By A. Stephanie
Almost two decades after the Shariah Advisory Councils were established to advise the SC and BNM, harmonisation of Syariah standards continues to pose a challenge to the expansion of Islamic finance. Two of Malaysia’s largest Islamic banks weigh in on what progress has been made in harmonising standards, and what more needs to be done.
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Though the Securities Commission (SC) was first to establish its Shariah Advisory Council (SAC) in 1995, it is the central bank’s SAC – established in 1997 – that is Malaysia’s highest Syariah authority on Islamic finance.
Malaysia has retained its dominance of Islamic finance largely due to its supportive regulatory framework. Yet globally, individual jurisdictions, banks and scholars continue to disagree on Syariah standards, as noted in the previous part of this series.
Dubai’s rapid rise in sukuk listings means the emirate is putting in more regulatory (and educational) support to harmonise Syariah standards towards its goal of becoming the capital of global Islamic finance.
Globally, efforts continue to be made by various organisations to harmonise standards, such as the Islamic Financial Services Board’s draft guidance on liquidity risk management and new standards on regulatory supervision of Islamic banks, according to Bank Negara Malaysia’s (BNM) Malaysia International Islamic Finance Centre (MIFC) 2014 report.
Other advances the report noted were the International Islamic Financial Market’s standard documentation for a collateralised murabahah (sale) agreement and the Accounting and Auditing Organisation for Islamic Financial Institutions’ standards for down payments and conditional contract termination.
New Syariah guidelines
Clearer guidelines ensure Malaysia will remain at the top of Islamic finance leaderboards, Maybank Islamic executive vice president and Syariah management head Muhd Ramadhan Fitri Ellias told KINIBIZ in an interview.
He said: “With regards to standards harmonisation, I think there is a difference of only 5% between boards, 95% being within common parameters. We share common dos and don’ts.
“In 2013, the SC revised its Syariah parameters, adding financial ratio benchmarks to its screening process. This was another move towards convergence of Syariah standards.
“Previously, the commission’s screening process for stocks listed on Bursa Malaysia was on a business activity basis only when global exchanges also screened financial ratios.
“Another critical move towards strengthening our position on the global map was BNM’s release of the Islamic Financial Services Act that same year. With clear and sound regulatory framework, we can spur investor confidence to invest in Kuala Lumpur,” Muhd Ramadhan remarked.
Human capital advantage
There is also a dearth of scholars versed in Islamic finance, and the banker noted Malaysia’s advantage in the talent development sphere to fulfil the needs of financial institutions.
“We see lots of Malaysian human capital exported to London and Dubai in the Islamic finance industry. This is our clear-cut advantage,” Muhd Ramadhan said, adding that he welcomes more Islamic hubs, and doesn’t see Dubai’s emergence as a threat to Kuala Lumpur.
“Kuala Lumpur is the most comprehensive Islamic financial hub, not only on the equity or sukuk side but also has robust Islamic financial institutions, an Islamic finance education institution, and other market players such as fund managers and takaful providers.
“If you compare listed shares, Dubai may be ahead because their stocks have larger market capitalisation. But comprehensively, Kuala Lumpur is undisputedly the biggest Islamic finance hub and I see the gap between us and other hubs widening,” he said.
While the United Arab Emirates (UAE) is slated to unveil its federal Syariah board later this year, it is not the only Islamic nation to do so. Countries like Oman, Bahrain, Qatar and even Afghanistan have or are in the midst of finalising national Syariah authorities on Islamic finance.
Jurisdictional differences important
Remarking on the finalising of UAE’s central Syariah board, CIMB Islamic executive director and CEO Badlisyah Abdul Ghani told KINIBIZ, “This is in line with what we have in Malaysia, and is very good progress as we have been looking towards other jurisdictions to follow us for many years.
“Every jurisdiction must have a governing body that looks at Syariah for Islamic finance, because Syariah works on a jurisdictional basis.
“It doesn’t work across the globe; it needs to be undertaken and utilised based on local parameters, which are based on custom, market convention, the law of the land, and the various business practices that exist.
“Each jurisdiction must have commonality within its own borders so that it has an effective market. With a central Syariah body, it gives us certainty of doing business, nothing more and nothing less,” he said.
Asked how various Syariah standards would come into play when different jurisdictions are involved in cross-border financing, Badlisyah remarked, “In terms of sukuk, one could have multiple arrangers from different jurisdictions, but we follow the law of the issuer. There is no point applying Dubai law for a Malaysian issuer and its asset.”
“The structure sold in Dubai or elsewhere will follow Malaysian law, as well as perhaps English or New York law, depending on which law the investor is comfortable with. The sukuk’s Syariah structure will be designed in such a way that complies with both Malaysian and English laws,” he added.
Risk sharing not for the poor
Years on, and Islamic finance continues to be defined by risk sharing; in fact this and avoidance of riba (usury) are often the basis of differences in scholarly opinion and Syariah standards.
Badlisyah feels strongly about this: “In my opinion, the statement that Islamic finance is based on risk sharing is inaccurate – Islamic finance is based on risk taking. You cannot effectively make profit where you do not take some level of risk from the activity, and risk sharing is one form of risk taking.
“There are many other forms of risk taking in commercial transactions. People sometimes get sidetracked when they discuss risk sharing as the way of doing Islamic finance, when it is just a small component of it. As a result, they do not make available other commercial transactions that can facilitate consumers’ many other financial needs,” he remarked.
For instance, Badlisyah noted, one cannot offer a risk-sharing product to the poor as it is totally irresponsible. He said, “How can the poor invest in a risk-sharing product when they just can’t afford it? If something goes wrong with the investment, they lose everything.
“You need to offer them a product from a commercial perspective, which provides them very low risk. And you can’t do that based on a risk-sharing framework.”
Beyond corporate financing
A musharakah (joint venture) is the only product in the Islamic finance universe that is risk sharing, whereas mudharabah (profit sharing) is the only risk-transfer product.
Badlisyah illustrated: “If you are an investor, and I have an activity which I think has good returns, you’ll invest in it while I manage it. If anything goes wrong with this investment, you take 100% loss, I don’t. But I take a share in the profit. That is mudharabah.
“We only sell this kind of product to people with lots of money and who are willing to take the risk, such as an Islamic-structured product that invests in commodities, shares on the New York Stock Exchange, investments that probably give you 8%-10% returns on an indicative basis,” he remarked.
“Whenever someone comes to a conference or writes something about Islamic finance, focusing entirely on risk sharing, that person is doing a disservice to the industry.They will skew this public good called Islamic finance to the rich, when we are doing Islamic finance for all segments of the public,” Badlisyah said.
Noting that there are multiple contracts that exist within the Islamic finance universe that facilitate many different activities, he said Islamic bankers need to have all of these to cater to the different consumer segments.
Sukuk has been used as the ambassador for the industry to proliferate its utilisation across the globe. But in Malaysia, it’s business as usual across all segments.
“As far as our industry is concerned, the bigger portion of assets is attributable to retail and small and medium enterprises (SMEs),” Badlisyah said, noting that retail business, comprising individuals and SMEs, accounts for 70% of CIMB Islamic’s assets, which totalled RM40 billion by end-2014.
Meanwhile, Maybank Islamic is the largest Islamic trade financing providers for Malaysia and the Asean region, with SME financing being a key growth area in 2014, Muhd Ramadhan said.
“Via the Teras fund managed by Bumiputera Agenda Steering Unit (Teraju), we are the largest financiers of bumiputera SMEs,” he said, noting that the bank’s SME business jumped 77% last year, ending 2014 with RM3.4 billion in total assets.
Nevertheless, there remains a large portion of untapped SME and trade business for Islamic finance, and it lies in the hands of halal players. In the next part of this series, KINIBIZ elaborates on efforts to develop a global marketplace to marry Islamic finance and the halal sector.
Yesterday: Dubai snaps at Malaysia’s heel for sukuk dominance
Tomorrow: Marrying Islamic finance and halal
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