Islamic finance seems overwhelmed by scholar reforms

Analysis: Islamic finance seems overwhelmed by scholar reforms

By Liau Y-Sing and Frederik Richter Available at:

KUALA LUMPUR/MANAMA (Reuters) – Islamic finance is toughening supervision of its powerful religious advisers as shareholders worldwide demand increasing accountability from directors, but key reforms may do little to boost independence and transparency.

Islamic banking is overhauling rules that govern the conduct of its influential sharia advisers, with competition for investor dollars and a growing market putting pressure on the once-arcane industry to adopt clearer, more uniform guidelines.

Key to these challenges is the small number of scholars advising a growing number of banks on increasingly complex financing structures, raising issues such as transparency of rulings, independence of advisers and how to groom new scholars.

But varying sharia standards, different regulatory approaches and vast disparities in development across markets stand in the way of reforms to streamline and boost supervision, which are critical to growth.

“Investors want to see the same degree of responsibility and professionalism going into sharia compliance as they expect from Moody’s for credit ratings and S&P for market information,” said John Sandwick, a Geneva-based Islamic asset and wealth manager.

Sharia advisers control the reins of the $1 trillion industry through their rulings on whether financial products satisfy Islamic law. Their role has been in focus following a recent attempt by Kuwait’s Investment Dar (TIDK.KW) to challenge its sharia board’s decision.

Bahrain-based industry body AAOIFI is drafting rules to regulate sharia scholars’ shareholdings in banks and address concerns such as the number of sharia supervisory boards on which a single scholar can effectively serve.

The International Sharia Research Academy for Islamic Finance, which is backed by Malaysia’s central bank, is planning a global regulatory body for sharia advisers.

“This is a step too soon,” said Ayman H. A. Khaleq, a partner and Islamic banking lawyer at Vinson & Elkins in Dubai, referring to the proposed global authority.

“I don’t know how you’re going to convince all governments that this is the best approach. Without convincing governments, how are you going to give teeth to that association?


Sharia scholars, typically experts in Islamic law and international banking practices, are now subject to differing levels of supervision across the jurisdictions but experts think this model cannot sustain the industry’s growth.

“Each industry player will come up with their own conflict avoidance and confidentiality provisions and you may find that some banks have higher standards than others so we will see issues in the future if we’re not able to regulate well at this point,” said Rafe Haneef, HSBC Amanah’s managing director for global markets.

Reflecting the industry’s diversity, Middle Eastern countries like the United Arab Emirates leave regulation to the industry whereas Malaysian authorities assume centralized control through national sharia advisers and dedicated Islamic banking laws. Practitioners agree on the need for more supervision but differ on the scope of oversight needed.

Best Regards

  • Malaysia Embassy, Bosnia and Herzegovina


    Islamic banking and finance in Bosnia and Herzegovina

    Bosnia and Herzegovina might not be considered a heartland of the Ummah, but Islamic banking has nonetheless established itself there, as Professor Rodney Wilson reports

    Available at:

    As Europe’s only state with a Muslim majority, the potential for Islamic banking and finance in Bosnia and Herzegovina would appear promising. In practice, the spread of Islamic banking has been limited, despite the enthusiasm of the Muslim community to undertake their financial transactions in a Shari’ah compliant manner.

    Much of the explanation for the failure of Islamic finance is political, given the continuing tensions between the different ethnic and religious groups, despite the ending of the civil war and the Dayton Peace Accords.

    However, it is also economic, legal and financial, given the small size of the economy, the existing banking law, uncertainties over property rights and the fragmented nature of the financial system.

    However following a seminar on Islamic banking and finance sponsored by Bosnia Bank International on 8 May, attended by government ministers, including the Prime Minister, Minister of Finance and Central Bank Governor, their appears to be a new commitment to take the agenda for Islamic finance forward. It was stressed that it provides opportunities for the Muslim majority, but does not in any way constitute a threat to the Serb Orthodox or Croatian Catholic communities, as Shari’ah compliance in financial transactions is an option, rather than being compulsory, and is not a precursor for the more universal application of Shari’ah law.

    Economic and financial issues
    Bosnia and Herzegovina emerged from the former republic of Yugoslavia as Europe’s smallest economy with a gross national income of just over $8 billion and a per capita income of around $2,000. The population numbers 3.9 million, more than half of whom are Muslims, but this means the size of the Muslim community is much smaller than that of France or Germany, and although larger than the Muslim community in the United Kingdom, it is much less affluent. The market for retail banking and financial services is therefore limited overall, and even smaller for the potentially Shari’ah compliant segment.

    Sarajevo the capital, was a major centre on the trade routes through the Balkans at the time of the Ottoman Empire, when most of the Bosnian population converted to Islam, but today Sarajevo is isolated, with its airport accommodating only short take off and landing aircraft because of the restricted runway and surrounding hills. There are however, daily flights to neighbouring countries, and a good service by Turkish Airways from Istanbul, but no direct flights from the Gulf. For Sarajevo to revive as a trade and communications centre substantial investment in infrastructure would be needed, including the airport and road network. Sukuk issuance could be one way forward as far as Islamic finance is concerned, although at present Bosnia and Herzegovina have yet to issue any Islamic securities.

    The fragmentation of the banking system with over 20 banks partly reflects the country’s ethnic and religious divisions, but there has been a degree of consolidation, with major Austrian and Italian banks entering the market through the acquisition of local institutions. The Raiffeissen Bank of Vienna has become the largest bank, with over 600,000 savings accounts and a network of 60 branches throughout the country, but this is a conventional bank, with no experience of offering Islamic windows. The bank nevertheless has a substantial Muslim client base. It entered the Bosnian market with the acquisition of Market Banka, a local bank, in which the European Bank for Reconstruction and Development (EBRD) had an equity stake as its contribution to post-war reconstruction. Unicredit Zagrebacka Bank, an Italian bank with branches also in neighbouring Croatia, is the second largest bank in terms of assets, with 74 branches and 337,000 account holders. It also has no knowledge or experience of Islamic banking, but its customer base is in any case concentrated in the Roman Catholic community.

    The only Serbian banks are in the semi autonomous enclave of Republic Srpska, where any Islamic bank development is unlikely given local suspicions and hostility. The Turkish Ziraat Bank Bosnia is represented in Sarajevo, and handles trade finance with respect to imports and exports from and to Turkey. The Turkish Ziraat Bank is a conventional rather than an Islamic bank however, Shari’ah compliant finance being rather limited in Turkey, with only a few small dedicated Islamic banks. Although many Bosnians stay in Turkey to study, and some have family connections there, relatively few work there. In contrast, there are substantial numbers of Bosnians working in Austria and Germany, and their remittances, which exceed $2 billion each year, make a major contribution to the economy of Bosnia and Herzegovina. These remittances are handled through institutions such as the Raiffeissen Bank. This lucrative money transfer business gives the Austrian banks a considerable advantage, and in addition they feel comfortable dealing with the Balkan region generally, given their historical involvement dating back to the time of the Austrian Hungarian Empire.

    The major Gulf involvement in Bosnian finance has been through BBI, which is jointly owned by the Islamic Development Bank, with 45.46% of the shareholding capital and Dubai and Abu Dhabi Islamic Banks, each with a 27.27% share of the capital. All the financial dealings of these founding shareholders are of course Shari’ah compliant, and the BBI is also expected to conduct its operations in a Shari’ah compliant manner, but at present, the range of Shari’ah compliant financial products offered by the bank is limited.

    Dr. Ahmad Mohammad Ali, President of the Islamic Development Bank, serves as Chairman of the General Assembly of BBI, but in practice, although Dr Ali has visited Sarajevo, he is usually represented by his deputies at the annual meetings. The day to day management of BBI is by Said Mohamed, its director general, with Amer Byukvic serving as his deputy, Mrs. Vildana Skaljic as executive director and Salih Purisevic as secretary general. The management are all local nationals with previous extensive banking experience.

    BBI claims to be the first Islamic Bank in Europe, as it was established on 19 September 2000, four years before the Islamic Bank of Britain was granted a licence. Like the Islamic Bank of Britain, it is a small institution, with a paid-up capital of $75 million. There is no stock market in Sarajevo, and therefore BBI cannot emulate the Islamic Bank of Britain in seeking additional equity finance through having a listing on a local Alternative Investment Market (AIM), although it would be possible for BBI to obtain an AIM listing in London, as some other banks from Eastern Europe have done.

    BBI faced some difficulties in getting a license due to negative perceptions amongst non-Muslims, but on 13 March 2002 it received a permit from the Banking Agency of the Federation of Bosnia and Herzegovina to participate in internal payments operations, which meant its cheques and electronic payments were accepted by other local banks. In November 2002 BBI received a deposit insurance licence from the Deposit Insurance Agency of Bosnia and Herzegovina, but this raises some Shari’ah compliance issues, as although guarantees are acceptable for current accounts that pay no return, they are not acceptable for investment mudarabah accounts where the client shares in the bank’s declared profits. Depositors with the Islamic Bank of Britain are offered a waiver to sign to opt out of this guarantee that is required by the Financial Services Authority, but in Bosnia and Herzegovina such a waiver is not offered, and there seems to be a lack of awareness of this issue, although BBI does have a Shari’ah committee to advise on its operations.

    Islamic finance in Bosnia and Herzegovina
    As BBI is a very small institution with only four branches, the scope for Islamic finance is very limited in Bosnia and Herzegovina. At present most of the banks operations are retail, as it provides current accounts with debit cards and cheque books, as well as overdraft facilities of up to two months salary provided these are paid directly into the client’s account. From a Shari’ah perspective overdraft facilities are questionable however, especially if charges are applied that are related to the amount and duration of the overdraft, as this amounts to Riba. However because other banks in Bosnia and Herzegovina provide overdraft facilities, BBI fees obliged to compete by offering the same credit.

    Savings accounts are offered to those of limited means, these account holders being issued with passbooks to manage their accounts. Investment accounts on the Mudarabah profit sharing principle are offered to clients of higher net worth with at least $30,000 to deposit. The return paid is modest, as the Bosnian currency, the convertible mark, a legacy currency related to the former German mark, is pegged to the Euro.

    Returns are higher however than those paid on Euro deposits reflecting the risk of devaluation, ranging from a minimum of 2.37% for one month deposits to 4.89% for deposits of 3 years or more. For large deposits returns vary from 2.88% for one month deposits to 5.39% for three year deposits. Varying returns according to the duration and size of deposits is standard practice amongst Islamic banks and this is approved by Shari’ah scholars as long as the rates and rate spreads are not guaranteed and vary in relation to the institution’s underlying profitability.

    One of the more interesting product offerings by BBI is a Hajj and Umra Investment Account. Depositors are assured that the funds raised will be invested in a Shari’ah compliant manner in Bosnia and Herzegovina, and through an arrangement with other banks, deposits can be paid into any bank in the country and transferred to the client’s account in BBI. The depositor shares in the profits of the bank for the duration of the deposit, and withdraws the funds to meet the travel and accommodation costs associated with Hajj and Umra. The clients are however responsible for making their own travel arrangements rather than the bank, and there is no link up with travel agents to secure discounted prices through bulk ticket purchases as is the case with Tabung Haji in Malaysia.

    BBI offers a range of retail financing facilities, the focus, as with many Islamic banks, being on home and car finance. Home finance is available for up to 70% of the purchase price or the construction cost in a designated area for new building. Repayments, collected monthly through direct debit, should not exceed one third of the clients’ salary. The cost of financing is variable, calculated on the basis of 6 month and one year EURIBOR (Euro Inter-Bank Offer Rate), plus a profit margin of 5 percent for the bank. The financing structure is based on diminishing Musharakah, with the client entering a partnership with the bank to jointly purchase the property. The monthly payments by the client is divided into two components, a rental element for the share the bank owns, and a repayment so that over a period of 15 years the bank’s share is bought out. In the case of older clients the period of the partnership cannot extend beyond their 65th birthday. If the client wants to accelerate their repayments there is flexibility in the contract to permit this. A processing fee of 1% is charged, or 2% if the property is more than 100 kilometres distance from Sarajevo.

    To qualify for the financing the client’s salary must be paid into a BBI account, and a permanent employment certificate and an income statement for a 3 month period is required, endorsed by the tax authorities.

    The structure for car financing is similar and covers new and used vehicles up to 3 years old. The bank pays up to 80% of the value of the vehicle including tax and customs duty in the case of new cars. The financing period is up to 5 years for new vehicles and up to 3 years for used cars. A processing fee of one percent is charged, and the finance is priced at the 6 months EURIBOR cost. BBI also provides Qard Hasan beneficial loans on an interest free basis to those in need for specified purposes including fees for medical treatment, emergency home reconstruction and education expenses.

    There is little Shari’ah compliant corporate finance in Bosnia and Herzegovina, the main facilities being provided by BBI including domestic and international payments services, trade financing, usually through Murabahah, and funding for the acquisition of business assets such as premises, equipment, raw materials and stock. For asset financing a business plan is required providing details of the operations envisaged and anticipated cash flows as well as audited balance sheets and income statements for the preceding three years. Other documentation may be required depending on the nature of the business, including land registry certificates, statements from the tax office that there are no outstanding liabilities and details of any other financing.

    The future for Islamic finance in Bosnia and Herzegovina
    Although Bosnia and Herzegovina would seem a good potential market for Islamic finance there are many constraints on market growth. One obvious way forward would be for conventional banks to open Islamic finance windows or counters providing Shari’ah compliant products, but, as already indicated, the Austrian banks have no experience in this area. Banks such as HSBC Amanah are absent from the market, and as there are no direct flights from London in any case communications are an issue. This is also a handicap in communications from the Gulf, and it is unlikely that other Islamic banks from the region, apart from already those involved in BBI, will enter the market.

    Bosnia and Herzegovina has also the potential to attract foreign direct investment from the Gulf, especially given its tourist potential as Sarajevo was a venue for the Winter Olympics before the break up of Yugoslavia, and the mountains are a potentially attractive for summer visitors. However for resort developers such as Emaar to become interested in investing in Bosnia and Herzegovina, the property laws would have to be overhauled as at present there are ownership uncertainties that deter foreign purchasers.

    A new Federal Banking Law is to be introduced next year, and it is intended that there will be specific provision for Islamic finance within this law. At present there is much uncertainty over the regulation of Islamic financial products, which could be overcome through greater participation of the Central Bank in the activities of the Islamic Financial Services Board whose remit includes advising regulators how to implement the Basel II standards with respect to Islamic banks. The government of Bosnia and Herzegovina could also encourage Islamic finance by funding its own debt through the issuance of Sukuk securities. There is no securities market in Sarajevo, but sovereign and corporate Sukuk issued on behalf of Bosnian institutions, and presumably denominated in Euros, could be offered to investors in the Gulf and traded there or in other securities markets.

    In the longer term Sarajevo could become the major centre for Islamic finance in the Balkans, linking the European Union with Turkey, the Arab Middle East and the Gulf. To some extent this would be a revival of Sarajevo’s historical role during the Ottoman Empire as a trading and commercial centre. Such developments would depend on the government of Bosnia and Herzegovina having the political will to take such a project forward, and gaining support from the Gulf and Turkey.

    Although envisaging Sarajevo as an Islamic financial centre may seem far fetched at present, there are hundreds of young and talented students in its university who are enthusiastic about Islamic finance, as was apparent from the attendance at a lecture there on 9 May which the author delivered, and this bodes well for the future. Mohammed Taqi Usmani’s famous Introduction to Islamic Finance was translated into Bosnian and published in 2003, and Professor Fikret Hadzic, the Dean of the Economics Faculty of the University of Sarajevo has written a substantial book in Bosnian on Islamic Banking and Economic Development that was published last year. Bosnians are becoming better informed about Islamic finance, which should facilitate further developments.

    Best Regards

  • Dinner at Professor Fikret Hadzic’s (Professor of Economics, University of Sarajevo) house in Sarajevo.

  • With the Grand Mufti of Bosnia and Herzegovina cum the President of Shari’ah Board of Bosnia Bank International, Dr. Mustafa Ceric

    Malaysia can take lead in improving Islamic finance

    Malaysia can take lead in improving Islamic finance

    Available at:

    KUALA LUMPUR: Malaysia, as a leader and innovator in Islamic finance, can do more in exploring the Islamic principles to create a more cohesive financial system, says Dr Armen V Papazian, fellow of the Judge Business School, University of Cambridge, England.

    “At present, across the Islamic world, not even a single of them is printing money based on Islamic principles,” said Papazian, who is also chief executive officer of Keipr, a boutique consultancy firm in the United Arab Emirates, during his presentation.

    “Money is still created based on the conventional system,” he added, explaining that money at present was not only created out of nothing, but the instrument was backed by debts which bore interest rates – a violation of the syariah principles.
    Dr Armen V. Papazian proposes the use of Islamic principles in creating money

    “But money does not have to be created out of nothing. It has to be backed by real activities, focusing on capability and real value creation by real people,” he said, proposing the use of Islamic principles in creating money.

    “The alternative investments opportunities in the future are ones that engage real people and involve real activities,” Papazian said, arguing that that was what Islamic principles had been contending all the while.

    “Fundamentally, it is based on people creating value through employment, which then pushes up aggregate demand in an economy, and then the stock market, which then makes the options work,” he said.

    “We have to decide: Is our practice of Islamic finance merely for the product industry, or are we allowing it to evolve into a system,” Papazian told a press conference.

    “If Islamic finance were to merely exist as a product system (such as sukuk), then it has to survive in a system that is not,” he added.

    Papazian argued that Islam finance was now at a crossroad. It’s about going to the core of finance – money creation – and applying syariah principles on it, he pointed out, urging Malaysia to take the lead in applying Islamic principles to back the creation of ringgit.

    Best Regards

  • The Gazi Husrev-Beg Mosque, Sarajevo. It was built in 1531 by the famous Ottoman architect Mirnar Sinan

    Reality check for Islamic finance

    Reality check for Islamic finance

    By Rushdi Siddiqui, Special to Gulf News, Available at:

    Liquidations, defaults and downgrades call for some serious soul-searching

    Dubai: For Islamic finance, 2009 and 2010 may be categorised as the years of ‘R-Cubed’ — reflection, reassessment, and reality check. Since the beginning of 2009, there have been 42 liquidations of Islamic funds, defaults by 34 sukuks, rating downgrades of Takaful operators, and increase in layoffs in the sector.

    A recent Deloitte study, the ME Islamic Finance (IF) Leaders Survey, arrived at some interesting conclusions: 64 per cent of respondents agreed that IF is lagging in risk management; 65 per cent believe IF institutions are not properly capitalised; 66 per cent expect change in existing business models in the foreseeable future.

    Market volatility, liquidity crisis, confidence crisis, market sell-off, and so on, are horizon indicators for Islamic finance.

    The financial crisis did not pose a systemic risk to the industry, and a recent IMF paper asserted, with caveats, that Islamic finance fared better due to Sharia prohibitions against ‘toxic’ assets, enhanced by leverage and magnified by derivatives.

    But, the embryonic nature of Islamic finance also prevented the disaster. To some, ‘innovation’ in the sector seemed to imply the wrapping of existing products in an ‘Islamic veil’ and the addition of high-margin fees.

    The industry needs to take a step back and look at the ‘tea leaves’ associated with defaults, liquidations and rating downgrades as this a reality check on which pathway to take to the watering hole.

    However, a percentage-wise break-up puts things in perspective: 7 per cent of total funds liquidated accounting for 4 per cent of total assets under management.

    Many funds, it turned out, had small assets under management.

    Some theories on Islamic fund liquidation are underpinned by postulations like:

    * Capital-protected funds have limited life span
    * Crisis resulted in redemptions by investors and smaller amounts of assets under management could not support the costs of running the fund
    * Fund under-performance relative to peers and Islamic benchmarks resulted in redemptions

    The industry needs to reflect on not only the true size of the target market, but also their demand and distribution channels. For example, a recent release for the ‘JETS DJIM ETF,’ the first Islamic ETF in the US, said it “… will cease trading on October 19, 2010. … failed to attract the level of investor interest that had been anticipated. … with over seven million Muslims in the United States … but we found it difficult to reach target investors…”

    Sukuk defaults

    According to Thomson Reuters data, there were 34 sukuk defaults since the beginning of 2009. Some of the interesting observations:

    * Malaysia had 25 defaults in the corporate sector, led by oil/gas and auto-parts manufacturing, with three major modes of contract of Murabaha (14 defaults), BBA (6) and Ijara (3), and all were private placed.
    * Pakistan had three defaults in the cement and electric products manufacturing sector. Yet the news focused on high-profile defaults: Golden Belt, East Cameron Gas, IIG and Investment Dar.

    The total amount of defaults is about 1 per cent of $130 billion sukuk outstanding, and about 2 per cent of the 1,546 sukuk outstanding (Thomson Reuters, second quarter, 2010).

    Sukuk defaults are just as important as new issue coverage, as it not only tells on overall geographic market sentiment, issuer’s credit health (of debt-based Sukuk like Murabaha/BBA), but also shows the influence on the mode of Sukuk contract for geography.

    An interesting observation: sukuk ‘fallout’ seems more attributed to the Dubai standstill agreement of last year than the financial crisis, but it was the latter that had an impact on the former.

    The link between Takaful operators and Islamic investing is close, as premiums must be deployed in a Sharia-compliant manner. Although there have been no bankruptcies announced in the Takaful industry since beginning of 2009, there have been challenges.

    Over-exposed to equities

    President and CEO of Tokyo Marine ME Ajmal Bhatty stated … “the global economic downturn did affect investment portfolios of several takaful companies, but these were the ones that were over-exposed to equities and real estate. The ensuing issues and problems with certain sukuk also impacted few takaful companies. All of this resulted in the rating downgrade of some of the takaful companies.”

    The reality check is that Islamic finance needs to move toward its authenticity paradigm. We need to take a deep-dive analysis of liquidations, defaults and downgrades and ask: are these the growing pains of a young industry, do they call for a business model upgrade, or is the link to conventional finance much stronger?

    Best Regards

  • Srebrenica, Bosnia Herzegovina, a place where more than 8,000 Muslims were killed in July 1995.

    By seeking to eliminate a part of the Bosnian Muslims, the Bosnian Serb forces committed genocide. They targeted for extinction the 40,000 Bosnian Muslims living in Srebrenica, a group which was emblematic of the Bosnian Muslims in general. They stripped all the male Muslim prisoners, military and civilian, elderly and young, of their personal belongings and identification, and deliberately and methodically killed them solely on the basis of their identity. By Theodor Meron

    Islamic finance industry under-regulated: Survey

    Islamic finance industry under-regulated: Survey

    Available at:

    DUBAI — Sixty-six per cent of Middle East Islamic finance leaders believe that the industry is under regulated, a survey report released on Thursday by Deloitte reveals.

    Titled ‘Benchmarking Practices’, the report provides a wealth of statistical findings as well as analysis of these themes.

    According to other key findings, 80 per cent of Islamic finance leaders surveyed expect levels of corporate structuring and organizational change to increase. Only 35 per cent of Islamic finance executives believe that Islamic banks are properly capitalised.

    “As the first of its kind in the Middle East, this survey provides a truly regional picture of market sentiment and how Islamic finance leaders perceive the current economic slowdown, business performance, and the way forward,” Dr Hatim El Tahir, Director of Deloitte’s Islamic Finance Knowledge Center in Bahrain, said in an emailed statement. “Although Islamic finance is expected to continue its growth path, the development of the industry’s infrastructure and regulatory framework is of high concern to most executives who took part in this survey,” added El Tahir.

    Two out of three Islamic finance leaders expect a change in the existing business models of Islamic finance in the foreseeable future.

    Some 64 per cent of survey participants agree that Islamic finance Institutions are lagging behind on 
the implementation of risk management systems.

    Four key themes emerged from the survey. These include the importance of introducing new or revised regulatory measures – chief among them being Islamic accounting standards and risk management. Other themes include the importance of adopting best practices and transparency in financial reporting; the necessity of adjusting investment strategies through diversification; and the need for investment in human capital and talent development to cope with the growth and industry challenges.

    “The Islamic Finance Leaders Survey is a key pillar of this aim. By providing essential industry benchmarks, we hope to inspire dialogue and create a basis for the positive growth of the industry in the years to come,” El-Tahir said. Islamic finance will need to move beyond the retail market and develop its capital markets globally to compete better with conventional finance, Daud Vicary Abdullah, global leader of Deloitte’s Islamic finance group, said.

    International markets such as Japan and London are actively trying to raise sharia-compliant capital in order to tap liquidity from the Gulf region. Islamic finance still represents less than 1 percent of the global market,” he said. “It’s not yet punching its weight,” he said.

    Abdullah said that the economic power is moving further east and currently in the Middle East region, with $600 billion of the $1 trillion Islamic finance industry is coming from the Gulf Cooperation Council.

    He said Deloitte is working with three major financial Japanese financial corporations to raise Islamic funds outside of the domestic market and is also working on Islamic finance projects in Italy, Germany
 and Luxembourg.

    But the Islamic finance industry will need to address concerns over accounting standards and risk management, the Deloitte survey found, if it wants to reach its growth potential.

    Best Regards

  • With the Grand Mufti of Bosnia and Herzegovina, Dr. Mustafa Ceric in Sarajevo

    Global regulators agree tougher Basel III bank rules

    Global regulators agree tougher Basel III bank rules

    By Rachel Armstrong Available at:

    SINGAPORE (Reuters) – New bank capital requirements agreed by global regulators brought relief to Asia’s financial sector on Monday as fears that lenders might be forced into fresh capital raising were put to rest. The new rules, known as Basel III, will require banks to hold top-quality capital totalling 7 percent of their risk-bearing assets.

    This is a substantial increase from the current requirement of 2 percent, but is significantly lower than what banks had feared earlier this year and comes with a phase-in period extending in some cases to January 2019 or later. “It’s no big bang for banks, not with a phase-in arrangement of five years,” said Commonwealth Securities analyst Craig James.

    Japan’s largest banks, which have some of the lowest levels of capital in Asia, rallied on the news. Mizuho Financial Group rose as much as 2 percent and Mitsubishi UFJ Financial Group increased as much as 3.0 percent. Analysts at Macquarie estimate that Japanese banks have on average a common equity ratio of 6.3 percent, just shy of the 7 percent requirement.

    However, banks will not be required to meet the minimum core tier one capital requirement, which consists of shares and retained earnings worth at least 4.5 percent of assets, until 2015. An additional 2.5 percent “capital conservation buffer” will not need to be in place until 2019. “I don’t think any Japanese banks now have to raise capital on the back of this, barring any sizeable acquisitions,” said Ismael Pili, Macquarie’s head of Asian financials research.

    An official from Japan’s regulator, the Financial Services Agency (FSA), said Japan’s top banks can meet the new capital requirements “within their usual business efforts,” adding he did not think the banks would be forced to raise fresh capital or drastically reduce their assets.


    For China, it may take some time before the new measures hit the rule books, one of the country’s top bankers said. “It will take a long time to implement Basel III rules,” Bank of China Chairman Xiao Gang told Reuters on the sidelines of the World Economic Forum’s summer meeting in Tianjin, China. “It’s also difficult to say when China will implement this rule because we haven’t exercised Basel II yet,” he said.

    However, Zhu Min, a special adviser to the IMF and former deputy governor of the Chinese central bank, signalled he is keen for the rules to be adopted in a co-ordinated manner. “The concern is that if everybody in the world applies different levels at the same time, it may cause international arbitrage in the regulatory framework,” he told reporters in Tianjin.


    Most banks in the rest of Asia have capital levels well above the minimum levels under Basel III. That presents some banks with an opportunity for further growth by releasing some of their surplus capital, some analysts said. “From here in Asia, the trick is to find the well-capitalised banks and match them with markets ripe for a further expansion in lending,” said Macquarie’s Pili, adding Indonesian banks have the most to benefit from the new requirements.

    But with Asia leading the global economic recovery, the region’s banks are likely to be the first in the world to have to meet the additional counter-cyclical capital buffer of 0 to 2.5 percent, which national regulators will apply during periods of excess credit growth. “My take for non-Japan Asia, you are still looking over the course of the next 10 years at significantly more capital in the system,” said Bill Stacey, head of equities at Keefe, Bruyette & Woods Asia in Hong Kong. He added that if regulators in Asia make full use of the counter-cyclical buffer, some banks may face a total capital requirement of 13 percent – the 10.5 percent tier one and tier two requirement plus the buffer on top.

    For Europe, the pain is likely to be more immediate. Top German lender Deutsche Bank is seeking a headstart on its rivals by announcing plans to raise almost 10 billion euros to bolster its capital. Other banks in Germany, Spain, France, and elsewhere are likely to follow suit to meet the new standards.

    But the long run-up period that banks have to meet the requirements is likely to make the process easier for Europe’s financial sector. The euro rallied almost 1.0 percent against the dollar in Asian trade to hit $1.2808.

    This implementation period raised questions, though, about whether heavy lobbying and the global economic recovery reduced regulators’ resolve for harsher measures following the deepest financial crisis in decades. “The phasing-in period for the new capital requirements is surprisingly long, which will add to the scepticism about the robustness of the bank capital enhancement efforts,” said Mohamed El-Erian, co-chief investment officer at Pimco, the world’s biggest bond management company.

    The Basel III agreement was reached in Switzerland by central bank governors and top supervisors from 27 countries, after a year of horse-trading and lobbying that involved banks and governments seeking to protect their national interests. Along with the capital standards, Basel III includes a range of reforms agreed earlier this year to reduce risk-taking by banks, including rules on how liquid banks’ assets must be and how banks must treat tax assets on their books. Some changes were watered down in July after strenuous lobbying by banks.

    Leaders of the Group of 20 rich countries and big emerging economies, blaming the global credit crisis partly on risky trading by banks, called on regulators in 2009 to work on tougher bank capital rules. The G20 leaders are set to endorse Sunday’s deal when they meet in Seoul in November.

    Best Regards

  • Eidul Fitri 1431h/2010 in Durham

    Zeti Akhtar Aziz, Central Bank Governor, Malaysia: World’s Best Central Banker.

    Zeti named among top central bankers.

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    New York-headquartered Global Finance Magazine has named Bank Negara Governor Tan Sri Dr Zeti Akhtar Aziz as one of the world’s best central bankers over the past year among five other central bank heads in five countries and the European Central Bank president Jean-ClaudeTrichet. She and the other six bankers were graded “A” in the magazine’s annually-published feature entitled “Central Banker Report Card” for successes in areas such as inflation control, economic growth goals, currency stability and interest rate management.

    The grade ranges from A to F, with A is the highest and F is the lowest. ‘A’ denotes excellent performance and ‘F’ outright failure, said Global Finance in a statement today. Other central bank heads to receive the highest grade are Australian Glenn Stevens, Israel’s Stanley Fischer, South Korea’s Lee Seong-tae, Taiwan’s Fai-NanPerng, Turkey’s Durmus Yilmaz and European Union’s Trichet. The magazine has readers in 163 countries comprising financial practitioners of multinational companies, with offices in London and Milan, other than its headquarters in New York. – Bernama

    For full list of last year central banker report card, click here: The Central Bankers Report 2009

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  • Cordoba, Spain