Finance

Islamic Economy Award nominations are now open

The Islamic economy is too often characterized around its biggest silos: the multibillion dollar banks recycling petrodollars across the world and the expansion of global and regional conglomerates into the halal food market as their indigenous market growth slows to a crawl. SMEs are always either the next big thing in the $1.1 trillion halal food market and $1.35 trillion Islamic finance market, or the acquisition target, but they rarely get recognized in between.

In the future, the evolution of the Islamic economy will be dictated by not just small and medium-sized enterprises (SMEs) but microbusinesses that start with an idea and end up creating and capturing a niche market. The Islamic Economy Awards are looking to find these idea-driven SMEs. Last year, the awards highlighted, among other winners:

  • Tanamera, a small natural products manufacturer in Malaysia
  • Saffron Road, an American halal food producer that equally values the sustainability of its products for a broad consumer base
  • TimeZ5, which designed and manufactures the first physiological prayer mat offering pain relief and improved posture  (more…)

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Development of Islamic venture capital: Key considerations for investors

The need for growth–oriented entrepreneurial ventures in every society is a must, and it is especially needed in the Muslim world. Venture capital forms a great influence in any economy because it creates innovations, new jobs, income and wealth.

Venture capital is not a new phenomenon; examples of entrepreneurs raising capital from private investors were found in the Babylonian era, in the early age of Islam and early medieval Europe. These and contemporary examples show that venture capital is not unique to the United States, where it thrives today.

The idea of venture capital originated from muḍārabah contract and made its way to Europe with the spread of Islam (Cizacka, 1996: 10). Nevertheless, venture capital and private equity industry was, in its initial decades, a predominantly American phenomenon. The phenomenon has been pivotal in transforming innovative ideas from universities and research and development laboratories in the US into high growth companies such as the Intel Corporation, Cisco System, Microsoft, Oracle, Amazon.com, Yahoo! and others. (more…)

Bringing illicit trade and crime out of the shadows

shadows

Illicit trade and organised crime is something that that surrounds us all. While the illicit economy is by its nature difficult to measure, one of the more staggering estimates is that it is as large as 20 to 30 percent of the global economy or about $50 to $70 trillion dollars.

Illicit trade and related terrorist or criminal activity is not something that just operates in the shadows. An economy of this size is not something that can be stuffed under mattresses. It is extremely complex and equally sophisticated. Illicit funds reenter the licit world through routine activities like real estate investments, the sale of high value goods like antiquities and art or financial transactions, not to mention more nefarious activities like wildlife crime or human trafficking.

Governments and regulators have already zeroed in on banks as the first line of defence, placing stricter requirements that impose more due diligence checks on clients’ relationships in order to help prevent terrorist financing and other financial crimes. (more…)

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IILM – Thomson Reuters Liquidity Management Roundtable

The participants in the International Islamic Liquidity Management corporation (IILM) Roundtable on Liquidity Management which concluded on Thursday in London reviewed the success of the IILM in issuing $3.19 billion in total sukuk with $1.35 billion currently outstanding. Beyond this success, the event, which was organized by IILM with Thomson Reuters, spent far more time looking forwards to the challenges that the Basel III liquidity rules will create for Islamic banks.

Participants were in agreement that the IILM, with its A-1 rating, would certainly count as a high quality liquid asset (HQLA) under the Basel rules. Acceptance of the IILM sukuk has grown since its first issuance last August but there is still a lack of liquidity caused by the product’s newness as well as the huge gap between demand for liquid assets and the relatively small supply.

One idea to provide an alternative way to create liquidity for the IILM sukuk in the absence of trading would be for central banks to add it to the list of eligible collateral for any Islamic banks wanting to use the sukuk as a HQLA. The Basel Rules, as amended in January 2013, give national supervisors flexibility to define “alternative HQLA” which Islamic banks can hold in lieu of traditional HQLA like U.S. or their own government’s Treasury Bills which are not sharia-compliant outside of a few countries. (more…)

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Weekly Investment Banking Scorecard

deals intelligence

A trio of multi-billion dollar US-dollar denominated corporate bond offerings topped the list of weekly offerings and pushed the volume of US marketplace investment grade corporate bond offerings to $712.9 billion for year-to-date 2014, an increase of 10% compared to a year ago and the strongest year-to-date period since records began in 1980. Led by bank issuance which accounts for 32% of year-to-date volume, US issuers make up 60% of this year’s volume, followed by Canada, the United Kingdom and Japan.

Weekly Highlights: (more…)

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Uphill climb for Philippines’ lone Islamic bank

The long-running conflict on the island of Mindanao has led to significant economic development challenges for the island which is home to most of the branches of Al Amanah Islamic Bank, as well as the largest Muslim population in the Philippines which forms a minority of the country’s population. Al Amanah has struggled during the decades and was taken over by the Development Bank of the Philippines (DBP) in 2008. It required a 1 billion pesos ($22.9 million) recapitalization in 2009 before it began a 5-year rehabilitation plan scheduled to conclude at the end of 2014 when DBP will sell it, likely to a foreign bank.

The challenges of the bank are complicated by the conflict between its charter which says it was established to provide financing “based on the Islamic concept of banking” while the majority of its current deposits—both private sector and government—are conventional deposits. Its assets (many of which are conventional loans) have been shrinking as it sells off its legacy non-performing assets to the government and it only completed its first ijara financing of 2.15 million pesos ($49,000) in August 2012.

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The plan, according to the notes to its 2012 financial statements, is that the bank will be converted completely to an Islamic bank at the end of its rehabilitation period. This, however, is complicated by the difficulty in growing Islamic assets or deposits, let alone getting enough scale to reach profitability. This will likely lead the bank to continue to rely on its conventional banking business which is not likely to help it expand its Islamic banking business even as the conflict in Mindanao comes to an end with a peace treaty that was signed in March 2014. The macro backdrop for Al Amanah Islamic Bank’s struggles is not nearly so gloomy. While GDP growth in Northern Mindanao (the region’s most prosperous area) slowed in 2013 to 5.6% compared to 2012’s 7.2% pace, growth in the banking sector accelerated from 9% to 10.8%. The combination of positive economic outlook, large Muslim-minority population and completed rehabilitation of Al Amanah Islamic Bank makes it a target for an Islamic bank looking to expand into a new market.

The macro backdrop for Al Amanah Islamic Bank’s struggles is not nearly so gloomy. While GDP growth in Northern Mindanao (the region’s most prosperous area) slowed in 2013 to 5.6% compared to 2012’s 7.2% pace, growth in the banking sector accelerated from 9% to 10.8%. The combination of positive economic outlook, large Muslim-minority population and completed rehabilitation of Al Amanah Islamic Bank makes it a target for an Islamic bank looking to expand into a new market.