Friday, July 08, 2011

Islamic Exchange Traded Fund (Islamic ETF): new instrument on the Islamic capital market

The development of Islamic capital markets in domestic and global markets continued to show positive trends. This is caused by various factors that support these developments. The first factor is the issue of Islamic development which continues to progress very rapidly, so it must be balanced with capital market products in accordance with sharia to respond to market demand. The second factor is the Muslim investors who keep their funds in the stock market, but expect the product must be in accordance with sharia. It becomes something very positive because their awareness of Sharia compliant products require them to invest in shares in accordance with sharia. The third factor is the factor of competitive advantage compared with conventional products.
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Indonesia is a phoenix rising

Indonesia has tremendous investment potential, according to a recent report by Nomura, but policymakers must be wary of complacency.

Indonesia's progress towards regaining its appeal to investors, lost during the Asian crisis more than a decade ago, has been well-acknowledged by analysts and officially endorsed by rating agencies. Increasingly, too, the risks for investors are weighted on the upside, if key institutional reforms are put in place.

In an exhaustive report published on June 7, Nomura identified six top investment opportunities, assuming that the country delivers regular annual GDP growth rates of 7 percent. Its positive outlook is predicated on Indonesia's "abundant natural gifts", including a youthful and more affluent population, rich natural resources, a burgeoning democratic political structure and the fact that the archipelago is situated in the right region - Asia.
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Tuesday, July 05, 2011

Indonesia: Prospects Still Abundant

As Malaysia continues to pursue its ambition of becoming the leading global hub for Islamic finance, Indonesia is working towards its own goal of international recognition in the industry. RAPHAEL WONG looks at the Indonesian Islamic banking sector through the eyes of two Malaysian banks that have assimilated into the market.

The introduction of the Islamic Banking Act No 21 in 2008 to provide a comprehensive regulatory framework for Shariah banking in Indonesia was welcomed by the banking industry, attracting interest from foreign Islamic windows and banks eager to capture a slice of a potentially lucrative pie. Indonesia is home to about 1.7 billion Muslims, and its banking industry has developed rapidly in recent years.

Indonesia`s capital market efforts have been successful, with numerous government Sukuk oversubscribed not only by domestic investors but also on the international front. The latest issuance saw the finance ministry selling IDR1.15 trillion (US$130.36 million) of 25-year Sukuk in an auction on the 24th February with a weighted average yield of 10.2%. It received offers for more than four times its targeted IDR1 trillion (US$114 million).

CIMB Group`s first foray into Indonesia`s Islamic financial market came about in 2002 when it acquired a controlling stake in PT Bank Niaga, a bank that was formed in 1955. In 2002 Bank Niaga was already an established player in the Islamic banking industry relative to the size of the country`s Islamic finance market then. A rebranding and a merger with Lippo Bank in 2008 saw the birth of PT Bank CIMB Niaga with the Islamic unit renamed to CIMB Niaga Syariah and consolidated as part of CIMB Group`s global Islamic banking and finance franchise, CIMB Islamic. CIMB Niaga Syariah is now the seventh largest Islamic financial institution in Indonesia in terms of assets and deposits.

Maybank Syariah Indonesia, on the other hand, began as a conventional bank. Bank Maybank Indocorp in January 1995 was the first Malaysian-Indonesian joint venture to be allowed by domestic regulators to operate a bank in the country. It converted to a full fledged Islamic bank in 2010.

On the level of development of Islamic banking in Indonesia, CIMB Islamic CEO Badlisyah Abdul Ghani explains that Malaysia has had a head start, and therefore already has all the regulation, legislation and Shariah framework in place, while Indonesia is still in the midst of setting the stage. However, he highlights the fact that Indonesia is the only other country in the world that has a separate Islamic Banking Act and operates on a dual banking model.

"As such, the types of product in the market differ somewhat. Malaysia has gone through the process of getting all the relevant products approved by the regulators while in Indonesia product approval has to go in tandem with regulatory development. Once the framework is fully in place, it will be in sync with the products available... and [will] eventually be at par with what Malaysia has," he explains.

On the comparison of products in the two countries, Mr Ghani feels that particularly in the matter of Shariah it is better to cross each bridge as and when they reach it. "Indonesia is still going through the necessary approval process for these products so there is no point in discussing the differences of the Shariah because you don`t know until these products are submitted for approval," he says.

Maybank Syariah Indonesia president and director Baharudin Abd Majid believes that a proactive approach is the solution to propel Islamic finance forward in the country. Though not the first to moot such an idea, Mr Majid advocates for a participatory involvement between Islamic banks and conventional banks, with Islamic windows as strategic partners to foster the growth of Islamic banking assets.

"This is what we have been trying to champion by approaching presidents and directors of Islamic banks and asking them to participate in this strategy. By pulling the resources and expertise of all Islamic banks and windows, we can realize the goal of increasing our business. Islamic windows can persuade the parent bank to acquire the Shariah compliant products or assets to be placed in their portfolio. We should therefore look at that business angle and work towards the quantum growth of the industry instead of relying on individual growth," he suggests.

On the response from the corporate sector, Mr Majid says that through education, the bank has managed to convince one of the clients to take up take up a Shariah compliant portion in the second tranche of the syndication. He feels that the driving factor will be pricing and service that is equal to or better than in the conventional space. "We have a great opportunity to build up our assets," he adds.

What about competition between the Islamic banks? Mr Ghani feels that competition does not exist only within the Islamic space but also with the conventional sector, as both sectors target the same markets. "At the moment, it is not a level playing field. If you talk about competition, it is lop-sided towards the conventional. The Islamic banking industry can only compete on a level playing field when the appropriate legislation and regulation is in place," he says.

As a result of its license, CIMB Niaga Syariah is focused on consumer banking, comprised of commercial and retail banking - a division that is already fairly established according to Mr Ghani. Maybank Syariah Indonesia has taken a different route, opting to focus on corporate investment banking. Mr Majid explains that at the micro level retail banking in Indonesia is very competitive, but it is healthy competition. "In Indonesia it is just a numbers game, where the backbone of the banking sector is consumer banking, as this is the bulk of the consumption. There is a great market for that," he says.

However, the same cannot be said about the country`s Islamic corporate banking sector which, in Mr Majid`s opinion, has yet to reach the level achieved by the consumer sector. He believes that this is where an Islamic window has the advantage, as it is able to leverage the expertise and exposure of the parent bank and its subsidiaries.

Despite the setbacks involved with the lack of legislation and regulation, Mr Ghani is optimistic about the future of Islamic finance in the archipelago, as the government is still very committed to continuing the development of Islamic finance and facilitating a level playing field. This, he explains, is evident from the implementation of the Islamic banking law and Sukuk law over the last three years. "The regulators need to follow through with various other frameworks, and naturally it will take time, but we do know it is being worked on and will come out soon enough," he says.

Mr Majid, on the other hand, believes that Islamic banks, through participatory and collective efforts, are able to initiate the much needed growth in the country themselves; particularly in the corporate and investment banking sector. "It is a matter of internal priority set by these individual banks. We do not need to wait for the incentives to come in but rather work together among the Shariah compliant banks. The competition is very healthy and we need to work on this strategy. Entrepreneurs are constantly looking for top quality products which we can offer with competitive pricing. The awareness is there, and the prospect I foresee is a `quantum leap` in the growth of Islamic banking in Indonesia."

By - Islamic Finance Asia
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Tuesday, May 03, 2011

Why Islamic Microfinance?

A large number of studies on poverty indicate that exclusion of the poor from the financial system is a major factor contributing to their inability to participate in the development process. In a typical developing economy the formal financial system serves no more than twenty to thirty percent of the population. The vast majority of those who are excluded are poor. With no access to financial services, these households find it extremely difficult to take advantage of economic opportunities, build assets, finance their children’s education, and protect themselves against financial shocks. Financial exclusion, thus, binds them into a vicious circle of poverty. Building inclusive financial systems therefore, is a central goal of policy makers and planners across the globe. These concerns are reflected in the Millennium Development Goals (MDG’s) set by the United Nations in the year 2000 and the international initiatives that have followed

Muslim population of the World is approximately 1.3 billion individuals. They are spread across the world and excluding few countries in Middle East all are suffering from extreme poverty. Among the Muslim countries few are very densely populated and contribute to a significant proportion of poor in Islamic countries. e.g. Indonesia, Bangladesh, Pakistan, and India have almost 400 poor Muslims with a daily income of less than Dollar Two.

Access to Financial services is very low in these countries despite the availability of such services. CGAP Survey reveals that it is estimated that some 72 percent of people in Muslim countries do not use formal financial services, many of them citing religious injunctions against paying interest.

The survey further reveals that “While conventional microfinance products have been successful in Muslim majority countries, these products do not fulfill the needs of all Muslim clients. Combining the Islamic social principle of caring for the less fortunate with microfinance’s power to provide financial access to the poor has the potential to reach out to millions more people, many of whom say they would prefer Islamic products over conventional microfinance products.”

Few other studies have revealed that there is great demand and preference for Shariah compliant products. Findings of another research carried out by Nimrah Karim, Michael Tarazi and Xavier Reille are as under.

Sixty percent of low-income survey respondents in the West Bank and Gaza claim a preference for Islamic financial products over conventional ones. Over half of this group is willing to pay higher prices for them.

A number of studies carried out in Jordan by USAID and IFC/FINCA, who found that 24.9 and 32 percent, respectively, of survey respondents cited religious reasons for not turning to traditional financial products. IFC/FINCA also found that 18.6 percent of those interviewed cited religious reasons as the most important factor in determining whether or not to obtain a loan. In Yemen about 40 percent of the poor demand Islamic financial services regardless of price. In Syria, another survey showed that 43 percent of respondents never obtained microloans for religious reasons. Forty-six percent of people who had never applied for a loan admitted that religious reasons had prevented them from ever even applying. Five percent of current borrowers said they would not apply for another loan for religious reasons.

This can be very carefully stated that there is a high demand for Islamic financial products in Islamic world. This can also be gauged from substantial growth of Islamic banking during recent past. Islamic Microfinance products and Institutions are to be created and strengthened to achieve Millennium Development Goal. This will help include a majority of poor people in the financial system and achieve micro and macroeconomic goals.

Source taken from :
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Saturday, April 23, 2011

China’s emergence and its impact on ASEAN

Many analysts claim that China is the future of Asia and of the world. This can be seen from the statistical data of China’s economic growth, China’s defense budget, China’s demographic data and in its participation in regional and global cooperation, such as economic cooperation with the World Trade Organization (WTO) and the Asia-Pacific Economic Cooperation (APEC). In a regional context, China and the ASEAN countries have agreed to establish the free trade zone of China and ASEAN (ASEAN-China Free Trade Area, ACFTA) which started in January this year China’s participation in world economic forums shows that China has become the engine of the world economy. China had US$1.8 trillion of foreign exchange reserves in 2008 and is the third-largest exporting country in the world, with a volume of $3.24 trillion. China is the largest exporting country in Asia. This fact places China in an important position and gives it and important role in the world economy.

The rise of China is not going to happen without impacting on the world and particularly on the 10-member Association of Southeast Asian Nations (ASEAN). This region may be among the most affected by China’s economic emergence.

How will China’s growing economy affect the ASEAN countries? Two of the ways in which China’s emergence is affecting the economies in ASEAN are in the production of similar but cheaper export products and the ability of China to attract more foreign domestic investment (FDI) than any of the countries in the ASEAN.

The sheer size of China’s domestic market has an indirect effect on the economies in the ASEAN. China, with its 1.3 billion people, compared to the whole of the ASEAN population of around 500 million, will attract investors and businesses who want to locate or relocate their businesses to China to benefit from its huge domestic market.

China’s domestic market and its economy are larger than those in the whole of the ASEAN region. The smaller nature of the domestic consumer markets of these countries makes them dependent on exports to boost their economies. With 1.3 billion people, China affords an abundant supply of cheap labor, which will lead to a low-cost economy. Currently, China produces the same goods for the global marketplace at a cheaper cost than most of the ASEAN countries.

As a result, most of the countries in Southeast Asia have lost their market share to China. This is what is most feared with the full implementation of the ACFTA in 2010, especially in those countries that have similar goods and markets globally.  It is feared that China could flood their markets with the same goods at cheaper prices, and thus they will lose their market share, losing their jobs and their competitiveness.

Another impact of an emerging China on the ASEAN countries is its ability to pull more foreign direct investment (FDI) than any of the countries in ASEAN. China attracted $92.4 billion worth of foreign direct investment in 2008, a 23.6 percent increase from 2007 while ASEAN countries attracted $60.17 billion in 2008, a decrease from $69.48 billion in 2007 due to the global economic crisis.
But the rise of China will not only have a negative impact on the countries in the region but also a positive one, but mostly in the long term. As China continues to grow economically, it will serve as a huge market for exports from the ASEAN countries.Most countries in Southeast Asia tend to see the Chinese market as an important avenue to increase exports, particularly of agricultural products such as rice, rubber, sugar and palm oil.

Another important reason why an emerging China is beneficial to the ASEAN is that the Chinese market will serve as an alternative and a cushion for ASEAN countries.For example, when the US market had negative growth due to its financial crisis in 2007, China still recorded high economic growth.

One of the main reasons for accelerating the ASEAN-China economic integration is to take advantage of China’s emergence and its huge domestic market. The full establishment of the ACFTA this year will help ASEAN and China benefit from each other. China’s economy lacks natural resources while ASEAN countries have an abundance of natural resources.This lack of natural resources on the part of China could have a tremendous impact on their growth and development efforts in long run. As a further advantage of the ACFTA, ASEAN countries can benefit from an increasing number of Chinese tourists due to the rise of a Chinese middle class.

The existence of a huge ethnic Chinese population in the ASEAN countries can be leverage to take advantage of China’s emergence. The Diaspora Chinese (David N. Abdulai, 2007) can be guidance and contacts for the Chinese to invest in the ASEAN region and this will attract China’s attention to concentrate more on ASEAN countries.

Indonesia is one of the ASEAN countries that can benefit from China’s emergence through the implementation of the ACFTA. China can become one of the targets of Indonesia’s exports. However, if Indonesia does not prepare itself for the full implementation of the ACFTA, it only will negatively affect its domestic market. China’s cheaper products will flood the Indonesian market and, in the end, extinguish domestic industries. In 2008, imported products from China took over 70 percent of the domestic market share, which was previously controlled by domestic enterprises. 

Written by Ali Rama   
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