More Saudi family firms in trouble

By Nadim Kawach Available at:

A severe debt problem involving two major Saudi family businesses has been caused by massive short-term borrowing and other similar groups could be suffering from such problems, said a Saudi investment centre yesterday. The defaults by Saad and Algosaibi has allied with the global credit tightness to dissuade banks from lending to the private sector and this has put further pressure on the domestic economy that is already reeling under lower oil prices, said the Riyadh-based Jadwa Investments Company.

The company said slackening bank credit has prompted it to cut down its forecast for the kingdom’s economic performance this year, expecting the real GDP to shrink by one per cent compared with earlier projection of 0.5 per cent. “The recovery of the kingdom’s economy has been hit by problems at one prominent local family business and an associated businessman. In addition to these two groups it seems that several other family groups are stressed financially,” said Jadwa in its monthly economic bulletin.

“The causes of these problems appear to be short-term borrowing for long-term assets, investment losses and the accumulation of large inventories of raw materials whose prices subsequently collapsed. Owing to concerns about the health of family business and their own exposures, banks have become more cautious in extending credit to the whole of the private sector.” It said there are links between the two families through marriage, but the extent of the business links is unclear with each side issuing conflicting statements. “The immediate causes of the recent problems are not unique to family groups. Companies worldwide that are heavily reliant on short-term borrowing have suffered from a drying up of credit from the banking sector.”

According to Jadwa, in Saudi Arabia only 22 per cent of total credit has a maturity of more than three years, while losses on investments have been widespread as the value of assets has plunged because of the global crisis. It noted that the Saad group has substantial holdings in the property and financial services sectors, which have been particularly hit. “Shortages in the first half of last year and expectations of a continuation of the economic boom encouraged some companies to stock pile, while prices were rising only for the value of these stocks to collapse as commodity prices plunged as the global financial crisis intensified,” said the report.

“Nonetheless, it seems probable that the dynamics within the two groups aggravated the problems. Both groups started based on a single business line; for Saad this was contracting and for Algosaibi it was trading. “Jadwa said over the years, the interests of those two group mushroomed and they became large conglomerates with diversified interests. It said many family businesses have followed a similar path in the kingdom, but it appears that the Saad and Algosaibi groups did not have sufficient internal controls to operate a diversified group of companies. “Due to the Algosaibi and Saad group defaults, banks have become increasingly wary about lending to all family businesses (family business account for a large part of the private sector). Other companies within the private sector are also finding it tougher to raise finance as a result,” said the study. “Availability of credit was already constrained for the private sector. Total commercial bank lending to the private sector has declined in five of the seven months to end-June and the total outstanding is over SR14 billion below its November peak. Credit to the private sector rose by 0.5 per cent in June, though the breakdown indicates that this was targeted to a few specific sectors.” Jadwa said none of the local banks have publically admitted to exposure to the Saad or Algosaibi groups, but it “seems that this runs into billions of dollars.”

“The Algosaibi group has acknowledged that it owes $9.2 billion to 120 banks across the world. Local banks have very large exposures to family businesses.” The report said second quarter results have shown that National Commercial Bank, Al Rajhi Bank, SABBS, Samba, Banque Saudi Fransiand Saudi Hollandi have increased their provisions for bad debts. “It is highly likely that other banks will do likewise in the third quarter and that provisions made during the second quarter will be raised. Nonetheless, we do not think problems at family businesses will pose a systemic threat to the banking sector owing to its strong fundamentals. Non-performing loans were just 1.3 per cent of total loans at the end of 2008 and provisions were sufficient to cover over 153 per cent of these loans,” said the study.”However, there is likely to be a reform of lending practices at commercial banks. In cases where there are long-term relationships between banks and large customers, lending standards have sometimes been less stringent than would otherwise be the case as a result of the level of trust between the parties.”

Best Regards

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  • From left, Dr. Mehmet Asutay, Profesor Kosugi Yosushi, Zulkifli Hasan, Hylmun Izhar and Professor Dr. Abdul Ghafar Ismail. Kyoto, Japan.


    Islamic finance principles to restore policy effectiveness, By Professor Willam Buiter

    Financial Times Available at:

    Further expansionary monetary policy has become rather ineffective in the overdeveloped world because banks are capital-constrained rather than liquidity-constrained and because liquidity spreads in financial markets that bypass the banks have shrunk remarkably. Remaining spreads between sovereign debt instruments and assorted private securities of similar maturities can now be rationalised quite easily as reflecting just differential default risk. Until the banks get significantly more capital on their balance sheets, quantitative easing, credit easing and enhanced credit support are examples of pushing on a string.

    The banks will take the liquidity offered and redeposit the bulk of it with the central bank again rather than lending it to the private sector or purchasing more risk financial instruments. Low official policy rates (and the expectation of the official policy rate being kept at a low level for a further significant period of time) will help recapitalise the banks. So will the quasi-fiscal subsidies most central banks have been channelling into the banking system through the favourable terms offered by the central banks to the private banks in their transactions, facilities etc., but such gradual recapitalisation through wide margins on low volumes of lending is slow and could lead to a re-run of Japan’s lost decade for much of the G7.

    Further expansionary fiscal policy is likely to be ineffective in most of the G7 countries (possibly excepting Germany and Canada). This is, first, because households are short of capital and overly indebted and, second, because any further increase in short-term fiscal deficits is likely to undermine confidence in the sustainability of the fiscal-financial-monetary programme of the state. Excessive indebtedness of households can, especially when consumer psychology swings from optimism and recklessness to pessimism, caution and prudence, give rise to a strong precautionary saving motive. Household income or wealth windfalls will tend to be saved rather than spent on consumption. Consumption or saving behaviour under such conditions is well-characterised by a simple target wealth model, with households making up the gap between target and actual financial wealth as quickly as possible, subject to a psychologically/socially determined ’subsistence’ level of consumption spending. Under such conditions, tax cuts will be mostly saved and the public spending multiplier will be disappointingly low.

    When markets begin to fear that the politics of medium-term and longer-term fiscal tightening – tax increases and public spending cuts – do not look credible, the realisation will dawn, even in the most myopic of our short-sighted financial markets, that unsustainable public debt expansions will either lead to sovereign default or will be monetised and lead to inflation in the medium to long term (starting, say, 4 or 5 years from now). The state is short of capital and overly indebted. An expected inflation premium will boost long-term nominal interest rates. An inflation risk premium may raise long-term nominal and real rates. If sovereign default cannot be ruled out (and where can it truly be ruled out with complete certainty), credit risk premia will boost long-term nominal and real interest rates as well. Financial crowding out of interest-sensitive private spending will result.

    I have left the non-financial corporate sector out of this litany of capital-deficient overly indebted sectors. I still believe that the non-financial corporate sector in North America and Europe by and large started the crisis-cum-recession season in reasonably good shape. If, however, Andrew Smithers is right, and even in August 2007 the balance sheets of many non-financial corporates in the north-Atlantic region were wonky, my argument of a general capital shortage and excessive indebtedness (and therefore of excessive leverage) would apply to every sector in the domestic economy of the north-Atlantic region.

    A possible solution: the application of Islamic finance principles through the equitization of private and public debt. If too much debt and too little capital are (part of) the problem, then the conversion of debt into equity is (part of) the solution. Capital structure or financial structure is irrelevant in a complete markets model. Indeed, the standard interpretation of the complete markets model has no financial instruments at all. There is a single grand market at the beginning of time in which contingent spot and forward contracts are traded for all real goods and services. The rest of history is simply the monitoring of the states of the world that materialise and the delivery in each period, location and state of the world, of the real goods and services contracted for at the beginning of time.

    This, of course, is crazy stuff, but a lot of economics, and even a lot of macroeconomics got stuck in that time-warp. Even without complete markets, there are other, slightly less restrictive economic models (although still quite dangerous as stylised representations of the real world) in which capital structure/ financial structure (debt, equity, retentions, dividend policy etc) don’t matter for the performance of the economy. In such Modigliani-Miller worlds, individuals or households can always undo, by changing the composition of the household financial portfolio, anything a corporation may try to do.

    For instance, if a company decided to decrease its leverage by issuing more equity and using it to buy back debt, its shareholders can neutralise this action by increasing home-made leverage, that is, by borrowing more (to buy the company’s equity). In an extreme version of the Modigliani-Miller world government financial policy (or at least the choice of debt vs. lump-sum taxes) is irrelevant as well as corporate financial policy. If the government cuts my (lump-sum) taxes and borrows instead, thus redistributing resources from my heirs (who will pay higher taxes to pay for the increased public debt) to me, I simply turn around, save my tax cut and leave the tax cut in its entirety as a larger bequest to my heirs. They use the increased bequest to pay their higher taxes.

    Again, we don’t live in a Modigliani-Miller world. Limited liability applies to firms, but not to households. Default and bankruptcy are costly processes that consume real resources. Indeed, all external or third-party contract enforcement is costly. Most intertemporal trade (and all of finance) involves time-inconsistent actions by at least one of the parties and relies on external or third-party enforcement. Self-enforcing contracts, relying on repeated interactions, reputation and private punishments or rewards are few and far between. Taxes are distortionary and don’t affect households and firms in the same way. Most household wealth (the present value of current and future labour income) is illiquid, non-tradable and cannot be collateralised – courtesy of the abolition of slavery and indentured labour. Private information and complex principal-agent problems (between shareholders, managers and workers) further undermine the Modigliani-Miller view of the world. Financial structure matters.

    Debt is a fixed commitment on the part of the borrower. Default on debt is a costly process which can be traumatic for those involved. Debt has its uses. In a world of incomplete markets and incomplete contracts and with hard budget constraints (including credible enforcement of debt contracts), debt can have a disciplining influence on managers (as agents for the shareholders in one of the corporate principal-agent relationships). When there are hard budget constraints, debt can act as a bonding mechanism because the debtor exerts additional effort to avoid the personal costs of financial distress. Of course, this only works if the budget constraint is hard. With soft budget constraints – the situation of banks that are bailed out by the tax payer when their debt threatens to go into default – debt has no incentive-improving and effort-enhancing impact on the agent.

    When the economy is in sufficiently deep dodo, debt can become paralysing: its stops socially useful expenditures and risk taking. We are likely to be in such a situation now, with much capital destroyed and with public debt about to be boosted to sustainability-threatening levels by the deficits caused by collapsing economic activity, normal countercyclical spending increases and extraordinary public sector financial rescue efforts. It is therefore time to turn water into wine or, failing that, to turn debt into equity; in some cases both the existing stocks and new flows should be equitized, in other cases only new flows.

    The equitization of bank debt

    I have on many occasions advocated the recapitalisation of banks through mandatory debt-to-equity conversions. Ideally this would occur through an expedited process of ‘insolvency lite’, through the special resolution mechanisms (SRR) that exist (or where they don’t exist ought to be created in a hurry) for banks and other systemically important institutions. Simply, the unsecured creditors of banks and similar institutions, starting with those holding subordinated debt and working up the seniority ladder until enough capital has been created, receive a letter in the mail saying: “Congratulations, you are now a shareholder. There will be no dividends or share repurchases for a while.” This is fair (certainly much fairer than making the tax payer cough up) and it is efficient, properly aligning incentives for future risk taking. The unsecured creditors have had the benefit for many years of gratis default insurance. It is time they engaged in some true risk and profit sharing.

    The equitization of mortage debt.

    Household mortgage debt could be turned into an equity claim. Many proposals of this kind have been floated in the US for quite a while now. For a new equity mortgage, the bank would start off as the owner of the property that secures the mortgage. The contract could take the following form. With a 20-year mortgage, say, the ‘borrower/tenant’ would pay the bank a rental to live in the property, plus a periodic payment transferring part of the equity in the property to the tenant, say 5 percent of the purchase price each year.

    The intial value of the equity (the purchase price) is the present discounted value value of the rentals expected not just over the 20 years of the mortgage contract, but over the entire economic life of the property. The actual rental payments would be determined by some index of local market conditions. Each period the bank would only receive a share of the total rental income from the property equal to its remaining equity share. As long as the tenant meets the terms of the contract, she cannot be forced to vacate the property. The bank could sell its share of the property (and the right to collect the rents for the remainder of the mortgage). It would have a stake in the upside (and the downside) of the property market.

    A mortgage contract of this nature (suitably modified to allow for past interest and amortisation) could be offered to existing mortgage holders who are in default on their mortgages as an alternative to repossession. It could significantly reduce the socially wasteful repossession costs, which have been estimated for the US at between $50,000 and $80,000 per property repossessed. It could also be offered as an alternative to regular mortgages for new home borrowers.

    The equitization of public debt

    How can we turn public debt into something more akin to equity? One way would be to replace regular fixed or variable interest rate bonds by a security that would have the growth rate of nominal GDP (plus or minus some fixed number) as its interest rate. With $1 million worth of 10-year debt, for instance, there would be an amortisation of $100,000 each year, unless the growth rate of GDP that year were negative. With 5 percent nominal GDP growth in the first year, interest that year would be $50,000. With minus 2 percent GDP growth in year 1, interest payments would be minus 10,000, which could be paid as a reduction in principal repayments that year to $90,000.

    This way, with government revenues and deficits so closely coupled to GDP (as a measure of the effective tax base), weak growth would reduce the expansion of the public debt through the intrinsic debt dynamics that comes out of the product of the interest rate and the outstanding stock of debt.

    Argentina issued GDP growth warrants of this kind following its latest debt default in 2002. Of course, this could only work if the statistical office in the country were independent of the government and did not fiddle the GDP growth data to minimize the government’s interest burden. A way to handle the long-lasting stream of GDP revisions would also have to be found, but such technical problems can surely be overcome. Even without fiddling the data, the fact that the growth rate of nominal GDP is, within limits, controllable by the government, could create worries about adverse incentive effects on the borrowing government. It is, however, hard to imagine a government that would slow down the growth rate of its economy just to reduce the interest rate on its debt.

    This form of risk-sharing between the borrowing government and the investor would seem to be of interest not just in crisis situations but more generally. New government borrowing could take this form even for governments of undoubted fiscal rectitude. Governments threatened with the prospect of having to default on their debt because of unexpected weakness of GDP could try to restructure existing debt by offering to swap it, at a discount, for GDP growth warrants of the kind described earlier.


    Debt, characterised by fixed financial commitments, can be a poor financing choice in a risky, uncertain world where the private and social costs of default are high. Many distortions, often created by policy makers, have contributed to the excessive use of debt in the private sector. There is the nonsense that (nominal!) interest is a deductible cost in the calculation of taxable corporate profits in many countries, but that dividends or retained earnings are not deductible. The deductibility of residential mortgage interest in the personal income tax system of many countries (although not in the UK) is another obvious distortion. While it is true that, in the presence of asymmetric information, certain agency problems can be mitigated if companies issue debt (as long as there are hard budget constraints), the highly leveraged state of many households, financial institutions and governments today would appear to be undesirable, preventable and remediable.

    What we need is the application of Islamic finance principles, in particular a strong preference for profit-, loss- and risk-sharing arrangements and a rejection of ‘riba’ or interest-bearing debt instruments.

      “I am not talking here about the sham sharia-compliant instruments that flooded the market in the decade before the crisis; these were window-dressing pseudo-Islamic financial instruments that were mathematically equivalent to conventional debt and mortgage contracts, but met the letter if not the spirit of sharia law, in the view of some tame, pliable and quite possibly corrupt sharia scholar. I am talking about financial innovations that replace debt-type instruments with true profit-, loss- and risk-sharing arrangements”.

    Mandatory debt-to-equity swaps for the banking sector, conversion of defaulted residential mortgages into equity-sharing instruments for banks and households (possibly for the old stock as well as for the new flow), and the replacement of traditional government debt by GDP growth warrants and similar social risk-sharing instruments could enhance both the ex-ante incentives for risk taking and the ex-post capacity of our economic system to respond to shocks.

    Author: Professor Willem Buiter is a Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions.

    Best Regards

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  • Nijo Castle (Built by Shogun Tokugawa Ieyasu, founder of the Edo Shogunate in 1603), Kyoto, Japan

    Dubai Islamic Bank Q2 falls 40% and Commercial Bank of Kuwait Q2 net loss at $8.2 mln

    Available at,

    Dubai, (Reuters) – Dubai Islamic Bank posted a net profit of 450 million dirhams ($122.5 million) in the second quarter, down 40 percent from a year earlier but better than analysts’ forecasts. The bank, one of the largest Islamic lenders in the Gulf Arab region, said in a statement on Saturday half-year profit stood at 820 million dirhams. Analysts surveyed by Reuters had forecast earlier this month that the bank’s second-quarter profit would fall between 53 and nearly 67 percent. [ID:nL697302]

    The bank said it took a provision of 135 million dirhams in the second-quarter, which is less than amounts announced by several regional banks hit by losses on loans. “The bank’s total impairment provision for first half of 2009 now stands at 239 million dirhams. This reflects a prudent and conservative approach during a period of marked global financial instability,” the statement said. DIB said last month it had no exposure to troubled Saudi conglomerates Saad Group [SAADG.UL] and Ahmad Hamad Al Gosaibi Group & Brothers.

    The bank’s investment and financing assets fell to 50.7 billion dirhams from 52.6 billion dirhams at the end of 2008, the statement said without elaborating. Total assets rose 3 percent to 87.8 billion dirhams in the same period. “As we begin to see gradual stabilisation of the markets in the past quarter, DIB is optimistic of the recovery of regional markets,” Chairman Mohammed al-Shaibany said in the statement. “The bank’s financing-to-deposit ratio stood at 71 percent as of 30 June 2009,” it said, adding this “reflects the bank’s conservative credit policy as well as a strong liquidity position.”

    On July 7, Standard & Poor’s Ratings Services lowered its long-term counterparty credit rating on DIB to ‘BBB+’ from ‘A-‘ with a negative outlook but affirmed the ‘A-2′ short-term counterparty credit rating on the bank. S&P said it expected a decline in the real estate sector in Dubai to put pressure on DIB’s asset quality and profitability, adding the negative outlook reflected it expectation of a weakening of DIB’s financial profile. Established in 1975, Dubai Islamic Bank is one of the oldest players in the fast-growing Islamic banking sector. (Reporting by Firouz Sedarat).

    Available at:

    KUWAIT, (Reuters) – Commercial Bank of Kuwait (CBKK.KW) (CBK), the country’s third biggest lender by market value, made a 2.34 million dinar ($8.15 million) loss in the second quarter on provisions, according to Reuters calculations. Net profit for the first half came in at 800,000 dinars, the bank said in a statement on Saturday without giving quarterly figures. Reuters calculated the second-quarter loss based on financial data which showed the bank made 3.14 million dinars net profit in the first quarter of this year and 36.4 million dinars profit in the second quarter of 2008.

    “Commercial Bank of Kuwait has reported a profit before provisions of 66.9 million dinars and, after the bank’s board of directors has allocated provisions against the loan and investment portfolios, the net profit is 0.8 million dinars,” the bank’s chairman Abdulmajeed al-Shatti said in a statement. CBK had a total of 256.2 million dinars of loan provisions in the first half of the year, the statement said. On Friday, Fitch Ratings said Kuwaiti banks, including CBK, were coming under increased stress due to contraction in the local economy and exposure to risky asset classes which would affect their profitability.

    “Kuwaiti banks’ exposure to risky asset classes is significant, with over half of the banking system loan book exposed to potentially risky sectors of the economy, including investment companies, real estate and construction, and lending for the purchase of securities,” Fitch said. Shatti said in the statement that despite government steps to support the local economy, the “outlook remains uncertain.” In March, Shatti said 2009 would be a difficult year and that CBK may take provisions to weather the global downturn. Earlier this month, National Bank of Kuwait (NBKK.KW), the country’s largest, posted a 32.7 percent fall in second-quarter net profit on provisions and a fall in the value of investments. Kuwait Finance House (KFIN.KW), the Gulf’s second largest Islamic lender, has posted a 61 percent fall in second-quarter net profit on provisions as the global crisis hit Kuwaiti banks.

    OPEC member Kuwait has been hit hard by the financial crisis. The government had to step in to save Gulf Bank (GBKK.KW) last year, the only major bank in the Gulf Arab region requiring a government bailout, while several major Kuwaiti investment firms are struggling to meet debt requirements. CBK’s total assets amounted to 3.7 billion dinars at the end of June, while shareholders equity stood at 451.5 million dinars, the bank said. (By Rania El Gamal and editing by Firouz Sedarat)

    Best Regards

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  • INTERNATIONAL WORKSHOP IN ISLAMIC ECONOMIC, BANKING AND FINANCE, 8th-9th JULY 2008, Jointly organised by Durham Islamic Finance Programme, Durham University and Center for Islamic Area Studies at Kyoto University, KIAS, Japan; and Global COE Program: In Search of Sustainable Humanosphere in Asia and Africa, Japan.

    Commentaries on the IFSB Exposure Draft Guiding Principles on Shari’ah Governance System


    Dear Readers,

    It has been quite sometimes I do not share any of my writings or thoughts. I take this opportunity to share with you my commentaries on the IFSB Exposure Draft Guiding Principles on Shari’ah Governance System issued early this year. This exposure draft has already been tabled to the Shari’ah Board of the Islamic Development Bank and now in the process of revision. The revised draft shall be referred to the Shari’ah board for endorsement of its Shari’ah compliance and then be referred to the technical committee for discussion and amendment. It is expected that this Guiding Principle will be ready by end of this year. Enjoy reading!

  • Commentaries on the IFSB Exposure Draft Guiding Principles on Shari’ah Governance System
  • Best Regards

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  • International Conference on Endowment and Minor Affairs, Dubai, United Arab Emirates

    Five former senior officials from the Islamic Finance Company have been sent to prison.

    By Andy Sambidge (

    Five former senior officials of an islamic finance firm have been jailed after being found guilty of charges including breach of trust and the violation of the commercial law of the UAE and embezzling AED423m. The Abu Dhabi Court of First Instance sentenced Ali Hamel Khadem Ghaith Al Ghaith Al Kubeissy, the ex-chairman of Islamic Finance Company to three years in jail, news agency WAM reported on Sunday.

    Abdullah Saeed Abdullah Al Kubeissy was jailed for two years and board members Al Al Walid Bin Hamad Al Mubarak, Eissa Shamlan Eissa Al Shamlan and Ghaith Hamel bin Khadem Al Ghaith Al Kubeissy were sentenced to one year in jail each. The court indicted them for “breach of trust, mis-assessment of shares with bad faith and violation of the commercial law of the UAE”, it was reported.

    Established in October 2006 with a paid up capital of AED1 Billion, the Islamic Finance Company’s objective was to provide a comprehensive range of Islamic financial solutions as well as asset management services. The court found Ali Hamel Khadem Ghaith Al Ghaith Al Kubeissy guilty of “wasting” AED423m in addition to other amounts. He also misused the power of attorney granted to him illegally while the court also established that the accused did not record minutes of the board meetings in violation of the law, WAM reported. The UAE ministry of economy had filed an official complaint against the five defendants, requesting that Dubai Public Prosecution conduct urgent investigations.

    Best Regards

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  • With Dr. Humayon Dar, CEO of BMB Islamic.

    Integration Of Islamic Finance Should Be Facilitated Across Jurisdictions

    KUALA LUMPUR, July 8 (Bernama)

    The international integration of Islamic finance should be facilitated by the mutual recognition of financial standards and products across jurisdictions, said Bank Negara Governor, Tan Sri Dr Zeti Akhtar Aziz on Wednesday. It is one of the most important factors in sustaining the internationalisation of that sector,” she said in her address at the Malaysia-United Kingdom (UK) Islamic Finance Forum held here. She said that there had already been the progressive convergence of Shariah views and rulings, and the mutual recognition of financial standards and products across jurisdictions.

    “As this continues to occur, it would be a major driver towards greater international financial integration,” she added. “This convergence and harmonisation is taking place with greater engagement among the regulators, practitioners and scholars in Islamic finance across jurisdictions,” she highlighted.

    The Lord Mayor of the City of London, Alderman Ian Luder also attended the one-day forum, organised in collaboration with the Commonwealth Business Council. Luder was leading a business delegation representing UK-based financial and professional services firms to Malaysia, for three days from Tuesday.

    According to Zeti, the UK and Malaysia had one of the oldest relationships which has been dynamic while evolving in the rapidly changing international environment. “The bilateral trade in goods between both Malaysia and the UK only accounts for 1.4 percent of our total trade. But Malaysia’s bilateral trade in services with Britain accounted for 6.3 percent of our trade in services in 2008. “While the balance of trade is in our favour, the balance in the services account is in favour of the UK, amounting to RM2.3 billion,” Zeti said. Meanwhile, Zeti said Islamic financial assets comprised 17 percent of the total assets of the banking system in Malaysia and the daily average volume transacted in the Islamic money market was RM6 billion. The sukuk market, which has been expanding at an average annual rate of 22 percent, now accounts for more than 50 percent of the Malaysian bond market, she stated.

    Best Regards

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  • Burj Arab, Dubai, UAE

    First Islamic bank in Australia?

    MCCA announces Islamic bank ambition

    By Alison Bell Available at

    Local Islamic banking co-operative, the Muslim Community Co-operative (Australia) Ltd (MCCA) is confident of securing a banking licence in three years to become Australia’s first Islamic bank. MCCA managing director Chaaban Omran said the co-operative would work with the Australian Prudential Regulatory Authority (APRA) to transition its current registrable superannuation entity (RSE) licence into a banking licence.

    “We are (currently) regulated by ASIC (the Australian Securities and Investments Commission) and are the holder of a RSE licence. “The way the supervision will work will be a modification of that particular licence,” Mr Omran told business leaders at an Islamic banking and finance conference in Melbourne. “If we get enough momentum from the industry it may be less than three years,” he said. In four years MCCA plans to have a presence in the investment banking sector, he said.

    MCCA was established in 1989 and provides property finance and is now setting up a superannuation investment mandate and plans to build funds around that mandate. “The investments are the most critical thing for us,” Mr Omran said, adding that MCCA was also planning to launch a range of equity investment funds.

    “We have a lot of challenges. Apart from capital requirements, there are issues to do with how we manage cash for example because APRA requires a certain level of funds to be invested. r Omran said there are around 500,000 Australian Muslims forming a market worth $1.3 billion.

    MCCA complies with Shariah Islamic law that prohibits all forms of interest charges. Islamic banks are governed by a supervisory board of Muslim clerics to ensure compliance with Shariah law as well as banking regulations in the countries in which they operate.

    Islamic finance does not recognise the concept of caveat emptor (“let the buyer beware”) in which risks can be transferred to unsuspecting buyers of products and services, says PricewaterhouseCoopers’ head of Islamic finance, Mohammed Amin. Shariah-compliant finance is innovative, ethical and has been tried and tested throughout the centuries, Mr Omran said. “We’re not dealing with a new concept. The only difference is that the awareness has not been raised in Australia.”

    Best Regards

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