The Islamic Finance Handbook: A Practitioner’s Guide to the Global Markets
THE ISLAMIC FINANCE HANDBOOK – Book Sample
Introduction – THE ISLAMIC FINANCE HANDBOOK
The subprime crisis that peaked in 2008 has pushed the world economy into the est recession since the end of World War II. As doubts mount over the proper ongoing of the conventional banking and ﬁnance industry during the crisis, growing attention is being given to Islamic banking and ﬁnance.
Headed by Iran, Saudi Arabia, and Malaysia, Islamic ﬁnance has penetrated more than 65 countries around the globe. By the end of 2013, Islamic ﬁnancial assets were estimated to be around US$1.3 trillion to US$1.5 trillion. Although Islamic assets are roughly less than 1 percent of global ﬁnancial assets, their rapid growth, especially in Southeast Asia and the Middle East, and their superior performance during the crisis have led many to believe that Islamic ﬁnance is a viable alternative.
The rapid growth of the Islamic ﬁnance can be seen in various regions of the world. To provide perspective and an overview of the Islamic ﬁnance industry, key developments of the industry for various regions are highlighted in this introduction.
Southeast Asia can be considered one of the key centers of Islamic banking and ﬁnance, with Malaysia being a leader. In Malaysia, the formal development of Islamic ﬁnance began with the establishment of Tabung Haji (an interest-free savings-like or deposit-taking institution for Muslims to perform hajj [pilgrimage] in Mecca) in 1963.
The ﬁrst Islamic bank in Malaysia, Bank Islam Malaysia, began operations in July 1983 with the passage of the Islamic Banking Act of 1983. In 1984, the government has enacted the Takaful Act 1984 to pave the way for the establishment of the ﬁrst takaful (Islamic insurance) company, Syarikat Takaful Malaysia.
Since then, the Islamic banking industry has seen the participation of conventional banks in providing Islamic banking services, initially through Islamic windows at banks and presently through Islamic bank subsidiaries as well as the establishment of new domestic and international Islamic banks.
Aside from experiencing a rapid development of the Islamic banking industry, Malaysia introduced the Islamic money market in 1994 to provide an avenue for short-term investment based on Shari’ah (Islamic law), and it has made its mark in the development and issuance of sukuk (an Islamic bond). In 2012, the government consolidated various acts into two separate acts, namely the Islamic Financial Services Act (IFSA) 2012 and the Financial Services (FSA) Act 2012. Both acts came into effect on June 30, 2013.
Neighboring Indonesia, which has the largest Muslim population in the world, has recently recognized the need to harness the Islamic ﬁnance industry’s potential. In 2012, Indonesia’s Islamic banking assets were US$17 billion, an increase of more than 50 percent from the previous year.
Propelled by government support, Islamic ﬁnancial assets in Indonesia are expected to continue their rapid growth. The republic is showing positive signs in Islamic retail banking, sukuk, project and infrastructure ﬁnancing, takaful (insurance) and Islamic microﬁnance. Currently, Indonesia houses 5 Islamic banks as well as 24 banks that have Islamic windows. With a population of 230 million, Indonesia has a huge market potential for Islamic ﬁnance.
Islamic ﬁnance currently plays a very small role in the Australian ﬁnancial sector. slims accounting for more than 476,000, or just 2.2 percent, of the n, its retail presence is likely to remain quite small. The potential lies
instead with the growth of foreign investment. Australia has the fourth largest fund management industry in the world but it has only recently started to offer Islamic products. This business could easily be expanded to appeal to overseas investors as well as locals.
Similarly, on the funding side, Australia’s substantial infrastructure funding requirements, as well as those of its massive resource development industry, could be ﬁlled at least in part through sukuk issues directed at offshore investors. More ﬂexible regulatory and taxation measures would greatly facilitate these developments. The Australian government has at least made positive statements toward this end, but so far it has done nothing to loosen the existing restraints.
This chapter discusses Australia’s Islamic ﬁnance industry and its possibilities, focusing speciﬁcally on asset management, tax and accounting, retail ﬁnance, micro- ﬁnance, takaful and re-takaful, issuances and sukuk, the debt capital market, the equity capital market, regulatory issues, cross-border ﬁnancing, and the future.
Australia has an active and growing conventional fund management industry. With assets of some A$1.7 billion in 2013, it is already the fourth largest in the world. It is a strong supporter of the United Nations Principles for Responsible Investment; therefore, socially responsible managed investments are popular with local investors. Since Shari’ah-compliant funds follow some of the same principles, Shari’ah-based funds would seem to have some attraction. Only a few managers, however, offer such products. Some of these so far are MCCA, Crescent Wealth, Hyperion Fund Management, LM Australia, and the Brisbane Islamic Investment Fund.
MCCA, as explained later in the retail section, manages the MCCA Income Fund. When it was created in 2009, it claimed to be the ﬁrst Shari’ah-compliant investment fund in Australia. The fund allows retail investors to purchase as little as A$500 of a diversiﬁed portfolio of Shari’ah-compliant home loan mortgages and also provides a funding mechanism for MCCA to arrange new lending. The fund earned its members a low risk return of 5.11 percent in 2011–2012—an attractive investment for any individual Muslim’s self-managed superannuation funds. This is an important market because overall self-managed funds account for one-third of the assets of Australian superannuation funds.
Crescent Wealth was created speciﬁcally to offer Shari’ah-compliant investment products to both local and overseas investors. Its funds have been developed and managed under the supervision of the International Shari’ah Supervisory Board of Amanie Islamic Finance Consultancy and Education as well as the Australian Invest- ment and Securities Commission. The Westpac Bank–afﬁliated Asgard investment platform now offers four Crescent investment products through its eWRAP investment…
Canada is widely considered to have the most effective and safest banking system in rld, according to the World Economic Forum. The Global Financial reports that 6 of the world’s top 10 safest banks are Canadian, and the
World Bank ranks Canada in the top ﬁve countries for investor protection.
A strong domestic economy in Canada ensures a steady demand for ﬁnancial services. Canada has a national banking system with more than 8,000 branches. It has a highly competitive domestic ﬁnancial sector, resulting in high service standards at competitive costs to consumers. In addition, there is a strong commitment to innovation: Canada has a high number of automated banking machines per capita and beneﬁts from high levels of utilization of electronic channels. Further, Canada has a very stable environment; failure in the Canadian ﬁnancial sector is rare.
Within Canada, Toronto is Canada’s ﬁnancial services capital and one of North America’s premier ﬁnancial centers. Other Canadian cities with signiﬁcant ﬁnancial sectors are Montreal, Vancouver, and Calgary.
One of the most rapidly growing segments of the international ﬁnancial services sector is Islamic ﬁnance. Recognizing this trend, and in competition with a number of other Western ﬁnancial centers, including London, Toronto is leading Canadian efforts to explore the prospects of attracting additional Islamic ﬁnancial activity.
With a prominent and growing Canadian Muslim community and a strong and innovative ﬁnancial sector, Toronto could certainly emerge as a North American center for Islamic ﬁnance. Most recently, the government of Ontario announced plans to level the playing ﬁeld to ensure that legislative or regulatory barriers for alternative ﬁnance (i.e., Islamic ﬁnance) are eliminated. Discussions are under way between Canadian federal and provincial authorities and the private sector to identify relevant provisions of law and policy and then identify and implement legislative or regulatory solutions.
Toronto is home to Canada’s ﬁve largest domestic banks, all of the major foreign banks with a presence in Canada, the major bank-owned investment dealers, and more than 100 non–bank owned investment dealers.
Toronto is also the headquarters of Manulife and SunLife (two of the top 10 life insurers worldwide, based on market capitalization), a signiﬁcant number of domestic and international property and casualty insurance companies, and the major corpo- rate brokerage houses. Both Manulife and SunLife operate in Asian markets and have experience with Islamic insurance models.
In the world of fund management, the leading Canadian mutual fund companies, institutional fund managers, and many of the country’s largest pension funds are headquartered in Toronto.
In addition, Toronto is the home base of the TMX Group, the third largest stock exchange in North America and the eighth largest in the world based on market capitalization. For example, more mining companies are listed on TSX and TSX
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