ISLAMIC FINANCE PAKISTAN

I S L A MI C FIN A N CE IN D US T RY N E WS L ETT E R V O L UM E 3 IS S U E 1 I J A N 2 01 2

Ernst & Young Issued World Islamic Banking Competitiveness Report 2011-12
The 8th annual edition of the World Islamic Banking Competitiveness (WIBC) Report 2011-12 is developed in collaboration with leading global professional services and advisory firm, Ernst & Young, with a principal focus on A Brave New World of Sustainable Growth. The WIBC Report 2011-12 explores the key industry trends and the critical success factors guiding the global Islamic banking and finance industry to the next level of performance and growth. The global Islamic finance industry has undergone major transformations in the last few years in its quest to boost international competitiveness and to build a sustainably profitable business model. There has been a focus on product innovation efforts that aim to provide a more comprehensive array of Shariahbased products for the market. The global Islamic finance industry has also seen significant developments in regulatory frameworks and Shariah standardization initiatives. Industry forecast suggests that Islamic banking assets with commercial banks globally, will reach $1.1 trillion in 2012 (2010: $826bn). In MENA, Islamic banking assets increased to $416bn in 2010, representing a five year CAGR of 20% compared to less than 9% for leading conventional banks. As new geographies open up to Islamic banking, the MENA Islamic banking industry is expected to more than double to $990bn by 2015. However, there are significant performance variations across markets. In 2010, average Return on equity (ROE) of leading Islamic banks declined to 10%. Also, market valuations appear to be converging to that of regional conventional peers.

In MENA, I s l a m i c banking a s s e t s increased to $416bn in 2 0 1 0 , representing a five year CAGR of 2 0 % compared to less than 9% for leading conventional banks. The M E N A I s l a m i c banking industry is expected to more than double to $990bn by 2015.

O you who believe, be steadfast for (obeying the commands of) Allah, (and) witnesses for justice. Malice against a people should not prompt you to avoid doing justice. Do justice. That is nearer to Taqwa. Fear Allah. Surely, Allah is All-Aware of what you do. (Al-Maida: Ayat No. 8)

Inside this issue

Inside Story Editors Message 1 2

Local and 5 International News Get a glimpse of what has been happening in the world of Islamic finance Ask Us by Mufti Ibrahim Essa and Mufti Javed Ahmed In the Spotlight Find our read of the month Upcoming Events Institution in the Spotlight 7

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Editorial
Governance and Islamic Financial Institutions
Corporate Governance refers to the way an organization is directed, administrated or controlled. It includes the set of rules and regulations that affect the managers decision and contribute to the way company is perceived by the current and potential stakeholders. By doing this, it also provides the structure through which the companys objectives are set and the means of obtaining those objectives and monitoring performance. Good corporate governance ensures the accountability of the management and the Board. It is understood that efficient corporate governance will make it difficult for inappropriate practices to develop and take root, though it may not eradicate them immediately. The Islamic finance industry has been growing rapidly over the last few years. This is a commendable achievement given the instability prevailing in the international financial market. Since Islamic Financial Institutions (IFIs) in many ways are similar to the conventional financial institutions, the existence of a proper framework of corporate governance is a matter of dire necessity. However, different from conventional financial institution, IFI has the responsibility to ensure the compliance with the Shariah principles in its products, instruments, operations, practices, management etc. as opposed to conventional financial institutions. IFSB Guiding Principles on Corporate Governance states that an appropriate mechanism must be created to ensure the compliance with the Shariah principles. Similarly, IFSB Guiding Principles on Risk Management states that IFI shall have in place adequate systems and controls, including Shariah Board/advisor to ensure compliance with the Shariah principles. Shariah compliance is the backbone of Islamic banking & finance, giving its practices the due legitimacy. Good governance boosts the confidence of the shareholders and the public that all the practices and activities are in compliance with the Shariah at all times and this can be achieved by having a proper Shariah governance framework. This issue of IFP is out with a new and improved look where an interaction between Islamic finance professionals, industrialists, businessmen, Shariah advisors, students and any another stakeholder can take place. Your comments and contributions will be highly regarded and sought after. Muhammad Shahzad Hussain Arshad Hussain Zubairi Ammar Khalid Rima Farooq

Advisory Board
Syed Shahjahan Salahuddin Mufti Irshad Ahmed Aijaz Mufti Najeeb Khan Anwar Ahmed Meenai Mohammad Aslam Mujeeb Baig Faizan Memon

Editor-in-Chief
NusratUllah Khan

Associate Editors

Let us know, if you know friends or colleagues who, in your view, may benefit from this newsletter. Send us their email addresses at newsletter.ifp@gmail.com

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Continued World Islamic Banking Competitiveness Report

Competitive Landscape
Growth within the Muslim population throughout the emerging markets of Middle East and North Africa (MENA) and Asia are key drivers behind increasing demand for Islamic financial services. The MENA region boasts macroeconomic synergies that bode well for future GDP growth. The GCC, Iraq, Algeria and Libya all have large hydrocarbon while countries such as Turkey, Egypt, Saudi Arabia and Morocco have large human capital reserves and accumulated wealth. Governments are utilising their revenues from hydrocarbon to stimulate, develop and sustain economic activity within the region. Within MENA, the GCC markets are generally more developed with greater lending/financing assets to GDP penetration. Shariah compliant assets represent a significant portion of the total banking system assets of the region. MENA Islamic banking market share has reached 14%; in the GCC the Islamic banking market share has crossed the all important 25% threshold which means Islamic banks are competing in the conventional market. Strong historical growth, driven by core Islamic segment; going forward expect change of play as Islamic banks begin to compete for mainstream customers w ho are open to Islamic or conventional banking. Industry is still fragmented with most Islamic banks holding less than $13bn assets yet to achieve scale, facing pressure on profitability. The largest Islamic banks within the region are all leaders in their respective home markets and have expanded internationally to some degree. Bank financing activity appears to be picking up. Regulatory requirements may induce banks to raise higher-cost investment/ time deposits. Moreover, real estate concentration remains a concern for Islamic banks. Business repositioning-(M&A, conversions, changing business focus) appear to dominate MENA Islamic banking. Examples include conversion of Amrah Bank to Islamic, Royal Decree passed to allow Islamic finance industry to commence in Oman, Bahrain Islamic and Al Salam Bank tendency that these are of a short tenure. After a painful decline in profitability through the financial crisis the Return on Assets (ROA) appears to be stabilizing, but now lower than conventional banks. Higher provisions and operating costs have contributed to the steep decline in profitability of Islamic banks. Higher cost to income ratio is a combined result of modest core banking revenues and a higher cost base due to misaligned processes and systems. Performance culturehigher staff cost should translate into better performance but Islamic banks lag behind their conventional peers. Operating costs are impacting Islamic banks across the region operating models need to be made scalable. Both Islamic and conventional banks have seen a deterioration in the provision to income ratio. While the bigger Islamic banks have seen comfortable deposit growth, the smaller institutions have had to raise expensive investment deposits to meet liquidity and regulatory requirements. Average cost of customer funds is lower for Islamic banks, primarily due to high share of free deposits in the deposit mix. Islamic banks continue to hold more liquid assets than conventional banks in most markets. Both Islamic and conventional banks have a negative liquidity gap for short-term maturity band.

Strong historical growth, driven by core Islamic segment; going forward expect change of play as Islamic banks begin to compete for mainstream customers who are open to Islamic or conventional banking.

announce they are exploring merger, Goldman Sachs registers a $2bn Islamic bond programme with the Irish Stock Exchange and International Bank of Qatar announces the sale of its Islamic banking business to Barwa Bank.

Performance Analysis
Islamic banks have experienced a more painful decline in profitability over recent years but this now appears to be stabilizing. They are able to generate higher financing margins because of their relatively stronger retail focus. Equity multiplier suggests that Islamic banks have room for further expanding risk weighted assets. Islamic banks benefit from a higher proportion of free customer deposits but there is a

Competing to Win The CEO Agenda

Several Islamic banks have initiated a comprehensive transformation agenda for sustainable growth. The search for a new business model is divided into four aspects which include operational efficiency and effectiveness, growth, risk

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ContinuedWorld Islamic Banking Competitiveness Report

Competing for customers who are not driven by Shariah considerations only service quality is likely to replace pricing as the primary proposition. Moreover, banks need to review their customer and market strategies to help understand customer requirements and engagement tactics in the new competitive landscape. Also, banks can identify trends in customer behavior and spending to provide suitable products in line with the customers needs successful rollout has delivered and Shariah compliance, technology risk, including absence of fully compliant/certified systems and liquidity and associated cost. While most Islamic banks remain localized to their GCC base, there is potential demand for an estimated 100 new Islamic financial institutions across MENA by 2020. However, a major impediment to growth is the weak Islamic finance infrastructure in several OIC markets. Regulators recognise the profit and loss sharing concept of Islamic banks; There are currently 17 Islamic banks and four international Islamic banks; Conventional banks are encouraged by the Central Bank to establish Islamic windows; and Various incentives (legal & tax) are provided by the government (e.g. up to 100%. Oman, Banking Parameters: Total banking assets 2010: US$41bn CAGR (08-10): 6.6%; Islamic banking market share 2010: 0%; Total banking deposits 2010: US$27bn CAGR (06-10): 22%; Banking asset penetration 2010: 70%; and Deposit penetration 2010: 47% Islamic finance commentary Royal Decree to introduce Islamic banking.

Country Spotlight

Islamic banks have Malaysia, Banking Parameters: Total banking assets 2010: experienced a more US$505bn CAGR (06-10): 9.1%; painful decline in Islamic banking market share profitability over recent 2010: 17.3%; years but this now Total banking deposits 2010: US$ 360bn and CAGR [06-10] 9.5%; appears to be stabilizing. Banking asset penetration 2010: Islamic banks are able to 220%; generate higher financing Deposit penetration 2010 : 156%; margins also because of their relatively stronger retail focus. Summarized by Ammar Khalid
increase in retention and profitability. Banks in the region often use costly incentives to attract customers but then spend little on service to retain them this is unsustainable. A customer-centric operating model which has processes, built around the customer are the biggest drivers of benefits. Top risks for Islamic Banks are managing the transformation, to customer centric business model, reduced profits and valuations, geopolitical, macroeconomic shocks, human capital, including misaligned compensation structures, product risk, balancing innovation, law of the land

Meezan Bank Ltd Designation: Assistance Manager - Treasury Department

The operations of Islamic banks are based on Islamic law and differ from conventional banks in terms of spirit, cultural background and practice. However, both conventional and Islamic banks operate in a globally integrated banking industry, which is characterised by strong competition and rapid changes in technology. - Dr Farhad Reyazat

An initiative of IFP forum

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Oman Islamic Economic Forum, A Success

Key figures within the Islamic finance industry from across the world participated in the Oman Islamic Economic Forum 2011, a two day event held from the 17-18 December in the nations capital of Muscat at the Al Bustan Palace Ritz Carlton Hotel. Stakeholders, including financial practitioners, academics, and business leaders from both Oman and abroad, attended the event, the purpose of which was to look at how Islamic finance can bring future benefits principally to Oman, as well as, to the international community. The event website states that the event will explore steps Oman needs to take to develop its Islamic finance capacity and that it will offer an agenda for the creation of a robust Islamic finance framework.

'Best Islamic Technology More Banks Attracted to Worlds First Shariah Provider of 2011' Compliant Interbank
The trophy was granted to Path Solutions, which was received by Stanley T. Young, SVP Worldwide Sales who commented by saying, "We are delighted to get industry recognition for the value Path Solutions brings to the global Islamic finance industry. This award is a great achievement and testimony to our ability to respond to a challenging year and continue to be at the forefront of a growing industry".
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More international banks are attracted to the world's first Shariah compliant interbank benchmark. It has been reported that the recently laun che d Is la mic In te rbank Benchmark Rate (IIBR) aimed at raising the quality of the Islamic capital profile has some more banks knocking at its door.

Best Advisory Firm award

IDB Issues $60 Million for Hydropower Project

The Islamic Development Bank (IDB) would extend longterm lease finance (Ijara) facility up to US $60 million to Star Hydro Power Limited for the development of the Patrind hydropower project.

For the third year in a row EY has won the Best Advisory Firm award 2011 in December. Andrew Barstow, MENA Financial Services Advisory Leader, received the award on EYs behalf. Running for its sixth year, The Islamic Finance and Business awards are widely considered as benchmark of excellence.

Islamic Research and Training Institute Appoints First Malaysian Director General
The Dean of Islamic Banking and Financial Institutions at International Islamic University Malaysia has been appointed Director General of the Islamic Research and Training Institute (IRTI). The IRTI is part of the Islamic Development Bank group (IDB), which is based in Jeddah, Saudi Arabia, and Datuk Dr. Mohd Azmi Omar will be its first Malaysian Director General.

Saudi Budget Report Suggests Growing Role for Islamic Finance Across Nation
Following the announcement of Saudi Arabias budget last week in the capital of Riyadh, despite the lack of mention of Islamic finance models, they are expected to grow in popularity within the nation over the coming year. Looking at the initiatives and plans launched by Islamic finance companies and banks leading up to the announcement of the nations annual budget, it would seem that they will be expected to have a growing role across Saudi Arabia in 2012. Besides providing funds for small and medium-sized enterprises (SMEs), which will help create jobs in a nation with a 10% unemployment rate, the provision of mortgage and housing finance, funding infrastructure and projects and helping businesses to diversify sources of funding are expected to be key areas for development. Sukuk, or Shariahcompliant bonds, are expected to be particularly successful in 2012.

Disclaimer:
The news included here is on the basis of information obtained from local and international print and electronic media sources. IFP team does not accept any responsibility about their bona-fide.
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Re-composition of KSE- Government of Pakistan PIA gets $100m Islamic Meezan 30 Index (KMI-30) Ijara Sukuk financing
Karachi Stock Exchange (Guarantee) Limited has carried-out the exercise of re-composition of KSE-30 Index for the review period from January 1st, 2011 to June 30, 2011. The re-composition has been carried out on the basis of the criteria of selection of companies as detailed in the Brochure of KSE-Meezan 30 Index. In accordance with provisions of the notification of GoP Ijara Sukuk Rules, 2008, another GoP Ijara Sukuk will be issued as per the Structure and Assets described in Annexure C by Domestic Marker a n d M o ne t ar y M a n ag em e n t Department of State Bank of Pakistan (SBP). Pakistan International Airlines has closed a $100 million Shariacompliant financing facility. The facility was arranged by Abu Dhabi Islamic Bank, Al Hilal Bank, Citibank N.A., and United Bank Limited as mandated lead arrangers and joint book runners. Warba Bank in Kuwait has joined as lead arranger. Citibank N.A. is also performing the role of the account bank and security trustee. This innovative Islamic transaction is secured by PIA`s ticket sales generated in the UAE and aggregated through IATA`s Billing and Settlement Plan, and through sales by general sales agents. The three-year facility will be used for PIA`s general corporate purposes and reflects investor confidence in the airline and its strategic importance to Pakistan.

FMAP/NIFT launches revaluation rates for Sukuks

The Financial Markets Association of Pakistan (FMAP), in collaboration with NIFT, has launched two new Sukuks revaluation benchmark rates pages. These pages are to be used by Islamic banks, Islamic banking windows and mutual fund managers to revalue their holding of Islamic bonds on daily basis. FMAPs mandated 6 brokers (who are already contributing to the PKRV page for fixed income bonds), are contributing rates for these pages. These pages can be currently viewed on NIFT/FMA Portal or Reuters under the names PKISRV GOP Ijara Sukuk rates) and PKCSRV SLR-eligible public entity Sukuks). Abdullah Ahmed Muhammad, General Secretary of FMAP, said the benchmark rates on Sukuk will go a long way in bringing uniformity in the local Islamic Financial market.

Meezan Bank to provide Long-Term Financing to Linde Pakistan

Meezan Bank Ltd. and Linde Pakistan Ltd. (formerly known as BOC Pakistan Limited) have entered into a Diminishing Musharakah agreement for the setup of a new state-of-the-art Air Separation Plant and related supply chain equipment in Lahore by Linde Pakistan.

Insurance Firms may Start Takaful Business

To improve the penetration of insurance sector in country, the Securities and Exchange Commission of Pakistan has decided that the conventional insurance companies will be allowed to open Takaful windows and the necessary formalities are expected to be completed by March 2012. The move has already been initiated by SECP, as a large number of policy holders are interested to opt for Islamic insurance against the conventional products, mainly due to religious belief. There are two Family Takaful insurance companies operating in the country and to broaden the base, SECP has decided to allow more companies into the Islamic insurance segment. The conventional insurance companies have large marketing base and network spread across the country. It would help growth of Takaful based insurance in smaller cities and towns where the penetration is not easy for comparatively new Islamic insurance companies.

Disclaimer:
The news included here is on the basis of information obtained from local and international print and electronic media sources. IFP team does not accept any responsibility about their bona-fide.

An initiative of IFP forum

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Book in the Spotlight

Managing Finances - A Shariah Compliant Way By Omar Mustafa Ansari
Reviewed by Aamna Ismail
The astounding development of Islamic banking at global level has necessitated education and training for the bankers, businessmen and savers / investors who are looking increasingly for the financial products which are in harmony with the principles of the Shariah. The book Managing Finances - A Shariah Compliant Way by Omar Mustafa Ansari is a useful addition to the available material in this regard and a valuable guide for all those who want to manage their funds in line with the principles of Shariah. In this book the author has sufficiently explained the most proper way of banking operations and managing investments according to Shariah. Employment is also a type of entrepreneurship in which the employee renders his services against a specific return, and accordingly, certain matters particularly relating to the employees have also been included in this study. This book provides a guide to general public, particularly businessmen, for the awareness of basic Islamic concepts needed for managing business finances. It is pertinent to note that there are certain differences of opinions between scholars regarding the permissibility or otherwise of a opinion of a transaction. In such cases, the author has avoided to comment on the permissibility of the same, although the dissenting opinion have been disclosed for the knowledge of the readers. The book has been written with special reference to Pakistans financial market. In this book, the author has done a great contribution for all and provided much needed guidance regarding Islamic finance.

It appears to be an invaluable contribution, which should go a long way for people like us in understanding the burning topic of our times.
(Viquar Siddiqui - Ex CEO Central Insurance Limited)

This is definitely a very good contribution on the topic and I am sure, it will facilitate many individuals.
(Kamran Wahab Khan General Manager - Pakistan Petroleum Limited)

Omar is a Chartered Accountant by profession. Presently he is Partner / Head of Islamic Financial Services Group at Ernst & Young Ford Rhodes Sidat Hyder. Omar has gained professional experience of more than 17 years as partner. His key expertise includes advisory and assurance, auditing, financial reporting, sales tax, investigative auditing, internal controls and mergers etc. Omar has gained substantial experience in the audit and related services to local and multinational companies operating in diversified sectors. His area of specialization is providing audit and other services for Islamic finance industry. The clients he has served / is serving on assurance (including audits) in Islamic finance industry includes: full-fledged Islamic banks, Takaful companies, Islamic mutual funds and Modarabas. Besides audit and related services, Omar has acquired diversified experience in respect of the fields of Islamic finance and banking including Shariah Published by: Time Compliance inspection manual and operating manual for Islamic commercial Management Club banking and financial institutions. Available at: Fazlee Book Omar has been one of the key speakers and trainers for training courses for Super Store Islamic bankers, arranged by the National Institute of Banking and Finance Price: Rs. 300/(NIBAF) - an institute run by the State Bank of Pakistan.

About the Author

An initiative of IFP forum

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Ask US
By Mufti Ibrahim Essa and Mufti Javed Ahmed
Question: Kindly guide us about the Shariah rulings regarding the mortgage of financial papers and Sukuk. Answer: It is permissible to mortgage the financial papers and Sukuk which can be issued and transacted according to Shariah, such as Islamic Sukuk and shares of Islamic financial institutions. The shares of companies whose original activities are permissible can be added to this category. It is also permissible to mortgage usufruct-based Sukuk which represent common shares in the usufructs of specific assets. It is not permissible to mortgage financial papers and Sukuk that are not issued or transacted according to Shariah such as interest-based bonds, preference shares, debentures. Such financial papers include also traditional investment deposits and shares of the companies that peruse Shariah-banned activities like manufacturing of alcohol, swine trade and dealing in Riba. Among these financial papers also are shares of traditional financial companies, shares of conventional insurance companies and also such that originally deals in permissible activates, yet Riba-based and other prohibited dealings constitute a predominant part of their business activates. Question: Is it lawful in Shariah to allocate a profit of a certain class or period or portion of the capital for the institution or the investment account holders? Answer: The method of profit distribution should be well-known so that no room is left for uncertainty and dispute and it should be in terms of ratios of the entire profit of the whole period. Therefore It is impermissible to allocate within a single pool, the profit of a specific type or portion of the capital or assets into which capital is converted, for one of the parties i.e. institution and investment account holder. It is also impermissible to allocate within a single pool, the profit of a certain financial period or a specific transaction for one party, and the profit of another financial period or a transaction for the other.

Moves and Promotions

Ahmed Khizer Khan New President & CEO of Burj Bank Limited Mr. Ahmed Khizer Khan has joined Burj Bank as the President and CEO. His last assignment was as Chief Operating Officer of ICD (Islamic Corporation for Development of the Private Sector), Jeddah.

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Upcoming Events For the Year

Islamic Finance Conference Event Venue: Butterworths LexisNexis, United Kingdom Event Date: 25 January 2012 International Conference of Islamic Business (Organized by RIPHAH International) Event Venue: Islamabad Event Date: Tentatively in the 2nd week of February 2012 2nd National Islamic Microfinance Conference Pakistan 2012 Event Venue: Lahore, Pakistan Event Date: 4 - 6 February 2012 2nd Annual Islamic Finance Conference 2012 Event venue: London, U.K Event Date; 27 - 28 March 2012 7th Annual The World Takaful Conference (WTC 2012) Event Venue: Dusit Thani Dubai, UAE Event Date: 16 & 17 April 2012 Middle East Islamic Finance & Investment Conference Event Venue: Dubai Event Date: 18 April 2012 World Islamic Funds Conference & World Islamic Financial Markets Conference Event Venue: Bahrain Event Date: 21 & 22 May 2012 World Islamic Banking Conference Event Venue: 5 & 6 June 2012 Event Date: Singapore World Takaful Conference (Family Takaful Summit) Event Venue: Malaysia Event Date: 11 & 12 June 2012 World Islamic Banking Conference Event Venue: Bahrain Event Date: 9, 10 & 11 December 2012

An initiative of IFP forum

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Institution in the Spotlight

Post Graduate Diploma (PGD) in Islamic Finance

Program Recognition
PGD in Islamic Finance is being offered by The Guidance Institute in collaboration with PAF-KIET. The diploma will be issued by PAF-KIET which is an institute chartered by the Sindh government and recognized by the Higher Education Commission (HEC) of Pakistan. The Guidance Institute is the key learning center and executive training division of the Hikmah Foundation, a non-profit organization established to make a difference in the education field, leadership development and personal excellence.

Who should aim for Guidance PGD?

Guidance PGD is the right platform for you to pursue your objectives if you are a: Program Venue: Banker - determined to switch to the fast growing Islamic Banking industry. Fresh Graduate - aiming to start your career in Islamic The venue for the program is Banking & Finance. PAF-KIET city campus 28 D, Professional - eager to work in Islamic Financial Institutions in Block 6, PECHS, Sharah-eregions like Gulf & Malaysia/ Singapore. Faisal, Karachi. Businessman - planning to understand and make use of Islamic modes of financing to grow their business in a Shariah For further details compliant way. Write to: info@guidanceinstitute.com
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Demand for Islamic Banking & Finance qualification

6 full-fledged Islamic banks in Pakistan, 12 banks with Islamic windows and 4 Takaful companies need qualified and trained Islamic finance professionals in all areas of banking and Takaful. State Bank of Pakistan projects the need for 12,000 additional Islamic finance professionals by 2012. More than 30,000 will be required by the Gulf-based institutions over the next 5 years.

Unique features of Guidance PGD

Guidance PGD program is being conducted in collaboration with PAF -KIET. It is designed as a rigorous and practical-oriented program as per HEC requirements which are in line with the international post graduate level teaching standards. Guidance PGD courses are being conducted by renowned and experienced faculty that comprises of leading Shariah scholars and Islamic Banking & Finance professionals from the industry. Guidance PGD founding team includes accomplished Islamic finance professionals and Shariah scholars who understand the needs of Islamic finance industry.

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An initiative of IFP forum