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the NBE draft directive interest-free banking operations may include modes of advancing funds on a profit-and-loss sharing basis con- sistent with the Sharia’h law. Ibrahim Miftah, an economist, explains that what makes profit- sharing permissible in Islam, while in- terest is not, is that in the case of the former only the profit-sharing ratio and not the rate of return itself is predetermined.


“It has been argued that profit-sharing can help allocate resources efficiently, as the profit-sharing ratio can be influenced by mar- ket forces so that capital will flow into those sectors which offer the highest profit shar- ing ratio to the investor, other things being equal,” Ibrahim in his article, pending print- ing, explained. The NBE directive also stipu- lates that interest-free banking may include the modes of finance which are used for pur- chase or hire of goods, including assets, and services on a fixed return bases.


Among such recognized operations one is Murabahah which means a contract for the purchase and resale of goods with the resale price being determined on a cost plus basis. In such arrangements intisar (or Istisna) and salam are also included. The latter is defined to equate a contract featuring advanced pay- ment against delivery of goods: the financing is usually used for commodities. The former – intisar –is a contract under which a buyer place an order for goods to be manufactured for delivery at a future date.


The upcoming directive is expected to boost national savings because first time deposi- tors are expected to be encouraged by the new Islamic bank offering. PM Meles re- cently said the next five year economic plans to boost the current 9.4 per cent of national saving shares in the economy to at least 17.4 per cent and to 21.3 per cent shares if possible. Though new for Ethiopia, interest- free banking has long global history. The first private interest-free bank, the Dubai Islamic Bank, was set up back in 1975 by a group of Muslim businessmen from several coun- tries. After the establishment of the first pri- vate commercial bank in Dubai, more than fifty interest-free banks were established in Muslim countries and as well as in European countries such as Denmark, Luxembourg, Switzerland and the UK.


Low Market Capitalisation for OIC


The market capitalisation of equity mar- kets in Organization of Islamic Conference (OIC) countries remains low compared to other leading markets, a report said. The total market capitalisation of 28 se- lected member countries of OIC stood at $1.86 trillion with a total of 6,655 compa- nies listed, a new research conducted by Bahrain-based Islamic International Rating


10 Global Islamic Finance October 2010


In terms of Islamic Funds market, as of June 2010, there were 504 Islamic mutual funds globally with total assets under management of $31 billion. Comparing it to the global funds sector, which stood at $22.8 trillion in total assets under management, Islamic Funds are still at very early stage, the duo pointed out in the study. However, given that the OIC markets are now roughly 11 per cent of the global economy, there is a significant


Agency and Dinar Standard of US, stated. This was even less than the Shanghai Stock Exchange whose market capitalization stood at $2.19 trillion with only 879 companies listed, it added.


The research selected 28 major OIC markets based upon a combination of quantitative and qualitative assessment of data sourced from Dinarstandard.com and the referenced third-party sources. The research summa- rised the current state of Islamic capital flow within its core OIC markets and also as- sessed the pulse of the OIC Islamic Capital Markets. It aims to provide investors, finance managers, and investment managers with a broad overview of areas of opportunities for them.


The study covers three key representative sectors: the stock markets, the flagship in- dustry segment of Sukuk (Islamic Bonds) and the Islamic Funds market. On the Islam- ic captal market growth, the study said the largest market among OIC member countries by market capitalisation was Saudi Tadawul with $327 billion, while in terms of number of listings Bursa Malaysia Berhad emerged on top with 967 companies.


The fastest growing bourse in terms of mar- ket capitalization from January 1 to June 30 this year was Dhaka Stock Exchange, it add- ed. On the Sukuk market, the study said that after reaching a peak of 2007, the industry suffered a dramatic decline in 2008 hit hard by global financial crisis and questions on Shari’a compliance.


Added to that was default by some of the Sukuk issuers which did not help the situa- tion either, said the study. However, in 2009, the situation seemed to have improved a bit with total issuances of $23 billion up from $19 billion in 2008. As of June 2010, there were a total of 1582 global Sukuk issues outstanding with a total value of $137 bil- lion, the joint study said.


“However, 88 per cent of the Sukuk are not listed and except for Malaysia, most of the Sukuks are unrated compared to conven- tional bonds, where it is norm to obtain rat- ings. The absence of ratings has also limited the growth of Sukuk markets particularly among the mid market players.”


room for growth in this sector, it added. In terms of asset class, 45 per cent are equity funds while 32 per cent are money market funds. Among the key challenges to this sec- tor is the size of Islamic funds as 80 per cent of them are less than $50 million, it added.


Affin Plans First Islamic Bank in Chi- na


Affin Holdings Bhd and its foreign partner, Hong Kong’s The Bank of East Asia Ltd, have announced that they have submitted a proposal to the China Banking Regula- tion Authority (CBRA) to open China’s first Islamic bank. BEA Chairman and Chief Executive Officer Dr David K.P Li in Kuala Lumpur said in a statement that,”CBRA is currently still study- ing the regulation and practices of Islamic finance. We hope to be the first Islamic bank in China once the authority has come up with the regulations”.


Affin holdings hope that the partnership will allow Affin Bank to make use of over 240 BEA branches worldwide covering Hong Kong, China, North America, the UK and Southeast Asia. BEA is also the single big- gest foreign shareholder of Affin with a 23.5 per cent stake. We are confident that this strategic alliance will place both banks in a better position in many Asian markets and enable us to tap an even wider business op- portunities,” Affin Holdings chairman Tan Sri Mohd Zahidi Zainuddin said.


Early this month, Affin Bank bought Indone- sia bank PT Bank Ina Perdana for RM138 million, its first venture outside of Malaysia. It may also offer Islamic finance services in the country which has a population of more than 200 million people.Affin Bank currently owns an Islamic banking subsidiary, Affin Is- lamic Bank, which started operations in April 2006 and since its inception has significant- ly seen a rise in demand for Islamic Shariah compliant banking.


China is a diverse country which could ben- efit from the introduction of a fully fledged Islamic bank which could help to further promote and boost the Islamic financial sec- tor as many countries are tapping into the lucrative industry which is set to reach over $1.5 trillion US dollars by 2012. China has some of the oldest roots of Muslim history and has a large population of Muslims liv- ing in China. There is much scope for both Muslims and Non Muslims to tap into the highly ethical principles of Shariah compli- ant Islamic finance. gif


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