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Dubai Technology and Media Free Zone Authority

ISSUE 119

ISSUE 119 EMBRACING COMMON VALUES ARNAUD LECLERCQ AND SOUMAYA HISSOUSSI, LOMBARD ODIER

EMBRACING COMMON VALUES Arnaud Leclercq and Soumaya Hissoussi, Lombard Odier, on how the bank’s sustainable DNA powered their move into Islamic finance

A CPI Financial Publication

PLUS:

16 ISLAMIC BANKING: 24 ISLAMIC TECH: Islamic banking and financial inclusion

Spearheading Islamic finance’s tech future

36 SUKUK:

Sukuk riding strong momentum into 2020


CONTENTS

ISSUE 119

REGULAR SECTIONS

EDITOR'S LETTER

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Greetings, all

W

elcome to Islamic Business & Finance. This is the 119th issue of the longest-running Islamic finance magazine in the world. We hope you all enjoying a particularly interesting start to 2020. There's so much I'm excited for you to discover in this issue. First of all, we have multiple features that focus on Islamic finance's relationship with the sustainability movement, which is gaining steam in both the conventional and Islamic spaces. Islamic finance and ethical finance share so much of their respective DNAs that more must be done to facilitate collaboration between the two, as both can learn a lot from each other. Furthermore, I hope you enjoy at the end of this issue a special look at a unique collection of coins that goes back to the very roots of Islamic finance. An anonymous collector is displaying his Islamic coin collection for all to see until 28 April 2020 in Abu Dhabi. Be sure not to miss it. Beyond that, there is plenty to peruse. I hope you enjoy digging into another great issue.

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NEWS + ANALYSIS

6

News & Analysis

OPINION

8

Addressing the talent gap

COVER INTERVIEW

Till next time,

10 Embracing common values

24

ISLAMIC BANKING

16 Islamic banking and financial inclusion

20 The Philippines sets the stage for Islamic banking growth

ISLAMIC TECH

24 Spearheading Islamic finance's tech future

William Mullally Log on to www.islamicbusinessandfinance.com for news, polls, events, analysis, blogs, features, commentary and more.

www.cpifinancial.net

ISSUE 119 | Islamic Business & Finance

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P.O. Box 502491, Dubai Media City, UAE Tel: +971 4 391 4681 Fax: +971 4 390 9576 islamicbusinessandfinance.com

CONTENTS

ISSUE 119

FEATURES

CHAIRMAN

SALEH AL AKRABI CHIEF EXECUTIVE OFFICER

CHIEF OPERATING OFFICER

NIGEL RODRIGUES nigelr@cpifinancial.net Tel: +971 4 391 3722

SHERIF R. ELHUSSEINI sherif@cpifinancial.net Tel: +971 4 391 5419

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EDITOR - ISLAMIC BUSINESS & FINANCE

WILLIAM MULLALLY william@cpifinancial.net Tel: +971 4 391 3718 EDITOR - BANKER MIDDLE EAST

NEWS EDITOR

NABILAH ANNUAR nabilah.annuar@cpifinancial.net Tel: +971 4 391 3726

KUDAKWASHE MUZORIWA kuda.muzoriwa@cpifinancial.net Tel: +971 4 391 3729

EDITORIAL

editorial@cpifinancial.net COMMERCIAL DIRECTOR

GROUP BUSINESS DEVELOPMENT MANAGER

NAP ESTAMPADOR nap.estampador@cpifinancial.net Tel: +971 4 433 5320

ANDREW COVER andrew.cover@cpifinancial.net Tel: +971 4 3913717

ADVERTISING

sales@cpifinancial.net CHIEF DESIGNER

SENIOR DESIGNER

BUENAVENTURA R. JALUAG, JR. jun@cpifinancial.net Tel: +971 4 391 3719

FLORANTE MAGSAKAY florante@cpifinancial.net Tel: +971 4 391 3724

DIGITAL MANAGER

SALES EXECUTIVE

DEO ABEJUELA deo.abejuela@cpifinancial.net Tel: +971 4 391 3722

PAULO SANDE paulo.sande@cpifinancial.net Tel: +971 4 365 4538

EVENTS MARKETING MANAGER

CONFERENCE PRODUCER

CRIS BALATBAT cris.balatbat@cpifinancial.net Tel: +971 4 391 3725

HITESHWAR BHAKHRI hitesh.bhakhri@cpifinancial.net TEL: +971 4 433 5322

SUKUK

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28 Financing infrastructure

projects in Africa: the promise of sovereign Sukuk

34 The conventional wisdom of indicative Sukuk pricing

36 Sukuk riding strong

momentum into 2020

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SUSTAINABILITY

40 How Islamic finance could

advance the sustainability movement

FINANCE MANAGER

ZANEER MOHAMED zaneer.mohamed@cpifinancial.net Tel: +971 4 391 3727 ADMIN EXECUTIVE

MARILYN BIDUYA marilyn@cpifinancial.net Tel: +971 4 391 4682 enquiries@cpifinancial.net

ISLAMIC ART

46 Rediscovering the lost coins of Islam

Get the next issue of Islamic Business & Finance before it is published. Full details at www.islamicbusinessandfinance.com ISSUE 119

©2019 CPI Financial. All rights reserved. No part of this publication may be reproduced or used in any form of advertising without prior permission in writing from the editor.

Dubai Technology

and Media Free

Zone Authority

Dubai Technology and Media Free Zone Authority

AND VALUES ARNAUD LECLERCQ SOUMAYA HISSOUSSI,

EMBRACING ES LU COMMON VA

LOMBARD ODIER

A CPI Financial Publication

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Islamic Business & Finance | ISSUE 119

PLUS:

C TECH: G: 24 ISLAMI ding Islamic

16 ISLAMIC BANKIN and Islamic banking financial inclusion

Spearhea future finance’s tech

TRACING THE INDUSTRY’S POSITIVE TRAJECTORY Dr Bello Lawal Danbatta, Secretary General, Islamic Financial Services Board (IFSB)

Hassan Jarrar, CEO, Bahrain Islamic Bank

PLUS:

16 ISLAMIC BANKING: 24 INVESTMENT: The next generation of customers

A bullish view on US real estate

35 AWARDS:

A look back at the IB&F Awards 2019

A CPI Financial Publication

how i, Lombard Odier, on Soumaya Hissouss Arnaud Leclercq and move into Islamic finance le DNA powered their the bank’s sustainab

INSIDE BISB’S SUCCESSFUL TRANSFORMATION A CPI Financial Publication

@IBFMag on Twitter for stories as they're being told

TRACING THE INDUSTRY’S POSITIVE TRAJECTORY DR BELLO LAWAL DANBATTA, SECRETARY GENERAL, ISLAMIC FINANCIAL SERVICES BOARD (IFSB)

INSIDE BISB’S SUCCESSFUL TRANSFORMATION HASSAN JARRAR, CEO, BAHRAIN ISLAMIC BANK

EMBRACING COMMON

PUBLISHED BY CPI FINANCIAL FZ LLC REGISTERED AT DUBAI MEDIA CITY, DUBAI, UAE.

ISSUE 117

ISSUE 117

ISSUE 118

ISSUE 119

Printed by Al Ghurair Printing & Publishing – Dubai, UAE

Dubai Technology and Media Free Zone Authority

ISSUE 118

PLUS:

20 ISLAMIC BANKING: 24 HALAL BUSINESS: 40 SUKUK: Saudi fundamentals

Adapting to the needs of SMEs

Issuance rises for fourth straight year

36 SUKUK:strong

Sukuk riding 2020 momentum into

www.cpifinancial.net


AWARDS 2020

Save the Date! 10 June 2020

Dubai, United Arab Emirates

Join over 200 of the top Islamic bankers in the region as we reward excellence and celebrate the achievements of the Islamic finance industry. Now in its 15 th year, the IB&F Awards is recognised as the longest established Islamic banking and finance awards programme honouring outstanding performance in Shari'ah-compliant finance.

Fastest Growing Islamic Bank Winner

Supported by

Organised by

For more information please contact us at Tel: +971 4 391 3725 or +971 (0) 58 594 4818


NEWS & ANALYSIS

Today marks the completion of another remarkable milestone in the journey of DIB and the UAE. The acquisition of Noor Bank is a landmark achievement, establishing DIB as one of the largest Islamic banks in the world and amongst the largest banking entities in the UAE. In line with our strategy, the completion of this deal means that we remain ideally positioned to expand our footprint in the region and beyond, in addition to supporting the UAE’s vision for growth and prosperity.”

- H.E. MOHAMMED IBRAHIM AL SHAIBANI, Chairman of Dubai Islamic Bank

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(ISTOCK)

Dubai Islamic Bank announced the completion of the acquisition of Noor Bank in a transaction structured through a share swap. Operations will be completely integrated into DIB.

Bank Negara Malaysia may issue up to five new digital banking licenses, according to its new Exposure Draft on Licensing Framework on Digital Banks.

The Bank has adopted a balanced approach to enable admission of digital banks with strong value propositions whilst safeguarding the integrity and stability of the financial system as well as depositors’ interests, taking into account that such digital banks have not operated in a full financial and economic cycle. To achieve these outcomes, an asset threshold of not more than MYR 2 billion in the initial three to five years of operations will be applied. This functions as a ‘foundational phase’ for the licensees to demonstrate their viability and sound operations, and for the Bank to observe performance and attendant risks.” - BANK NEGARA MALAYSIA, Addressing the talent gap

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INTRODUCING

THE NEW WWW.CPIFINANCIAL.NET We’ve got a new look, full of features and customised solutions to meet your evolving digital needs! Our new portal, redesigned from the ground up, offers a new cleaner look and added functionality. We combined all our brands under the same portal to create a user-friendly browsing experience for our trusted readers and valued business partners. In order to better serve the needs of the Middle East’s financial community, the new cpifinancial.net has added sections to supplement its in-depth financial news analysis, such as classifieds and business directory, in addition to overhauled opinion and features sections. We hope you enjoy our new intuitive design that is easy to navigate and provides added depth.

www.cpifinancial.net


OPINION

Addressing the talent gap I

n my conversation with David Parker, the Co-Chief Investment Officer of the Bahrain Economic Development Board and one of the board members of the Bahrain Fintech Bay which you can read in its entirety later in this very issue, we had a frank discussion about the challenges facing the traditional banking world, both conventional and Islamic, as it faces digital disruption. We spend so much time talking about the opportunities that digital disruption brings, both for individual institutions and the broader industry, that we don’t spend enough time talking about the threats that disruption brings. Those threats, of course, are many. We are seeing the definition of a financial institution get broader, as non-traditional players outside of the finance world are now getting involve in finance of their own. The list of those players that have entered the space is already too long to list, but one quote that David quoted to me was most important: People don’t need banks, they need banking services. Banks, of course, are heavily entrenched, but none can rest on their laurels. As I wrote about in the last issue, a bank’s competitors is no longer just other banks. Financial technology will now spring up basically everywhere that those who need it are, whether from banks or otherwise. One aspect that David mentioned though that I don’t feel I’ve spoken about enough here is the talent gap. Sure, we can talk all we want about the need for banks to get involved in technological innovation, but without the talent to do so, it becomes impossible to execute. The region has developed generations of workers with financial

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expertise, but the epicentres of tech are still elsewhere. What can be done? Bahrain EDB and Bahrain Fintech Bay have been addressing the problem by working with both educational institutions in Bahrain and abroad to make sure that Bahraini nationals are going to those epicentres such as Silicon Valley and Singapore in order to learn from those on the cutting edge. While this helps Bahrain as a whole, more institutions need to forge those partnerships themselves across the Islamic finance world, because the more the Islamic finance space interacts with the tech space on a skill development and knowledge sharing level, the more the rest will naturally follow.

William Mullally

Editor

www.cpifinancial.net


DIFC THE BEST OF BOTH WORLDS

IF ONLY there was a place where finance and culture existed seamlessly. IF ONLY there was a place that was the key to emerging markets. Where FinTech companies, venture capital firms and accelerator programmes thrive. IF ONLY there was a place that was internationally recognised and independently regulated. IF ONLY there was an established leading financial centre for the Middle East, Africa and South Asia. Where nearly 24,000 professionals and 2,100 of the world’s top companies work and live. There is. DIFC.

For more information difc.ae @difc


COVER INTERVIEW

EMBRACING

COMMON VALUES ARNAUD LECLERCQ, PARTNER HOLDING PRIVÉ AND HEAD OF NEW MARKETS, LOMBARD ODIER AND SOUMAYA HISSOUSSI, SENIOR VICE PRESIDENT, LOMBARD ODIER REPRESENTATIVE OFFICE DUBAI ON HOW THE BANK’S SUSTAINABLE DNA POWERED THEIR MOVE INTO ISLAMIC FINANCE

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PHOTOS: (Florante Magsakay/CPI FINANCIAL)

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hat do you think differentiates Lombard Odier from other operators in the same space? Arnaud: I would say that in the private banking landscape we are unique in who we are and what we do. If you look at the combination of factors that make us different, when you put all the individual elements together, we are certainly very different. To define the differences, we use both the verb ‘to be’ and the verb ‘to have’. Who are we, and what do we stand for? Too often, institutions define themselves to prospects and clients by what they have (e.g. ‘We have this product, we have an office in Singapore or Dubai.’). By doing this they neglect to explain the principles they stand for and what’s in their DNA. At Lombard Odier we start with who we are. In order to build a strong relationship with our clients, it is essential that we make this connection as human beings. We are the oldest private bank in Geneva and have always had a focused business model.

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COVER INTERVIEW

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COVER INTERVIEW

This means we are unrivalled experts at advising our clients and helping them protect and grow their wealth. As a firm, we have no external debt and are proud to have one of the highest capital ratios in the industry, and an AA- Fitch rating. We were among the first signatories of the United Nations Principles for Responsible Investment, and developed ESG investing methodology as early as 1997. One of our early Partners helped found the organisation that would become the Red Crescent. When you put all of this together, our DNA and what we stand for becomes something unique. We invest substantially, year after year, in our own technology, in order to provide an outstanding user experience and investment execution. Other banks use external providers, so they’re less

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flexible. We’re still independent and organised as a partnership after 224 years—this is not a common ownership model either in Switzerland or around the world. When you combine this with our scale—almost $300 billion in client assets at the end of December 2019—we are large enough to be globally relevant, but agile enough to provide bespoke solutions. How does your product offering stand apart? If you look at some initiatives, like our Islamic finance offering, the way we have done it is unique. We are not the only bank in the world with an Islamic solution, and we don’t pretend to be a local Islamic bank, but we have built a global investment solution—a proper mandate—

www.cpifinancial.net


COVER INTERVIEW

ARNAUD LECLERCQ in conversation with WILLIAM MULLALLY of Islamic Business & Finance

with three profiles: conservative, balanced, and growth. Firstly, we said that we are going to do it according to Shari’ah principles. We learned, we were humble, and we didn’t talk about it. It was initially developed for a few clients on request, uncertified, while we learned and consistently enhanced the offering by listening to our clients’ needs. After five years of establishing a record of performance and building something robust, we received a fatwa and secured official certification. But even that was not enough for us. We didn’t just want the mandate certified. We wanted the full process certified, from the documents that clients sign, to all our internal banking aspects. So we worked with our legal department, supported by Soumaya and Amanie Advisors, and the full process is now compliant. We continue to improve and enrich our offering. In the beginning, we had Sukuk and equities. Now we have funds from external parties, including emerging players, and we have received approval for gold. Using our over 200 years of global wealth management expertise as the foundation and accumulating multiple different layers of Islamic finance knowledge and experience, brought us to where we are today. Now we feel it’s time to talk about our unique Islamic finance offering, after six and a half years, especially with the awards we have won, and amid rising client and institutional demand. What kind of feedback have you gotten from clients? Arnaud: People have told us that what we do makes sense because it’s genuine. This is not just a fund we’ve launched to target this market. Of course it’s a business, as we are a bank, but we are doing this in line with our own ethics and step by step, and people recognise that. We have become a reference in the Islamic finance domain, because we are doing it by the book, we seek advice, and we correct and progress. The role of Soumaya from day one was key. Having a senior banker who lives her faith very strongly adds authenticity. People at some point recognise that the things that we do in this domain, as in others, are genuine. Sustainability is now everywhere, and everyone is ‘doing good’, but we have been doing this for a long time, it really is in our DNA. Our Islamic finance solution is naturally embedded into our sustainability approach because they share a number of common values.

www.cpifinancial.net

Soumaya, could you speak from your perspective about the evolution of the Islamic offering? Soumaya: We started it a few years ago as a bespoke solution for a client; it was a relatively small mandate. After a few years, we saw strong demand and we are now proud to manage substantial sums in this way, mainly for clients in the Middle East. Our solution is fully customisable to client’s individual demands. It uses a number of building blocks. It’s multi-asset class, we can offer global investments, Sukuk from a wide universe, equities from the Dow Jones Islamic index, and we have thematic funds as well, working with third party fund managers. We access different markets

Sustainability is now everywhere, and everyone is ‘doing good’, but we have been doing this for a long time, it really is in our DNA. – ARNAUD LECLERCQ, Partner Holding Privé and Head of New Markets, Lombard Odier

through ETFs and gold as well. We have seen demand for such products increase over the years, mainly from clients in the UAE, Kuwait, and Saudi Arabia. Those are also the biggest economies of the region. I think we’ve performed extremely well— we were proud to gain recognition with multiple awards in 2019. What has been the driver behind the Islamic offering? Arnaud: Clients have been at the heart of it. We are here to serve their needs. That’s a trademark of Lombard Odier—we customise and we adapt to our clients, not the other way around. We listen, we learn, and we try to do what our clients want. When we work on products like this, we’re happy. It’s satisfying, and the full team is behind the concept. I was with the board of the bank at the end of December, and we discussed our very successful and interesting Islamic franchise, and I think it’s

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COVER INTERVIEW

going to go much, much further. But that growth will happen step by step. Could you tell me more about the clients that are using you Shari’ah-compliant services? Soumaya: We see demand from both institutional and private clients, who may have very different requirements. Shari’ah institutions have very strict processes. They might come with their own strategy, and we suggest an asset allocation. Clients also have different risk profiles. Some may have a higher risk appetite, and so we go with a heavier equity weighting. Some may ask for a Sukuk-only portfolio because they are looking for regular cash flows and they want to reduce their risk, or they may have requirements for either shorter or longer maturities. Depending on where we are in the cycle, we use our expertise to guide them on preserving their wealth and generating returns according to their wishes. It really depends on clients’ risk profile and appetite. Our customisable solutions can adapt to individual client demands. Arnaud: The majority of our clients are invested in the balanced portfolio. They recognise that in order to do Islamic investment, you have to walk the walk. That’s something that separates us from the competition. We don’t leverage our balance sheet and we have no external debt; this is quite unique. It changes the perception among Islamic finance-focused clients. It shows that we are legitimate. Increasingly, clients want their financial managers to share their values. Of course they want performance, that’s our job, but they want their values to be respected. If you have an investment bank doing highly risky business, not to mention too much use of its balance sheet, the right hand and the left hand are doing two different things. They might say they are working towards sustainability, but the left hand is doing something more risky. When we explain to clients how we are different, they are impressed, and they want to work with us. People want to know that their bank shares their values, and that is a major change in the industry.

SOUMAYA HISSOUSSI

Depending on where we are in the cycle, we use our expertise to guide them on preserving their wealth and generating returns according to their wishes. – SOUMAYA HISSOUSSI, Senior Vice President, Lombard Odier representative office Dubai

How does the Islamic offering interact with the bank’s focus on sustainability? Arnaud: We have a long history of philanthropic engagement and of acting as a responsible business. Last year we became the first global wealth asset manager to receive the renowned

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COVER INTERVIEW

B Corp certification—one of the world’s leading corporate sustainability ratings. On the investment side, all of our research is done progressively through the filter of sustainability. We were doing it to a large extent before, but we are now embedding sustainability into all our investment processes. We are industry leaders in this regard. Soumaya: Shari’ah compliance is more of a legal framework. It has to follow certain rules. Sustainability is more of a philosophy and investment conviction. What we seek to do is to have a positive impact on society and the environment. Shari’ah shares those beliefs and values. They really do go in the same direction. If I take Lombard Odier, it’s a family business with long-standing legacy values built around sustainability, independence and its role in society. Our offering is about building on this more than two-century legacy.

ARNAUD LECLERCQ

On the investment side, all of our research is done progressively through the filter of sustainability. We were doing it to a large extent before, but we are now embedding sustainability into all our investment processes. We are industry leaders in this regard. – ARNAUD LECLERCQ, Partner Holding Privé and Head of New Markets, Lombard Odier

www.cpifinancial.net

How has the Islamic finance community reacted? When we had our first Shari’ah board with Amanie Advisors and the scholars, we explained to them where we come from and we gave examples of who we are and our corporate DNA. We mentioned specific examples, such as the actions of one of our firm’s early Partners back in the nineteenth century. When Europeans first started to invest in the US as an ‘emerging market’, he advised clients against investing in companies reliant on slavery. The scholars, when they were listening to that, told us, ‘actually, you are Shari’ah, as your history and actions show’. They were quite impressed, and they saw us as an example of what companies should do. It’s not just about offering a product that’s Shari’ahcompliant, it’s about having values that reflect the Shari’ah values throughout the organisation. What do you have planned next? We want to continue to strengthen our Islamic offering, and to do so also from our Abu Dhabi branch, which we opened last year in the Abu Dhabi Global Market, to supplement our Dubai office. We’re working on something new now, so I can’t talk about it just yet. We are also working on an ESG-Islamic solution as we seek to be more active in the region. Islamic finance is one thing we are working very hard on and where we want to retain our leadership in the industry. We plan to make an announcement about it in the next few months.

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ISLAMIC BANKING

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ISLAMIC BANKING

Islamic banking and financial inclusion PROF. SAIFUL AZHAR ROSLY, INCEIF, WRITES FOR ISLAMIC BUSINESS & FINANCE ABOUT THE ISSUES AND CHALLENGES FOR DEPOSIT-TAKING ISLAMIC BANKS WITH REGARDS TO THE MATTER

A

bank bearing an Islamic label has a lot more to perform than their conventional counterparts. Profitability is paramount. Operational efficiency, liquidity and capital adequacy are equally important. On top of that, Islamic banks have to further fulfill expectations of the Islamic values they carry in their business operation. These include compliance to Shari’ah rules and ethics. The Maqasid Shari’ah, which is the purpose of the law is another core element in Shari’ah that has put high expectations of Islamic banking. For these reasons, Islamic banks are expected to help small business and promote microfinancing. Carrying the Islamic label in their business warrants Islamic banks promote financial inclusion where ethical and social objectives can be realized in the product offerings. In Shari’ah, Islam prohibits the payments and receipts of riba (Al-Baqarah 275) which is a fundamental rule in Islamic financing. The intent of prohibiting riba serves to protect asset and property (al-mal), which is one of the daruriat. In the riba system, for example, banks borrow from the ordinary people as deposits and pay them three per cent. Banks use these deposits to make loans at say, seven per cent to the big corporations who can possibly earn as much as 50 per cent profit from their investments. In a way, banks are using deposits which are assets of the poorer people and lending them to the rich. In this way, the rich become richer, the poor become poorer. It is clear that achieving social objectives are not within the scope of modern banking.

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Furthermore, depositors who lend their money to banks will see their interest income even less after accounting inflation. In fact, depositors who are actually making loans to the banks are doing so at low interest rates and worst still without adequate collaterals put against the deposits. As banks use cheap deposits to fund big business, it can intensify income disparity and social discontent. Small business and start-ups who are not viable to banks are potential losers as they do not have the collaterals to support loans they are looking for. They are potential vehicles for innovation and employment creation but unable to do so because bank loans are made for the big corporations who make large business deals hence able to pay off their debts. AL-BAY AND BUSINESS ACTIVITIES Islamic banking too is challenged by similar issues. They are established as deposit-taking banks and commercial banks as well. The challenge is to conduct business under these two banking models, namely deposit-taking banks and commercial banks, where al-bay constitutes the basis of Islamic banking system. The Quran says, “Allah has permitted al-bay but prohibits riba”. As the Quran prohibits riba, it also promotes al-bay as the alternative to riba. Al-bay which is the conduct of trading and commerce describe amongst others, the wholesale and retail business but the main lesson is actually the taking of risks in business.

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ISLAMIC BANKING

In al-bay, the merchant uses his capital fund to purchase goods from supplier which he intends to sell at a profit in the market place. In good times he makes profit when sale made at the targeted price but he can also make some loss when no one buys his goods or selling them below costs. In this way, he faces business risk as he is putting his capital at risk to adverse market movement. As shown in the Diagram 1 below, the conception of al-bay can be further expanded into its business dimension where capital injection is necessary to initiate a business activity. While one can visibly see the acts of buying and selling in the market place, such activities cannot be possible without the injection of capital by the merchant in purchasing goods he intends to sell.

DIAGRAM 1: AL-BAY AS A BUSINESS TRANSACTION

CAPITAL

(Equity)

AL-BAY PRODUCTION

(murabaha, salam, istisna, ijara)

On the contrary, the merchant can also use his capital funds to make loans with riba. The loan which is usually collateralised is relatively free from risk, as the merchant can recover the loan from the sale of the collateral in a default event. In the Jahili period, defaulters became slaves when their loans do not carry any collaterals. In a way, the payment of riba and the principle loan are fully guaranteed, which signifies the gross immorality of the riba -based debt system as opposed to ordinary business. These two opposites of al-bay and riba must be properly distinguished to highlight a fundamental

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rule emerging from the Quranic verse (2:275) that one must take risks to justify the taking of profits, hence the legal maxim “al-ghurmu bil ghuni”—profit is accompanied with loss. REAL-SECTOR CONTRACTS It is common knowledge that real-sector contracts available to Islamic banks are grouped under sale-based, lease-based and equity-based. As shown in Diagram 1, the equity-based contract is associated with the sale and lease-based contracts as capital injection to the business entity. These real sector contracts that usually drive the production sector can also be utilized by big and small business alike, hence to the latter financial inclusion should take place in Islamic banks by default. ISLAMIC BANKS AS DEPOSIT-TAKING BANKS The main challenge is that these real-sector contracts are not made for a deposit-taking bank that most Islamic banks are adopting today. Risks in sale, operating leasing and equities transactions are different from the financial risks that conventional banks normally carry. Bank risk appetite is set by bank directors who are responsible in formulating policies and strategies to achieve bank corporate objectives. The risk-appetite of deposit-taking bank is constrained by the size of capital it is holding which is defined by the Leverage Ratio. Basel 3 requires leverage ratio of 3, which means that for $100 million of assets, the bank must hold $3 million of capital to support it. As banking is a highly leverage business, control is needed to prevent banks from taking excessive risks as they are using depositors’ money to make loans. Banks do not use capital funds to make loans but using it as a cushion against unexpected losses. For these reasons, central bank authorities put high risk-weights (RW) on sale, lease and equity-based products up to 400 per cent as they carry high default risks. This will put heavy stress on bank capital if Islamic banks desire to apply the real-sector contracts. ISLAMIC BANKING AS A HIGH LEVERAGE BUSINESS Unfortunately, Islamic banks were ‘born’ into this high leverage business that were originally designed for usury based Western banks. Islamic banking founding fathers and pioneers may have overlooked this important issue which is truly unfortunate. For this reason, Islamic banks too have to take precautions on taking up excessive risks that can threaten the safety of deposits. This will leave no opportunities

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ISLAMIC BANKING

deposits, which is none at all. For this reason, asset risks are only carried by bank shareholders while depositors carry none. Only under a crisis mode, will depositors set to lose when bank become insolvent as no money is available for withdrawal claims. In this way, real-sector contracts as outlined by al-bay stand to face a bleak future when Islamic banks continue to operate under the deposit-taking system.

PROF. SAIFUL AZHAR ROSLY

for Islamic banks to pursue real-sector contracts whose risk profiles may not match risk-appetite of the deposit-taking banks. Much of the problem is associated with bank deposits which can be withdrawn on call. Bank deposits can both arise from loan given to bank by the public as depositors and money credited to one’s bank account from bank loans. Either way, demand deposits are generally callable, thus depositors hold no risks of loss. When depositors make loans to the bank which bank uses to make a new loan, risks of the new loan fall squarely on the bank. At the same time a bank also faces withdrawal risk from sudden withdrawals of deposits when say, news spread out that the bank is becoming insolvent. For this reason, banks are further required to observe Basel 3 capital adequacy requirement which is set at 10.5 per cent. In this manner, Islamic banks will be stressed-up with high capital holding if they plan to finance the relatively risky real-sector companies. It will cause depositors to panic from high non-performing loans when the ventures are not performing. As long as assets are funded by deposits, they can only take risks that commensurate with risks of

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THE WAY FORWARD: INVESTMENT ACCOUNT FUNDS FOR FINANCIAL INCLUSION The way forward is the promotion of investment account (IA) funds. Islamic banks in Malaysia are now required to separate investment account funds from the deposit funds. Investment account funds allows the investors to carry the risks of the fund users who are, say small and medium scale enterprises (SMEs), and thus enjoy a higher returns as well. With a risktaking mindset common in stocks and mutual fund investment, IA holders can earn relatively much higher than fixed deposits, hence possible improvement of income distribution in the economy. The bank who acts as an agent (wakil) will identify SMEs and structure IA based on the profiles of the projects of SMEs. In this manner, the risk-appetite of IA can be directly linked to the risk-profile of the SMEs. This system shall open opportunities for real-sector contracts application available in Islamic traditions, hence help Islamic banks to out-perform mainstream banking in this key area. In SME financing, IA holders can act as the rabbulmal while the former as mudarib. Banks as wakil will earn fees from financial services associated with SME valuation, listing and IA structuring and issuances. In this way, ‘blue ocean’ in Islamic banking is plenty to benefit from, where financial inclusion can be more viable to banks. But these are not up for grabs as Islamic banks today are still doing business with the money-lender mentality. Most of their business are driven by deposit funds and unlikely to move forward to make a difference unless the deposit regime is rationalized along the conception of al-bay as risk-taking system. Worse still, deposit products of Islamic banks in many Muslim countries today have been using the mudarabah label which may trigger Shari’ah non-compliance risk as the former is a loan while the latter is based on a profit-loss sharing (PLS) system.

Prof. Saiful Azhar Rosly, INCEIF can be reached at saiful@inceif.org

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ISLAMIC BANKING

The Philippines sets the stage for Islamic banking growth THE CENTRAL BANK OF THE PHILIPPINES APPROVED REGULATIONS THAT WILL IMPLEMENT LEGAL PROVISIONS ON THE ESTABLISHMENT OF ISLAMIC BANKS IN THE COUNTRY, A MAJOR MOVE FOR ISLAMIC FINANCE’S GLOBAL RISE

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ISLAMIC BANKING

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ECONOMIC GROWTH Philippines

8

ARMM

7 6 5 %

T

owards the end of 2019, the central bank of the Philippines, Bangko Sentral ng Pilipinas, stated its intentions to move further into the realm of Islamic finance. “The BSP is pushing for an open approach where conventional banks can operate Islamic banking windows or to establish subsidiary Islamic banks,” the central bank’s Deputy Governor Chuchi Fonacier told Bloomberg News in October. In August of 2019, the Philippines government passed a law in order to promote Islamic finance, in a country where 10 per cent of the population is Muslim. The law stated that Philippines banks could “engage in Islamic banking arrangements”, though this in itself was not enough to move forward, and all eyes turned towards the Central Bank. Now, at the beginning of 2020, The Central Bank has made its move. “The Philippine central bank issued regulations for the country's Islamic banks and Islamic banking units, covering the licensing framework on the establishment of Islamic lenders and the central bank's expectations on the Shari’ah governance framework concerning such banks,” said Ranina Sanglap, S&P Global Market Intelligence The Bangko Sentral ng Pilipinas said 3 January that it approved regulations that will implement legal provisions on the establishment of Islamic banks and Shari’ah compliance. “The regulations are part of the BSP's aim to create an enabling environment that will allow Islamic banks to operate alongside conventional banks and to provide a comprehensive set of standards to encourage investor interest in Islamic banking and finance. Under the regulations, conventional banks, whether local or foreign, will be allowed to open an Islamic banking unit or to establish a subsidiary Islamic bank. Islamic banks will be responsible for their compliance with Shari’ah principles,” said Sanglap. This announcement is a positive step towards the establishment of a cohesive Islamic finance regulatory framework in the country, according to Fitch Ratings. “However, the development of an Islamic finance ecosystem will take time, and we do not expect Islamic banks to take significant market share from the well-established conventional banks over the medium term,” said Bashar Al Natoor, Global Head of Islamic Finance and Senior Director, Financial Institutions at Fitch Ratings. Islamic banking is still quite nascent in the Philippines as there is only one major player - Al

4 3 2 1 0 2010 2011 2012 2013 2014 2015 2016 2017 2018

SOURCE: Fitch Ratings; Philippines Statistics Authority

GROSS REGIONAL DOMESTIC PRODUCT PER CAPITA (Pesos Per Capita; Current Prices) Philippines

ARMM

180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 SOURCE: Fitch Ratings; Philippines Statistics Authority

Amanah, a subsidiary of the Development Bank of the Philippines (BBB/Stable). The BSP's new regulations aim to allow the sector to compete on an even regulatory playing field. “If the move is able to support financial inclusion and economic development, particularly in the Autonomous Region in Muslim Mindanao (ARMM), an area with one of the largest Muslim populations

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ISLAMIC BANKING

The State House in the city of Bacolod.

in the Philippines, it would be broadly in line with the government's agenda for inclusive growth. The ARMM, with a population of four million in 2018, is currently one of the least banked regions in the country, partly reflecting low levels of economic development,” said Natoor. The growth of Islamic banking in the Philippines will be affected by several factors. One will be the extent to which the financial ecosystem evolves to allow Islamic banks to operate on an equal footing with their conventional counterparts from a regulatory and tax perspective. A fully developed Islamic financial ecosystem would also require other key pillars of Islamic finance, such as Shari’ahcompliant insurance (Takaful) and Sukuk. The absence in the Philippines of a central Shari’ah board to certify Islamic financial products could hamper the sector's development, according to Fitch Ratings. Another important factor will be the ability of banks and other interested stakeholders, including regulators and government, to spread awareness about Islamic finance and build up a cadre of staff with expertise in working and structuring Shari’ahcompliant financial products, according to Fitch. Efforts to spread awareness may benefit from the experience many Filipinos have had working in the Middle East, where Islamic banking is widespread. “One factor to watch will be whether the authorities' efforts to develop the regulatory environment are able to attract foreign direct investment, leading to merger and acquisition activity or potential tie-ups that might accelerate

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the sector's growth. Fitch believes that Islamic financial institutions from member states of the Gulf Cooperation Council, for example, could have interest in the potential for cross-border deals. “These institutions have been instrumental in developing Islamic finance outside the Gulf, in countries such as Morocco and Turkey. Despite the potential for better regulation to further develop Islamic banking in the Philippines, we believe the sector's growth will likely remain constrained by limited funding sources, as well as a lack of public awareness and trust in Islamic financial services, at least in the medium term. Building greater consumer awareness and achieving trust will take time, in our view,” said Natoor. This has been the case when Islamic banking was introduced in other countries, even those with a significant Muslim majority like Morocco. The country's first Islamic banking licences were issued in 2017, but despite the sector's rapid growth Islamic banking still accounted for less than one per cent of the Moroccan banking industry's total loans at end-2018, according to Fitch. Other Muslim-majority countries such as Turkey and Indonesia also saw strong growth from a low base in the early stages of the development of Islamic banking, but the sector's market share subsequently stalled at around five per cent to six per cent of total banking system lending in these countries. In the majority-Catholic Philippines, Islamic banking's potential share of total national lending is likely to be considerably more limited.

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ISLAMIC TECH

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ISLAMIC TECH

Manama, Bahrain, where Bahrain EDB is based.

Spearheading Islamic finance’s tech future DAVID PARKER, CO-CHIEF INVESTMENT OFFICER, BAHRAIN EDB AND BOARD MEMBER, BAHRAIN FINTECH BAY SPEAKS EXCLUSIVELY TO ISLAMIC BUSINESS & FINANCE

C

ould you tell me more about what your focus is?

My personal brief covers four areas, all of which in some way or another link to Islamic finance and the Islamic financial sector. I’m responsible for financial services, so we do a lot of work with both the conventional and the Islamic players in Bahrain. I’m responsible for the ICT and start up sector. We’re very keen to attract more innovators, more fintechs, into Bahrain. We think the Islamic finance space is something that’s really ripe for innovation. If you take blockchain technology for example, if you look at the principles of blockchain it’s all about transparency that drives trust. Well, isn’t that one of the underlying principles of Islamic finance?

How far has the Islamic fintech space come in the last few years? Not as far as we would like. We are interested in Islamic fintech from several different angles. First of all, we want to see more Islamic banks innovating. We’re starting to see banks such as Al Baraka Bank, for example, increasingly engaging with start-ups globally and are very focused on the fintech agenda. One of them recently joined the board of Bahrain Fintech Bay. We want to continue to work with the existing financial institutions in that space to help them embrace digital disruption and innovation. Second, we’re very key to work with Islamic fintechs in different parts of the world and invite them to come to Bahrain and test their products and services here. We were delighted to welcome into our sandbox for example Wahed Invest, which is a Shari’ah-compliant robo-advisory firm. The third area, in which I believe there is a lot of potential, is to what extent can we engage with companies doing interesting things in the

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conventional space which have the potential to develop a Shari’ah-compliant version of that product? We worked with Rain in Bahrain, who were the first graduates from our regulatory sandbox, and were the first platform to become licensed for crypto trading in the country. They have now developed a Shari’ah compliant focus in their product. We’re starting to see companies that are looking at the Muslim market and the Islamic fintech space as an opportunity. I think that’s where it gets really exciting from a fintech perspective. This is an industry you could argue that Bahrain has always been at the forefront of. Bahrain pioneered Islamic finance decades ago, and we think fintech is the next phase of that. The only other location that we look at that we see do some interesting things is Malaysia. Something we’d love to do from a Bahrain perspective is see how we could tie in with the relevant authorities in Malaysia, as for us it’s all about building bridges. Malaysia frequently ranks number one in the world for Islamic finance. We know there are some interesting things going on in Malaysia and the Islamic fintech space. We are in different parts of the world—they are very much a part of the ASEAN economy, we’re a part of the Gulf economy. Could we build bridges? That question excites me. We also are asking what else is going on in Pakistan, Indonesia, parts of Africa, London and Luxembourg, which is also looking at the Islamic finance and fintech space. We are trying to build bridges with those other hubs.

What are some of the challenges in getting traditional institutions to embrace innovation? I think that the main challenge in terms of getting

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traditional institutions to embrace innovation is to appreciate both the opportunities and the threats. From an opportunity perspective, obviously it’s a way in which institutions can become more efficient, drive down costs, and to go back to the point I made earlier, that they can further reinforce the principles behind Islamic finance through technologies like blockchain. The threat, for me, is that they don’t one day find that other players have moved into the financial services space and eating their lunch so to speak. We’re seeing now the emergence not just of fintech but techfin—technology companies starting to develop financial platforms and financial services. I was at an event recently and someone said: “people don’t need banks. They need banking services.” If you think about it, if new players start to come into this space and do things more efficiently and more effectively than banks, and I’m thinking technology companies for example, that’s a threat. What we don’t want to see is institutions in Bahrain that we have high regard for, that are important parts for our financial centre, starting to run into difficulties. We want to encourage a degree of disruption; we want to encourage more innovation. We want to shake things up a little bit. We don’t want, however, to lose those long-standing and trusted institutions. They are looking at this space very aggressively. Bahrain Islamic Bank, thanks to the leadership of its chief executive Hassan Jarrar, have been leading the way. He and I recently visited Singapore recently attending the Singapore Fintech Festival, and we took the opportunity to visit some of the banks in Singapore to see what they were doing to embrace the digital agenda and what institutions in Bahrain could learn from that. There are opportunities, there are threats, and some are moving quicker than others. We think the insurance space will start to move as well, and we will see Takaful and ReTakaful companies embrace innovation and digital transformation in the way that the banks have started to do. It’s a combination of the financial institutions, the innovators, and to some degree the investment community, but also the regulator.

What part does the Bahrain Central Bank play? One thing we’re very grateful for in Bahrain is that we have one single super-regulator, the Central Bank of Bahrain, who have shown real leadership. This is

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not an easy place to be if you’re a regulator, because you want to embrace innovation but you also want to ensure consumer protection, anti-money laundering and all the things good regulators do. That creates a problem. How do you get that balance right? How do you get the balance between driving innovation on the one hand and encouraging an environment that is innovation friendly while also ensuring that you have tight regulation and tight controls to protect consumers? The CBB stand up against any other regulator in the world in the way they’ve got that balance right. Right from the outset, they have been driving this agenda. When we introduced crowdfunding regulations in Bahrain, they put in place Shari’ahcompliant regulations. They put Shari’ah-compliant crypto regulations with Rain. At each stage, they’ve been really very mindful of the Shari’ah-compliant agenda with all new innovations and regulations.

DAVID PARKER

What percentage of Islamic institutions are pushing in innovation? It’s difficult to put a percentage on it because it’s

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ISLAMIC TECH

almost like a conveyer belt. At the beginning, you have complete ignorance—banks who don’t appreciate the opportunities or the threats that this digital transformation presents to them. I’m not engaged with anyone anymore in the banking space who is still in that stage. They’re all in what I would describe as stage two which I would describe as curious. They appreciate that this is something that can’t be ignored, so they’re looking to learn. They have possibly identified key stuff and are starting to adapt accordingly. Then you have those who are actively engaged in the digital space, and following them are the ones who I would describe as outright pioneers in driving this agenda. I’m not going to go on record on which institutions those are,

One thing we’re very grateful for in Bahrain is that we have one single superregulator, the Central Bank of Bahrain, who have shown real leadership. – DAVID PARKER, Co-Chief Investment Officer, Bahrain EDB and Board Member, Bahrain Fintech

as I’d rather leave it for others to judge, but I’ve already mention one who has impressed me with vision and leadership in this space and that’s Hassan Jarrar from Bahrain Islamic Bank, and some of the initiatives coming out of Al Baraka.

How does the Bahrain Fintech Bay fit in? It gets exciting for me when we talk about all the different component parts of the ecosystem. We have the Bahrain Fintech Bay which has given us an ecosystem under one roof—the beating heart of conventional and Islamic finance and innovation in one space. When we set it up, we didn’t want it to simply be a co-working space—we wanted it to be an ecosystem. You can’t have an ecosystem without the incumbents. It’s great that some of the Islamic institutions are founding partners of the Bahrain Fintech Bay who are working with the Bay to contribute to the wider ecosystem. That, in this part of the world, stands Bahrain apart. The different players are working together to push this agenda,

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to drive the ecosystem and the future growth of the ecosystem through the Bahrain Fintech Bay initiative. The Bahrain Economic Development Board then intervenes to try to make this process go faster, as well. These are the key component parts of our ecosystem. None of that would stand up if we didn’t have the skills and the talent. We have many years, many decades, of strength and talent as a financial centre. Next year we actually are celebrating 100 years of banking in Bahrain, as Standard Chartered set up shop 100 years ago in Bahrain. We’re very proud of that. We’ve been a pioneer in Islamic finance for 50 years, which is again something we’re very proud of. When we’re talking about fintech in terms of skills and talent, in terms of ‘fin’ we have talent, but in terms of ‘tech’ that’s one area that we’ve really had to adapt. We don’t have a long-standing track record as a country in technology. From many years, we made our revenues in oil, though we didn’t have quite as much of it as our neighboring countries of course. We’ve always had to diversify which is why we became a financial centre but we’ve never been a tech hub. In the emergence of Silicon Valley, you won’t see much mention of Bahrain. We want to be on the forefront of the fourth industrial revolution— the internet age. This is driven by the vision of his Royal Highness the Crown Prince who is also the chairman of the EDB, to embrace innovation as the new oil and embrace this digitalised economy.

So how do we address the talent gap? We’ve done a few things. We’re starting at grass roots, and we’ve started to take this into schools and colleges to work with our homegrown universities. Bahrain Polytechnic University and the University of Bahrain have been very active in this space. We’ve also reached out internationally to drive this agenda properly. Fintech Bay has partnered with Georgetown University in Washington DC USA to develop the national fintech talent programme, involving individuals not just going through development in Bahrain but taking secondments in other parts of the world using our partnerships in New York, Silicon Valley and Singapore so they can get more closely involved with the things that are developing this space. Hopefully this allows us to point young Bahrainis in the right direction in terms of the skills that they’re going to need to pursue their future career paths in this brave new world of fintech and digital transformation. That’s really exciting as well.

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SUKUK

FINANCING INFRASTRUCTURE PROJECTS IN AFRICA:

The promise of sovereign Sukuk GHASSEN BOUSLAMA, ASSOCIATE PROFESSOR OF FINANCE, NEOMA BUSINESS SCHOOL – FRANCE WRITES EXCLUSIVELY FOR ISLAMIC BUSINESS & FINANCE

(ISTOCK)

A young man near Timbuktu in Mali, which issued a Sukuk in 2018.

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SUKUK

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A

fter recording its lowest level for more than two decades, economic growth in subSaharan Africa has recovered significantly since the beginning of 2017, and should reach 2.5 per cent by the end of 2019. This recovery has been turnaround by the growth of the continent’s principal economies (Nigeria, South Africa, and Angola) after the dramatic slowdown in 2016. According to recent World Bank data, several countries continue to demonstrate economic resilience by achieving annual growth rates above 5.4 per cent between 2015 and 2017 (Ivory Coast, Ethiopia, Kenya, Mali, Rwanda, Senegal, and Tanzania). For such growth to continue, the continent inevitably will require greater industrialisation, and this will necessitate infrastructure development, both commercial and social. Overcoming the significant lack of such infrastructure will require considerable investment, around $90 billion annually over the next ten years, according to the World Bank. African governments have permanently used traditional financiers, such as multilateral agencies institutions, development funding institutions and private sector participation to finance their infrastructure projects. However, these traditional funding sources are becoming scarce. Due to problems with raising funds on traditional financial markets, reduced margins, and the return of concerns about a new cycle of debt in Africa, it has become vital to look actively for alternative financing sources. Given the large Muslim population in Africa and the abundance of liquidities in a number of Gulf states, Islamic finance appears today as an extremely credible alternative funding source for the continent. Some African countries have recently adjusted their tax system and developed a suitable legal framework for the issue of Islamic financial instruments. This will enable them to diversify their sources of finance and facilitate access to Gulf state investors for project financing on the continent, who will require Shari’ah-complaint instruments. One of the most suitable Islamic instruments for financing infrastructure project is Sukuk. This financial instrument is underlying to a tangible, identifiable economic asset, which is naturally appropriate for the long-term investment projects.

THE AFRICAN SOVEREIGN SUKUK MARKET While the use of Sukuk issuances on the continent is currently marginal, less than one percent of total

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global volume, growth prospects for this niche are extremely promising. Indeed, the African Islamic bond market has seen an increase in the number of sovereign issuances in recent years by several African countries such as Senegal, Ivory Coast, Nigeria, Togo, Mauritania, Mali and South Africa. Other countries have also announced their attention to issuing these instruments in the coming months, including, Tanzania and Kenya (see table 1).

TABLE 1 – NUMBER OF SUKUK ISSUANCES IN AFRICA (JANUARY 2001 – DECEMBER 2016) Country

Number of Sukuk

Total amount in millions of US dollars

Gambia

210

136

Ivory Coast

2

460

Nigeria

3

133

Senegal

2

445

South Africa

1

500

Sudan

28

19,378

Togo

1

245

Mali

1

285

Total

248

2549,378

SOURCE: Bloomberg, 2019

Sudan was the first African country to issue Sukuk, in 2007, at a time when African governments were not yet interested in Islamic finance. More recently, South Africa became the third non-Muslim country, after Hong Kong and the United Kingdom, to issue a sovereign Sukuk. In September 2014, South Africa issued a Sukuk Al Ijara of $500 million, with an interest rate of 3.9 per cent, which created strong demand, and was subscribed more than four times over. This was the second issuance in US dollars made by an African country on the international market, after the Sudanese issuance ($130 million). All other issuances have been in the local currency. Since 2014, several West African countries, with the support of the Islamic Corporation for the Development of the Private Sector (ICD), the private sector arm of the Islamic Development Bank (IDB), have issued a wave of successful Sukuk. This opened the door for other countries to consider the instrument, particularly those in East Africa.

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SUKUK

Some of them have begun to study or adopt legal and regulatory changes so as to create a legal framework in line with the requirements of Islamic finance and Shari’ah.

SOVEREIGN SUKUK ISSUANCES IN WEST AFRICA Mauritania declared its aim of developing the Sukuk market in 2012. The country’s efforts since then finally came to fruition in May 2017 with the issuance of its first Islamic treasury bonds. According to the Mauritanian central bank, this issuance is initially based on raw materials markets, with the dual objective of raising funds for State funding and broadening its banks’ product portfolio, whether they are Islamic or not, by making available an instrument for managing excess liquidities. Nigeria has not been left behind. It has also made three Sukuk issuances. Indeed, the regulatory and legal environment is very advanced in Nigeria and the Securities and Exchange Commission has also published guidelines on the management of Sukuk issuances. Of the eight West African Economic and Monetary Union countries (UEMOA), four have already succumbed to Sukuk fervour (Togo, Senegal, Mali and Ivory Coast) and two others have announced their intention to issue them (Niger, and Burkina Faso). All of these issuances (see table 2) have been organised by the Islamic Corporation for the Development of the Private Sector. In January 2017, this same institution organised a regional consultation to draw up a “model Sukuk law” at the headquarters of the Central Bank of West African States in order to harmonise Sukuk issuance practices between the member countries of this institution. In 2013, UEMOA launched the agency UEMOATitres, whose purpose is to help states in the union raise the resources they need to fund their economic development policies on capital markets at an affordable cost. For West African countries, this is a crucial instrument that could lead to increased numbers of Sukuk issuances in the years to come. The agency is responsible for identifying the most appropriate ways to mobilise resources for State funding on regional and international capital markets. In this regard, the region would benefit from developing specific regulations, which are extremely necessary, to accelerate the development of Sukuk issuances. These regulations need to include arrangements for Islamic type securitisation and for dealing with cases of default.

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In October 2016, Senegal, Togo and Ivory Coast released their Sukuk for quotation on the regional securities market (BRVM) in Abidjan (Ivory Coast). With the equivalent of $1.2 billion of Islamic bonds listed, BRVM became the leading Sukuk market on the African continent, ahead of Khartoum ($130 million). In addition to making the securities liquid on the market, the declared ambition for CFA zone countries is to make the market particularly attractive for future issuances. Other countries in the same zone are also planning Sukuk issuances and have undertaken fiscal and regulatory reforms to accelerate such operations, particularly Burkina Faso, and Niger, which has already signed an agreement with ICD for a Sukuk issuance in the next few months.

A SUKUK ISSUANCE BY A TRANSNATIONAL INSTITUTION: AFRICA FINANCE CORPORATION This frenetic series of Sukuk issuances has also involved a transnational institution, the Africa Finance Corporation (AFC). This pan-African financial institution, specialising in multilateral and project development, issued its first Sukuk in January 2017. Initially, the institution planned to raise $100 million, but as a sign of the operation’s success, the Sukuk was oversubscribed by more than 100 per cent, resulting in the transaction eventually being closed at $150 million, and with a final order book worth around $230 million. This Islamic bond, of the Murabaha type, was the first Sukuk issued by an African supranational entity. Rated A3 by Moody’s, it will mature in three years, on 24 January 2020. These Sukuk were offered to international investors outside the United States as a private investment and were domiciled in the Cayman Islands. Around 63 per cent of the investors who subscribed to this Islamic bond were from Asia, 23 per cent from the Middle East, 13 per cent from Africa, and the remaining one per cent from other regions. This bond issuance is not the AFC’s first experiment with Islamic Finance. In 2015, the firm accepted a funding offer of $50 million over 15 years from the Islamic Development Bank, to finance Islamic finance projects in numerous African member countries of the bank.

THE ADVANTAGES OF SOVEREIGN SUKUKS FOR AFRICAN STATES The main advantage of sovereign Sukuk is to diversify the geographic and institutional investors. The Sukuk

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issued by the Africa Finance Corporation and the South African Treasury illustrate this aspect fairly well. The Sukuk issued in January 2017 by the AFC attracted more than 63 per cent of subscribers from the Middle East and Asia. Conversely, the Eurobond issued in April 2017 attracted only four per cent investors from the Middle East. Similarly, the Sukuk issued in 2014 by the South African treasury for $500 million succeeded to attract 59 per cent of investors from the Middle East and Asia. However, for two of its conventional issued bonds, 62 per cent of investors were from the United States, 19 per cent from the United Kingdom, 17 per cent from Europeans and two per cent from the rest of the world. The musharakah, mudarabah or murabahah sovereign Sukuk are instruments allowing to finance investment projects taking into account the common ownership of assets or services and thus the sharing of risk between issuer and investors. In this sense, if the state does not commit to providing a fixed income

Another advantage of Sukuk lies in its flexibility. Indeed, this instrument is ideally suited for financing infrastructure projects that could generate stable or variable cash flows, such as hydroelectric projects. Depending on the nature of the Sak, the rents or dividends paid to Sukuk holders will have the regularity of interest paid under conventional bank loans. In the event of a change in sales prices or productivity, Sukuk holders would be predisposed to accept changes in the cash flows received. In this context, the Sukuk offer flexibility that benefits both the sovereign issuer and the investor. Based on the principle of profit and loss sharing, the Sukuk can offer other advantages to the sovereign issuer enabling it to face the various challenges facing infrastructure financing. Sukuk allow risk sharing between groups of investors through a securitisation mechanism. Indeed, tying the Sukuk to the performance of an underlying asset makes them asset-backed securities offering less risky investments to the State.

TABLE 2- SOVEREIGN SUKUK ISSUANCES IN WEST AFRICA (2011- 2016) Country

Type of Sukuk Total amount Currency (billions)

Maturity (years)

Rate

Date of issuance

Ivory Coast

Ijara

150

CFA

5

5.75 per cent

2015

Ivory Coast

Ijara

200

CFA

5

5.75 per cent

2016

Senegal

Ijara

100

CFA

4

6.5 per cent

2014

Senegal

Ijara

150

CFA

10

6 per cent

2016

Togo

Ijara

150

CFA

10

6.5 per cent

2016

Mali

Ijara

150

CFA

7

6.25 per cent

2018

SOURCE: Bloomberg, 2019

for Sukuk holders, it would significantly reduce the burden of public debt. On the other hand, sovereign wakalah, ijara or murabahah Sukuk allow financing economic activities without considering this source of financing as a debt for the issuer, but as a partnership between issuers and investors. This category of Sukuk does not appear in the balance sheet, but simply in the footnotes of the issuer's income statement. From there, the Sukuk have a significant advantage for a sovereign issuer, specifically the reduction of public debt. Indeed, African public debt weighs heavily on the state budget and reduces the growth of gross domestic product by repaying external debt.

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In addition to the advantages mentioned above, Sukuk would also have real added value in terms of reducing the risks of corruption and embezzlement, particularly for Ijara-type issuances. The creation of an ad-hoc entity that manages the underlying assets financed by the Sukuk and the intermediation between the issuer and the Sukuk holders, ensures the transparency of the transaction and the traceability of the cash flows exchanged between different stakeholders. The existence of an underlying asset generating profits allows investors to understand the nature of the cash flows and to be more engage in the project. The

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funds collected should be accounted for, because the SPV uses it to acquire the assets. Funds cannot therefore be lost, wasted or misappropriated. This transparency would increase investor confidence and thus lead to an increase in foreign direct investment (FDI). Sukuk therefore represent an opportunity for countries facing the challenges of corruption.

REGULATORY CHALLENGES OF SUKUK ISSUANCES IN SUB-SAHARAN AFRICA Issuing Sukuk in Africa is not a simple process. The implementation of a legal and regulatory frame that favours Islamic finance can take years, particularly as potential issuers and decision makers have limited knowledge of Islamic financial instruments. In South Africa, which hosts the most developed financial markets on the continent, Islamic finance regulations took around four years to become law. Legal measures to enable the development of Islamic finance in Africa are thus an essential feature. The existence of supranational regulations in Africa, such as OHADA law (Organisation for the Harmonisation of Corporate Law in Africa) facilitates the inclusion of clauses compatible with the demands of Islamic finance. However, legal experts are unanimous about the difficulty of creating a single “Islamic business law” for the continent and of harmonising practices. In this regard, the UEMOA, which has had the largest number of Sukuk issued on the continent, would benefit from having specific regulations more than necessary to accelerate the development of sovereign Sukuk. This must contain in particular fittings relating to Islamic securitisation and the treatment of default cases. Today, if the trend for Islamic finance and the Sukuk in this region is certain, the regulatory framework remains weak. The Central Bank of West African States (BCEAO) is also planning to adopt a legal framework regulating Islamic finance soon. Sukuk issuances by countries that already have sophisticated and liquid financial markets could make sense, and enable them to diversify their financial resources, as in the case of South Africa for example. But such issuances could be more complicated and costly in other African countries. Sukuk issuances need to be underwritten by tangible assets. Thus, governments must obtain the necessary approval and pass legislation to sell/buy state property. This is a long process and unless the government is a regular

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Sukuk issuer, investment in such a procedure can be very costly. Countries that have so far issued Sukuk have already a degree of maturity in terms of bond issuances on international euro-band financial markets, particularly Nigeria, Ivory Coast, Senegal, and South Africa. Moreover, Sukuk issuances still face problems insofar as most investors in this market concentrate on securities rated Investment grade (rated BBB-/Baa3 at least), which is not necessarily the case for several sovereign issuers in Africa. To attract liquidities from the Gulf states to African Sukuk issuances, some kind of improvement of credit terms, such as a partial guarantee of the underlying risk, could make it possible to achieve ‘investment grade’ rating. This type of structure might stimulate the development of Sukuk issuances throughout the region.

CONCLUSION Given the size of the Muslim population on the continent, the African Sukuk market is still at an embryonic stage, and the Islamic banking infrastructure is almost inexistent. An improvement of the legal frame of banking, regulatory reforms, and investment in training with regard to Islamic financial instruments should boost the status of the African continent as a destination for Islamic finance. If such progress materialised, and if the continent managed to take even a marginal share of a world Sukuk market that exceeds $100 billion annually, Islamic finance could become an important additional source of funding for Africa’s needs, and to reduce its gap between its infrastructure investment and that of the rest of the world. To make further progress, it is also essential for African entrants to the Sukuk sector recognise the multidimensional challenges that they will have to face. Awareness and detailed understanding of products that conform to the Shari’ah, and the use of a coherent marketing strategy are important to inform and convince new clients, and thus to increase penetration levels. In addition, the creation of a favourable environment for the deployment of Islamic finance, and the implementation of a national strategy to develop the sector successfully also need to be adapted to the country’s specific features, including the size of its economy and its traditional financial system. If appropriate measures are taken, Islamic finance in general, and Sukuk issuances in particular, can contribute to the development of sustainable, inclusive growth for Africa.

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The conventional wisdom of indicative Sukuk pricing MOHAMMED KHNIFER, SENIOR ASSOCIATE, DEBT CAPITAL MARKETS AT ISLAMIC CORPORATION FOR THE DEVELOPMENT OF THE PRIVATE SECTOR (ICD), WRITES EXCLUSIVELY FOR ISLAMIC BUSINESS & FINANCE

O

ne of the most known misconceptions among prospective issuers in emerging & frontier markets is that Sukuk pricing differs from bonds. Well, it does not. Debt Capital Market bankers use the same conventional wisdom for the pricing of bonds. Knowing the indicative pricing is the most decisive factor for reluctant issuers who weigh the other option of using loans or bonds.

KNOW-HOW Depending on the initial term length (tenor), a relative benchmark would be used for the Sukuk pricing. The size of the spread is denominated in basis points (bps) and it varies according to the risk of the borrower. The relative value of indicative pricing is driven by the following: • The issuer’s own outstanding Sukuk/bonds • The issuer’s credit default swaps • Peer group analysis If there is a lack of benchmark for a sovereign in terms of its own bonds, peer bonds could be used as a proxy to arrive at final pricing. Remember that pricing is an art. Hence, there could be other methodologies that will deliver almost the same results as the indicative pricing. In certain trades, there will be marginal to no difference in pricing between a Sukuk and a conventional bond for the issuer.

DISTRIBUTION AND DEMAND By capitalising on demand / supply gap, cost of

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funding can be lowered for the issuer. Sukuk supply/ demand imbalance may offset new-issue premiums. Sukuk attracts both conventional & non-interest demand across different investor classes. Some 50 per cent of the sovereign Sukuk issuances are subscribed by conventional bond investors. The addition of Islamic investors in the funding pool will create price tension between these two distinct investor types leading to better price discovery. All investor classes (Islamic, regional & international) are important to create price tension.

RATINGS Credit ratings agencies assess the relative credit risk of debt securities, borrowing entities (issuers of debt), and the creditworthiness of governments and their securities. Obtaining such ratings will facilitate the marketability of the Sukuk. From a credit perspective, Sukuk represents the same credit risk as that of the underlying obligor (borrower). MOHAMMED KHNIFER

Mohammed Khnifer can be reached by email at mkhnifer@isdb.org and on twitter @mkhnifer.

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SUPPORTING PARTNER 15 Annual th

WORLD TAKAFUL & INSURTECH CONFERENCE

06-07 APRIL 2020

THE RITZ-CARLTON, DUBAI

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SUKUK

The fiscal benefit of potentially higher oil prices for Gulf sovereigns will likely be offset by the adverse effect on capital outflows and weaker economic growth.

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SUKUK

Sukuk riding strong momentum into 2020 BOLSTERED BY A CONTINUATION OF THE STEADY TRAJECTORY IN 2019, FACTORS INCLUDING LIQUIDITY, TECHNOLOGY AND REGULATORY INITIATIVES ARE EXPECTED TO SUPPORT A HEALTHY PIPELINE OF ISSUANCES THIS YEAR

G

lobal Sukuk issuances witnessed a 25.6 per cent hike last year from 2018 numbers, with foreign currency issuances leaping 20.8 per cent. This was driven by high levels of liquidity in Indonesia, good performance in Malaysia, Turkey's efforts to tap all available financing sources and the return of some GCC issuers to the market. Total Sukuk issuance for 2020 is expected to reach $160 billion-170 billion this year, including $40 billion-$45 billion of foreign currency issuance, according to S&P. This represents an approximately 5 per cent growth on the $162 billion seen in 2019. The research and ratings agency added that ample global liquidity and negative yields on more than $10 trillion of debt mean that issuers with a good credit story will find relatively easy entry to the Sukuk market this year.

2019: A GOOD YEAR Notable players last year were the usual suspects—

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Malaysia and Indonesia. Nevertheless, the GCC also pulled it weight with higher issuances of local currency denominated government Sukuk from Saudi Arabia and a few private sector issuers. In Kuwait, the central bank continued to offer Sukuk as liquidity management instrument for Kuwaiti banks. Bahrain’s issuance volumes increased only slightly as the government had less need to tap capital markets having dusbrsed funds from the $10 billion GCC support package. On the other hand, the UAE witnessed a marginal drop as corporates front-load their issuance programmes in 2018 to prepare for less supportive market conditions. In the wider Middle East, Turkey increased its volumes, with total Sukuk issuance of $13.8 billion in 2019, compared to $8.4 billion in 2018. Turkish had to tap all available pockets of liquidity including the Sukuk market as it has been under significant pressure in recent months due to their heavy reliance on external debt and declining rollover ratios.

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What's Behind The Good Performance in 2019? Total sukuk issuance increased to 162 $billion in 2019, compared with 129 $billion in 2018 (see SUKUK

chart 1). Sukuk issuances from Malaysia, Saudi Arabia, Indonesia, Turkey, and Qatar supported the activity of the market (see chart 2). Chart 1

THE SUKUK MARKET PERFORMED WELL IN 2019

Sukuk Market To Continue Expanding In 2020, Barring Event Risk

Chart 2

A FEW COUNTRIES WERE RESPOSIBLE FOR THE SUKUK MARKET'S STRONG PERFORMANCE IN 2019

Sukuk Market To Continue Expanding In 2020, Barring Event Risk

standardization agenda progresses. Chart 5

SUKUK CONTRIBUTION TO GCC FUNDING DECLINED IN 2019 www.spglobal.com/ratingsdirect

Of particular note was the strong performance of Malaysia, explained primarily by government issuances, including the issuances related to the transfer of some Lembaga Tabung Haji (LTH) assets in the course of its restructuring to a wholly owned subsidiary of the Ministry of Finance. The International Islamic Liquidity Management Corporation, and to a lesser extent other private sector and government-related entity issuers, have also stepped up their sukuk issuance volumes in 2019 (see chart 3).

January 2

2020 ,12

SOURCE: S&P Global Ratings

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Islamic Business & Finance | ISSUE 119 Innovation is coming Last year saw the launch of a new platform for sukuk issuance and management using data technology blockchain. We think that if adopted by the market, this platform could boost GCC

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SUKUK

BETTER PROSPECTS Additional easing by the US Federal Reserve is unlikely and only a marginal deposit rate cut by the European Central Bank is expected this year. S&P suggests that global liquidity remains abundant. While some issuers with a good credit story will find it easy to tap the Sukuk market, others will continue to prefer conventional instruments because they are easier to issue—and this is usually the case with new issuers. Apart from that, continuous support from the industry itself as a whole, such as incentives from governments, consultative efforts from regulators and standard setting bodies as well as innovative propositions from banks and fintechs will all assist in bringing the industry mainstream. S&P pointed out several global themes that bode well for Islamic finance—technological innovation, sustainable investments and diversification— will continue to open the market to new players particularly small and midsize issuers.

BANKING ON INNOVATION On the tech front, 2019 witnessed the launch of a blockchain-enabled platform for Sukuk issuance and management. Yet to gain traction in the market, the platform simplifies the Sukuk issuance process having the potential to effectively boost issuance. As it relies on a set of standarised legal documentation for the Sukuk structure, an issuer can simply insert its underlying assets and build its investor book on the platform. With the whole transaction Sukuk Market To Continue Expanding In 2020, Barring Event Risk

Chart 4 SUKUK INVOLVEMENT FROM NONCORE COUNTRIES IS STILL LIMITED

SOURCE: S&P Global Ratings

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2020 Is Likely To Be Another Good Year We think that this strong performance will likely continue in 2020 for a number of reasons including:

managed on blockchain, it improves transparency and traceability, making standardisation more achievable in Islamic finance transactions.

SUSTAINABLE INVESTMENTS Socially responsible investment is a trend that became increasingly popular over the last 12 months. Green bonds and Sukuk issuances are expected to increase this year as more investors buy into the concept and benefits become more apparent. Additionally, as GCC countries transition towards less carbonintensive economies, green projects are expected to increase, with some funds like raised through the Sukuk market.

OIL AND POLITICS These two factors continue to be the main risks impacting large Islamic finance markets. S&P suggests that the most obvious impact would be made by lower oil prices. A lower price would mean higher financing needs for GCC governments, which would then need to choose between conventional or Sukuk instruments. And historically, the conventional bond route seems to be the preferred option. Similarly, a higher oil price would likely mean lower financing needs and lower issuance volumes for GCC governments. Since the start of the new year escalated tensions between the US and Iran was a legitimate concern by many parties. However, the situation seemed to have stabilised and analysts believe that a full-fledge direct military confrontation is something that is highly unlikely. S&P said that any escalation will remain contained as a direct conflict would be economically, socially, and politically destabilising for the entire region, including US-Gulf allies. It added that a potential intensification of proxy conflicts will also further undermine confidence and investment in the region—which is something that is undesirable for main economies in the region. If a protracted and wider conflict emerges, assuming export routes remain functional, the fiscal benefit of potentially higher oil prices for Gulf sovereigns will likely be offset by the adverse effect on capital outflows and weaker economic growth, the ratings agency said. In case of a significant increase in tensions, investors could shift their attention to more stable regions. Such a situation would prompt an increase in funding costs, a lower appetite for regional instruments, or major foreign funding outflows.

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How Islamic finance could advance the sustainability movement

(iStock)

ISLAMIC FINANCE IS DEVELOPED WITH A HIGHER OVERARCHING OBJECTIVE THAT EMPHASISES MAXIMISING POSITIVE VALUE CREATION AND PREVENTION OF NEGATIVE IMPACT WHICH DOVETAILS WITH ESG GOALS, WRITES ADNAN ZAYLANI MOHAMAD ZAHID, ASSISTANT GOVERNOR, BANK NEGARA MALAYSIA

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SUSTAINABILITY

W

e must now acknowledge, that the sustainability agenda has gained increasing importance and a momentum of its own. Everywhere, there is a sense of urgency and call for action. Consumers are making their purchasing decisions with the environment in mind. Investors and shareholders are making demands for their companies and corporations to adopt environmental, social and governance or ESG standards. Corporate managers, emboldened with such mandates by their shareholders are reshaping their organisations into new corporate citizens, responsible, responsive and socially aware. Governments are certainly not left behind. Globally, societies are seeking ways to create sustainable solutions for their communities. Achieving the sustainability goals will not be an easy journey. The global environment itself is more challenging than before with increasing volatilities and uncertainties arising from the global trade war, geopolitical developments and a multitude of factors. Many of these could derail or delay our efforts. How do we then stay on course to keep sustainability and responsible finance a prime focus of business in the financial sector? In my view, Islamic finance is primed to advance the sustainability agenda. Islamic finance is developed with a higher overarching objective that emphasises maximising positive value creation and prevention of negative impact. The Maqasid Shari’ah first articulated by al-Ghazali in the 12th century outlines the goals of preservation of religion, life, family, mind and property with the ultimate aim of prevention of harm and attainment of benefits. Many scholars have developed this further, describing the Maqasid Shari’ah as the attainment of good, welfare, advantage, benefits and warding off evil, injury, loss. Modern scholars have also weighed in, touching on nurturing righteousness and establishing justice. Contemporary scholarship in Islamic law also recognises human development to be a prime expression of maslahah (public interest) pertaining to all economic activities. These guiding principles for Islamic finance stands in contrast to the secular philosophy of utilitarianism, which has been deeply influential in developing the modern frameworks for economic and political decision making today. In short, utilitarianism, developed by Jeremy Bentham and John Stuart Mill in the 17th and 18th centuries, proposed a measure

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of ethics based on ‘the greatest happiness for the greatest number of people’. On the surface, this is an attractive proposition, that is the goodness of an action is determined by its outcome in promoting common welfare. Both utilitarianism and the Islamic principle of al-Masalih al Mursalah are rooted in the rational pursuit of public welfare. However, a major critique of utilitarian ethics is that it ignores the interests of the minority in favour of the majority, downplays the importance of family and society over individualism and strangers, and prioritises aggregate benefits over other ethical principles such as justice or equality. One could thus argue that the Maqasid Shari’ah, which underpins the foundation of Islamic finance and the Islamic economy, has a more holistic perspective on the pursuit of public interests, in that it aims to leave no one behind in pursuit of prosperity while building a cohesive society. In Malaysia, Islamic financial institutions are leading the sustainability agenda and spearheading sustainable finance through the adoption of valuebased intermediation (VBI) initiatives. VBI is the vehicle to transform the industry, from one focused on profits and Shari’ah compliance to one that is also focused on positive impact. Through VBI, Islamic finance will bring various stakeholders together to advance the sustainability agenda, encouraging Islamic financial institutions to assess how they create value and impact, particularly in response to changing economic, social and environmental conditions. This will support the socioeconomic development in line with Malaysia’s long-term agenda of economic growth and shared prosperity for all. The commitment by the Islamic financial institutions has been encouraging. The formation of the VBI Community of Practitioners manifests the leadership by Islamic banks in this area with some of its members also being part of the Joint Committee on Climate Change (JCC) that was recently formed in September and chaired by the Bank and Securities Commission. The JCC aims to look at and create greater synergy in development of climate-related solutioning for the capital and financial markets. It should be noted that many VBI offerings of Islamic banks are already meeting contemporary sustainability themes but more will be forthcoming. Those already on offer include green and specialised financial products and services for

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retail and SME markets, financial solutions for lower income households, custom products for women entrepreneur and SMEs, green solutions that promote environmental sustainability and innovative solutions that promote physical and mental wellbeing. Takaful operators are also taking steps to explore value-based protection for their customers. A dedicated task force has been formed by the Takaful industry to formulate a strategic roadmap to advance VBI in their business offerings and practices. VBI also encourages Islamic financial institutions to play a greater nurturing role in advocating sustainable practices among clients, such as adoption of Malaysian Sustainable Palm Oil Certification, as well as providing necessary funding and technical advisory services. Part of the progress in advancing VBI as a driver for positive change in the Islamic financial services industry has been the bank’s role in working collaboratively with the VBI Community of Practitioners. In November 2019, the bank issued the "Value-based Intermediation Financing and Investment Impact Assessment Framework - Guidance Document" (VBIAF). This provides guidance on the assessment of financing applications and investment opportunities, taking into consideration economic, social and environmental impacts. VBIAF may also serve as a reference for the wider industry that seeks to incorporate ESG risk considerations in their own risk management system. We are also working with our industry partners to produce three sector-specific guides for the VBI Impact Assessment Framework, namely, palm oil, energy efficiency and renewable energy. These will be issued for consultation in 2020 to supplement the VBIAF with technical and step-by-step procedures for industry players in those sectors. The sustainability agenda, carried by the VBI initiative for the Islamic Finance sector, complements directly to the national aspiration in this area. To date, the country is progressively marching towards growth with sustainability following its commitment to the UN Sustainable Development Goals (SDGs) and as a signatory to the Paris Agreement to tackle climate change. Strategic plans involving various sectors such as green technology and renewable energy have been and are being implemented to achieve the SDGs. In 2018, Malaysia ranked 55 out of 156 countries in terms of its overall SDG performance and is on track in increasing affordable and clean energy to fulfill this particular SDG7.

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SUSTAINABILITY

Under the 11th Malaysia Plan (2016 – 2020), green growth has been identified as the game changer in bringing Malaysia towards a sustainable socioeconomic, development path. Since 2016, several new legislations, policies and action plans were introduced, while existing financing mechanisms were strengthened to support the uptake of green initiatives. As 2020 approaches, Malaysia is committed to continue implementing its strategic long-term plans and green friendly policies. Budget 2020 is reflective of this commitment, with the allocation of a matching fund of MYR10 million towards a joint United Nations SDG-government fund to co-finance SDG initiatives in Malaysia.

There is a large financing gap needed to be filled to realise the SDGs in developing countries, which is estimated to be between $2.5 – 3 trillion annually. One major sector to drive a green economy is renewable energy. – ADNAN ZAYLANI MOHAMAD ZAHID, Assistant Governor, Bank Negara Malaysia While government funding is important to realise the SDGs, most of the investments would need to be sourced from the private sector. An annual target of MYR350 billion from private investments by 2020 was identified in the national roadmap for the SDGs, in line with achieving the targets of the 11th Malaysia Plan. Thus, financial institutions are expected to embark on new financing and investment opportunities towards sustainable projects and practices. There is a large financing gap needed to be filled to realise the SDGs in developing countries, which is estimated to be between $2.5 – 3 trillion annually. One major sector to drive a green economy is renewable energy. Projections provided by the Sustainable Energy Development Authority (SEDA) estimates that MYR 33.5 billion is needed by private sector financing to achieve the national target of 20 per cent installed capacity of renewable energy by 2025 in Malaysia. Beyond that, financing is needed for other important sectors such as education, healthcare, social entrepreneurship and food production to galvanise sustainable development. There is also a more prominent role for financial institutions

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to advocate for or provide advisory services to businesses in sustainability areas. For Islamic finance, green Sukuk issuances have served as a bridge between Islamic finance and sustainable investment. However, more is required for Islamic finance to have greater impact and this pursuit can be further enhanced with the VBI initiative. With this Islamic financial institutions will be able to play an important role in supporting the 2030 Government’s Shared Prosperity Agenda. Nevertheless this will not be without its challenges. Balancing different priorities on the social, economic and environmental fronts is a delicate act, as these may seemingly pull in different directions. It is inevitable there will be issues and challenges that need to be addressed on the path to attaining sustainability goals. I would like to touch on three key challenges and share the bank’s views and strategies in responding to these and to further accelerate our journey. First, is the low level of awareness, understanding and appreciation of sustainability practices and what it entails among stakeholders. This has led to limited integration of sustainability-related consideration in individual and institutional practices. Knowledge gaps among financiers in technical areas of the sectors relating to sustainable or green financing such as renewable energy, sustainable agro-production and manufacturing, and social entreprenuership has naturally contributed to apprehension in financing new and relatively unknown sectors. A necessity in achieving scale will be to inculcate awareness on the need for and benefits of a green and sustainable economy. This requires a significant shift in perspective towards how we value social and ecological factors. These should be viewed as inter-linked with the economy and economic wellbeing and not as silos. Neither as a zero sum game, or polar opposites. Beyond this and given the multidimensional nature of the SDGs, knowledge and capacity building across sectors is crucial. In this regard, the bank views climate resilience as a significant part of achieving the SDGs. Understanding and managing climate-related risks enhance the financial sector’s role in enabling an orderly transition to a low-carbon and sustainable economy. Over the past 20 years, more than 50 natural disaster events occurred in Malaysia, accounting for MYR8 billion losses. As climate-related events intensify, the economic costs arising from physical risk, transition risk and liability

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risk will escalate and may have persistent systemwide impacts on financial stability and adversely affect macroeconomic conditions. Viewed from this perspective, climate change developments therefore are crucially relevant to the bank’s mandate. With this in mind, the bank, as a member of the Central Banks and Supervisors Network of Greening the Financial System or NGFS is committed towards building a comprehensive understanding of the impact of climate-related risks to the Malaysian financial system and economy. In September of 2019, a Regional Conference on Climate Change was organised to raise awareness and call for action in managing climate change risks and opportunities, attracting more than 500 board of directors and senior management of financial institutions, regional central banks and supervisory authorities. A technical workshop had also been hosted earlier by the bank with strategic partners to evaluate and manage environmental and social risks in the energy and primary commodity sectors for VBI CoP members and risk managers of financial institutions. Another focus area of the bank is in developing greater standardisation of understanding and definition of green finance for the domestic financial industry. The development of a principles-based taxonomy aims to achieve this, which would support informed decisions and analysis of exposures to climate change in fund raising, lending and

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investment activities. Ultimately, this can potentially increase financing to green projects. The first draft of the taxonomy is targetted before the end of this month and we would welcome feedback from the industry on this. The Joint Committee on Climate Change is also there to build industry capacity, by sharing knowledge, expertise and best practices in assessing and managing climate-related risk. The four subcommittees formed under the Joint Committee are in the midst of developing their action plans, including strategies and initiatives to upskill financial institutions in managing climate-related risks and transition to a low carbon economy. The second challenge is in forging strong collaboration and cooperation among key stakeholders and overcoming the collective action problem. When it comes to costly and difficult action, we always prefer others to do it. Ministries, government agencies, policymakers and regulators must therefore set aside their differences and work for the greater good, consolidate their strength based on their shared values and work collaboratively to develop and bring creative ideas for sustainable development into fruition. Initiatives need to be driven beyond personal motivation and belief. Strategies need clear milestones with clear accountability by stakeholders. Sector-specific approaches need to converge to limit risks of a disorderly transition.

Sustainable energy is key to managing climate risks.

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SUSTAINABILITY

The journey of sustainability is therefore one that is best navigated collectively. We have to come together to support joint and coordinated responses to mitigate unsustainable practices. For the Malaysian financial sector, the formation of the Joint Committee on Climate Change was an important milestone in pursuing collaborative actions for building climate resilience. A key mandate of the Joint Committee is to facilitate collaboration between key stakeholders in advancing coordinated solutions to address arising challenges and issues. This is in addition to building industry capacity, and identifying issues, challenges and priorities facing the financial sector in managing the transition towards a low carbon economy. The third challenge that we face as a developing nation is in balancing sustainability and competing socio-economic priorities, given our limited resources for transition to low-carbon economy. For example, reduction in fossil fuel use may lead to significant trade-offs with growth and poverty reduction objectives, particularly in the short to medium-term. Targetting sustainable growth and development amidst capacity and funding constraints can thus present significant challenges for political leadership, economic priorities and social outcomes. In this context, given the higher cost of transition, the country may need a longer time to transition towards more sustainable growth policies. This may however result in delayed actions which would heighten physical risks. For the bank, given the importance of financial inclusion, this could also involve placing different priorities on the impact of climate change in different community segments and to tailor interventions that are appropriate and relevant to provide effective financial protection, particularly to vulnerable segments. A corollary of our pursuit towards a more sustainable, greener economy, would also be that some segments of the economy may face declining demand, big shifts in asset values or higher costs of doing business. “Brown assets” or non-sustainable assets such as fossil fuel reserves for example would potentially become “stranded assets”, which has implications on the value of investments in energy companies, particularly those dealing with oil, gas and coal. Globally, it is estimated that more than 80 per cent of the known coal deposits, 50 per cent of gas, and one third of the oil reserves cannot be used for energy production if global warming is to be kept below 2°C.

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Transition towards lower-carbon economy, through transformation of the current modes of production and consumption may come at a cost. Some have argued that on a macro level, this could lead to a positive ‘green growth’ effect. Climate policies associated with structural reforms, including mandatory climate-related financial disclosure could increase investment and benefit the global economy in the medium term. Investment in research and energy efficiency could have a positive impact on innovation and knowledge spillovers, while creating opportunities for economic growth, job creation, and financial innovation. An example of a new business opportunity that could arise is the upcycle of waste materials into new products. Nevertheless, as in many policy shifts of this nature, there will be winners and losers and public policy must strive to strike an acceptable balance to all the communities and sectors that have been adversely impacted. To conclude, the journey towards sustainability requires careful and well-informed assessments, policy planning, coordination, execution and communication. Long-term planning is crucial to remain focused on the end goal. With a long lag between present actions and the impacts, as well as the prominence and visibility of the short-term outcomes, perseverance is key. We may have to overcome "sustainability fatigue" that may arise in the the efforts and resources that must be invested in pursuing sustainability. Failing to do so would lead us to fall into a pattern of disregard and laissez-faire, thus derailing us from achieving sustainability. Ultimately, in striving for sustainability, we are endearing into each and every one of us our role as custodians and stewards of this planet and its resources. We all have a role to play in achieving the 2030 SDGs, including the financial sector which can be a significant contributor in this journey. This will be among the key themes in the next Financial Sector Blueprint 2021-2025 that is currently being developed. For the Islamic finance industry, the larger aspiration is the adoption of VBI to bring about continued, sustained, sustainable positive impacts to the economy and society. A long view is required to value social and environmental gains, and to recognise returns beyond financial profits. Being cognisant of the limited window of time that we have at present, our actions from now would lessen the potential losses and enhance the prospects of our future.

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Rediscovering the lost coins of Islam A NEW EXHIBITION IN THE UAE, HELD AT THE SHEIKH ZAYED GRAND MOSQUE CENTRE IN ABU DHABI, AIMS TO HIGHLIGHT BOTH THE HISTORY OF ISLAMIC FINANCE AND THE HISTORY OF RELIGIOUS TOLERANCE IN THE REGION THROUGH A NEWLY UNVEILED COLLECTION OF COINS

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ISLAMIC ART

I

slamic finance and Islamic art converge at Coins of Islam: History Revealed, an exhibition being held at the Sheikh Zayed Grand Mosque Centre (SZGMC) in Abu Dhabi. The exhibition, inaugurated by H.H. Sheikh Mansour Bin Zayed Al Nahyan, Deputy Prime Minister and Minister of Presidential Affairs and under the patronage of Her Highness Sheikha Fatima Bint Mubarak, opened on 28 January and is set to run until 28 April. The collection of coins, which aims to reveal the history of money in the Middle East and the Islamic world and also to show the historical links between cultures and faiths that these coins symbolise. The 300 coins that are a part of the collection intricately tell the story of the early days of Islam, as the pre-Islamic and Western coinage was gradually replaced with coins that were indicative of the values of the faith, such as removing individual figures, quoting the Holy Quran, displaying mosques, and more. It also shows the early days of how finance and Shari’ah compliance first interacted. “The coins were always Shari’ah compliant. Islam was the national religion of all the issuing parties, so they had to be compliant. You had civilizations that were more open than others. In come cases, you have, even in the late centuries, you have representations of animals that are not exactly compliant, so every civilization had a different way of staying true to the values of Islam,” Dr. Alain Baron, the founder of Numismatica Genevensis told Islamic Business & Finance. Dr. Baron painstakingly built the collection over a 10 year period for an anonymous private collector, who intended the collection of Islamic coins not only as a personal feat but a way of educating the public, which is what the exhibition aims to do, Dr. Baron revealed to Islamic Busines & Finance. Dr. Baron approached the representatives of the Sheikh Zayed Grand Mosque Centre in Abu Dhabi, with whom he found a shared goal of education and promoting tolerance. “We had talks with the Grand Mosque, and we were positively surprised that the Mosque had positive ideas about tolerance. This sends a very strong message, and we had a common ground we could work on,” said Dr. Baron. "Islamic history and culture inspired this exhibition in line with the SZGMC's vision. Since its establishment, the Centre has become a leading cultural destination, serving as a beacon of intellect and reason through its various activities.

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By displaying historical artifacts, like these extraordinary coins, SZGMC aims to underline the rich history and cultural legacy of successive Islamic eras across centuries,” said HE Abdurrahman bin Mohammed Al Owais, Chairman of the Board of Trustees of Sheikh Zayed Grand Mosque Centre. "Ever since its establishment, Sheikh Zayed Grand Mosque Centre has worked towards supporting the UAEs efforts to establish rapprochement between cultures. While also improving the quality standards of cultural tourism across the country and transform it into a leading global destination. Today as we witness another outstanding achievement at this grand edifice that is considered an important addition to the integrated system of services and facilities, SZGMC seeks to develop and provide millions of different religions and nationalities,” HE Al Owais continued. “One of the world's most significant collections of Arab and Islamic coinage ever assembled, the exhibition will celebrate the splendors and H.H. SHEIKH MANSOUR BIN ZAYED AL NAHYAN, Deputy Prime Minister and Minister of Presidential Affairs and DR. ALAIN BARON, founder of Numismatica Genevensis

Fatimid Caliphate Al Muizz li-Din Allah AH 198- AD 953-975 Hammered coins were produced by placing a blank piece of metal - called a planchet or flan - of the correct weight between a lower and upper die, which was then hit to produce the required image on both sides. The lower (obverse) die, was usually counter sunk in a log or other sturdy surface while one of the minters held the upper (reverse) die while it was struck, either by himself or an assistant. Dies used for the manufacture of gold dinars were usually made of bronze and with a single pair of dies minters could produce up to 50,000 dinars. Displayed in Section 3: Coins Across The Islamic Dynasties. From a set of post-reform Umayyad gold dinars dated AH 77-132 (AD 696/7-750). Damascus HIstory’s first purely Islamic coin, first minted between 77 AH (696-697 AD) by the Umayyad caliph Abd El Malik Al Marwan. The new dinars replaced all pictorial designs with Arabic inscriptions taken from the Quran. Displayed in Section 2: Birth of Islamic Coinage.

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Filali Sharifs of Morocco, Moulay Hasan I (1873-1894), AR 10, 5 and NI ½ and 1 dirham patterns, Paris AH 1298 (1880/1). Morocco has a remarkable Islamic tradition from the 7th century to the present day. Morocco has the richest Islamic architectural heritage in North Africa. These coins are from a unique set from the beginning of the Moroccan coinage that were presented to the King in 1873. Displayed in Section 3: Coins Across The Islamic Dynasties

Abbasid Caliphate, Zubayda (AD 782-831), AR dirham, Jazirat al-Raghistan AH 183 (AD 799/800). Living during and after the time of Imam Al-Shafe'i, Queen Zubaida was married to Haroon Al-Rasheed in 165 AH (781 AD) the fifth Abbasid Caliph who ruled for 23 years (786-809). Queen Zubaida was a devout Muslim and never missed a prayer. She was revered as a philanthropist and remains known for the system of wells she built for pilgrims making their way from Baghdad to Mecca. The exploits of her and her husband were immortalised in the book One Thousand and One Nights.

Abbasid Caliphate, al-Mahdi (AD 775-785) and al-Hadi (AD 785-786), set of AR dirhams of al-Yamamah (now part of al-Riyadh) struck between AH 165 and 170 (AD 781-787). One of the earliest gold coins to be struck in Mecca. Displayed in Section 3: Coins Across The Islamic Dynasties.

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achievements of the Islamic civilization across centuries and the unique perspective on that history afforded by its coins. It is our absolute honor to emphasize the SZGMC's mission as a centre of learning and knowledge and to highlight the unique and profound role that numismatics plays in our understanding of history and culture,” said Dr. Baron. HE Noura Al Suwaidi, director of the General Federation of Women, praised the collection. "Coins of Islam: History Revealed exhibition showcases one of the most unique collections of rare coinage ever assembled, which has been collected from all across the globe. Through the display of 300 coins, the exhibition traces the historical evolution of Islamic coinage by documenting the coin's date of minting and the historical background associated with its production, supported by rich factual information that conveys their cultural and historical value. Besides, it sheds light on Islam's long history of engaging with other cultures and faiths,” said HE Al Suwaidi. "The Mother of the Nation's deep insight implicates her interest in such exhibitions that represent the enduring history of our nation and enlighten society in general and women in particular about the rich heritage of Islamic culture, and the extent of progress it has achieved throughout history." Importantly, the collection has a strong dedication to promoting women by highlighting how important women were to the development of Islamic and the development of the region. "One of the main features of the Islamic coinage exhibition is the dedication of an entire section to women, which documents the significant presence of strong and inspirational women in various cultures across the centuries. This section showcases a selection of coins engraved with images of incredible women who left their mark on history. It also reflects the mission of HH Sheikha Fatima Bint Mubarak to support women's empowerment, as well as her immeasurable achievements that have played a significant role in the renaissance of the UAE,” said HE Suwaidi. "The exhibition narrates the history of coins, based on the timeline of minting across various civilizations of the world. It also portrays the images of revered historical figures, as well as other imagery that depicts inhabitants and cultures and further highlights the commonalities and human connections between these cultures."

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Ilkhans, Muhammad Khan (AD 1336-1338), AV dinar, al- Jazirah AH 737 (AD 1336/7). The only coin in the world bearing the names of the prophet Mohamed and his Four caliphs on one side (Abu Baker, Umar, Othman, & Ali) and four great prophets from the pre-Islamic era on the other side (Noah, Abraham, Moses & Jesus) – a unique witness of religious tolerance and among the earliest evidence of Christian-Islamic dialogue. Displayed in the Introductory section: Tolerance.

UAE, Abu Dhabi, Shaikh Zayed b. Sultan Al Nahyan (b. 1918, r. 19662004 CE), AV medal commemorating the Sheikh Zayed Grand Mosque. 40.47 g., 40 mm.

UAE, Abu Dhabi, Fatima bint Mubarak Al Ketbi (b. 1943), AV medal commemorating the founders of the Emirate (2005). 40.21 g., 40 mm. Displayed in Section 6: Zayed and Civilization.

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