Sum of USD350 billion lost by Gulf sovereign funds: UN Report

Available at: http://topnews.ae/content/2811-sum-350-bln-lost-gulf-sovereign-funds-reports-un

A latest UN report has specified that the global financial crisis has had an adverse affect on Sovereign wealth funds (SWFs) of four oil-exporting Gulf States, as they lost nearly 350 billion dollars last year. But it should be noted that after the funds of Saudi Arabia, Kuwait, Qatar and Abu Dhabi received enormous returns from oil income from the government, they almost maintained their total asset value at the end of 2008.

The United Nations Conference on Trade and Development (UNCTAD) said in the report dubbed World Investment Report 2009, released last week, “Assets held by the four Gulf funds dropped to 1.115 trillion dollars last year from 1.165 trillion dollars at the end of 2007 and those government injections of 300 billion dollars helped narrow their losses.” The most affected was the Abu Dhabi Investment Authority (ADIA), which lost nearly 183 billion dollars, from the 453 billion dollars that it had in 2007. However, the fund was able to end last year at 329 billion dollars, as the government pumped 57 billion dollars in it.

A sum of 94 billion dollars was lost by Kuwait Investment Authority (KIA), from 262 billion dollars it held at the end of 2007. But since the Kuwaiti government injected 59 billion dollars into the fund, it (fund) was able to stand at 228 billion dollars at the end of last year. The report said, “Qatar Investment Authority (QIA) lost 27 billion dollars and ended at 66 billion dollars in 2008, while Saudi assets, run by the Saudi Arabian Monetary Agency (SAMA), valued at 501 billion dollars at end-2008, shed around 46 billion dollars.”

It should be noted that till date, Gulf SWFs have never revealed the size of their assets nor losses. The UNCTAD report described Gulf SWFs as becoming more proactive investors in recent years, along with entering riskier investments and targeting strategic holdings in international companies. UNCTAD said, “The recent collapse of real estate and equity markets has generated large losses for SWFs, but it also offers investment opportunities.”

Due to this, some Gulf SWFs have become apprehensive about investing abroad. Instead, they are now investing in domestic economies. Over 13 million barrels of oil is pumped by the four Gulf states per day, just under half of total OPEC production of around 29 million bpd.

Best Regards
ZULKIFLI HASAN
DURHAM, UK

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    Only 1 in 4 Malaysia Federal Territories companies pay business zakat

    By Habhajan Singh Available at: http://www.themalaysianreserve.com/SubPage.asp?pageid=6&eventid=934

    Some 4,000 companies registered in the Federal Territories (FT) are eligible to pay business zakat estimated around RM46 million, but at the moment only one in four are fulfiling their zakat obligations. Pusat Pungutan Zakat (PPZ) MAIWP, the body entrusted to oversee the collection of zakat in the FT, has set its sight on reaching out to these eligible corporations to encourage them to fulfil their zakat obligations. PPZ, established by the Federal Territory Islamic Religious Council, is better known locally by its Malay acronym MAIWP, and began operations in 1991. It practises a corporate style of management combined with a computerised collection system, proactive marketing and customer-oriented approach.

    In a recent interview, PPZ general manager Mohd Rais Ali identified reaching out to the board of directors of these eligible corporations as one of its challenges in the coming years.
    He said that an internal survey showed that there are 43,266 companies registered in the FT, which covers Kuala Lumpur, Putrajaya and Labuan. Out of this, it identified 13,055 companies with Muslim shareholders to be eligible to pay business zakat. In 2008, 1,060 companies paid zakat on business. “That’s only 27%. If all companies pay (business zakat), PPZ can collect RM45.92 million,” he told The Malaysian Reserve. Zakat on business is levied at the rate of 2.5% on the zakatable assets of a business, which include the value of the net current asset and the short-term investment as shown in the balance sheet. Last year, total collection for zakat nationwide was RM1.03 billion, with PPZ collecting RM206 million. Besides business zakat, the other types of zakat include zakat on income, savings, shares, gold, crops, livestock and self (zakat fitrah). PPZ’s business zakat amounted to RM28.7 million in 2008.

    On the payment mode, Mohd Rais said that zakat through salary deduction is the most popular means and it contributes to about 70% of the organisation’s collection. “It’s almost a fixed income (for us). We get some RM12 million from about 40,000 payers annually. Of course, the 20-80 pareto rule applies here, as well,” he said. The pareto principle, also known as the 80-20 rule, states that, for many events, roughly 80% of the effects come from 20% of the causes. Business management thinker Joseph M Juran suggested the principle and named it after Italian economist Vilfredo Pareto, who observed that 80% of the land in Italy was owned by 20% of the population. When dealing with PPZ, he said most employers now bank in direct their zakat payments, making the transaction cashless.

    PPZ, set-up via a company named Hartasuci Sdn Bhd, is placed under a foundation cal led Yayasan Taqwa Wilayah Persekutuan and is controlled by MAIWP. Its basic responsibilities are to collect zakat for the council and raise zakat awareness amongst Muslims. Since its inception, PPZ has experienced many changes and improvements in its administration by passing bureaucratic procedures as well as adopting a customer-oriented and pro-active marketing approach. “We provide multiple channels for people to fulfil their zakat requirements. Since 1991 until now, we have introduced various modes of collection. We have, for example, zakat through salary deduction and cheques. “At on time, you had to personally go to Baitumal Malaysia offices. Today, you can walk into any bank branch or post office to make the payment. We have also started kiosks at selected mosques,” he said. PPZ’s board of directors, chaired by Datuk Mustafa Abdul Rahman, includes Datuk Che Mat Che Ali, Dr Sohaimi Mohd Salleh and Dr Didi Indra Tjahja. Some of senior management team members are Abdul Hakim Amir Osman (operation manager), Mohammed Hassan (assistant operation manager), Azhan Ismail (finance, investment & development manager) and Azrin Abdul Manan (management & human resource manager).

    Best Regards
    ZULKIFLI HASAN
    DURHAM UNIVERSITY, UK

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    Happy Eidulfitri 1430H

    Assalamualaikum,

    Dear Readers,

    I would like to take this opportunity to wish all of you Happy Eidulfitri! Maaf zahir dan batin! Please apologize for any wrongdoings or anything I have said that offended to anybody. I pray to Allah the Almighty for His blessings and may He grants us an opportunity to meet Ramadhan next year. Aaminnn.

    Best Regards
    ZULKIFLI HASAN
    DURHAM UNIVERSITY

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  • Gold Souk, Dubai, United Arab Emirates

    Benign Islamic Finance

    This article is a response by Lorne Cutler (http://network.nationalpost.com/np/blogs/holy-post/archive/2009/08/28/shariah-finance-a-zero-sum-game.aspx) to Dr. Sebastian Gorka’s assertion on his article in Holy Post entitled Shariah finance: A zero-sum game, in August 28. Click here: http://network.nationalpost.com/np/blogs/holy-post/archive/2009/08/28/shariah-finance-a-zero-sum-game.aspx Dr. Sebastian Gorka is military affairs fellow with the Foundation for Defense of Democracies in Washington, D. C., and associate fellow with the Joint Special Operations University, Florida.

    Islamic or shariah-compliant financing is becoming increasing popular, both in Muslim countries and Western countries with large Muslim populations. It was therefore quite a surprise to read Dr. Sebastian Gorka’s assertion (Shariah finance: A zero-sum game, Aug. 28) that the primary reason for Islamic financing is to funnel funds into political and military Jihad to destroy the West. This is based on Dr. Gorka’s view that Islam doesn’t actually prohibit interest, only usury, and as such Islamic banks have really been established to fund jihad with the prohibition of interest really being a ruse.

    This is equivalent to saying that the real reason for conventional interest-based banking is to launder money for organized crime. Leading Western banks such Citibank, HSBC, Deutschebank and ABN-Amro have opened up Islamic subsidiaries. It is hard to believe that they would knowingly funnel money to terrorist groups.

    At one time, Christianity and Judaism also considered interest as usury and prohibited it. This was at a time when lending was considered taking advantage of the poor. The poor would borrow money to pay off debts of servitude. Any interest added to the burden of the poor was considered usurious. Gradually, however, capital was required in the creation of real wealth. Charging interest was no longer taking advantage of the poor but a critical tool in creating wealth and raising standards of living. While Christianity and Judaism changed their views regarding interest, Muslim scholars did not.

    Each Islamic bank has a panel of three Islamic scholars who opine on whether something is shariah-compliant. These panels can only determine what constitutes shariah-compliant financing, not whether the structure complies with the laws of the country, and they have no authority to act against the country’s law.

    There are international agreements prohibiting banks from money laundering and funding terrorist groups. If required, existing international agreements can be modified to ensure Islamic banks are governed by these agreements if they aren’t already. If certain banks don’t abide by these rules, Western banks will be prohibited from working with them. Canada’s criminal code also makes it an offense to support terrorist groups. If a religious scholar advising a particular Islamic bank also preaches jihad, regulations could be established to prevent our banks from dealing with that bank. Islamic banks would be subject to the same regulations and supervision as are conventional banks.

    Interest is a merely a tool, not a fundamental Canadian or Western value. If certain groups have problems charging interest, there is nothing inherently wrong in setting up financial institutions that can provide funding in a way that does not abrogate religious principles. Our existing and future banking laws and regulations can protect us against the risk of a bank engaging in illegal activities.

    Best Regards
    ZULKIFLI HASAN
    DURHAM UNIVERSITY

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  • Desert Safari, Dubai, United Arab Emirates

    Supervising Islamic Finance

    Available at: http://www.aawsat.com/english/news.asp?section=6&id=18054

    By Lahem al Nasser

    Riyadh, Asharq Al-Awsat-Since its emergence, Islamic banking has never been subjected to any kind of independent supervision with the exception of supervising itself and that of [Islamic] Shariaa bodies that observe its activities and the tools and products of Islamic banking and its institutions. The supervisory bodies that oversee financial corporations, such as central banks, market authorities and the bodies supervising insurance have paid no attention to this, either because they want to avoid double standards or because they are unaware of the importance of a supervisory body and of the need for standards to govern such an industry and its institutions. Those who passed laws with regards to this industry did not activate them, and they were more like ineffective instructions rather than laws.

    This is because those in charge of supervisory bodies were unaware of the substantial and perhaps radical differences between the Islamic banking industry and conventional banking. Most of these people were conventional bankers who had no previous experience in the field of Islamic banking. Moreover, they had no incentive to learn, as they were in strong positions in the sense that they were the ones to enact, and at the same time, supervise the laws. They alone can solve or further complicate matters.

    In addition, Islamic banking was not as wide spread as it is today and people were not forced to deal with it. However, as the influence of this industry has increased recently and has expanded so much that it has become a dominating feature of some financial institutions and their products in some countries, it will force the officials in charge of supervisory bodies to review their positions and to strive towards learning about the secrets of this industry and towards studying it carefully so that they can supervise it more effectively.

    As some Asian and Western cities, London in particular, seek to attract the finances of Islamic banking and its institutions in order to become the financial capital of this industry, the Islamic banking industry took on an international dimension after having been immersed in localism. After the emergence and intensification of the global financial crisis and after the Western world in particular realised that the Islamic banking system and its institutions could help the world out of the crisis, several systematic and advanced markets opened up to this industry. Such markets do not allow any kind of activity unless proper laws are enacted and proper mechanisms of supervision are ensured so as to guarantee risk control and good management. These countries have sought to pass laws that are suitable to the characteristics of such an industry and to create an effective supervisory system to monitor it.

    With the risks of this industry being brought to light, such as the risks entailed in the settlement of Sukuk and the fact that several financing operations of some struggling companies are Islamic finances, this still gives rise to disputes between banks, these companies, Sukuk bearers and issuers. Due to the lack of clear rules and specialized courts necessary for this industry, there is no doubt that such disputes would be prolonged, which would affect the interests of the parties involved, especially banks and Sukuk bearers who would be highly affected by any delay in judgment and in obtaining their rights in such cases.

    All these combined elements are now putting pressure on the founding Islamic countries to deal with the Islamic banking industry in a different manner so that this industry is acknowledged, proper laws are enacted, effective supervisory bodies are formed for risk control, accounting policies are legislated to ensure proper transparency and so that a fair judicial system is set up to preserve and give people their rights in the quickest and easiest way possible. This will make Islamic banking and its institutions a significant source of development for these countries and also a factor of financial strength after having been marginalized for a long time by the supervisory bodies in these countries, causing the finances in these countries to head towards other advanced markets that can guarantee a sound legal environment. As a result, these countries were deprived of that industry’s finances that would have contributed to the development of these countries by making the appropriate finance available for the infrastructure of these countries and contributing to financing the private sector and creating suitable job opportunities for their people. Providing the appropriate supervision of any industry is enough to protect it and ensure its development and the Islamic banking industry is in dire need of supervision to protect it against itself and to ensure its development.

    Best Regards
    ZULKIFLI HASAN
    DURHAM, UK

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    National Shari’ah Board versus Bank Shariah Boards

    Available at: http://www.opalesque.com/OIFI112/Discussion_Board_Country_versus_Boards405.html

    “There are growing calls from within the industry to establish country –specific Shariah boards that complement bank-specific Shariah boards. Is this just another layer of costs (for investors to bear)? How is the role of Shariah advisors and advisory companies evolving in this context? How can the industry simultaneously encourage plain vanilla solutions (i.e. standardized and/or cost effective) as well as innovative structures (i.e. intellectual capital and/or black-box)? Is there a middle-ground?”

    Sh. Faizal Manjoo, Lecturer in Islamic Law & Finance, Markfield Institute of Higher Education

    It depends on the size and nature of the business. In countries like Mauritius (which has a very small Muslim market) the Bank of Mauritius guidelines allow for a Central Shariah Board under the auspices of the Bankers Association. The banks that need the SSB will pay for the service and employ them on an ad hoc basis or on a retainer basis. This helps mitigate costs. This is a model that can be emulated by other countries, provided there is confidentiality and that Shariah governance from the SSB prevails.

    In the case of large IFI’s, it is preferable to have their own SSB, because quite often a prompt strategic decision and approval is needed. This is more appropriate for private banks where they often develop products for individual clients, so a bank-specific SSB may help in this instance. The main point to consider is that there are two markets: the local and the international markets. If we talk of the local market then there is no problem having local scholars on the SSB, but when dealing on the international level the whole scenario changes. The Shariah Board will need to have greater product knowledge and recognition at the international level (not just country-wise).

    Usually large banks will opt for their own SSB. There are some companies mushrooming to provide such services which are successful, but others are finding it difficult to break through the market. The number of clients who would need such a service is limited and also it is very difficult to have a company having all the expertise needed to cover the full spectrum of clients/products. Another issue is who is approving the products for clients and issuing the fatawas? The number of Shariah scholars having world reputation is limited and it is unlikely that such a small group will sit on the Shariah boards of all these advisory companies.

    Yes it is possible to have plain vanilla solutions. In fact the prophetic tradition is clear “religion is easy/simple”. It is the modern financiers who want to complicate Islamic products with SPV’s, Swaps etc to avert risks (which they ought to take in a pure Islamic legal context). For example, we have instances in Bahrain where there is undergoing work regarding standardized contracts, with similar work available thru the State Bank of Pakistan. These can be used and adapted to one’s needs. Also there are the AAOIFI Standards which can be a good platform to develop plain and straight-forward products as everybody in the industry can acquaint themselves to these standards if they wish. However, this will apply mostly for retail products or takaful where there are one-off products that don’t require redesigning every now and then. In the case of private banking or highly engineered products for specific clients this approach would not work. Presently it is difficult to synchronize the industry due to lack of regulation and proper legal framework. It will take some time to reach the level of uniformity to satisfy the industry as a whole.

    Prof Mahmood Faruqui, Senior Advisor, Bank Of London and the Middle East Plc

    National Shariah Board: It must be established and maintained under the aegis of the Banking Regulator. Thus, those regulators are excluded which are designed to be insulated against Shariah e.g. UK, Singapore, Hong Kong, some countries in the GCC, or France. Even where a form of National Shariah Council exists e.g. Malaysia, Pakistan, Sudan, some units of GCC; its role could vary on a wide spectrum: It may be restricted to oversight of ‘fit & proper’ personnel & Processes of Shariah approvals in the individual IFIs, or it could extend its authority – & accountability – to approving products of, or issue binding guidelines to, individual IFIs under the banking regulator.

    Costs: An IFI does need a Shariah Committee/Board to approve its specific transactions. A National Body may facilitate domestic & possibly regional harmonization. The problem with National, in addition to IFI-specific, Boards is not so much costs as adding bureaucracy, and considering impact of various views i.e. AAOIFI, Fiqh Academy or ISRA, or IFSB before finalizing the National View.

    Shariah Advisory Companies: Those which have reputable professionals in Fiqh & Western Laws do add efficiency and assist in innovation, because they can simultaneously interact with Shariah Scholars and Lawyers. Shariah approval gives comfort on sanctity, and Counsel’s opinion gives comfort on enforceability, of the specific transaction. However, if the Company is an entrepreneur competing on Costs and perhaps Shariah arbitrage, then its business aspirations may outweigh other considerations.

    ‘Plain Vanilla’ or ‘black box’ products: Both. The bread & butter plain vanilla products provide volume and territorial coverage. It also subsidizes research & development. What was exotic in 2002 is plain vanilla today, not just in Shariah compliance but e.g. computer software!

    Dr. Muhammad Qaseem, Country Head, Shari’a Department, Dubai Islamic Bank

    The Shari’a Boards at national level will not only complement the bank-specific Shari’a boards, but will also provide a forum for properly regulating the industry at the national level and ensuring compliance by all the players. The National Shari’a Board would have a policy making and general oversight role to ensure Shari’a compliance of the products and practices of Islamic financial institutions; and will not be involved in their day-to-day activities as the bank-specific Shari’a advisors or boards are; so the roles are complementary and not overlapping. Further, it would be a dispute resolution body between the IFIs managements and their Shari’a advisors/boards.

    Since the cost of the national Shari’a Boards will be borne by the State/Central Banks, it will not add another layer of cost on the part of the investors. While the plain vanilla products have been accepted and are being practised by all, there is no bar on innovation and new structures. However, new structures have to pass the scrutiny tests of other stakeholders and be fine-tuned to serve the interests of the industry.

    Ehsan Waquar, Member Shariah Committee/Manager Shariah Compliance, Emirates Global Islamic Bank

    The basis of the success of Islamic finance is the suppleness of the Shariah law, as it accommodates the glitch by providing an alternative solution that provides the desired objective without compromising on Shariah limitations. And I suppose this is the magnificence where no man-made law can have such an immense adaptability.

    There has been a constant debate regarding the standardization of agreements, standards and regulations. I personally think that the people who talk about standardization are misguided about the versatility of Shariah law. They want to condense the clouds in a droplet and that is not possible at all. Yes the thing required is to harmonize and regulate the industry by a strong, vigilant and expert group of people supporting and assisting the regulators. Once the supervision is effective, it will consequently bring harmony that will lead to standardization of the system. There will be less of irregularities, and gradually over a period of time it will develop a data that will create precedence for the industry

    There has been an overwhelming demand in the industry throughout the globe that such verdicts, deliverables that are said to be Shariah Compliant, must be recognized and regulated unless those turn to be a constraint and a challenge. Introducing a regional or country level Shariah Board is a step ahead towards the debate discussed above. Yes this will at times incur a cost that will be borne by the investors, but think in the broader perspective that an opportunity availed in the short term may not be an opportunity in the long term rather that might be a stigma for the future transactions and investments. So a minute financial burden at this stage will secure a financial arena for the lucrative future to come.

    There has been a very strong view that advocated the complete standardization of Islamic transactions. There are many examples of standardization of contracts in various industries, and in financial trading. There has been standardized master agreement, such as agreements developed by the International Swaps Dealer Association (ISDA).in the past there has been efforts by the International Swaps and Derivatives Association (ISDA) and the International Islamic Financial Market (IIFM) to initiate development of master agreement for documenting privately negotiated Shariah compliant derivatives transactions. The fundamental idea behind this standardization is that the investors are able to incorporate reference definitions contained in the standards, saving costly, timeconsuming and peculiar Shariah opinions, resulting in lowered transaction costs and increased transactional efficiency. But I will just add to the last conclusion that when structuring any conventional financial transaction, its documentation does not diminish the legal advisors role despite the fact that the conventional financial system has been prevailing for centuries, then how can we ignore the necessity of the Shariah experts while structuring Shariah Compliant transactions?

    This step, I assume, will broaden the framework of vanilla structures, thus more products will fall into a vanilla structure category. However this will not lessen the importance of innovation through hybrid structuring and bundling and unbundling of products and services.

    Best Regards
    ZULKIFLI HASAN
    DURHAM, UK

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