After months of conducting a feasibility study and engaging with central banks across the world, the Bank of England (BOE) has finally issued a consultation paper on establishing Islamic liquidity instruments to ease mounting pressure on UK Shariah banks in meeting the liquid asset buffer requirements as outlined by Basel III regulations.
Allowing local Islamic banks access to its balance sheet has been the goal of the BOE since the UK government made its bid to become the western hub of Islamic finance – a commitment sealed by its inaugural sovereign Sukuk in 2014; however, the regulator has been presented with several significant challenges in doing so. These include identifying Shariah compliant collateral to support financing facilities and the challenge of engineering a deposit account in compliance with Shariah without compromising the economic properties of interest-paying reserve accounts.
“The bank recognizes that Islamic banks are currently unable to use the bank's existing liquidity facilities. In particular, the Sterling Monetary Framework is the mechanism by which the bank sets interest rates, and interest-based facilities are not deemed Shariah compliant,” said the BOE. Presently, only Sukuk issued by the IDB (and the UK government) are eligible as a liquid assets buffer for Islamic banks and the Prudential Regulation Authority has proposed to widen the range of permissible assets to include Islamic bonds by top-rated sovereigns and lower-rated Shariah sovereign papers (subject to haircuts) as a buffer in line with Basel III requirements.
Despite the challenges, the apex bank has nonetheless consistently reassured the industry of its commitment to close this chasm, and is now seeking feedback on four proposed potential models covering both deposit products and insurance: a Wakalah fund-based arrangement and commodity Murabahah for deposits as well as a collateralized commodity Murahabah and Shariah compliant repurchase agreement (sale and buy back) mechanism for liquidity insurance.
Placing greater priority on creating a deposit facility over liquidity insurance (which could follow subject to further analysis), the regulator however noted trade-offs in selecting a suitable mechanism.
“In order to assess different Shariah compliant facility models for the facility, the bank has established a set of key criteria. Inevitably, there are likely to be trade-offs; it is unlikely that one model will consistently be the most effective at meeting all criteria. Fundamentally, what the bank is seeking to determine through this feasibility work is whether one (or more) of these models will meet these criteria to a sufficient degree for implementation,” it elaborated in a statement.
Should the central bank be successful in rolling out an Islamic deposit product, this would significantly support the liquidity needs of over 20 institutions offering Shariah compliant financial products in the UK and lower concentration risks in its Islamic financial industry.
Accepting feedback until the 29th April, the BOE will announce its decision on a feasible model later in the year.
The consultation document can be found at:
http://www.bankofengland.co.uk/markets/Pages/sterlingoperations/shariah-compliant-facilities.aspx
Source: IFN Daily Alert.
The primary purpose of this blog is to share latest information, opinions, exchange knowledge and expertise on the field of Islamic Finance from different perspectives. The secondary purpose is to share opinions and key development of Islamic Banking and Islamic insurance in Tanzania.
Monday, February 15, 2016
Tuesday, February 2, 2016
Talent Development: The Bahrain Way
It is an acknowledged fact that Bahrain has over the years significantly contributed to the rapid growth of the global Islamic finance industry. Precedence has shown that numerous countries often look to Bahrain for direction in areas such as regulation, product development and capital markets. Playing host to the largest concentration of Islamic financial institutions in the world, the Kingdom has managed to over the years develop a competent pool of talent for the industry. NABILAH ANNUAR explores the methods and measures taken by Bahraini authorities in developing their human capital.
Evolution
Growing at an average of 10-15% year-on-year, the Bahraini Islamic finance sector is expected to maintain this momentum in 2016 with Sukuk, investment accounts and Takaful being the main driving factors. Apart from having the largest number of Islamic financial institutions worldwide, Bahrain also hosts a number of organizations committed to the development of Islamic finance, making it a content and knowledge hub for the industry. These institutions include: AAOIFI, the International Islamic Financial Market (IIFM), the General Council for Islamic Banks and Financial Institutions, the Islamic International Rating Agency and Deloitte’s Islamic Finance Knowledge Center.
Despite the sustained growth, the country is not excluded from facing human capital constraints, a predicament that is experienced in all prominent Islamic finance markets. This is reflective both of the rapid growth of Islamic finance as well as its continued evolution, as new products, structures, and services are developed. “Bahrain has adopted a proactive approach to tackling these issues, which it has been able to do thanks to an extensive infrastructure of training and standard-setting institutions. Many of these entities are engaged in providing further education and training, in order to ensure that already existing industry practitioners keep abreast of changes as well,” conveyed Dr Jarmo Kotilaine, the chief economist at Bahrain Economic Development Board, exclusively to IFN Education.
“Bahrain’s greatest strength in driving the development of talent for Islamic finance has been its nearly half-a-century-long history as a financial center, which has driven the growth of a local talent pool, as well as the infrastructure of educational and training solutions.” According to Kotilaine, currently over 60% of the employees in the Kingdom’s financial services sector are Bahraini nationals. Evidently, the country has managed to create a pool of talent for its financial services industry.
Challenges
It is an observed fact that the needs of Islamic finance have grown rapidly over the past decade from a relatively smaller base to a competitive landscape and shortages in many areas. This has been made more severe by the rapid evolution and global reach of the industry. “An important element of addressing the structural human capital challenges facing the industry has involved close collaboration between the Kingdom’s regulator, the Central Bank of Bahrain (CBB), as well as the industry’s leading training institute, the Bahrain Institute of Banking and Finance (BIBF), and other educational institutions such as the University of Bahrain. This interaction has allowed the training providers to better anticipate and respond to the needs of the industry, alongside the players in the sector, who have also been able to plan for their future needs in a more collaborative manner,” elaborated Kotilaine.
Collaborative efforts
One aspect that Bahrain’s Islamic finance industry thrives on is the frequent collaborative efforts formed between various banks, government agencies as well as educational institutions in its market. “Collaboration among relevant stakeholders has always been at the heart of the ‘Bahraini model’. This ensures awareness of the different needs and initiatives as well as ongoing coordination. Since the beginning, the development of Islamic finance has been viewed as a strategically significant project of national importance,” affirmed Kotilaine.
Among recent initiatives, the University of Bahrain now offers a Bachelor’s degree in Islamic finance. The BIBF signed a progression agreement to allow graduates of its advanced diploma in Islamic finance to continue their studies with the University of Bolton’s MBA in Islamic finance. Customarily, local banks also play an important role in training human capital, whereby collaborative efforts with education providers are made to offer training programs in Islamic finance, which operate in line with the local labor market’s requirements and needs.
Similarly, the Bahrain Institute of Banking and Finance last year signed an MoU with the International Shariah Research Academy aimed at cooperation in the development of academic and training programs mainly in finance and Islamic banking. Under the agreement, emphasis will be on boosting the educational quality of programs, the exchange of cadres, teachers and researchers, as well as research and administrative visits, workshops, lectures and conferences.
Another innovative joint effort was the partnership created between Al Salam Bank-Bahrain and BMI Bank, a subsidiary of Al Salam Bank-Bahrain, with the BIBF to support the BIBF Dealing Room, part of an initiative to enhance the quality of training in the banking and financial sector by providing technology-enabled experiential learning in a controlled environment.
The CBB has over the past years played a proactive role in helping devise a bespoke regulatory framework for different segments of the industry. It has also invested in the long-term development of the industry, by setting up the Waqf Fund, which has an endowment and a broad mandate to support growth of Islamic finance. In many instances, these Bahraini institutions play an important role in providing human capital solutions to other countries with emerging and growing Islamic finance sectors.
Always seen to be taking pre-emptive measures, the CBB has taken the lead in understanding human capital needs of the industry. One of the Central Bank’s main mechanisms in addressing this issue is the establishment of the BIBF, which is funded through an industry levy and supports the ongoing human capital needs of Bahrain-based financial institutions. The strong support from the Central Bank can also be seen through the role it plays in training and education efforts with various international and multilateral standard-setting bodies based in the Kingdom.
Looking ahead
Continuing with its standard operating procedure in building bridges between all stakeholders in the country, Bahrain also seeks to enhance its educational facilities across the Kingdom. Kotilaine told IFN Education: “At the heart of future development lies the ongoing dialogue and collaboration among the various stakeholders involved in Islamic finance. Bahrain is continuing to expand and add to the infrastructure of both training and research facilities in the countries.” Authorities plan to leverage on the numerous international research firms that are based in the Kingdom such as EY and Deloitte, in moving forward. Bahrain’s Al Baraka Banking Group has also recently announced a partnership with the World Bank to enhance research in the industry.
“Alongside existing bodies such as AAOIFI, IIFM and CIBAFI, we are confident that Bahrain will continue to help shape and support the development of the international Islamic finance sector through the expertise and experience based here,” said Kotilaine on a positive note. Additionally, industry observers have called upon Bahraini players to focus on talent acquisition in the back-end of the financial services sector as well as the preservation of a sound and friendly business infrastructure environment to maintain stability and growth in the Kingdom.
Evolution
Growing at an average of 10-15% year-on-year, the Bahraini Islamic finance sector is expected to maintain this momentum in 2016 with Sukuk, investment accounts and Takaful being the main driving factors. Apart from having the largest number of Islamic financial institutions worldwide, Bahrain also hosts a number of organizations committed to the development of Islamic finance, making it a content and knowledge hub for the industry. These institutions include: AAOIFI, the International Islamic Financial Market (IIFM), the General Council for Islamic Banks and Financial Institutions, the Islamic International Rating Agency and Deloitte’s Islamic Finance Knowledge Center.
Despite the sustained growth, the country is not excluded from facing human capital constraints, a predicament that is experienced in all prominent Islamic finance markets. This is reflective both of the rapid growth of Islamic finance as well as its continued evolution, as new products, structures, and services are developed. “Bahrain has adopted a proactive approach to tackling these issues, which it has been able to do thanks to an extensive infrastructure of training and standard-setting institutions. Many of these entities are engaged in providing further education and training, in order to ensure that already existing industry practitioners keep abreast of changes as well,” conveyed Dr Jarmo Kotilaine, the chief economist at Bahrain Economic Development Board, exclusively to IFN Education.
“Bahrain’s greatest strength in driving the development of talent for Islamic finance has been its nearly half-a-century-long history as a financial center, which has driven the growth of a local talent pool, as well as the infrastructure of educational and training solutions.” According to Kotilaine, currently over 60% of the employees in the Kingdom’s financial services sector are Bahraini nationals. Evidently, the country has managed to create a pool of talent for its financial services industry.
Challenges
It is an observed fact that the needs of Islamic finance have grown rapidly over the past decade from a relatively smaller base to a competitive landscape and shortages in many areas. This has been made more severe by the rapid evolution and global reach of the industry. “An important element of addressing the structural human capital challenges facing the industry has involved close collaboration between the Kingdom’s regulator, the Central Bank of Bahrain (CBB), as well as the industry’s leading training institute, the Bahrain Institute of Banking and Finance (BIBF), and other educational institutions such as the University of Bahrain. This interaction has allowed the training providers to better anticipate and respond to the needs of the industry, alongside the players in the sector, who have also been able to plan for their future needs in a more collaborative manner,” elaborated Kotilaine.
Collaborative efforts
One aspect that Bahrain’s Islamic finance industry thrives on is the frequent collaborative efforts formed between various banks, government agencies as well as educational institutions in its market. “Collaboration among relevant stakeholders has always been at the heart of the ‘Bahraini model’. This ensures awareness of the different needs and initiatives as well as ongoing coordination. Since the beginning, the development of Islamic finance has been viewed as a strategically significant project of national importance,” affirmed Kotilaine.
Among recent initiatives, the University of Bahrain now offers a Bachelor’s degree in Islamic finance. The BIBF signed a progression agreement to allow graduates of its advanced diploma in Islamic finance to continue their studies with the University of Bolton’s MBA in Islamic finance. Customarily, local banks also play an important role in training human capital, whereby collaborative efforts with education providers are made to offer training programs in Islamic finance, which operate in line with the local labor market’s requirements and needs.
Similarly, the Bahrain Institute of Banking and Finance last year signed an MoU with the International Shariah Research Academy aimed at cooperation in the development of academic and training programs mainly in finance and Islamic banking. Under the agreement, emphasis will be on boosting the educational quality of programs, the exchange of cadres, teachers and researchers, as well as research and administrative visits, workshops, lectures and conferences.
Another innovative joint effort was the partnership created between Al Salam Bank-Bahrain and BMI Bank, a subsidiary of Al Salam Bank-Bahrain, with the BIBF to support the BIBF Dealing Room, part of an initiative to enhance the quality of training in the banking and financial sector by providing technology-enabled experiential learning in a controlled environment.
The CBB has over the past years played a proactive role in helping devise a bespoke regulatory framework for different segments of the industry. It has also invested in the long-term development of the industry, by setting up the Waqf Fund, which has an endowment and a broad mandate to support growth of Islamic finance. In many instances, these Bahraini institutions play an important role in providing human capital solutions to other countries with emerging and growing Islamic finance sectors.
Always seen to be taking pre-emptive measures, the CBB has taken the lead in understanding human capital needs of the industry. One of the Central Bank’s main mechanisms in addressing this issue is the establishment of the BIBF, which is funded through an industry levy and supports the ongoing human capital needs of Bahrain-based financial institutions. The strong support from the Central Bank can also be seen through the role it plays in training and education efforts with various international and multilateral standard-setting bodies based in the Kingdom.
Looking ahead
Continuing with its standard operating procedure in building bridges between all stakeholders in the country, Bahrain also seeks to enhance its educational facilities across the Kingdom. Kotilaine told IFN Education: “At the heart of future development lies the ongoing dialogue and collaboration among the various stakeholders involved in Islamic finance. Bahrain is continuing to expand and add to the infrastructure of both training and research facilities in the countries.” Authorities plan to leverage on the numerous international research firms that are based in the Kingdom such as EY and Deloitte, in moving forward. Bahrain’s Al Baraka Banking Group has also recently announced a partnership with the World Bank to enhance research in the industry.
“Alongside existing bodies such as AAOIFI, IIFM and CIBAFI, we are confident that Bahrain will continue to help shape and support the development of the international Islamic finance sector through the expertise and experience based here,” said Kotilaine on a positive note. Additionally, industry observers have called upon Bahraini players to focus on talent acquisition in the back-end of the financial services sector as well as the preservation of a sound and friendly business infrastructure environment to maintain stability and growth in the Kingdom.
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