons, Islamic finance comes
Coris Bank International ML Mali Windows
at the right time by allowing emerging countries to finance
CBI Baraka
themselves and also for SMEs to have an alternative source
Asusu Niger Microfinance
of financing. During 2018, a number of significant advances
were noted which marked progress in the market. However, a Banque Islamique Du Niger Niger Islamic bank
number of challenges remain to be overcome in order to make Banque Islamique Du Senegal Senegal Islamic bank
the regional market more attractive and more competitive. Coris Bank International SN Senegal Windows
CBI Baraka
Review of 2018 Pamecas Senegal Microfinance
CGF Bourse Senegal Islamic mutual
Since February 2018, the Central Bank of West African States fund
released instructions to regulate Islamic finance in the eight countries Mecit Togo Microfinance
of the monetary union. This regulation framework covers the credit
Source: Author’s own
and microfinance activities offering Shariah compliance products. In
February 2018, the Republic of Mali issued its first sovereign Sukuk
the Constitutive General Assembly of the African Network for the
of XOF150 billion (US$258.63 million) in local currency with maturity
Promotion of Islamic Finance (Reseau Africain pour la Promotion de
in 2025. This Sukuk Ijarah will be used to finance the government’s
la Finance Islamique — RAPFI) held from the 21st to the 23rd June
development program in low-cost housing. With this Sukuk, the
2018 in Benin, marking a significant Islamic finance development
WAEMU region is definitely the most prolific one in Africa.
in Senegal as well as in the West African space. RAPFI is a non-
profit association based in Abidjan in the Ivory Coast whose main
Islamic financial institutions invested huge resources in the market
objective is to promote and popularize Islamic finance in Africa.
for developing their activities. CORIS Bank Group through its Islamic
window, Baraka, opened five Islamic branches in Senegal, Mali,
In terms of training, four postgraduate programs in Islamic finance
Benin and the Ivory Coast. According to market estimates, about
are available to date. These were launched by the Institute of
57,337 people are currently served by Islamic financial institutions
Administration and Business Start-ups of the Faculty of Economics
with 62% men, 27% women and 11% other associations and
and Management of UCAD, in partnership with the CIFIA Academy;
companies. To date, there are 14 financial institutions offering
by BEM Management Business School, CESAG in partnership with
Islamic financial products in the WAEMU.
the IDB; and Sahel University in Niamey, Niger in partnership with
the OIC. One undergraduate program – a Bachelor’s degree – is
Nine African countries, namely Benin, Burkina Faso, Cameroon, the
available in IST in Ouagadougou, Burkina Faso.
Ivory Coast, Mali, Niger, Senegal, Togo and Tunisia participated in

Preview of 2019
Chart 1: People served by Islamic financial institutions in the WAEMU Following the passing of the regulation framework, the market is
expecting the beginning of a new era in this region. New rules and
regulations on Takaful are expected in 2019 together with some
sovereign Sukuk issuances by countries such as the Ivory Coast
Others 11%
and Niger, among others. More initiatives will be made in terms
of microfinance as some Islamic banks and windows prepare to
start the year. Foreign investment funds are also eyeing the Islamic
finance market in the WAEMU and there are possibilities that they
will start their activities in 2019.
Women 27%
Men 62% Conclusion
The WAEMU is a very dynamic market as it is the most prolific zone
in terms of Sukuk issuance in Africa. The Islamic ecosystem is
progressively growing with various financial institutions like Islamic
banks, Islamic windows and Islamic microfinance serving a total of
57,337 people in the WAEMU. So much has been done in 2018 and
we expect more for 2019 in terms of regulations and market
development.
Source: Author’s own

December 2018
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