Historically, Islamic finance has been concentrated in Muslim-majority countries of the Middle East and Asia, but in the last decade has expanded to countries with smaller Muslim populations. Ahmad Lutfi Abdull Mutalip writes.
This includes a number of European and other countries which until recently have actively began to reform their tax, legal, and regulatory frameworks in order to attract Islamic investments. To date, there have been many new regulatory developments in Islamic finance across the world at national, regional and international levels, and which only contribute to the strength of the Islamic finance industry. These regulatory developments point the positive growth of the industry and that it will continue on this impressive growth trajectory and is set to reach US$6.5 trillion in total assets by 2020.
Key developments in the MENA region
Egypt: Our journey in navigating through the regulatory issues and developments of 2013 takes us to Egypt which approved a new Sukuk law that will allow the country to tap a new source of financing at the back of a soaring budget deficit. A number of Egyptian banks, such as AlexBank, Intesa Sanpaolo, Ahli United Bank, Industrial Development and Workers Bank of Egypt, Export Development Bank of Egypt and Barclays Bank Egypt, submitted applications to the Central Bank of Egypt seeking Islamic banking licenses.
Libya: The Libyan government announced plans to implement to enact a new Islamic banking law by the end of 2012. The new law was passed in May 2012 and further work has been carried on to amend legislations in order to attract foreign investments and stimulate the private sector following the civil war. On this front, the Libyan authorities have been looking at several options for Islamic banking services within the country; these include allowing conventional banks to operate branches or Islamic banking windows and also permitting conventional banks to convert to fully-fledged Islamic banks. However, substantial resources still needs to be mobilized in Libya in order to activate various institutions, such as insurance companies, Islamic funds and investment instruments by the end of 2014 or the beginning of 2015.
In January 2013, the Libyan government approved a law that would ban all interest payments in Libya, in efforts to accelerate the move toward an Islamic banking system in the country. This law is expected to come into force in early 2015.
Bahrain: In Bahrain, the International Islamic Financial Market (IIFM) launched its global standard Inter-Bank Unrestricted Master Investment Wakalah Agreement and related guidance memorandum in June 2013. The Wakalah Agreement is a legal instrument that aims to help Islamic financial institutions manage their liquidity requirements through the Wakalah principal as an alternative to the standard Murabahah currently used in the market. The launch of the standard form Wakalah is the latest standard form document published by the Bahrain-based IIFM, pursuant to the launch of the ISDA/IIFM Tahawwut (Hedging) Master Agreement and the ISDA/IIFM Mubadalatul Arbaah (Profit Rate Swap) and IIFM Master Agreement for Treasury Placement in March 2010.
Oman: The sultanate introduced Islamic banking last year and initiated the process by developing the required legislation and issuing licenses to fully-fledged Islamic banks and windows. The Bank of Muscat, Oman’s biggest bank by assets, received a license to offer Shariah compliant services in early 2013. The Central Bank of Oman announced in the first quarter of 2013 that the country is looking to issue OMR200 million (US$520.2 million)-worth of conventional bonds and Sukuk in line with its budget financing needs in what would be the country’s first sovereign Sukuk issuance. Capital Market Authority of Oman completed the drafting of bylaw that regularizes the issuance of Sukuk and the proposed amendments to the Capital Market Law. Pursuant to this development, the sultanate celebrated the issuance of the first Sukuk by the private sector – Tilal Development Company (TDC) – worth OMR50 million (US$130 million). Al Madina Investment acted as the principal advisor, joint lead arranger and joint lead manager for the Sukuk Ijarah on behalf of TDC.
Qatar: Qatar has one of the fastest growing Islamic banking sectors in the world and its Sukuk issuance has been very encouraging, with Qatar becoming one of the top five largest Sukuk issuance nations in the world in 2012. Islamic banks in Qatar have continued to post positive results owing partly to the directive issued by the central bank to disallow conventional banks from offering Islamic banking products and services via window operations earlier this year.
The Qatar Exchange (QE) also launched the Al Rayan Islamic Index. The index is based on QE listed stocks of minimum free float size and liquidity that are Shariah compliant. The index was launched with the view to support the creation of a Shariah compliant exchange-traded fund (ETF) by Al Rayan Investment.
Key developments in the Southeast Asian region
Singapore: At the tabling of the Singapore government’s 2013 budget, the government said that it will tax Islamic finance businesses at the standard 12% rate, instead of the 5% concessionary rate, from the 1st April 2013.
Malaysia: On the 30th June 2013 the Islamic Financial Services Act 2013 (IFSA) came into force, ushering in a new regulatory and supervisory framework for Malaysia. The IFSA consolidates the provisions of the Islamic Banking Act 1983 and Takaful Act 1984 which were also repealed, into a single piece of legislation. The Act is a step towards global trends in financial regulation and aims to provide the regulator with greater powers to counter future risks to stability in the financial sector, increase consumer protection and promote competition in the broader financial services sector.
As the Malaysian regulatory and supervisory framework enters a new stage of its development, the IFSA will ensure the laws that govern the conduct and supervision of Islamic financial institutions in Malaysia continue to be relevant and effective to the financial system, while streamlining the regulation of financial institutions for the next ten to twenty years.
2014: A preview
In Malaysia, the domestic bond market is the largest in Southeast Asia with a value exceeding RM1 trillion (US$302.94 billion), and daily transaction value of more than RM30 billion (US$9.09 billion) in the foreign exchange and money markets. In order to ensure efficient operations of financial markets, a clear regulatory framework is required. In this regard, Malaysia is expected to make amendments to existing laws and enact a Netting Act to protect enforcement rights of “close-out netting” under the financial contract. This will in turn reduce credit risk and contribute to a more robust derivatives market, thereby reducing systemic risks in domestic financial markets and reduce costs of doing business in Malaysia.
Conclusion
The Islamic finance industry is a fast-changing and dynamic industry with new developments taking place all the time. The development of Islamic finance in domestic economies will continue on a positive growth and will change to incorporate more productive structure that are more innovation-driven and knowledge intensive. The role of the regulator therefore will also evolve in order to remain current with these changes. The regulator will need to become an enabler of growth and development in this very young industry. This will lead to increased predictability and sound robust legal and regulatory framework.
Ahmad Lutfi Abdull Mutalip is the managing partner and Whalan Kazombiaze is the Islamic finance executive of Global Financial Services & Islamic Banking Practice of Azmi & Associates. They can be contacted at
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