Prudential is looking at ways of expanding the group’s range of takaful products – which are compliant with sharia law – building on its experience in Indonesia, where 25% of all sales are sharia-compliant products. Half these takaful sales are to non-Muslims, consumers being attracted to the simplicity of the products and their ethical stance to investment.

The profits of the Pru’s Asian operations broke through £1bn for the first time in 2007, matching the profits achieved by the insurer’s traditional UK operations.
Read: Guardian.co.uk

Indonesia’s central bank

An Indonesian parliamentary working committee agreed to pass a new bill on Sharia or Islamic banking into law, a legislator said on Thursday, which would encourage growth of the country’s Islamic finance sector. Under the existing scheme, the parliament will hold a plenary hearing, which is expected to officially pass the bill agreed by parliamentary working committees.

The bill would allow foreigners to establish sharia banks in partnership with Indonesian citizens or local entities. It would also offer more flexibility to commercial banks, allowing them to convert their business into sharia-compliance banks. Read: Global Islamic Finance Center

The Sharia banking industry is developing rapidly worldwide. While it makes sense for global financial institutions to foster growth, exploit the opportunities offered by the Sharia banking market, and keep themselves regularly updated against the status of Sharia banking market in some of the emergent countries, it is worthwhile to keep eyes on developments in Sharia banking markets. Keeping the same fact in mind, RNCOS decided to research on one of the fastest growing Sharia banking destinations – Indonesia and launched a report, “Sharia Banking System in Indonesia”. The report gives an extensive research and in-depth analysis on the Sharia banking market in Indonesia and helps clients to analyze the opportunities being opened by the market. Based on this analysis, the report gives a future forecast of the market intended as a rough guide to the direction in which the market is likely to move. Read more: Bharat Book Bureau

Jakarta, Indonesia

Albaraka Banking Group (ABG), a Bahrain-based leading Islamic bank, announced the opening up its doors for business in Indonesian market. The president and chief executive of the bank, Adnan Yousif, announced plans to expand its investments and operations in Islamic markets of Southeast Asian region, and especially in the Indonesian market, which is considered as the biggest market in the region.

Shaikh Saleh Abdulla Kamel, chairman of Albaraka, said: “Indonesia is the largest Muslim country in terms of population as it is the home of 220 million people and its commercial and economic links with the Arab and Islamic world are growing whilst it witnesses significant economic and financial changes that reflect improving investment environment. All these factors encourage major Islamic financial institutions to open offices in Indonesia to serve the Muslim people there and participate in financing and facilitating trade and investment between Indonesia and the Arab countries”.

He added that the Southeast Asian Islamic countries are considered as centre for technology, trade and labour, while the Gulf States are centre of finance and energy in the Islamic world, stating that it is necessary to rely on ingredients from all parts of the Islamic world in order to achieve the hopes and aspirations of peoples and Islamic societies.

ABG is a Bahrain joint stock company listed on Bahrain and Dubai Stock Exchanges. ABG offers retail, corporate and investment banking and treasury services strictly in accordance with the principles of the Islamic Shari’a. The authorized capital of ABG is $1.5 billion, while total equity amounts to about $1.57 billion. Read : Bahrain Tribune

Islamic banking in East Asia is slowly developing, but needs more action by regulators to establish legal and regulatory frameworks in order to emerge as a significant segment across the region, according to an analyst.

Aside from Malaysia, where the industry’s assets now account for 15.4 percent or about US$62 billion of the country’s banking system assets, its market penetration across the region has been somewhat patchy, said Christine Kuo, vice president and senior analyst of Moody’s Investors Service.

For instance, she said, while Islamic banking has achieved relatively high market penetration in Brunei and asset growth in Indonesia has been rapid (though off a low base), Islamic banking services available in the Philippines, Singapore and Thailand remained very small in terms of asset size.

“In Malaysia, there exists a natural business potential for Islamic banking services as approximately 60 percent of its population is Muslim, but it is government reforms during the past 20 to 30 years which have really helped develop the necessary legal and regulatory framework and institutions for the industry to flourish,” Kuo said in a report.

“The adoption of various incentives, including tax breaks, has also proven critical to nourishing the business,” she said. “In fact, the Malaysian experience over the last three decades demonstrates how instrumental regulators can and need to be in order to grow the Islamic banking sector,” she added.

This compares to Indonesia, where the industry’s market share is still less than two percent (about US$3 billion) despite rapid growth in recent years, Kuo said. “The low penetration in Moody’s opinion can largely be attributed to the slow pace of change to related regulations and institutions, although a few important changes seem to be gathering momentum,” she said. However, over the long term, Indonesia has huge potential as it is home to more than 200 million Muslims, the largest Muslim population in the world, Kuo said.

“The growing acceptance of Islamic banking even among non-Muslims, combined with announcements from Singapore, Tokyo and Hong Kong that they are to increase their participation in Islamic finance, have also underlined the industry’s potential,” she said.

However, as Islamic banks expand they will need to deal with the twin challenges of managing their rapid growth while competing against conventional banks, Kuo said. “The former includes addressing risk issues specific to Islamic financial institutions, such as concentration risk due to a limited scope of eligible asset classes, higher costs for managing liquidity and concentration of liabilities,” she said. “These can best be dealt with if the banks are not under undue pressure to grow assets too quickly,” she added.

At the same time, the average bank financial strength ratings (BFSRs) of Islamic banks in East Asia are likely to be lower than their conventional banking peers in the same country because of higher Syariah law-related compliance costs and lack of economies of scale, according to Kuo. “Nonetheless, the deposit and debt ratings of Islamic banks could be significantly higher than the levels indicated by their BFSRs, thanks to support from parents and regulators,” she said.

Source: Bernama – Kualal Lumpur (Malaysia)

All the services currently provided by Indonesia’s third biggest bank by asset, PT Bank Rakyat Indonesia (BRI) will be transferred to its newly-acquired PT Bank Jasa Arta, which will later be renamed PT Bank Syariah BRI.

Bank Rakyat said it is seeking to accelerate growth in its sharia banking operations, given that stand-alone sharia banking businesses in Indonesia have performed better than the sharia units of conventional banks.

The three existing sharia banks — Bank Muamalat, Bank Syariah Mandiri and Bank Syariah Mega Indonesia – hold a combined share of 76 percent of the market in the world’s biggest Muslim country.

Comparatively, the sharia units operated by 74 conventional banks only have a combined market share of 24 percent. In 2007, the funding provided by sharia units and banks accounted for about 2 percent of total loans extended by the banking system.

Source : Global Islamic Finance Centre (GIFC)

Bank Indonesia headquarters in Jakarta

Whilst they are still strides away from the volume of Islamic investment seen in neighbouring Malaysia, Indonesia still has the largest number of Islamic financial institutions in the world. Despite being home to ten percent of the world’s Muslim population, Indonesia has so far held back, but Indonesia’s government is hoping new Islamic finance laws will entice foreign investment in the growing sector and secure a share of the $US700 billion global Islamic finance market.

“We do have three fully fledged Islamic banks, and about 25 Islamic divisions of conventional banks, and we have around 106, or 110 Islamic rural banks,” Dr Muhammad Syafii Antonio, from the Central Bank of Indonesia, recently declared. “So in terms of players, Indonesia is bigger, and in terms of market Indonesia is promising, so Indonesia is too big to be ignored.”

The Indonesian government is hoping that new laws will attract investment from the Middle East, and Dr Antonio says with the new changes in legislation, the share of Islamic investment on Indonesia’s national bond market could increase to 5 percent within the next two years.

Source: Global Islamic Finance Centre (GIFC)

Malaysia’s top lender, Malayan Banking Berhad, said MondayMay 5, 2008 it plans to buy up to 20 percent of Pakistan’s MCB Bank Ltd. for $933 million as part of an aggressive regional expansion. It marks the third regional acquisition in two months for Malayan Banking, widely known as Maybank, as it seeks to counter slowing economic growth in Malaysia and increased competition in the domestic financial market.

In a statement, Maybank said it has agreed to buy 15 percent of MCB Bank, Pakistan’s fourth largest bank in terms of assets, for $686 million. In addition, it said it has the rights to buy an additional five percent equity in MCB Bank for a maximum $247 million to bring its stake to 20 percent.

“It is an attractive opportunity for us to enter a high growth and profitable market. It is extending Maybank’s reach in South Asia” in line with its plan to become a key regional player, Maybank Chief Executive Abdul Wahid Omar told reporters. Despite volatility in the global market, Pakistan’s economic outlook remains steady and there is “limited execution risk,” he said. Maybank expects the deal to be completed by the end of June 2008, he said.

Islamic banking, retail services, credit cards and small medium enterprise banking will be key partnership areas with MCB Bank, the Maybank statement said. MCB Bank has 1,026 branches and employs 17,000 workers.

In March 2008, Maybank announced plans to acquire Indonesia’s sixth largest bank, Bank Internasional Indonesia, as well as a 15 percent stake in Vietnam’s An Binh Bank.

The Associated Press, May 5, 2008

About Maybank

Maybank was incorporated on 31 May 1960 and commenced operations on 12 September 1960. On 17 February 1962, Maybank was listed on the then Kuala Lumpur Stock Exchange (now known as Bursa Malaysia and today is one of the largest company by market capitalization in Malaysia. Maybank is the largest financial services group in Malaysia and the Group offers a comprehensive range of financial services and products ranging from commercial banking, investment banking, Islamic banking, offshore banking, leasing and hire purchase, insurance, factoring, trustee services, asset management, stock broking, nominee services, venture capital and Internet banking. The Group has over 450 offices in the 14 countries namely, Malaysia, Singapore, Philippines, Brunei Darussalam, Indonesia, Vietnam, Cambodia, Papua New Guinea, Hong Kong SAR, People’s Republic of China, Bahrain, Uzbekistan, Pakistan, Great Britain and United States of America.

About MCB Bank Limited

MCB is a leading private sector bank in Pakistan, offering a wide range of products and services to corporate and retail customers through a variety of delivery channels. It has a network of nearly 1,020 branches, including eight Islamic banking branches within Pakistan and six overseas.

About Bank Internasional Indonesia

PT Bank Internasional Indonesia Tbk is one of the largest banks in Indonesia, with over 230 branches and 700 ATMs across Indonesia, as well as a banking presence in Mauritius, Mumbai, and the Cayman Islands.

Three Indonesian banks plan to open sharia-compliant units this year to tap the potential of Islamic finance in the world’s most populous Muslim country, a central bank deputy governor said on Wednesday.

Analysts say Indonesia has the potential to become a major player in global Islamic finance because around 85 percent of its around 226 million people are Muslim.

It lags neighbouring countries like Malaysia and Singapore because of tax and accounting framework issues, but analysts expect sharia financing to take off after parliament passed the long-awaited sharia finance law last months.

Siti Fadjrijah told Reuters state-owned Bank Rakyat Indonesia, the country’s third largest lender, and Bank Bukopin, will convert their conventional units to sharia-compliant banks.

She said another state bank, Bank Negara Indonesia, will also set up a new Islamic bank together with Islamic Corporation for the Development of the Private Sector (ICD), a unit of Islamic Development Bank.

“This year three new sharia banks will be established in Indonesia,” Fadjrijah said on the sidelines of an Islamic finance conference in Jakarta.

When asked if Bank Indonesia will give more licences for foreign banks, she said: “It depends. When investors establish a new bank, I will ask what are their expectations, how they will increase their business. We must know their target.”

Sharia, or Islamic law, bans payment of interest, allowing money to be earned only from physical assets. It also bars investment in alcohol, tobacco or gambling.

HSBC is the only foreign bank which has sharia operations in Indonesia, but there are several domestic banks with sharia-compliant operations.

Indonesia’s central bank said in July 2007 it expects total assets of Islamic banks to rise to 91.57 trillion rupiah by the end of 2008.

Reuters India – May 7, 2008

Reporting by Liau Y-Sing, writing by Harry Suhartono, editing by Sugita Katyal

By Paul Wouters

Worldwide, the Islamic finance industry is developing rapidly. While it makes sense for the Islamic financial institutions to foster growth and to regularly compare themselves against the financial market as a whole, sometimes it is also worthwhile to keep an eye on developments in different countries.

It is easy to talk about “market shares” and “deposits”, but what do these terms really mean? And what can be expected in the near future? For a better idea, we will examine the Islamic banking system in some countries: Turkey, Indonesia and Pakistan.

Turkey and Indonesia are secular republics where Muslims form the majority of the population, but Islamic finance developed differently in the two nations. With a population that is roughly slightly over half that of both countries combined; the Islamic Republic of Pakistan is used as an outside comparator. To put all that into better perspective, the writer has included some data from Malaysia as benchmark.

Turkey

From the very start in 1985 with Albaraka Türk, the Turkish participation banks (before called Special Finance Houses) were poised to aim at the Turkish market as a whole. Therefore they did not really target the small niche of the “convinced” Muslim population in particular. This of course influenced marketing and product development.

Partly as a consequence of this strategy (and compared to Indonesia), the Turkish participation banks were able to flourish, and now they hold roughly 3.5 % of total assets in the country’s banking industry. It has outperformed its conventional counterpart for eight consecutive years now.

The collapse of Ihlas Finance House (2001 – alleged fraudulent insolvency) meant the loss of 40 % of the deposits held by the sector at that time and the subsequent stampede on the other Special Finance Houses (now participation banks) meant another 35 % loss.

Because of their ties to the “real economy”, the Special Finance Houses were not hit by the big financial crisis that hit Turkey in 2001 and they recovered fast. Their deposits now have been taken into the guarantee fund of the banks (to avoid other shock withdrawals) and the sector has acquired bank status.

Other differences to note: There is no specific government aid to the sector and nor is there (government or corporate) Islamic bond, although th eissuance of a government sukuk could be in the making, so it has been rumored for some time now. The talks on the projected rent (Ijarah) certificate are progressing slowly, due to inactive local financial markets, cheap conventional international funding and political factors.

Neither is there access to money markets, so we can hardly talk about a level playing field, as compared to conventional banking.

As there are no Islamic windows, foreign players can only enter the market via shareholdings in existing participation banks (or have to start their own participation bank from scratch.) A well thought off strategy of decentralization – for instance using techno / tax incentives and privatizations – created upcoming of several bigger conglomerates throughout the country.

Indonesia

In the world’s most populous Muslim nation, with its first established Bank Muamalat Indonesia (together with Bank Syariah Mandiri still today front runner), the situation differs profoundly. From the start, products and marketing were targeted at that very same group of “convinced” Muslim (market share of roughly 1.5 %).

Whilst the current impressive government initiatives aim to broaden that base (a potential “floating market” of approx. 75 % of the population would be within reach), Bank Muamalat confirms to adhere to its strict policies and target market. This means the other Islamic finance market players could see greater potential for growth.

The need to mobilize internal capital and attract foreign investments require special measures, and so Bank Indonesia announced in July 2007 that, subject to full implementation of the “blue print for development of the Indonesian Shari’ah Banking system”, total assets of the Islamic banks (and Islamic business units) are expected to triple by the end of 2008 (growth of approx. USD 6 billion) to reach an overall volume of 5% on the total Indonesian banking assets. When deposits/ loans follow same development, it will be clear that opportunities are at hand (growth potential of approx. USD 5 billion).

Foreign banks have yet to make their presence felt in the Indonesian Islamic finance market. HSBC was the first big international institution to establish a Shariah head office in Jakarta. The projected growth potential is enormous: HSBC calculated that roughly half of their clients would be willing to use the products if priced competitive. Recently, Albaraka Group announced the intention of expanding its a branch there.

The first government Sukuk (plans to raise up to USD 1 billion have been announced) is in the pipeline. Actual issuance could however be postponed till the fourth quarter of 2007 or even the first quarter of 2008, pending parliamentary approval. Indonesia alreday recognizes corporate Ijarah and Mudharabah Shari’ah Bonds.

Conventional banks that want a piece of the “Islamic pie” need to dedicate 5% of their assets to such venture. This commitment, together with other incentives, will be instrumental to the rapid growth over the next two years.

Pakistan

From the late 70s onwards, Pakistan has had a protracted history of Islamic banking. Beginning 1st July, 1985 all commercial banking in Pakistani rupees became interest free. The sudden conversion (and lack of preparedness) posed difficulties for the implementation of this practice.

However, from 2001 an evolutionary process was in place in order to nurture acceptability and development in a more structural approach. The first “Islamic bank license” was awarded to Meezan Bank back in 2002 (founded 1997). Most note worthy is the present Islamic Banking Policy (December 2001), under which Islamic banking is promoted parallel to conventional banking. Implementation of set by the Accounting and Auditing Organization of Islamic Financial Institutions (AAOIFI) and Islamic Financial Services Board (IFSB) is under way.

Image: Meezan Bank ‘07 Annual Report

Besides a draft for the new Government Securities Bill, Draft Risk Management and Draft Shari’ah Compliance guidelines have been published.

A growth of 40% per annum is expected and a % 15 market share is targeted. Conventional banks are allowed to operate Islamic bank subsidiaries or even “standalone Islamic banking branches” along-side full-fledged Islamic bank. A vast concentration of Islamic banking in the cities (Karachi and Lahore) is evident. There are government and corporate Sukuk on the market.

In 2007 ABN AMRO opened an Islamic branch, Emirates Global Islamic Bank has started a dedicated Islamic commercial bank and QATAR Islamic bank has confirmed plans to setup a Shari’ah compliant banking unit soon. Citibank was another big foreign entry.

Malaysia

Starting off with Bank Islam Malaysia in 1983, Malaysia now has separate Islamic legislation and banking regulations that co-exist with those for the conventional banking system.

In order to create an efficient, progressive and comprehensive Islamic financial system, Bank Negara Malaysia recognized the need to attract a large number of global players; develop a variety of instruments and, install comprehensive financial infrastructure.

Image: Bank Islam ‘07 Annual Report

Malaysian banks currently offer more than 100 of Islamic financial products and services that use various Islamic concepts – such as Mudharabah, Musharakah, Murabahah, Bai’ Bithaman Ajil (Bai’ Muajjal), Ijarah, Qard, Istisna’ and Ijarah Thumma Bai’ — alongside the Islamic Interbank Money Market.

Probably subject to pressure from the Dubai International Financial Center, Malaysia recently opened up regulations to allow sukuk issuance in foreign currencies and is competing with Singapore to be the prime Islamic finance hub in the Asian region. Hong Kong has decided to join the race as well.

Observations

First of all, it has to be noted that real entrance of foreign investments in Turkey, Indonesia and Pakistan still bounces on inadequate tax regimes.

Though it is difficult to distract far-reaching conclusions from the accompanying table, at first glance, it is clear that both Malaysia and Turkey share the following characteristics: relative big concentration of the population in bigger cities, lower portion of population working in agriculture and a lower weight of that sector in the overall economy. The GDP per capita (calculated in relative purchase power – not in hard dollars) in Malaysia and Turkey also is two to four times higher then in Indonesia and Pakistan.

Also in Indonesia and Pakistan, Islamic finance flourishes first in the big cities and then branches out to smaller concentrations of the population while the rural areas (probably due to lack of cash) appear to be dependent on micro finance.

In both countries, the agriculture sector appears to attract socially important (statistically less so for the total economy) “rural Islamic banks” targeting micro finance. There is no such sector in Turkey (neither conventional or Islamic.) Only recently, initiatives from the United Nations Development Program have been undertaken to introduce microfinance on a sustainable basis there.

Neither the percentage of the Muslim population (in Indonesia, Turkey, or Pakistan), nor the respective governments’ zeal to promote Islamic banking (in Indonesia, Pakistan) appears to be a determinant for success so far.

A marketing strategy of the Indonesian Islamic banks proved to be successful for the loyal but small niche of the “convinced” Muslim population, but did not succeed to appeal to the “public at large.

Admittedly, Turkish participation banks are at a serious disadvantage because of the above mentioned differences from the conventional system (lack of sukuk and money markets, limited products, no government incentives and no Islamic windows.) Nevertheless, they prospered thanks to the neutral banking approach focusing on financial advantages, with slight emphasis on ethical merits.

Looking at the mix of relevant measures applicable to the different countries, perhaps the following can serve as guidelines in contributing to the success of Islamic banking:

• dedicate sufficient means to Islamic rural banking / micro finance for agricultural areas
• create a level playing field in order for Islamic banks to compete with conventional banks (for instance, access to Sukuk and the money markets), without any specific need to issue prime conditions (that also distort the market)
• open up markets for international institutions (this attracts financial power and innovation)
• ensure possibilities for all financial institutions to create Islamic windows and/or branches (better product awareness and overall acceptance of Islamic banking would benefit the dedicated Islamic banks)
• ensure conventional banks that want access to the market commit sufficient means from the start (the need to dedicate assets enhances market growth)
• promote diversification of products (diversity is one of the handicaps of Islamic finance vis-à-vis the very mature conventional counterpart)
• try to spread wealth from existing bigger cities to smaller ones but do not focus on the existing metropolises
• try to create sufficient liquid financial markets and stock exchanges, if necessary through strategic alliances
• give sufficient attention to international accounting standards, (corporate) governance, transparency and accountability
• build strong prudential controls
• give bank status and deposit protection
• without loosing sight on the underlying Islamic principals, focus on market competition, quality of products and pricing thereof.

Source : Dinar Standard