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IB November 2013 Cover Final _Layout 2 06/03/2014 23:30 Page 1<br />
<strong>Islamic</strong> <strong>Banker</strong><br />
News and Analysis of <strong>Islamic</strong> Banking, Finance and Insurance<br />
Issue No. 214<br />
November 2013<br />
Dhul hIjja 1434 - muharram 1435<br />
Exclusive Interview: Dr Zeti Akhtar Aziz, Governor, BNM<br />
IF Industry is much sounder Today Than a Year ago<br />
The State of the <strong>Islamic</strong> Finance Industry<br />
Time for IF Industry to start realising its Potential<br />
Interview: Abdulrazzak Elkhraijy, NCB<br />
The Future is <strong>Islamic</strong> banking in saudi arabia<br />
Global Sukuk Market<br />
sukuk market to Withstand bond market volatility<br />
Mushtak Parker Associates Limited
IB November 2013 final _IB_JanFeb 2010.qxd 06/03/2014 23:29 Page 1<br />
islamic banker<br />
Leading the Way in Faith-based investment<br />
c ontents<br />
Issue No. 214 November 2013<br />
dhuL hijja 1434 - muharram 1435<br />
Publisher Leila badawi<br />
editor mushtak Parker<br />
Design & Production imtiaze manjra<br />
research & Development alan st clair<br />
marketing & Finance<br />
Contributing editors<br />
dr daud bakar (dubai)<br />
mustafa aksay (istanbul)<br />
dr adalet djabiev (moscow)<br />
stella cox (London)<br />
dr mohsin Khan (Washington)<br />
Wan abdul rahim Kamil (Kuala Lumpur)<br />
dr saleh malaikah (jeddah)<br />
dr abbas mirakhor (Washington)<br />
dr volker nienhaus (essen)<br />
adeel y siddiqi (London)<br />
richard thomas (London)<br />
adam ebrahim (cape town)<br />
tan sri nor mohamed yakcop (Kuala Lumpur)<br />
ali yasseri (tehran)<br />
shariah Consultant Professor abdul ali hamid<br />
editorial enquiries<br />
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eDITorIAL The sTATe oF The IsLAmIC FINANCe INDusTry 2<br />
TIme For IF INDusTry To sTArT reALIsINg ITs PoTeNTIAL<br />
NeWs IN FoCus & bANKINg IN brIeF 3<br />
FINANCe exCLusIve INTervIeW: AbDuLrAzzAK m eLKhrAIjy, NCb 6<br />
The FuTure Is IsLAmIC bANKINg IN sAuDI ArAbIA<br />
demand for islamic banking and finance products and services is set to increase<br />
steadily over the next few years in saudi arabia, the world’s single largest such market,<br />
especially from young customers, corporates and government entities. this includes<br />
retail banking, corporate finance and investment banking in particular for sukuk<br />
issuance. Mushtak Parker discusses with Abdulrazzak M Elkhraijy, executive vice<br />
President and head of the islamic banking development group at National<br />
Commercial Bank (NCB), the state of, the current opportunities and future challenges<br />
of islamic banking in the Kingdom<br />
TILAL DeveLoPmeNT LAuNChes omAN’s FIrsT CorPorATe suKuK 9<br />
INTervIeW Dr zeTI AKhTAr AzIz, goverNor, bANK NegArA mALAysIA 10<br />
IF INDusTry muCh souNDer ToDAy ThAN A yeAr Ago<br />
Following in the tradition of her predecessors, dr Zeti akhtar aziz, governor of bank<br />
negara malaysia, the central bank, is the most proactive and experienced governors serving<br />
the islamic banking, finance and takaful industry. her influence transcends her home<br />
jurisdiction of malaysia to the corridors of power at the g8, the basle committee and the<br />
iFsb (islamic Financial services board). she is the archetypal ‘central banker’s central<br />
banker’ and commands huge respect both at home and abroad. in this in-depth interview,<br />
Governor Zeti Akhtar Aziz discusses with <strong>Islamic</strong> <strong>Banker</strong> the state of the global islamic<br />
finance industry; the latest developments in the malaysian and regional markets; and the<br />
challenges the industry is faced with going forward<br />
suKuK gLobAL suKuK mArKeT versus boND mArKeT 14<br />
suKuK mArKeT To WIThsTAND boND mArKeT voLATILITy<br />
the prospect of the us Federal reserve (Fed) tapering the monetary stimulus programme<br />
sent shockwaves through the financial markets. sukuk have not been spared by the impact<br />
of rising us yields. however, Ramlie Kamsari, chief executive officer, CIMB Principal<br />
<strong>Islamic</strong> Asset Management in Kuala Lumpur, maintains that the global sukuk market has<br />
proved relatively more resilient in the face of this volatility, and that this resilience has largely<br />
been a demand-driven phenomenon, propelled by investors for products that are more<br />
compliant with their religious faith<br />
suKuK KhAzANAh NAsIoNAL sg$600m exChANgeAbLe suKuK 16<br />
KhAzANAh Issues seCoND suKuK IN sINgAPore mArKeT<br />
Khazanah nasional berhad, the malaysian sovereign wealth fund (sWF), successfully<br />
completed a benchmark exchangeable sukuk offering of sg$600 million<br />
(rm1.524 billion), via a Labuan incorporated independent special purpose company,<br />
indah capital Ltd. in november 2013, which the company stressed is the first<br />
singapore dollar-denominated negative yield exchangeable sukuk, and the first<br />
offering to offer exposure to a growing private healthcare market. <strong>Islamic</strong> <strong>Banker</strong> reports<br />
© mushtak Parker associates (mPa) Ltd. all rights reserved.<br />
no part of this publication may be reproduced or used in any<br />
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recording, taping or information storage and retrieval<br />
systems) without permission of islamic banker.<br />
all comments, news, statistics are provided for information<br />
purposes only. Whilst islamic banker takes every care to<br />
ensure that its reporting is accurate, it cannot take responsibility<br />
for any error of fact, comment, statistics or news, nor<br />
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basis of these comments, facts, statistics, dates and news.<br />
the views of contributors and guest w riters are not those of<br />
the editor and staff of islamic banker.
IB November 2013 final _IB_JanFeb 2010.qxd 06/03/2014 23:29 Page 2<br />
eDITorIAL<br />
The state of the <strong>Islamic</strong> Finance Industry<br />
time for iF industry to start realising its Potential<br />
as another year draws to a<br />
close the global islamic<br />
finance industry seems to<br />
be sustaining its traction<br />
especially in key markets in<br />
saudi arabia and malaysia, the two<br />
largest single islamic finance markets in<br />
the world by far.<br />
elsewhere, the encouraging signs have<br />
been in Qatar, turkey and indonesia,<br />
where there have also been regular<br />
domestic sovereign sukuk issuances for<br />
capital, reserve and liquidity management<br />
purposes, perhaps indicating the beginnings<br />
of a maturing of the local islamic<br />
finance market, especially of government<br />
policy towards the industry.<br />
in oman, tilal development company<br />
has recently issued the first corporate<br />
sukuk in the country perhaps paving the<br />
way for more such issuances. however,<br />
local institutions would prefer to get more<br />
guidance through a benchmark debut<br />
sovereign sukuk, although there have<br />
been very few signs that the ministry of<br />
Finance in muscat is currently contemplating<br />
such a move.<br />
two more recent debutantes in the<br />
sukuk market have been al hilal bank in<br />
abu dhabi, a potentially important development<br />
given that the bank is effectively<br />
a quasi-sovereign entity being whollyowned<br />
by the abu dhabi investment<br />
council, the investment arm of the government<br />
of abu dhabi; and osun state in<br />
nigeria, which last month became the first<br />
entity – sovereign or private – to issue a<br />
sukuk in africa.<br />
the market has also been buoyed by<br />
the developments in non-muslim jurisdictions<br />
such as the uK, Luxembourg and<br />
south africa, where work towards issuing<br />
debut sovereign sukuk in the international<br />
market is on track for the coming financial<br />
year 2014/15.<br />
uK Prime minister david cameron’s<br />
announcements at the World islamic<br />
economic Forum (WieF) held in London<br />
last month on six new initiatives on<br />
islamic finance has given further momentum<br />
to the market and has raised expectations<br />
further.<br />
already there are signs of movement in<br />
transactions in the real estate, housing,<br />
mergers and acquisitions (m&a) and<br />
infrastructure sectors.<br />
similarly, more new entrants to the<br />
market could also come from non-traditional<br />
countries such as senegal, which<br />
has recently mandated citigroup and the<br />
islamic corporation for the development<br />
of the Private sector (icd), the private<br />
sector funding arm of the islamic<br />
development bank (idb) group, to<br />
advise on and arrange its debut sovereign<br />
sukuk.<br />
as our two interviews in this issue suggest,<br />
the growth tensile for islamic finance<br />
in saudi arabia and malaysia is encouraging.<br />
abdulrazzak elkhraijy of the<br />
national commercial bank of saudi<br />
arabia (ncb) is rightly bullish about the<br />
prospects for the future expansion of<br />
islamic banking in the Kingdom.<br />
brIghT FuTure<br />
“every single day we see a growth in<br />
islamic banking. We have a commitment<br />
from our customers, from our shareholders<br />
and our management to grow this<br />
business. it started with us fulfilling our<br />
customers’ needs and the demand subsequently<br />
increased. this is the model we<br />
follow and hopefully there will be more<br />
expansion in islamic banking in this field.<br />
in the past customers used to take<br />
islamic banking for peace of mind. that<br />
was the demand, give me something to<br />
give me peace of mind, in terms of<br />
shariah compliance. today it is not only<br />
peace of mind, which is a must, but another<br />
thing is that islamic banking products<br />
have to be efficient and competitive with<br />
the others in the market. i strongly believe<br />
that the future of islamic banking in saudi<br />
arabia is very bright.”<br />
his estimate of islamic deposits<br />
accounting for between 40 to 45 per cent<br />
of total banking deposits in the country is<br />
revealing. if the growth trajectory continues<br />
upwards, driven by demand especially<br />
from young customers, it may be<br />
reasonable to assume that within the next<br />
few years islamic banking could overtake<br />
214 2 <strong>Islamic</strong> banker november 2013 dhul hijja 1434 - muharram 1435<br />
the conventional banking sector with<br />
more than half of the market share of the<br />
banking sector.<br />
similarly, in malaysia the market share<br />
of islamic banking of the total banking sector<br />
may not be as high but during the<br />
tenure of current bank negara malaysia<br />
governor dr Zeti akhtar aziz it has<br />
increased from 6 per cent in 2000 to 24 per<br />
cent at end november 2013. but future<br />
upward growth cannot be taken for granted<br />
even in the malaysian market, where competition<br />
from the conventional sector is<br />
entrenched, albeit the islamic sector has<br />
held its own over the last three decades.<br />
the global sukuk market too has proved<br />
relatively more resilient in the face of the<br />
volatility resulting from the prospect of the<br />
Federal reserve tapering the us monetary<br />
stimulus programme which sent shockwaves<br />
through the financial markets. the<br />
resilience of the global sukuk market has<br />
been largely a demand-driven phenomenon,<br />
propelled by investors for products that<br />
are more compliant with their religious faith.<br />
but banking is not merely about growth<br />
projections, market share, profitability etc.<br />
governor Zeti, in her idb Prize lecture<br />
this month, reminded that islamic finance,<br />
through its emphasis on risk-sharing for the<br />
attainment of socio-economic goals based<br />
on the objectives of shariah, provides the<br />
discipline that enhances the prospect of<br />
strengthening the link between finance and<br />
the real economy, thus contributing<br />
towards overall financial stability.<br />
“With the global economy now on the<br />
recovery path,” she added, “islamic finance<br />
offers enormous potential in supporting a<br />
more inclusive and sustainable economic<br />
growth. developing and emerging<br />
economies in particular stand to reap the<br />
largest benefits from this potential. to fully<br />
realise this potential, regulatory priorities in<br />
strengthening financial stability taking into<br />
consideration the specificities of islamic<br />
finance will ensure its continued resilience<br />
and its potential to effectively service the<br />
functioning of economies and the economic<br />
wellbeing of societies.” it is up to policymakers<br />
and the islamic finance industry to<br />
put substance to these lofty aspirations. .
IB November 2013 final _IB_JanFeb 2010.qxd 06/03/2014 23:29 Page 3<br />
Policy<br />
30.<br />
11.<br />
NeWs<br />
IN FoCus<br />
30.<br />
Zeti urges redifining of modern Finance<br />
dr Zeti akhtar aziz, winner of the islamic development bank (idb) Prize for islamic<br />
Finance in 2013, in the annual idb Prize Lecture given in jeddah in november<br />
2013, strongly stressed the need to redefine the fundamental character of modern<br />
finance and how it would interact with the economy and the broader society. “new considerations<br />
that prioritise justice and fairness, sustainability and inclusion have also<br />
become essential underpinnings of such a financial ecosystem. the recalibration of<br />
finance should aim to serve the needs of the real economy and more importantly the<br />
broader society. this would lead to more sustainable financial systems, and in turn contribute<br />
positively to growth and development,” urged dr Zeti, who is also the governor<br />
of bank negara malaysia, the central bank.<br />
indeed, islamic finance is a model to reanchor finance to the real economy, she suggested.<br />
this is because a core underpinning of islamic finance is the tenet that requires<br />
islamic financial transactions to be supported by genuine productive economic activity.<br />
islamic finance is also a financial regime that places emphasis on risk-sharing, thereby<br />
strengthening further the link of finance to the real economy. the concept of risk-sharing<br />
in finance is not new. in islamic finance, this is further reinforced by shariah principles that<br />
strongly discourage excessive debt given its detrimental effects on society. the use of risksharing<br />
transactions in islamic finance thus offers the potential to reinforce the links between<br />
finance and the real economy. the contractual arrangements between the financier and<br />
the entrepreneur place strong emphasis on the value creation and economic viability of the<br />
enterprise and also serves as a restraint on unbridled financial engineering.<br />
the move to embrace the risk-sharing dimension of islamic finance also presents<br />
new opportunities for financial management. indeed, in recent years, said dr Zeti, the<br />
greater use of equity-based models has been most evident in the sukuk market. the<br />
evolution of asset-backed and asset-based sukuk provides further options for investors<br />
to diversify their portfolio. asset-backed sukuk has profit and loss sharing elements that<br />
thus offers investment sustainability. the possibility of a default is minimised, as investors<br />
of asset-backed sukuk are not guaranteed to receive income or capital gains, and profits<br />
are paid by the issuers only when the underlying assets earn profits.<br />
similarly, argued dr Zeti, risk-sharing transactions and undertakings under the participatory<br />
finance models in islamic finance also enhances prospects for increasing financial<br />
inclusion and in bringing the financially unserved into the economic mainstream. in<br />
many idb member countries, studies have shown that economic development is constrained<br />
by the lack of access to finance, given that only about 30 per cent of the adult<br />
population use formal financial intermediaries.<br />
“greater outreach to small and medium enterprises (smes) and microenterprises can<br />
be achieved through the wider application of equity-based structures in financing for<br />
smes and islamic microfinance given their strong emphasis on promoting entrepreneurship<br />
and value-creating activities. this contributes towards the overall objective of<br />
generating inclusive growth that enhances the prospects for job creation. integration<br />
with other financial products such as microtakaful and social welfare arrangements such<br />
as endowment (waqf) can also provide a total financial solution for the lower income<br />
groups and small businesses,” she added.<br />
risk-sharing in islamic finance also extends to the creation of a more equitable and<br />
just distribution of wealth. it also has the potential for islamic finance to become a powerful<br />
tool that can enhance financial access for emerging economies, in particular the less<br />
developed countries. the continued success and viability of islamic finance will depend<br />
on ensuring focus on preserving financial stability. here, she stressed further progress<br />
on two fronts - continuing to evolve a more refined distinction within prudential and financial<br />
reporting frameworks to reflect the different nature and profile of risks under risksharing<br />
contracts; and the need to accelerate efforts to further strengthen the infrastructural<br />
underpinnings for the development of the overall islamic financial system.<br />
b A N K I N g<br />
I N b r I e F<br />
gCC/uK Investors in realty jv<br />
apache capital Partners LLP, the<br />
London and gulf-based real estate<br />
investment management firm, and<br />
tadhamon capital bsc, the bahrainbased<br />
islamic investment company,<br />
have set up a uK£100 million joint venture<br />
with mcLaren Property for the<br />
development of a major student accommodation<br />
and office scheme in<br />
shoreditch, London, which was<br />
acquired from ireland's national asset<br />
management agency (nama). the<br />
development will comprise 419 high<br />
quality student accommodation units<br />
and 43,000 sq ft of office space, with<br />
completion of the development scheduled<br />
for the start of the 2015 academic<br />
year. the development is well-located<br />
to benefit from the increasing demand<br />
from over 50,000 students studying<br />
within 20 minutes' walk of the<br />
site. shariah-compliant debt financing<br />
for the development is being provided<br />
by royal bank of scotland and the<br />
office development has been forward<br />
sold to helical bar Plc for uK£21 million.<br />
this transaction represents the<br />
second successful acquisition by<br />
mcLaren Property, apache and<br />
tadhamon from nama. the first was<br />
the 253-bedroom student accommodation<br />
develop-ment at Paris gardens,<br />
in southwark, London, which was completed<br />
in summer 2013 and achieved<br />
100 per cent occupancy during its first<br />
academic year. according to trowers<br />
& hamlins, the city law firm which<br />
acted for tadhamon and apache, he<br />
stable income-generation and capital<br />
growth potential of student accommodation<br />
make it a particularly popular<br />
asset class right now.<br />
gatehouse signs jv with sigma<br />
uK-based gatehouse bank has set up<br />
a uK£700 million jv with sigma capital,<br />
the edinburgh-based residential and<br />
urban regeneration specialist, which will<br />
support the roll-out of an initial 2,000<br />
new privately rented residential properties<br />
in the uK, with the potential to grow<br />
the portfolio to 6,600 new rental homes.<br />
<strong>Islamic</strong> banker november 2013 dhul hijja 1434 - muharram 1435 214 3
IB November 2013 final _IB_JanFeb 2010.qxd 06/03/2014 23:29 Page 4<br />
equities<br />
NeWs<br />
IN FoCus<br />
sc revises stock screening methodology<br />
bursa maLaysia main board<br />
Weightage oF shariah-comPLiant securities<br />
by sector november 2013<br />
mAIN mArKeT/ No. oF shArIAh- ToTAL % oF shArIAh<br />
Ace market Compliant securities -compliant<br />
securities<br />
securities<br />
CoNsumer ProDuCTs 106 133 80%<br />
INDusTrIAL ProDuCTs 194 261 74%<br />
mININg 1 1 100%<br />
CoNsTruCTIoN 36 44 82%<br />
TrADINg/servICes 143 206 69%<br />
ProPerTIes 59 86 69%<br />
PLANTATIoN 34 39 87%<br />
TeChNoLogy 71 95 75%<br />
INFrAsTruCTure 5 6 83%<br />
FINANCe 2 36 6%<br />
sPAC 2 2 100%<br />
hoTeLs 0 4 0%<br />
CLose-eND FuNDs 0 1 0%<br />
ToTAL 653 914 71%<br />
sourCe: securities commission maLaysia november 2013<br />
the securities commission<br />
malaysia, the<br />
securities regulator, has<br />
revised its shariah screening<br />
methodology for islamic<br />
equity funds and unit<br />
trusts regulated by the<br />
commission. the revised<br />
methodology has been<br />
approved by the shariah<br />
advisory council (sac) of<br />
the commission.<br />
under the revised<br />
screening methodology,<br />
the commission said in a<br />
statement, the sac adopts<br />
a two-tier quantitative<br />
approach, which applies the business activity benchmarks and the financial ratio<br />
benchmarks. the revision has taken into consideration of the rapid development<br />
of the islamic finance industry in malaysia, since the shariah screening methodology<br />
was first introduced in 1995.<br />
“the revision,” added the commission, “will potentially spur greater inflow of<br />
foreign islamic funds into malaysian shariah-compliant equities, thus expanding<br />
the islamic capital market’s global reach, as outlined in the capital market<br />
masterplan ii.”<br />
the sac last month also published its latest updated list of shariah-compliant<br />
securities, which features a total of 653 shariah-compliant securities and which<br />
constitute 71 per cent of the 914 listed securities on bursa malaysia, the national<br />
stock exchange. the list is updated every six months by the sac. the latest<br />
update is effective 29 november 2013.<br />
the list includes 16 newly classified shariah-compliant securities and excludes<br />
158 from the previous list issued in may 2013. it also indicates, according to the<br />
commission, that the shariah-compliant securities are well represented across<br />
the business sectors. to facilitate transition under the revised screening methodology,<br />
investors are given six (6) months from the effective date of the List of<br />
shariah-compliant securities, to dispose of securities that are excluded from the<br />
list, in the event that the respective market price of such securities exceeds or is<br />
equal to the investment cost.<br />
during the six-month period, according to the securities commission, dividends<br />
received and capital gains realised from the disposal of such securities may be<br />
retained by investors, without the need to channel any portion of the dividends<br />
and capital gains to baitulmal and/or charitable bodies. the next update will occur<br />
in may 2014.<br />
given that malaysia has over 14 islamic banks, the shariah-compliant securities<br />
list surprisingly contains only two financial entities, namely bimb holdings and<br />
syarikat takaful malaysia berhad. in addition there are four islamic real estate<br />
investment trusts (reits) listed on bursa malaysia, namely, al aqar KPj real<br />
estate investment trust, al-hadharah boustead reit, axis real estate investment<br />
trust, KLcc ProP & reits stapled sec. similarly, there is one islamic<br />
exchange traded Fund (etF), myetF dow jones islamic market malaysia titans<br />
25, managed by i-vcap management sdn bhd, a subsidiary of Khazanah nasional<br />
berhad, the malaysian sovereign wealth fund, also listed on bursa malaysia.<br />
b A N K I N g<br />
I N b r I e F<br />
ICD in jv Ijara Firm in Palestine<br />
the board of the islamic<br />
corporation for the development of<br />
the Private sector (icd) , the private<br />
sector funding arm of the islamic<br />
development bank (idb) group, has<br />
set up a joint venture leasing company<br />
in Palestine called Palestine<br />
ijara company (Pic), in partnership<br />
with the Palestine investment Fund<br />
(PiF) and the Palestine islamic bank<br />
(Pib). the company, said icd in a<br />
statement, will offer multiple leasing<br />
products and assist Palestinian<br />
smes in various economic sectors,<br />
including agribusiness, industry, construction,<br />
education, health care, and<br />
tourism, in fulfilling their growth<br />
potential by offering them a range of<br />
shariah-compliant financing products.<br />
the aim is also to generate<br />
employment especially amongst the<br />
youth. this is the 17th ijara company<br />
set up by icd in asia, the middle<br />
east and africa.<br />
Arzan uK£41m uK realty Deal<br />
mayfair-based 90 north real estate<br />
Partners LLP, an independent investment<br />
advisory firm, specialising in<br />
shariah compliant real estate investment,<br />
advised a middle eastern<br />
investor represented by dubai-based<br />
arzan Wealth, on the purchase of<br />
crossley retail Park, Kidderminster,<br />
Worcester-shire in a uK£41.5 million<br />
deal which is projected to give a net initial<br />
yield of 7.3 per cent per annum to<br />
the investor. the transaction was<br />
financed through a shariah-compliant<br />
debt facility provided by bank financing<br />
for the acquisition which was provided<br />
by aareal bank. nicholas judd,<br />
Founder Partner of 90 north stressed<br />
that “the investment platform we manage<br />
in partnership with arzan Wealth<br />
has now acquired approximately £110<br />
million of property and we are seeking<br />
further substantial acquisitions across<br />
a range of real estate sectors for<br />
2014”. north has over the last 18<br />
months transacted on 7 assets with a<br />
value of about uK£200 million.<br />
214 4 <strong>Islamic</strong> banker november 2013 dhul hijja 1434 - muharram 1435
IB November 2013 final _IB_JanFeb 2010.qxd 06/03/2014 23:29 Page 5<br />
Corporate sukuk<br />
NeWs<br />
IN FoCus<br />
riyad bank closes sr4bn sukuk offering<br />
riyad banK<br />
sr4bn suKuK aL-ijarah<br />
saLient Features at november 2013<br />
Issuer<br />
riyad banK<br />
DATe oF Issue november 2013<br />
sIze oF Issue<br />
sr4 biLLion (us$1.07bn)<br />
TeNor 7 years, caLLabLe aFter 5<br />
suKuK TyPe<br />
PrICINg<br />
LeAD mANAger AND<br />
FINANCIAL ADvIser<br />
CurreNCy<br />
use oF ProCeeDs<br />
goverNINg LAW<br />
DIsTrIbuTIoN<br />
years<br />
FiXed rate suKuK aL ijarah<br />
0.68% over 3-months sibor<br />
(saudi interbanK oFFered<br />
rate)<br />
riyad caPitaL<br />
saudi riyaL<br />
the Proceeds WiLL be used<br />
to diversiFy riyad banK’s<br />
sources oF Funding; reduce<br />
the asset /LiabiLity maturity<br />
mismatch by securing Long<br />
term Funding; and to suP-<br />
Port the Financing oF<br />
shariah-comPLiant business<br />
oF the banK.<br />
LaWs oF saudi arabia<br />
through Private PLacement<br />
to saudi institutionaL<br />
investors.<br />
sourCe: isLamic banKer and riyad banK november 2013<br />
riyad bank of saudi arabia successfully<br />
closed a sr4 billion<br />
(us$1.07 billion) 7-year local currency<br />
sukuk which was offered through a<br />
private placement to institutional<br />
investors in the local market. the<br />
issuance was duly over-subscribed.<br />
talal ibrahim al-Qudaibi, ceo of<br />
riyad bank, said in a statement to the<br />
saudi stock exchange (tadawul) that<br />
the sukuk will be for 7 years maturity<br />
callable after 5 years. riyad capital was<br />
the financial advisor and lead manager<br />
for this issuance. al-Qudaibi explained<br />
that riyad bank aims to diversify its<br />
sources of funding; reduce the asset /liability<br />
maturity mismatch by securing long<br />
term funding; and support the financing<br />
of shariah-compliant business.<br />
the issuance was priced at 0.68 per<br />
cent over 3-month sibor (saudi<br />
interbank offered rate). riyad bank,<br />
which is rated a+ by international rating<br />
agencies, standard & Poor’s and Fitch rating, is the latest saudi bank to raise<br />
funds from the local saudi riyal market through islamic finance instruments to support<br />
their capital structure and balance sheet activities.<br />
saudi hollandi bank, saudi british bank, banque saudi Fransi have all<br />
accessed the market through sukuk issuances. riyad bank recently recently<br />
announced increased profits of sr2,917 million in the first 9 months of 2013, which<br />
is 10 per cent higher than the same period in 2012.<br />
b A N K I N g<br />
I N b r I e F<br />
eIIb-rasmala in Trade Fund<br />
eiib-rasmala, a dubai-based joint venture<br />
islamic investment banking and<br />
asset management group, has launched<br />
the rasmala trade Finance Fund,<br />
which concludes a series of new fund<br />
launches in 2013, including the rasmala<br />
global sukuk Fund, the rasmala<br />
Leasing Fund and the rasmala gcc<br />
islamic equity income Fund. eiibrasmala<br />
comprises uK-based<br />
european islamic investment bank<br />
(eiib) and dubai-based rasmala<br />
group. according to eric swats, head of<br />
asset management, eiib-rasmala, the<br />
rasmala trade Finance Fund “will cater<br />
to the increasing demand for low risk,<br />
income-orientated shariah-compliant<br />
investment products. the Fund offers a<br />
diversified portfolio of trade finance transactions<br />
exposed to different geographies,<br />
industry groups and individual<br />
companies in order to lower exposure to<br />
rising interest rates. the fund will obtain<br />
enhanced investment returns from<br />
assets that can often be undervalued<br />
due to lack of recognition of their intrinsic<br />
payment capabilities. the overall strategy<br />
of the fund is expected to provide it<br />
with a means to achieve global diversification<br />
in trade finance markets.”<br />
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<strong>Islamic</strong> banker november 2013 dhul hijja 1434 - muharram 1435 214 5
IB November 2013 final _IB_JanFeb 2010.qxd 06/03/2014 23:29 Page 6<br />
FINANCe<br />
exclusive Interview: Abdulrazzak m elkhraijy, NCb, saudi Arabia<br />
the Future is islamic banking in saudi arabia<br />
demand for islamic banking<br />
and finance products and<br />
services is set to increase<br />
steadily over the next few<br />
years in saudi arabia, the<br />
world’s single largest such market, especially<br />
from young customers, corporates<br />
and government entities. this includes<br />
retail banking, corporate finance and<br />
investment banking in particular for sukuk<br />
issuance.<br />
“once you bring a financial solution to<br />
your customers that is islamic and conventional,<br />
most of the time they will prefer<br />
to go with the islamic solution as long as<br />
it is shariah-compliant, efficient and price<br />
competitive. everything in terms of the<br />
process side is important - the procedure,<br />
the policy, pricing, efficiency - everything,”<br />
explained abdulrazzak m elkhraijy,<br />
executive vice President and head of the<br />
islamic banking development group at<br />
national commercial bank (ncb), one of<br />
the largest banks in the arab World, in an<br />
exclusive interview with <strong>Islamic</strong> <strong>Banker</strong>.<br />
“the young people are demanding<br />
alternative shariah-compliant financing<br />
complying with a modern offering. you<br />
see them using more of the alternative<br />
products today in our branches and about<br />
90 per cent of the transactions are done<br />
in this way. it shows you that demand for<br />
islamic finance is good. the future of<br />
islamic finance in the Kingdom is indeed<br />
very bright,” he added.<br />
in a country where some 60 per cent of<br />
the population is under 25 years old, the<br />
youth are an important driver of the<br />
islamic banking market. this cannot be<br />
over-stated nor stereotyped. banks certainly<br />
cannot take the young saudi customer<br />
for granted, because in terms of<br />
products, technology and delivery they<br />
are demanding that these have to be<br />
modern and up-to-date with what is and<br />
how it is offered in the market.<br />
“you see,” explained ncb’s<br />
abdulrazzak elKhraijy, “more people are<br />
now not using the original traditional channel<br />
through the branches. they are using<br />
the alternatives, either online banking,<br />
telephone banking and the atms.<br />
by mushtaK ParKer<br />
ncb’s own retail banking operations is<br />
99 per cent shariah-compliant driven<br />
entirely by customer demand. there are<br />
only a few conventional customers largely<br />
related to its credit card business. the<br />
bank’s entire retail branch network is fully<br />
shariah-compliant offering “everything”<br />
including online and telephone banking<br />
and a large atm network. the trend for<br />
corporate and structured finance in the<br />
Kingdom is the same. already some 50 per<br />
cent of ncb’s corporate financing business<br />
is shariah-compliant and increasing.<br />
DeFININg DePosITs<br />
“ncb since the start of its islamic banking<br />
business, has been involved in a banking<br />
revolution based on customer demand<br />
and needs. every time we introduced a<br />
new product we saw more demand and<br />
growth in the percentage of the customers<br />
who are involved in islamic transactions.<br />
hopefully soon we will be able to make our<br />
retail business a 100 per cent shariahcompliant,”<br />
says abdulrazzak elkhraijy.<br />
as far as market size in the Kingdom is<br />
concerned, he concedes that this is difficult<br />
to assess. if you take deposits, for instance,<br />
it depends on how you define deposits.<br />
“some banks define all their demand<br />
deposits as shariah-compliant, for instance.<br />
at ncb we do not define all our demand<br />
deposits as such, even though there is no<br />
interest paid or taken on demand deposits.<br />
if you consider the whole process, if the surplus<br />
of that deposit is not invested in a<br />
shariah-compliant way and it is not under the<br />
control of a shariah department and therefore<br />
board, we do not consider it as islamic<br />
although it is demand and there is no interest<br />
paid on that. so this is the difficulty of defining<br />
what is the percentage of islamic deposits in<br />
the banking system as a whole,” he added.<br />
he is confident that islamic banking constitutes<br />
more than 40 per cent of the total<br />
banking system and continues on an<br />
upward projection especially in terms of<br />
customer deposits, financing and assets.<br />
sutainability in financial services including<br />
retail banking comes with value-added product<br />
development and innovation, especially<br />
to keep the loyalty of a young and increasingly<br />
sophisticated customer profile who<br />
demand new products, new delivery mechanisms,<br />
maybe even new incentives.<br />
“to me,” he explained, “you use the word<br />
that is very dear to my heart and that is<br />
innovation. i believe that if you want to look<br />
at innovation, look at islamic banking. at<br />
ncb when we started our islamic banking,<br />
our vision and strategy was to be the innovators<br />
in the industry, because we saw the<br />
big gap between what is available on a<br />
conventional side and in the islamic space.<br />
and if we want to be competitive, we need<br />
to be innovative to bring products that could<br />
compete with the conventional ones and<br />
satisfy the customer need on the retail side.<br />
“and we are very proud with our achievement<br />
at ncb. We are the bank that established<br />
the standard for investing globally in<br />
equities that is shariah-compliant.<br />
nationaL commerciaL banK oF saudi arabia (ncb)<br />
seLected unaudited FinanciaL resuLts Q32012/2013 ‘000 saudi riyaLs<br />
eND 30/9/2013 eND 31/12/2012 eND 30/9/2012<br />
ToTAL AsseTs sr367,080,620 sr345,320,133 sr320,803,112<br />
NeT INvesTmeNTs sr127,182,521 sr116,427,793 sr115,007,336<br />
CAsh AND bALANCes WITh sAmA sr33,070,059 sr40,298,428 sr18,676,663<br />
CusTomer DePosITs sr294,775,091 sr273,530,090 sr251,326,413<br />
PAID uP CAPITAL sr15,000,000 sr15,000,000 sr15,000,000<br />
ToTAL equITy sr41,918,029 sr39,404,145 sr38,444,288<br />
ToTAL INCome sr11,192,637 - sr10,356,200<br />
ToTAL oPerATINg exPeNses sr4,906,980 - sr4,931,450<br />
NeT ProFIT sr6,161,961 - sr5,180,863<br />
LoANs AND ADvANCes sr184,412,738 sr163,479,092 sr157,212,261<br />
ToTAL rIsK WeIghTeD AsseTs (PILLAr 1) sr250,980,123 sr232,098,061 sr233,083,898<br />
Core CAPITAL ADequACy rATIo (PILLAr 1) 16.3% 16.5% 16.0%<br />
sourCe: NCb November 2013<br />
214 6 <strong>Islamic</strong> banker november 2013 dhul hijja 1434 - muharram 1435
IB November 2013 final _IB_JanFeb 2010.qxd 06/03/2014 23:29 Page 7<br />
We were the first to introduce an islamic<br />
credit card; capital protection and other<br />
investment funds; and we were one of the<br />
first banks to finance a big housing project<br />
in saudi arabia. today we are concentrating<br />
maybe more on innovation in treasury<br />
products to find solutions for corporate<br />
clients.”<br />
ncb’s pioneering leadership in islamic<br />
equity funds is proven. it was Freddie<br />
crawford at Wellington management<br />
international that structured the first islamic<br />
equity fund of substance for ncb in the<br />
early 1990s under the bank’s al ahli brand.<br />
in its heyday al ahli global trading<br />
equity Fund used to be the single largest<br />
islamic equity fund in the world with a net<br />
asset value of just under us$2 billion.<br />
at end june 2013 however, the total<br />
assets under management reached a mere<br />
us$264.93 million, which still made it one of<br />
the largest if not the largest islamic equity<br />
funds. the decline reflects a wider trend in<br />
global islamic finance of the poor relation<br />
that islamic asset management is. this has<br />
been confirmed by several recent study<br />
published including one to be piublished in<br />
the new year by the malaysia international<br />
islamic Finance centre (miFc).<br />
islamic investment funds, according to<br />
various estimates, have a total size of<br />
assets under management not exceeding<br />
us$75 billion in 2013. this despite the fact<br />
that the actual number of funds has grown<br />
to some 1,060 at the end of 2013.<br />
the issue is that the aum of most of the<br />
funds are very small. equities have generally<br />
been a less preferred asset class of<br />
islamic investors, who have tended to prefer<br />
investment in real estate and sukuk. saudi<br />
arabia is the largest islamic funds aum<br />
domicile accounting for just over 40 per cent<br />
of global islamic funds assets followed by<br />
malaysia with just over 20 per cent.<br />
asked why islamic asset management<br />
especially equities have not taken off as an<br />
asset class compared to retail banking and<br />
sukuk, abdulrazzak elKhraijy believes that<br />
is essentially due to customer appetite.<br />
“i would love to see more islamic investment<br />
funds,” he contends, “but i think a<br />
combination of customer appetite, the perceived<br />
risks of investing in equities, and<br />
the volatility and past experience of stock<br />
exchange crashes including in saudi<br />
arabia and dubai, have affected this.<br />
there may also be a cultural aspect that is<br />
why the market needs to educate<br />
investors about asset management especially<br />
shariah-compliant asset classes<br />
such as equities.”<br />
he strongly believes that islamic asset<br />
management including investment in equities<br />
is here to stay, albeit its growth maybe<br />
not be as fast as it ought to be. ncb’s own<br />
islamic asset management business is<br />
arounf us$15 billion.<br />
in terms of corporate finance, while the<br />
potential is huge, not all saudi corporates<br />
are aware enough of the islamic finance<br />
products available in the market, while<br />
some remain reluctant and sceptival about<br />
them. ncb’s elkhraijy classifies saudi corporates<br />
in three categories in relation to<br />
accessing islamic finance. some of them,<br />
he explained, insist on using only islamic<br />
financing instruments.<br />
there is also increasing pressure on<br />
publicly-owned companies from the market,<br />
the customers and shareholders, that<br />
they use only shariah-compliant finance<br />
because they want to invest only in a<br />
company that uses shariah-compliant<br />
financing.<br />
suKuK mArKeT<br />
other companies unfortunately are neither<br />
interested nor really keen to understand<br />
islamic finance, and there are others<br />
still who are in the middle - they do not<br />
understand it, but they are trying to find a<br />
suitable product that fit their needs, and<br />
they are using it.<br />
on the capital market and especially<br />
sukuk front, the situation is different. the reason<br />
is that both the saudi government and<br />
the saudi arabian monetary agency<br />
(sama) are keen for local corporates to<br />
access their funding requirements from the<br />
capital market in the Kingdom because it is a<br />
valuable diversification of source of funding<br />
for saudi corporates, who are deemed to rely<br />
too much on bank financing which is more<br />
expensive. in many respects the islamic capital<br />
market especially sukuk is the preferred<br />
option for many saudi companies.<br />
elkhraijy is very bullish about the local<br />
sukuk market in 2014 and beyond. “We<br />
now see that there is more and more<br />
demand from saudi companies to finance<br />
their activities through the sukuk which is a<br />
very positive sign. the market is there but<br />
we need to be more active and to move at<br />
a faster speed. i believe that with all the<br />
state-sponsored infrastructure projects that<br />
are going on in saudi arabia, the government<br />
is encouraging the financing of these<br />
projects through the sukuk.<br />
We saw a sukuk being issued by the<br />
general authority for civil aviation (gaca)<br />
to finance the airports in jeddah and<br />
makkah.<br />
in saudi arabia there are many transportation<br />
projects that have been signed. i<br />
expect the sukuk market to really move<br />
very fast in saudi arabia.”<br />
to him the increasing number of new<br />
entrants to the market including smaller<br />
issuers is a good sign that the sukuk market<br />
is moving in the right direction.<br />
some of ncb’s clients insist on using<br />
only islamic instruments. What is also<br />
unique, stressed ncb’s elkhraijy, is the<br />
pressure especially on publicly-owned<br />
companies from customers and shareholders<br />
alike, that the companies use only<br />
shariah-compliant finance. ncb itself is<br />
working towards issuing its debut sukuk.<br />
most of the issuances in saudi arabia is<br />
through private placement by companies<br />
who are hungry for value-added shariahcompliant<br />
assets such as sukuk. but there<br />
have been significant international<br />
issuances by companies such as sabic<br />
(saudi basic industries corporation) and<br />
saudi electricity company (sec) and<br />
some of saudi aramco’s subsidiaries.<br />
another saudi company, al bayan, last<br />
year even raised funds in the malaysian<br />
ringgit market through a local currency<br />
issuance, a trend which issuers in several<br />
gulf countries including bahrain, Kuwait<br />
and the uae have pioneered.<br />
he does not see a rush of international<br />
sukuk issuances by saudi companies<br />
because it is much easier and less costly<br />
for them to first to do it locally and not to<br />
take the different risks such as currency<br />
risks. similarly, international investors will<br />
only invest in sukuk from issuers where the<br />
legal aspects and procedures are clearly<br />
defined and there is certainty in recourse<br />
to law and regulatory treatment of sukuk.<br />
in saudi arabia, there has also been<br />
some confusion over the position and<br />
precedence of sukuk certificate holders as<br />
far as creditors are concerned in a issuing<br />
company that has defaulted and in administration.<br />
“according to the shariah if it is a<br />
asset-based issuance it is thesukuk holders<br />
that are the owners, and we need to<br />
see this. clarification and clarity on this are<br />
very important for the whole industry,”<br />
maintained ncb’s elkhraijy.<br />
he does not believe that the above situation<br />
puts a damper on the development of the<br />
sukuk market. on the issue of a saudi sovereign<br />
sukuk issuance he maintained that he<br />
is “not in a position to answer such a question.<br />
i do not know.” another major issue is<br />
that saudi investors in sukuk like most in the<br />
region tend to hold on to the sukuk certificates<br />
until maturity rather than trading them.<br />
<strong>Islamic</strong> banker november 2013 dhul hijja 1434 - muharram 1435 214 7
IB November 2013 final _IB_JanFeb 2010.qxd 06/03/2014 23:29 Page 8<br />
FINANCe<br />
exclusive Interview: Abdulrazzak m elkhraijy, NCb, saudi Arabia<br />
“We need to have a bigger market so<br />
people could really trade the sukuk. once<br />
this is done, i think we will start a very<br />
active secondary market, which is very<br />
important for the development of the<br />
islamic capital market. What is encouraging<br />
is the number of new issuers especially<br />
smaller companies as opposed to<br />
those huge utilities and conglomerates,<br />
which i think is a good development.<br />
even some of the smaller finance companies,<br />
such as car finance and leasing<br />
companies are starting to issue sukuk.<br />
We are moving in the right direction,” he<br />
added.<br />
a new type of sukuk - social sukuk - has<br />
emerged with the securities commission<br />
malaysia in the process of developing a<br />
regulatory framework for sri (sociall<br />
responsible investment) sukuk. social<br />
sukuk also include the securitisation of<br />
Waqf (endowment) assets, which has<br />
been neglected in many countries - both<br />
muslim and non-muslim.<br />
there are an estimated trillion dollars of<br />
Waqf (endowment) and other types of<br />
social assets. only one sukuk, a sg$25<br />
million issuance, to date in over 35 years<br />
of contemporary islamic finance has been<br />
issued against a Waqf asset, by the<br />
islamic religious council of singapore<br />
(muis). and yet it has never been repeated<br />
since then.<br />
“you touch on a very important point,”<br />
explained ncb’s abdulrazzak elkhraijy.<br />
“Waqf is a unique islamic endowment trust<br />
institution. they potentially play an important<br />
role in the development of the countries<br />
in which they are established.<br />
they amount to trillions of dollars of<br />
assets that are not generating much<br />
because of the different laws and regulations<br />
of the jurisdictions in which they<br />
exist. unfortunately, the administration of<br />
Waqf in general is mired in bureaucracy<br />
and lack of adequate regulation, which<br />
means the Waqf assets are not generating<br />
any real returns.<br />
We should seriously look at developing<br />
a framework for regulating Waqaf and<br />
business minded institutions to administer<br />
and leverage them under the shariah<br />
guidelines so as to generate investment<br />
returns for the benefit of the communities<br />
they are meant to help by helping to alleviate<br />
poverty and to generating employment.”<br />
a major issue for the islamic finance<br />
market globally is the lack of short-term<br />
cross border liquidity management instruments.<br />
ncb is a strong supporter of the<br />
international islamic Liquidity<br />
management corporation (iiLm).<br />
“i think what the iiLm is doing will<br />
improve the liquidity requirements of<br />
islamic banking and this is a positive<br />
move. of course the challenge is to have<br />
regular issuances on a roll over basis. but<br />
it is a start and we will support the iiLm,”<br />
he added.<br />
PoPuLAr TAWArruq<br />
he agreed that the involvement of<br />
saudi banks and the development of<br />
short-term cross-border liquidity management<br />
instruments for islamic banking is<br />
very important. he is confident that saudi<br />
banks will take the lead in many such initiatives<br />
and that ncb plans to complete<br />
the iiLm primary dealer appointment<br />
process. the involvement of the saudi<br />
banking sector in the primary dealership<br />
is probably more important than some of<br />
the other markets. saudi banks will take<br />
the lead in many such islamic banking initiatives,<br />
he added.<br />
alrajhi bank is already in the iiLm primary<br />
dealership universe and the<br />
corporation is in the process of expanding<br />
the universe in due course.<br />
sama last year abruptly divested its<br />
equity from the iiLm, a move which has<br />
baffled even the saudi banks. he would<br />
like to see sama return to the iiLm fold.<br />
abdulrazzak elkhraijy is adamant that<br />
the future of murabaha and tawarruq is<br />
well-established and will continue to thrive<br />
in the gcc especially saudi arabia,<br />
because “it is a good vehicle for the<br />
investment. i would like to see more.”<br />
ncb in fact was the first bank to introduce<br />
tawarruq in the Kingdom and today<br />
a big chunk of its personal finance business<br />
is done through tawarruq.<br />
“the reason we started tawarruq is<br />
because the only personal finance product<br />
available was for the customer to go<br />
and buy a new car and then immediately<br />
sell it. the value of the car would decreciate<br />
immediately by 20 to 25 per cent. so<br />
the cost of this finance was very high and<br />
prohibitive for the customer.”<br />
of course we have full shariah board<br />
approval for tawarruq, which initially was<br />
basd on international commodity contracts.<br />
today all of the retail side is done<br />
through commodity contracts in the local<br />
market, which have been approved by our<br />
shariah advisors,” he explained.<br />
“When we started tawarruq we started<br />
with the commodity murabaha in the international<br />
market. today all of the tawarruq<br />
transactions on the retail side is done<br />
through the local market and all the concerns<br />
of the shariah scholars have been<br />
addressed. our relation with the customer<br />
is transparent and the certificates that he<br />
owns based on a certain product at a certain<br />
location, he has the right to go to collect<br />
it or sell it. tawarruq has been a good<br />
product to solve a lot of issues for us and<br />
our customers,” he added.<br />
ncb uses the classical form of<br />
tawarruq, which scholars have approved.<br />
the controversy is against tawarruq<br />
munazzam, organised tawarruq,<br />
because of a direct relationship between<br />
the bank and a third party which buys the<br />
commodity from the customer effectively<br />
at a discount.<br />
the popularity of tawarruq in saudi<br />
arabia is such that banks such as ncb<br />
are now extending the financing service to<br />
their corporate clients. to ncb tawarruq<br />
is not an issue because it does “not do<br />
anything in the islamic finance space without<br />
the approval of its shariah board.”<br />
on the contrary, if there is any argument<br />
against tawarruq, it is that tawarruq is an<br />
easy mode of islamic finance, and that it is<br />
dominating the short-term finance and<br />
cash management space. this, stressed<br />
elkhraijy, is something he does not want<br />
to see in perpetuaty and would like the<br />
market to develop alternative products if<br />
only to give customers wider choice.<br />
When we started Tawarruq we started with the commodity Murabaha in the internationa ?<br />
ket mainly through the LME contracts in London. Today all of the Tawarruq transacti<br />
retail side is done through the local market and all the concerns of the Shariah sc<br />
been addressed. Our relation with the customer is transparent and the certificates<br />
based on a certain product at a certain location, he has the right to go to collect<br />
Tawarruq has been a good product to solve a lot of issues for us and our customers<br />
214 8 <strong>Islamic</strong> banker november 2013 dhul hijja 1434 - muharram 1435
IB November 2013 final _IB_JanFeb 2010.qxd 06/03/2014 23:29 Page 9<br />
going forward, elkhraijy belives the<br />
three growth areas in islamic finance are<br />
sukuk, retail banking and a resurgence of<br />
the real estate finance market. there are<br />
also opportunities for infrastructure financing<br />
but this will depend on a country to<br />
country basis.<br />
he believes there is much room for product<br />
innovation especially in the corporate<br />
finance side,<br />
ncb also has an interest in islamic insurance<br />
and has a 30 per cent equity stake in<br />
al ahli takaful which is a family (life) insurance<br />
company. in saudi arabia, sama is<br />
promoting the cooperative insurance<br />
model as opposed to takaful based on the<br />
Wakala and tabarru model. ncb like all<br />
the other cooperative insurance promoters<br />
ion the Kingdom rely on their shariah<br />
board for guidance as to whether the cooperative<br />
insurance model is shariah-compliant.<br />
“if it is a shariah issue, i am not really<br />
in a position to say.<br />
as long as our shariah scholars say it is<br />
permissible or not permissible we will go<br />
with whatever their decision is,” he<br />
explained.<br />
in saudi arabia insurance is a new business<br />
and will need some time for people to<br />
understand it. the other thing is that most<br />
insurance companies in saudi arabia are<br />
small companies.<br />
PeACe oF mIND<br />
“i do not think that they really have the<br />
capabilities of doing many things. so i am<br />
a little bit hesitant to say that we will see<br />
innovations in other areas such as commercial<br />
credit insurance, export credit<br />
insurance amd investment insurance. We<br />
need to build capacity in the insurance<br />
market in the Kingdom first. this can be<br />
done through the emergence of larger<br />
companies, maybe through the mergers<br />
between different insurance companies in<br />
the saudi market,” he said.<br />
as for ncb’s own islamic banking business,<br />
abdulrazzak elkhraijy is bullish<br />
about its future expansion. “every single<br />
day we see a growth in islamic banking.<br />
We have a commitment from our customers,<br />
from our shareholders and our<br />
management to grow this business. it<br />
started with us fulfilling our customers’<br />
needs and the demand subsequently<br />
increased. this is the model we follow and<br />
hopefully there will be more expansion in<br />
islamic banking in this field.<br />
in the past customers used to take<br />
islamic banking for peace of mind. that<br />
was the demand, give me something to<br />
give me peace of mind, in terms of<br />
shariah compliance. today it is not only<br />
peace of mind, which is a must, but another<br />
thing is that islamic banking products<br />
have to be efficient and competitive with<br />
the others in the market. i strongly believe<br />
that the future of islamic banking in saudi<br />
arabia is very bright.” .<br />
Tilal Development Launches Oman’s First Corporate Sukuk<br />
the local tilal development company<br />
saoc (tdc), successfully issued<br />
oman’s first corporate sukuk in<br />
november 2013 – a omr50 million<br />
(us$130 million) sukuk al ijarah.<br />
the issuance was jointly lead managed<br />
by madina investment saog, bank<br />
nizwa, bank dhofar saog, meethaq<br />
islamic banking (bank muscat) and Qatar<br />
international bank.<br />
the omr50 million sukuk al ijarah,<br />
which has a tenor of 5 years, was issued<br />
through a special purpose vehicle,<br />
modern sukuk saoc, on behalf of tdc.<br />
in a statement, tdc stressed that the proceeds<br />
from the sukuk will be utilized for<br />
the expansion of the company's flagship<br />
project - the tilal complex, which is the<br />
first of its kind, offering mixed-use development<br />
comprising residential and retail<br />
units as well as a shopping complex<br />
known as the muscat grand mall.<br />
hamood bin sangour al-Zadjali, the executive President of<br />
central bank of oman, stressed at the sukuk launch that "issuing<br />
of the first ever islamic sukuk by the private sector is such<br />
a huge and important milestone in the history of the omani<br />
economy. We hope to see more expansion into islamic sukuk<br />
financing. as for the future possibility of the use of sukuk by the<br />
government, a bilateral committee has been formed by the<br />
ministry of Finance and the capital market authority.<br />
tiLaL deveLoPment comPany<br />
omr50m suKuK aL ijarah<br />
saLient Features at november 2013<br />
Issuer<br />
the committee is studying the<br />
issuance of government sukuk in<br />
omani riyals, and i hope that will attract<br />
further investment in the economy for<br />
the future."<br />
at the same time, abdul samad al<br />
maskari, chief executive officer of al<br />
madina investment saog, expects<br />
other omani firms to follow tdc in issuing<br />
sukuk. "this is a great achievement<br />
for the islamic capital market landscape<br />
in oman. We are proud of leading this<br />
historic transaction and arranging the<br />
first ever sukuk, taking into consideration<br />
that islamic Finance is at a very<br />
nascent stage in this market. We are<br />
certain that this pioneering issuance,<br />
along with the government's initiative to<br />
issue sukuk will encourage other corporates<br />
to consider sukuk as an alternative<br />
source of funding".<br />
the sukuk, which is rated bbb+ by capital intelligence, will<br />
pay a 5 percent profit rate per annum over its five year tenure.<br />
despite the above euphoria regarding the tdc sukuk,<br />
oman is a newcomer to islamic finance and a relatively smaller<br />
market. While the government is seemingly proactive in<br />
facilitating islamic banking up to a point, the sector is very<br />
nascent and will take time to entrench itself. the larger corporates<br />
however are still awaiting a lead from sovereign oman<br />
to issue its debut international sukuk before following suit. .<br />
modern suKuK saoc, on<br />
behaLF oF tiLaL deveLoPment<br />
comPany saoc (tdc)<br />
DATe oF LAuNCh november 2013<br />
sIze oF Issue<br />
omr50 miLLion<br />
Issue TyPe<br />
suKuK aL ijarah<br />
TeNor<br />
5 years<br />
CurreNCy<br />
omani riyaL<br />
ProFIT rATe<br />
5% Per annum<br />
joINT LeAD mANAgers<br />
use oF ProCeeDs<br />
aL madina investment<br />
saog; banK niZWa; banK<br />
dhoFar saog; meethaQ<br />
isLamic banKing; Qatar<br />
internationaL banK<br />
the Proceeds oF the suKuK<br />
WiLL be used to Finance the<br />
eXPansion oF tdc’s FLagshiP<br />
Project, the tiLaL comPLeX,<br />
a miXed-use deveLoPment.<br />
rATINg<br />
bbb+ by caPitaL inteLLigence<br />
sourCe: tdc november 2013<br />
<strong>Islamic</strong> banker november 2013 dhul hijja 1434 - muharram 1435 214 9
IB November 2013 final _IB_JanFeb 2010.qxd 06/03/2014 23:29 Page 10<br />
INTervIeW<br />
Dr zeti Akhtar Aziz, governor bank Negara malaysia<br />
iF industry much sounder today than a year ago<br />
Following in the tradition of her predecessors, dr Zeti akhtar aziz, governor of bank<br />
negara malaysia, the central bank, is the most proactive and experienced governors<br />
serving the islamic banking, finance and takaful industry. her influence transcends her<br />
home jurisdiction of malaysia to the corridors of power at the g8, the basle committee<br />
and the iFsb (islamic Financial services board). she is the archetypal ‘central<br />
banker’s central banker’ and commands huge respect both at home and abroad. in<br />
this in-depth interview, Governor Zeti Akhtar Aziz discusses with <strong>Islamic</strong> <strong>Banker</strong><br />
the state of the global islamic finance industry; the latest developments in the malaysian<br />
and regional markets; and the challenges the industry is faced with going forward<br />
<strong>Islamic</strong> banker: What sort of year is<br />
2013 turning out to be for the local<br />
malaysian <strong>Islamic</strong> finance market?<br />
governor zeti Akhtar Aziz: Well, we<br />
still have growth in islamic banking and<br />
there has not been a disruption in activities.<br />
the industry now accounts for about<br />
24 percent of the banking sector.<br />
It has increased a bit since last year?<br />
yes, it is quite significant. i remember<br />
when i became governor it was only 6 per<br />
cent. the fact that from the year 2000 until<br />
now it became 24 per cent, this is quite<br />
significant. it is almost a quarter of the<br />
banking system. so in that sense as an<br />
intermediation process it is growing.<br />
on the retail side there is interest from<br />
muslims and non-muslims, and that is<br />
quite a significant factor as well. in the<br />
case of the sukuk market, of course there<br />
was some slowdown because the overall<br />
growth has been affected by the economic<br />
contraction. in malaysia our gdP growth<br />
in the first half of the year was only 4.2 per<br />
cent, but we expect in the second half of<br />
the year for it to improve to nearer to 5 per<br />
cent for the year as a whole, or at least in<br />
the second half of the year.<br />
We expect the sukuk market to<br />
improve, but generally over the recent few<br />
years we have seen dollar issuance and<br />
renminbi issuance, and in addition to<br />
domestic currency issues we have seen<br />
foreign currency issuances. the takaful<br />
industry also has seen growth. so in general<br />
there is continued growth even in a<br />
challenging environment.<br />
so the growth driver on the retail and<br />
the commercial side is basically more<br />
people are coming to the sector, or is it<br />
government incentives to the industry?<br />
no, not at all it is not due to government<br />
incentives. it is because of the economic<br />
growth activity taking place. it is mostly<br />
domestic demand driving our economy,<br />
and the fact that islamic finance has been<br />
able to offer innovative financial products,<br />
and their products are competitive, in<br />
terms of mortgages and the financing<br />
instruments for even small and medium<br />
scale enterprises (sme's), that is what<br />
has contributed to the growth.<br />
There have been a number of<br />
government initiatives in the last few<br />
years to widen the market segment universe,<br />
and a couple of funds have been<br />
set up by the government that are<br />
shariah-compliant. how are they progressing?<br />
these are special in terms of giving incentives,<br />
but they are mechanisms and<br />
schemes that have been introduced for<br />
smes and other schemes for credit<br />
enhancements and so on. We think it is<br />
important to promote sme development,<br />
and to support the sme sector with advisory<br />
services, with guarantee schemes, and<br />
so on. this is important to generate growth.<br />
this is what i call Pro-growth Policies, so<br />
that even when you have a challenging<br />
environment it does not mean that you have<br />
to have a huge fiscal stimulus. it is by creating<br />
these kinds of schemes that will promote<br />
the private sector to drive itself.<br />
I remember it is quite an ambitious<br />
figure in terms of sme contribution to<br />
gDP?<br />
yes, and access to financing is important,<br />
and i should mention to you that for the<br />
sixth consecutive year, malaysia has<br />
been ranked number one for access to<br />
financing. you know the World bank has<br />
the Doing Business Index, and our prime<br />
minister mentioned that we have moved<br />
up to number six.<br />
When you look at the breakdown of that<br />
index, there is one component in the<br />
index which is Access to Financing and<br />
malaysia has been ranked first place for<br />
the last six years. islamic finance is an<br />
important part of that, but of course the<br />
other part is the conventional sector.<br />
Do you think that the establishment<br />
of the malaysia International <strong>Islamic</strong><br />
Finance Centre (mIFC) as a premier<br />
international sukuk origination<br />
domicile has been vindicated by the<br />
number of gulf institutions raising<br />
funds in the ringgit market?<br />
Well because we have the elements of the<br />
market from the regulation to the legislation<br />
to the intermediaries and the price discovery<br />
and the depth of the market, so it<br />
has drawn participation from all over the<br />
world to the market.<br />
you do not think it is because<br />
malaysia is a cheap place to raise<br />
money, at least for the last few years,<br />
which makes it more cost-effective<br />
say than the gCC?<br />
214 10 <strong>Islamic</strong> banker november 2013 dhul hijja 1434 - muharram 1435
IB November 2013 final _IB_JanFeb 2010.qxd 06/03/2014 23:29 Page 11<br />
Well i do not want to make the comparison.<br />
but in general you have to also look at the<br />
depth of the market and the demand,<br />
because you need demand and supply, and<br />
when there is a shortage of supply it creates<br />
opportunities for the issuers to be cost-effective<br />
in raising the funds. and of course we are<br />
an area of high percentage for demand for<br />
such papers. in asia there is surplus savings<br />
and there is that pent-up demand, which also<br />
improves the pricing.<br />
one encouraging feature is that a<br />
number of sukuk issuance globally<br />
is murabaha-based, so that means<br />
they are accepted. That is quite a<br />
departure from the past?<br />
yes, but there is quite a range of sukuk<br />
structures in general.<br />
In the malaysian National budget for<br />
2014, there is very little on <strong>Islamic</strong> banking,<br />
and a little bit on the development<br />
of the <strong>Islamic</strong> capital market with this<br />
new concept of socially-responsible<br />
investment (srI) sukuk <strong>Islamic</strong> and the<br />
introduction of an environmental, social<br />
and governance Index (esg) to raise<br />
the profile of listed companies which<br />
have high socially responsible practices.<br />
Is this a new phase in the philosophical<br />
development of malaysia’s<br />
<strong>Islamic</strong> finance proposition?<br />
in islamic finance this of course is already<br />
embedded. the Prime minister mentioned<br />
in his speech about environmental sustainability<br />
and socio-economic sustainability.<br />
this policy initiative is all part of it<br />
and to make it more explicit. the regulatory<br />
framework for the sri sukuk is being<br />
developed by the securities commission<br />
malaysia because they have been champions<br />
of the agenda of corporate social<br />
responsibility.<br />
just to clarify, does the srI sukuk initiative<br />
include things like social sukuk<br />
– this is sukuk issued against Waqf<br />
assets for example? I remember that the<br />
first such sukuk was issued by the<br />
<strong>Islamic</strong> religious Council of singapore<br />
(muIs), and it is never been repeated.<br />
given that the Waqf assets in the<br />
muslim world and elsewhere amount to<br />
almost an estimated trillion dollars, is it<br />
not important to leverage these assets<br />
for the benefit of the community, society<br />
and the economy?<br />
We are trying to encourage of course<br />
these Foundations, endowments and<br />
Waqf funds to be established.<br />
you are talking about issuing sukuk<br />
against these assets. We at bank negara<br />
malaysia have not been involved with any<br />
such initiatives. i am not quite sure<br />
whether that is something within our mandate.<br />
In singapore, muIs issued a sg$25m<br />
million musharakah sukuk against<br />
Waqf assets. The proceeds were used<br />
to renovate those assets which were<br />
subsequently rented out to generate<br />
returns for the Waqf and there fore the<br />
community.<br />
yes, but have they been any other issues<br />
of that nature? maybe we should look<br />
more into this issue of Waqf sukuk.<br />
As a member of the governing Council<br />
of the International <strong>Islamic</strong> Liquidity<br />
management Corporation (IILm) and in<br />
the context of its recent but modest<br />
debut sukuk issuance of us$$490 million,<br />
what is next on the cards for the<br />
Corporation?<br />
of course the iiLm have to keep up the<br />
pace of regular issuance. they have<br />
announced a us$2 billion sukuk<br />
issuance Programme and they have<br />
issued us$490 million thus far. so the<br />
next issuance has to be soon towards<br />
completion of the Programme.<br />
What you mean by soon?<br />
Well, in the next few months because<br />
these are 3-month papers so within that<br />
time they will mature. in the context of the<br />
corporation’s us$2 billion sukuk<br />
Programme, they have said that during<br />
that period they will have to have regular<br />
issuances and following the exhaustion of<br />
the Programme they will announce a new<br />
Programme for the subsequent year. and<br />
they have to have the underlying highquality<br />
assets for it.<br />
Is this regular rollover sukuk issuance<br />
enshrined in the mandate given to the<br />
IILm by its governing Council?<br />
all the operational issues of the issuance,<br />
the shariah issues, the issues of the primary<br />
dealers, the rating and so forth –<br />
have been dealt with. everything is within<br />
the expectations and the regulatory treatment<br />
of the Paper is subject to the rules<br />
and guidelines of individual regulators and<br />
so on. it was a highly complex exercise<br />
and it was achieved. and this is a major<br />
advancement because it represents a collaboration<br />
of nine central banks and one<br />
international development bank.<br />
‘isLamic Finance,<br />
another Form oF<br />
FinanciaL engineering’<br />
‘ ’ ’ ’ ’ ’ ’ ’ ’ ’ ’ ’ ’<br />
‘this book should be compulsory reading for<br />
anyone interested in islamic finance. it is written<br />
with conviction and experience, and with<br />
the belief that in islamic banking, both form<br />
and substance are equally important.’<br />
<strong>Islamic</strong> <strong>Banker</strong> july-august 2004 issue<br />
OrDer<br />
yOur COPy<br />
nOW !<br />
PLease send me one ( ); tWo ( );<br />
or ( ) (PLease sPeciFy) coPies oF<br />
‘ISLAMIC FInAnCe, AnOTher FOrM OF<br />
FInAnCIAL engIneerIng’ by mahmood<br />
aL-sheahabi at uK£20 Per coPy<br />
(incLuding First cLass or airsPeed Post)<br />
Print in bLocK caPitaL Letters<br />
NAme. . . . . . . . . . . . . . . . . . .<br />
.<br />
ADDress. . . . . . . . . . . . . . . . .<br />
. . . . . . . . . . . . . . . . . . . . . . .<br />
. . . . . . . . . . . . . . . . . . . . . . .<br />
. . . . . . . . . . . . . . . . . . . . . . .<br />
CITy. . . . . . . . . . . . . . . . . . . .<br />
CouNTry. . . . . . . . . . . . . . . . .<br />
PAymeNT<br />
cheQue draWn on a uK banK &<br />
PayabLe to MuShTAk PArker<br />
ASSOCIATeS LTD<br />
sIgNATure. . . . . . . . . . . . . . . .<br />
DATe. . . . . . . . . . . . . . . . . . . .<br />
<strong>Islamic</strong> banker november 2013 dhul hijja 1434 - muharram 1435 214 11
IB November 2013 final _IB_JanFeb 2010.qxd 06/03/2014 23:29 Page 12<br />
INTervIeW<br />
Dr zeti Akhtar Aziz, governor bank Negara malaysia<br />
The list of the primary dealers is conspicuous<br />
in terms of the absentees from<br />
for example saudi Arabia. Would you<br />
like personally to see saudi Arabia also<br />
involved?<br />
i have to tell you that there is a primary<br />
dealer bank from saudi arabia. each one<br />
of us nominated five or six primary dealers<br />
and it depends who was ready first.<br />
because the initial issuance was quite a<br />
small size (us$490 million), each one of<br />
us ended with only one actual nomination,<br />
i think there were only about seven pri-<br />
How difficult was it to get ? sover mary dealers for this first issuance so not<br />
eigns to commit assets to the pool, every name out of the pool of about 60 primary<br />
dealers participated in that. there is<br />
especially usually where sovereign<br />
assets are involved, there can one be saudi all bank, al rajhi bank, which is<br />
sorts of bureaucratic delays ? and included dif in that primary dealer pool. they<br />
ficulties?<br />
have gone through the primary dealer<br />
not at all. all these countries that are appointment process like the other banks.<br />
members have high-quality assets. yes,<br />
the legal documentation was highly challenging<br />
and therefore it took a long time monetary Agency (sAmA) return as an<br />
Would like to see the saudi Arabian<br />
for the legal process to be completed. and equity subscriber to the IILm?<br />
you know dealing with legal counsels, i look forward to their return. they are an<br />
they are very meticulous, and rightly so. important country and where islamic<br />
as such, it is not an issue of lack of finance operates. yes i do look forward to<br />
assets, there are immense assets, in fact their return to participate. and the other<br />
this is the advantage of such an arrangement<br />
because even countries that just who have shown interest both from<br />
members who, in the global community,<br />
have investment grade ratings, they can islamic countries and from non-islamic<br />
have high-quality assets and therefore countries, but we felt that in order to be fair<br />
there is a chance for them to actually monetise<br />
these high-quality assets.<br />
off should be for bringing new sharehold-<br />
to them, at least the first programme takeers.<br />
and that is important because at the<br />
I was actually referring to ? the initial will stage because we did not have any<br />
ingness of Sovereigns to contribute point of reference as a benchmark against<br />
assets, because, some sovereigns which to formulate this. this is all highly<br />
are a bit difficult in this respect. groundbreaking in that we do not have a<br />
Well it is not just about transferring ownership,<br />
it is also transferring the use of the<br />
assets (the usufruct) so in other words you<br />
are not actually transferring the ownership<br />
of the asset.<br />
And that process has got to comply<br />
with their own laws?<br />
yes exactly. so that is how it has been<br />
worked out. but the first two countries<br />
involved showed the process, so everything's<br />
groundbreaking because we do not<br />
have a prior reference point or precedent.<br />
so how many countries contributed to<br />
the pool in terms of assets?<br />
Well i think they (the iiLm) do not want to<br />
discuss it because they do not want to distinguish<br />
between pools of assets. in any<br />
case, the asset pool is a collective one to<br />
which any member country can contribute.<br />
reference point. so it is quite important to<br />
generate some income before we bring in<br />
new shareholders.<br />
In terms of the internationalisation of<br />
<strong>Islamic</strong> finance and forging international<br />
linkages, do think that the IFsb's<br />
mandate needs to be updated or<br />
revised? There is no unversal model or<br />
standard, say of authorising <strong>Islamic</strong><br />
banks. some countries such as<br />
malaysia have a dedicated <strong>Islamic</strong><br />
banking law; in oman and it comes<br />
under an amendment of the conventional<br />
banking act; in saudi Arabia they<br />
do not even do that, it is one banking<br />
act. so is it not high time that we had a<br />
universal authorisation model for<br />
<strong>Islamic</strong> banks? That would remove a lot<br />
of the uncertainty in terms of how the<br />
legal framework under which <strong>Islamic</strong><br />
banks operate. Whenever I speak to<br />
IFsb they say it is not part of their mandate.<br />
but after all, the legal certainty has<br />
a direct and indirect impact on the prudential<br />
and supervisory process.<br />
i am trying to think, even in conventional<br />
finance they do not impose a legal framework<br />
for the financial sector.<br />
but it cannot be authorised say in<br />
the uK if you do not satisfy the provisions<br />
of the uK banking Act?<br />
of course. so each country has their legal<br />
framework and you cannot impose on them.<br />
I am not suggesting imposing, but if<br />
there is a standard, you will have a universally<br />
applicable process for relating<br />
to the enabling legislation, the treatment<br />
of special characteristics of <strong>Islamic</strong><br />
banking for instance the treatment and<br />
nature of deposits, rebates, delayed<br />
payments and so on. The general and<br />
conventional banking acts do not<br />
accommodate these. I am thinking of<br />
legal clarity, uniformity and certainty for<br />
the ordinary person, for the customer<br />
both institutional and retail. how do you<br />
reconcile that?<br />
you need the legislation, and in most<br />
countries the legislation has to be<br />
approved by parliament and so on.<br />
Whereas in the case of prudential regulation,<br />
it does not go through that process. it<br />
is in the domain of policy-making decision<br />
bodies, the central banks and regulatory<br />
authorities. in the end all this depends on<br />
individual countries in how they perceive<br />
their islamic banking market.<br />
The IFsb is a standard setting body. We<br />
can argue that they have issued a<br />
shariah standard for instance. That<br />
does not have direct linkages to prudential<br />
and supervisory matters, so that is<br />
an exception in itself. Cannot an<br />
Authorisation standard, forget about the<br />
model, just serve as a guide to central<br />
banks such as the Central bank of<br />
oman, for instance? When I spoke to<br />
their deputy governor he said that the<br />
amendment to allow <strong>Islamic</strong> banks is<br />
just a starting point. eventually they will<br />
come to a position where they will have<br />
to adopt a dedicated <strong>Islamic</strong> bank law.<br />
yes, but is not that a role for the likes of the<br />
World bank or the islamic development<br />
bank?<br />
I will give you an example on Takaful<br />
where it directly affects the market, for<br />
instance, in saudi Arabia. They have the<br />
Cooperative Insurance Law - nobody<br />
knew whether it was shariah-compliant<br />
or not. The National Cooperative<br />
Insurance Co., which lead the process,<br />
did not have a shariah board for four<br />
years. At the start of 2013, sAmA directed<br />
that all insurance in saudi Arabia<br />
must be cooperative - they do not recognise<br />
Takaful. They jettisoned the Tabbaru<br />
and the Wakala model. so when you<br />
speak to both local Takaful companies,<br />
and global insurance companies with<br />
Takaful subsidiaries, they are absolutely<br />
exasperated and confused.<br />
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I am not expecting you to comment on<br />
the saudi example, but on the principle.<br />
at this stage the iFsb must stay focused<br />
on its prudential and supervisory mandate.<br />
it just has to for a very important reason -<br />
for financial stability reasons. if they start<br />
broadening their horizons beyond what<br />
they have thus far achieved over the whole<br />
spectrum of the financial stability aspect, it<br />
might detract from the expertise that they<br />
have built up for this.<br />
they have not arrived there as such, but<br />
they have made tremendous progress on<br />
the financial stability areas - not only capitalisation,<br />
risk management, governance,<br />
liquidity management - but also stress testing,<br />
deposit insurance and the financial<br />
safety nets.<br />
so they have to complete this agenda<br />
and financial stability is very important<br />
because we have seen what has happened<br />
to conventional finance. they were<br />
in disarray trying to bring in all the financial<br />
reforms at a time when they are in financial<br />
stress. so if islamic finance is putting in<br />
place step-by-step all these reforms at a<br />
time when we are not experiencing financial<br />
stress and we deviate from this vital<br />
financial stability task and look into other<br />
aspects such as authorisation and enbaling<br />
legislation, at this stage i think it would<br />
be difficult.<br />
another aspect is that the iFsb recognised<br />
well before even the advanced<br />
economies how highly interconnected and<br />
related the different segments in the financial<br />
system are - banking, insurance<br />
(takaful) and capital market intermediation.<br />
as such it was incumbent on the iFsb<br />
to also set standards for all these parts of<br />
the financial system.<br />
not surprisingly, we have securities<br />
commissions and insurance and takaful<br />
commissions which are also members of<br />
the iFsb. the iFsb mandate is very comprehensive<br />
in its nature and so at this stage<br />
i am more inclined to stay with the<br />
Prudential and supervisory standard<br />
setting mandate so that we have a solid<br />
foundation for financial stability.<br />
Do you think that the malaysian and the<br />
global <strong>Islamic</strong> financial system are<br />
sounder today compared to a year or<br />
two ago?<br />
definitely, because we are looking at all the<br />
issues regarding financial stability, capital<br />
adequacy and stress testing. in addition, in<br />
malaysia, we are also putting together<br />
deposit insurance for islamic finance that<br />
includes both banking and takaful.<br />
We also have initiatives in place in the<br />
event that one financial institution is in trouble<br />
or is experiencing financial stress, then<br />
we have a mechanism for resolution. so<br />
definitely i feel more confident now than<br />
previously when we did not have all this.<br />
In terms of the basel Liquidity Coverage<br />
ratio (LCr) standard introduced in early<br />
2013, has bank Negara malaysia taken<br />
up the suggestion of the basel<br />
Committee relating to the components<br />
of high quality Liquid Assets (hqLA),<br />
which would qualify for contribution to<br />
capital structure? Are you allowing, or<br />
recognizing investment in qualifying<br />
sukuk to form part of the hqLA mix of<br />
<strong>Islamic</strong> banks licenced by bank Negara?<br />
yes, i think we are implementing that<br />
requirement by 2015, and it will include<br />
sukuk.<br />
bank Negara malaysia has recently published<br />
the latest progress report of the<br />
Law harmonisation Committee whose<br />
mandate is to ensure that the country’s<br />
legislation creates a level playing field for<br />
<strong>Islamic</strong> finance compared with conventional<br />
finance. I think there are three or<br />
four outstanding issues, but can you<br />
clarify this access to <strong>Islamic</strong> finance,<br />
especially involving malay reserved<br />
Land is concerned.<br />
you know the role of the Law<br />
harmonisation committee is to look at all<br />
the laws that have implications for islamic<br />
finance, which is a very good thing. this is<br />
important because in the past the implications<br />
of these laws were not fully obvious<br />
or realised.<br />
the committee review these laws and i<br />
think they have completed their review of<br />
17 laws thus far. that has been quite<br />
impressive actually, because it is very hard<br />
to make any changes and amendments to<br />
any laws from what i have experienced.<br />
the issue you are referring to concerns<br />
malay reserved Land. i will ask Wan mohd<br />
nazri bin Wan osman, our director of<br />
islamic Fiannce & takaful to eloborate<br />
because he has a legal background so he<br />
is in a better position to explain it.<br />
(A clarification from Wan nazri. It is<br />
quite simple. As far as Malay reserved<br />
Land is concerned, only Malays can own<br />
and deal in those lands. So we suggested<br />
to the relevant government authorities<br />
to allow <strong>Islamic</strong> banks to finance transactions<br />
that are collateralised by the Malay<br />
reserved Land, to get better value for<br />
these assets. It makes sense.)<br />
There are some risks involved in that<br />
you cannot sell the land to a nonmalay?<br />
as long as the status quo remains, this land<br />
is still being demarcated to remain under<br />
malay ownership.<br />
The malaysian National budget for<br />
2014 projected a gDP growth rate of<br />
about 4.5 to 5 per cent in 2013. Are you<br />
confident that this figure will be<br />
achieved? What will be the drivers for<br />
that assessment?<br />
in the First half of 2013 we already had 4.2<br />
per cent growth, but we saw the export<br />
sector improving, and we expect this to<br />
continue to do so in the second half of the<br />
year. domestic demand also continues to<br />
remain strong and is going to be the main<br />
driver, and at least the contraction in<br />
exports has not diminished.<br />
both consumption and private investment<br />
I believe?<br />
yes, and most important that the consumption<br />
is being reinforced by a significant<br />
growth in investment activity, especially<br />
by the private sector and that is why<br />
it is more sustainable. then there are few<br />
projects that are also being implemented<br />
including the mrt and other major infrastructure<br />
projects.<br />
In terms of FDI flows I think there is an<br />
upward trend?<br />
steady inflow, yes. malaysia still continues<br />
to be a growth centre, or profit centre<br />
rather, for Fdi.<br />
I noticed there is a projected budget<br />
deficit of about rm40 billion for 2014.<br />
Is that of any undue worry?<br />
the government has recognised that it has<br />
to reduce the size of this deficit and they<br />
have made significant progress over several<br />
years. at the peak of the deficit it was<br />
i believe 5.8 per cent of gdP and it has<br />
been brought down gradually now to 4 per<br />
cent of gdP. We are seeing the movement<br />
in the right direction there, so there is<br />
progress on that front.<br />
at the same time the government has<br />
already announced the subsidy rationalisation<br />
and the introduction of the valueadded<br />
tax and so on. so this will improve<br />
the revenue base and reduce the burden<br />
on the government of these huge subsidies<br />
that they are paying out. the savings from<br />
the subsidies will partly be used to reduce<br />
the deficit and partly used to finance those<br />
in the lower income categories. .<br />
<strong>Islamic</strong> banker november 2013 dhul hijja 1434 - muharram 1435 214 13
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suKuK<br />
global sukuk market versus bond market<br />
sukuk market to Withstand bond market volatility<br />
the prospect of the us Federal reserve (Fed) tapering the monetary stimulus programme<br />
sent shockwaves through the financial markets. sukuk have not been<br />
spared by the impact of rising us yields. however, Ramlie Kamsari, chief<br />
executive officer, CIMB Principal <strong>Islamic</strong> Asset Management, maintains that the<br />
global sukuk market has proved relatively more resilient in the face of this volatility,<br />
and that this resilience has largely been a demand-driven phenomenon, propelled<br />
by investors for products that are more compliant with their religious faith<br />
as a result of the global financial<br />
crisis and ensuing<br />
recession in the us, and in<br />
keeping with its mandate to<br />
achieve maximum employment,<br />
the us Federal reserve (Fed)<br />
responded by setting short-term interest<br />
rates to a near zero. the Fed also began<br />
purchasing vast quantities of us<br />
treasuries and mortgage-backed securities,<br />
a process referred to as quantitative<br />
easing (Qe).<br />
these Qe efforts, in combination with<br />
the anchoring of the short end rate, have<br />
kept the yield curve artificially low in an<br />
effort to revive the us economy.<br />
in sustaining this low rate environment<br />
via securities purchases, the Fed’s monetary<br />
policies have created massive liquidity<br />
in the capital markets. this influx of liquidity<br />
combined with low domestic interest<br />
rates provided both the means and the<br />
incentive for institutional investors to<br />
aggressively seek higher yields in alternative<br />
markets. many investors have looked<br />
to fixed income securities such as highyield<br />
bonds and emerging markets (em)<br />
fixed income securities, including us<br />
dollar-denominated global sukuk securities,<br />
for higher yields than were available<br />
from us treasuries.<br />
the idea that the Fed might begin the<br />
winding down of the third round of its quantitative<br />
easing programme (Qe3) has been<br />
a dominant focus since may 2013, due to<br />
Fed chairman ben bernanke’s public<br />
comment that the Fed could begin to taper<br />
its Qe3 purchases to later this year, if there<br />
were signs of a sustainable improvement<br />
in the us economy.<br />
since that time, yields have been rising<br />
quickly, with the 10-year us treasury<br />
going from a yield of 1.63 oer cent in early<br />
may to 3.00 per cent as of early<br />
september. during that time, in response<br />
to the Fed’s direction, the market was<br />
very much trading on technical based on<br />
us economic data, seeing it as a guide to<br />
the timing of Fed’s action to reduce and<br />
eventually end Qe3.<br />
moDesT us groWTh<br />
most recently, market participants<br />
seemed to reach a consensus, fuelled by<br />
further commentary by Fed officials and<br />
their reading of the economic data, that the<br />
Fed would start to taper to some extent following<br />
the september 2013 Federal open<br />
market committee (Fomc) meeting.<br />
during this same period, given the implications<br />
of a consequential rising in the<br />
rates environment, combined with receding<br />
excess in global liquidity, market participants<br />
reacted by selling off emerging<br />
market (em) equities, and further selling<br />
off government, quasi-government and<br />
corporate fixed income em assets.<br />
the result was a lack of market liquidity<br />
in those investment areas, as well as the<br />
significant spike in volatility witnessed over<br />
the past several months. the market’s<br />
reaction, or overreaction, caused a significant<br />
increase in yields and a commensurate<br />
fall in the prices of fixed income securities<br />
in most if not all global asset classes,<br />
leading to significant investment losses<br />
during the period following bernanke’s<br />
comments.<br />
since the june Fomc meeting, the<br />
stream of us economic data has been, on<br />
the whole, more positive than negative,<br />
supporting expectations of sustained albeit<br />
modest economic growth. bernanke provided<br />
some additional “clarity” in july,<br />
emphasising the staying power of the<br />
Fed’s accommodative policy in the near<br />
term should the economy not provide convincing<br />
and sustainable evidence of its<br />
strengthening. his remarks helped to calm<br />
global markets to a certain extent.<br />
however, uncertainty over the timing and<br />
pace of the reduction of purchases, as well<br />
as the unavoidable end of Qe3, continues<br />
to weigh on market participants.<br />
TAbLe 1. returns voLatiLity oF<br />
doW jones suKuK totaL return indeX (djsuKtXr) and<br />
jP morgan emerging marKet bond indeX (embi) gLobaL totaL return indeX<br />
over 2-year Period<br />
reTurNs voLATILITy<br />
DoW joNes suKuK ToTAL reTurN INDex 2.24%<br />
jP morgAN emergINg mArKeT boND INDex (embI) gLobAL ToTAL reTurN INDex 7.21%<br />
sourCe: bLoomberg and cimb PrinciPaL isLamic asset management sdn bhd as at 30 june 2013<br />
over the tWo-year Period ending 30 june 2013, the gLobaL suKuK marKet (rePresented by the doW jones suKuK totaL return indeX)<br />
eXhibited LoWer returns voLatiLity comPared to the em bond universe (rePresented by jP morgan emerging marKet bond indeX<br />
(embi) gLobaL totaL return indeX), suPPorting the vieW that, historicaLLy, gLobaL suKuK as an asset cLass is reLativeLy insuLated<br />
comPared to the conventionaL emerging bond marKet.<br />
214 14 <strong>Islamic</strong> banker november 2013 dhul hijja 1434 - muharram 1435
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the global market sentiment and volatility<br />
have caused dislocation in the mainstream<br />
fixed income markets and also<br />
affected the global sukuk market.<br />
nevertheless, sukuk is better insulated and<br />
unlikely to underperform compared to its<br />
conventional benchmarks due to its defensive<br />
nature and buy-and-hold investor base.<br />
As such, sukuk is less impacted compared<br />
to conventional em fixed income instruments.<br />
(refer to Table 1).<br />
increasing demand and popularity for<br />
shariah-compliant products and structures<br />
post the global financial crisis have formed a<br />
strong demand base for sukuk. moreover,<br />
the global demand for sukuk is forecasted<br />
to grow three-fold from us$300 billion to<br />
us$900 billion by 2017. the exponential<br />
rise is primarily a result of double digit<br />
growth of the islamic banking industry and<br />
the increasing appetite for credible, shariahcompliant,<br />
liquid securities.<br />
suKuK Less ImPACTeD<br />
in addition, two-year historical return<br />
performance for sukuk is comparatively<br />
better than for conventional bonds<br />
because the investor base is less affected<br />
by unwinding of fixed income securities<br />
and em asset positions. much of this<br />
demand originates from islamic financial<br />
institutions as well as fund managers and<br />
high net worth individuals.<br />
hydrocarbon based wealth and an economic<br />
resurgence in the middle east and<br />
north africa (mena) regions are key factors<br />
positively shaping the investor base for global<br />
sukuk investments. in addition to increasing<br />
the liquidity of the sukuk market, investors<br />
can expect to see more stability in the global<br />
sukuk market because a substantial proportion<br />
of the participants in this market have the<br />
intention of holding their sukuk investments<br />
for the medium-to-long term.<br />
sukuk is an ideal investment for investors<br />
looking for opportunities to position for economic<br />
recovery while maintaining exposure<br />
in islamic fixed income markets. the financial<br />
sector is considered a proxy for the<br />
growth of an economy since banking entities<br />
typically flourish as a function of economic<br />
expansion. given that shariah-compliant<br />
banks and other financials constitute<br />
the second largest sector at around 28 per<br />
cent of the dow jones sukuk total return<br />
index (djsuKtXr), as shown in Table 2, a<br />
diversified global sukuk portfolio can provide<br />
broad exposure to the financial sector<br />
including islamic banks such as Qatar<br />
islamic bank (Qatar), First gulf bank (uae)<br />
and abu dhabi islamic bank (uae).<br />
the challenge going forward is how to<br />
manage global sukuk portfolios in a rising<br />
rate environment. it is well known that interest<br />
rate volatility poses a real challenge to<br />
fixed income portfolio managers since rising<br />
rates can negatively impact the value<br />
of fixed income portfolios.<br />
cimb-Principal islamic asset<br />
management sdn bhd (cimb-Principal<br />
islamic) significantly reduced interest rate<br />
risk across their managed global sukuk<br />
portfolios by shortening duration earlier in<br />
2013. the market expectation is that the<br />
Fed will start to taper purchases gradually,<br />
starting as early as this year and would<br />
then start increasing short end Fed Funds<br />
rates gradually with the first increase anticipated<br />
sometime in early 2015.<br />
a sukuk portfolio that currently has a<br />
five-year average maturity would have only<br />
about three years to maturity by 2015,<br />
therefore escaping much of the durationrelated<br />
volatility as rates rise. over the<br />
course of this period, investors would be<br />
able to reinvest incoming proceeds in higher<br />
yielding short and medium maturity<br />
securities.<br />
depending on investment parameters<br />
and risk tolerance, our portfolio managers<br />
will look to add existing and newly issued<br />
higher yielding investment grade names to<br />
their portfolios. some high yield credits are<br />
expected to outperform and provide annual<br />
return of 6 per cent to 7 per cent.<br />
the expected returns on high-yield<br />
bonds are a function of two factors: (i) the<br />
magnitude of the recent sell-off which<br />
added significant yield for purchasers of<br />
the securities; and (ii) higher profit rates<br />
for new issues and positive price performance<br />
in the primary market. as<br />
economies recover, investors may tolerate<br />
more risk in their portfolios for added<br />
yield due to improving expectations on<br />
issuer performance and lower expectations<br />
for default.<br />
TAbLe 2.<br />
recently, international rating agency,<br />
moody’s investors service, announced<br />
that the global default rate on global highyield<br />
debt for the first quarter 2013 was<br />
2.4 per cent, near a record low.<br />
in terms of asset allocation, cimb-<br />
Principal islamic continue to favour financials<br />
within the gulf cooperation council<br />
(gcc) region such as saudi arabia,<br />
Qatar, abu dhabi and dubai.<br />
in addition to moving down the credit<br />
curve on senior unsecured securities in<br />
response to improving global economic<br />
growth data, our portfolio managers<br />
could allocate a certain proportion of their<br />
portfolios to subordinated sukuk instruments<br />
of the strongest banks in the gcc<br />
countries.<br />
suKuK resILIeNCe<br />
the prospect of the Fed tapering the<br />
monetary stimulus programme sent shockwaves<br />
through the financial markets.<br />
sukuk have not been spared by the impact<br />
of rising us yields. however, the global<br />
sukuk market proved relatively more<br />
resilient in the face of this volatility.<br />
the resilience of the global sukuk market<br />
has been largely a demand-driven<br />
phenomenon, propelled by investors for<br />
products that are more compliant with<br />
their religious faith. sukuk are also<br />
emerging as a new asset class for conventional<br />
investors as the asset class has<br />
undoubtedly filled a gap in the global capital<br />
market.<br />
in addition the global sukuk market is<br />
supported by cash-rich investors who<br />
tend to hold global sukuk securities until<br />
maturity. since the market is still very<br />
much focused on the possibility of the<br />
Fed reducing its bond purchases, one<br />
way to protect global sukuk portfolios<br />
from the potential effects would be to<br />
employ proactive portfolio managers that<br />
are attuned to managing these risks..<br />
WorLd broad investment grade (WorLdbig) bond indeX<br />
and doW jones suKuK totaL return indeX sector Weightings<br />
WEIGHTINGS<br />
seCTor DoW joNes suKuK WorLD boND INvesTmeNT<br />
ToTAL reTurN INDex grADe (WorLDbIg) boND INDex<br />
goverNmeNT & goverNmeNT sPoNsoreD 44.42% 68.22%<br />
FINANCIALs 28.43% 5.75%<br />
eNergy AND uTILITIes 19.09% 2.41%<br />
INDusTrIAL 8.06% 6.77%<br />
CoLLATerALIseD (mbs & CovereD boNDs) - 16.85%<br />
sourCe: bLoomberg and cimb PrinciPaL isLamic asset management sdn bhd as at 30 june 2013<br />
FinanciaLs constitute the second Largest sector at around 28% oF the doW jones suKuK totaL return indeX. this oFFers an investment<br />
oPPortunity For conventionaL FiXed income investors Who Want to diversiFy the QuaLity oF their overaLL PortFoLio’s eXPosure<br />
to the FinanciaL sector as they can gain eXPosure to isLamic banKs such as Qatar isLamic banK (Qatar), First guLF banK (uae) and<br />
abu dhabi isLamic banK (uae).<br />
<strong>Islamic</strong> banker november 2013 dhul hijja 1434 - muharram 1435 214 15
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suKuK<br />
Khazanah sg$600m exchangeable sukuk<br />
Khazanah issues 2nd sukuk in singapore market<br />
Khazanah nasional berhad,<br />
the malaysian sovereign<br />
wealth fund (sWF), successfully<br />
completed a benchmark<br />
exchangeable sukuk offering<br />
of sg$600 million (rm1.524 billion), via a<br />
Labuan-incorporated independent special<br />
purpose company, indah capital Ltd. in<br />
november 2013, which the company<br />
stressed is the first singapore dollardenominated<br />
negative yield exchangeable<br />
sukuk, and the first offering to offer<br />
exposure to a growing private healthcare<br />
market.<br />
the sukuk, which was upsized from<br />
the initial size of sg$500 million (rm1.27<br />
billion), is exchangeable into ordinary<br />
shares of ihh healthcare berhad (ihh),<br />
one of the largest healthcare providers in<br />
the world by market capitalization, which<br />
is owned by Khazanah.<br />
the issuance was jointly lead managed<br />
by cimb bank berhad, deutsche bank ag<br />
and standard chartered bank, who are also<br />
the joint bookrunners for the transaction.<br />
this is Khazanah’s second sukuk offering<br />
in the singapore dollar market. the<br />
sWF issued its debut singapore dollar<br />
sukuk - a sg$1.5 billion (rm3.6 billion)<br />
offering in august 2010. since then it has<br />
pioneered the issuance of the first sukuk in<br />
the renminbi market - a rmb500m (rm246<br />
million) issuance in october 2011; and a<br />
us$357.8 million negative yield equitylinked<br />
exchangeable sukuk in march 2012.<br />
in a statement, Khazanah nasional<br />
stressed that this latest issuance is in line<br />
with its fund-raising strategy and long<br />
term commitment towards progressive<br />
divestment of its investments. the sg$denominated<br />
exchangeable sukuk also<br />
provides a natural currency hedge for<br />
Khazanah towards its singapore-related<br />
investments. in addition, for the first half<br />
of 2013, ihh’s singapore healthcare<br />
operations contributed about 35 per cent<br />
and 30 per cent of ihh group’s revenue<br />
and ebitda respectively in sgd, providing<br />
a natural currency link to the sukuk’s<br />
underlying stock.<br />
KhaZanah nasionaL bhd<br />
sg$600m negative yieLd<br />
eXchangeabLe suKuK<br />
saLient Features at november 2013<br />
Issuer<br />
indah caPitaL Limited, a<br />
Labuan incorPorated sPeciaL<br />
PurPose comPany, on<br />
behaLF oF KhaZanah<br />
nasionaL berhad<br />
sPoNsor & obLIgor Khazanah nasional berhad<br />
DATe oF LAuNCh november 2013<br />
sIze oF Issue<br />
sg$600m<br />
suKuK TyPe<br />
TeNor<br />
eXchangeabLe suKuK - the<br />
suKuK is eXchangeabLe into<br />
ordinary shares oF ihh<br />
heaLthcare berhad, Which<br />
is onWed by KhaZanah<br />
nasionaL bhd<br />
5 years With an investor<br />
Put oPtion Which is eXercisabLe<br />
at the end oF year<br />
three. uPon the eXercise<br />
oF the eXchange rights<br />
under the suKuK, its hoLd<br />
ers WiLL initiaLLy be entitLed<br />
to receive an aggregate<br />
oF 311.4 miLLion ordinary<br />
shares oF ihh, subject<br />
to adjustments Pursuant<br />
to the terms and<br />
conditions oF the suKuK.<br />
CurreNCy<br />
singaPore doLLar<br />
yIeLD To mATurITy -0.25% PLus a 17%<br />
DIsTrIbuTIoN<br />
LeAD mANAgers AND<br />
booKruNNers<br />
use oF ProCeeDs<br />
eXchange Premium P.a<br />
through an acceLerated<br />
booKbuiLding eXercise<br />
Which started on 17<br />
october 2013<br />
cimb banK bhd; deutsche<br />
banK ag; standard<br />
chartered banK<br />
this issuance is in Line With<br />
KhaZanah’s Fund-raising<br />
strategy and Long term<br />
commitment toWards Progressive<br />
divestment oF its<br />
investments. the sg$denominated<br />
eXchangeabLe<br />
suKuK aLso Provides a naturaL<br />
currency hedge For<br />
KhaZanah toWards its<br />
singaPore investments.<br />
LIsTINg<br />
singaPore eXchange; bursa<br />
maLaysia (eXemPt regime);<br />
Labuan internationaL<br />
FinanciaL eXchange inc.<br />
sourCe: KhaZanah nasionaL bhd november 2013<br />
Khazanah managing director, azman hj.<br />
mokhtar, explained that “islamic finance has<br />
become an indispensable part of the global<br />
financial system and malaysia is at the forefront<br />
of this dynamic market, continuously<br />
pushing the boundaries in product innovation<br />
and market depth. We are very pleased<br />
that this transaction has been executed at a<br />
very competitive price against the uncertain<br />
market backdrop, setting a benchmark<br />
for sukuk issuances with an order<br />
book that covered 5.5 times of the initial<br />
issue size. this proves the market’s<br />
strong faith and confidence in the quality<br />
of the sukuk, the underlying equity story<br />
of ihh and Khazanah’s credit.”<br />
the sukuk was successfully priced<br />
through an accelerated book-building<br />
process on 17 october 2013, at the tightest<br />
end of the price guidance of -0.25 per<br />
cent yield to maturity and 17 per cent<br />
exchange premium. on the equity front,<br />
ihh closed at rm4.19 per share which is<br />
a commendable 50 per cent increase<br />
from its iPo price of rm2.80 back in july<br />
2012. the transaction was significantly<br />
oversubscribed, attracting a diverse<br />
group of over 100 investors comprising<br />
long only funds, hedge funds, arbitrage<br />
funds as well as asset managers across<br />
asia and europe.<br />
according to Khazanah, the sukuk has<br />
a tenure of 5 years with an investor put<br />
option which is exercisable at the end of<br />
year three. upon the exercise of the<br />
exchange rights under the sukuk, its<br />
holders will initially be entitled to receive<br />
an aggregate of 311.4 million ordinary<br />
shares of ihh, subject to adjustments<br />
pursuant to the terms and conditions of<br />
the sukuk. this, says the sWF, represents<br />
approximately 3.8 percent of ihh’s<br />
current issued and paid up share capital.<br />
the sukuk will be listed on the<br />
singapore exchange, Labuan<br />
international Financial exchange inc and<br />
bursa malaysia (under an exempt<br />
regime). ihh is one of the leading international<br />
provider of premium healthcare<br />
services in attractive markets with strong<br />
and rapidly growing demand for quality<br />
healthcare. ihh is currently listed on<br />
bursa malaysia and the singapore<br />
exchange and operates an integrated<br />
healthcare business and related services<br />
with leading market positions in<br />
singapore, malaysia and turkey, as well<br />
as healthcare operations and investments<br />
in the china, india, hong Kong, vietnam,<br />
brunei, macedonia and the uae..<br />
214 16 <strong>Islamic</strong> banker november 2013 dhul hijja 1434 - muharram 1435
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