Finances for men

Accounting meets religion in challenge for islamic banks


Reconciling accounting standards and religious principles is challenging Islamic banks and regulators as they adapt to new international book-keeping rules due to come into force in 2018. The new rules, known as IFRS 9, will leave their mark on all major products used by Islamic banks - from simple savings accounts to Islamic bonds - and impact their bottom-lines. Banks around the globe are gearing up to implement IFRS 9 from January 2018, posing a particular challenge for many Islamic finance contracts as they change the way financial assets are classified and measured, requiring lenders to book expected losses in advance. The problem for most Islamic financial products is that their accounting treatment can often diverge from the actual economic substance of a transaction, a key concept behind IFRS 9. This has prompted the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) to set up a working group to look at ways to revise its rules for Islamic financial institutions, which now hold assets worth around $2 trillion. AAOIFI issues guidelines that are followed wholly or in part by Islamic financial institutions across the world, so its efforts would help align the industry to global practices. The working group is revising AAOIFI's accounting standard for provisions and reserves and developing a new one for impairments and expected losses, secretary-general Hamed Hassan Merah told Reuters. These changes will be discussed at a workshop in Jordan on Dec. 14 and at a meeting of AAOIFI's accounting board starting on Dec. 26, with an exposure draft expected to be released for public comment early next year, Merah said.

AAOIFI will also look at amendments to its standard for investment accounts and a new standard covering Islamic derivatives such as waad and khayar, Merah added. LACK OF GUIDANCE A potential clash with Islamic principles could make IFRS implementation tricky for Islamic banks when it comes to accounting of provisions and impairments.

"We still see diverging practices in a number of aspects," Abdelilah Belatik, secretary-general of the General Council for Islamic Banks and Financial Institutions, a Bahrain-based non-profit organization, said."Some of these different practices are due to regulatory reasons, and in other cases to the lack of guidance."Islamic banks' credit ratings, profitability and the cost of funding to customers could be affected by IFRS, Hamad Abdulla Eqab, chairman of AAOIFI's accounting board, said during the organization's annual conference earlier this month. For instance, while IFRS 9 requires recognition of expected losses, AAOIFI rules only permit recognition of incurred losses.

Islamic law does not allow customers to be charged for a future event or a future loss, said Eqab, who is also group chief financial officer at Albaraka Banking Group BARKA. BH. Another issue related to IFRS 9 is how some Islamic finance transactions are classified, such as murabaha and musharaka. Murabaha is a cost-plus-profit arrangement widely used to structure Islamic loans, while musharaka is a partnership contract where two or more parties share profits according to a stipulated ratio. They could be deemed trading activities depending on the specific details of each contract, Belatik said. Islamic bonds, or sukuk, may also be affected. A popular sukuk structure is a sale and lease-back contract known as ijara. However, some sukuk could be classified as leases and therefore fall under a different standard, IFRS 16.

Australian budget opens door to islamic finance


SYDNEY May 9 The Australian government has proposed removing tax barriers to asset-backed financing arrangements as part of its federal budget, a move likely aimed at facilitating interest-free transactions used in Islamic finance. Islamic finance is gradually catching on in Australia, with National Australia Bank Ltd helping fund a A$160 million ($114 million) Brisbane property purchase in February, after its maiden Islamic finance deal in August. Under its 2016/17 spending plan, the government would seek to ensure the tax treatment of asset backed financing is similar to other arrangements which are based on interest bearing loans.

The measure would become effective only in 2018 and apply to transactions supported by assets, including deferred payment arrangements and hire purchase arrangements.

The two most common Islamic finance contracts are murabaha, where a client buys a commodity on a deferred-payment basis, and ijara, an installment-based leasing arrangement.

Islamic finance follows religious principles such as bans on interest and gambling but the asset-based nature of such contracts means they can incur double or triple tax charges because they require multiple transfers of titles of underlying assets. The proposal comes almost five years after the Australian Tax Office first presented a paper on Islamic finance to the government for its review.

Basis point hong kong loan volume slips back to crisis levels


HONG KONG, Sept 28 (Basis Point) - Hong Kong loan volume fell 41% this third quarter from last quarter as large corporates shunned the loan market, opting instead for bonds and bilateral loans. Volume for the first nine months totalled US$32.4bn, compared to US$43.4bn for the same period last year. If not for a busy second quarter when a few large refinancings and acquisition deals boosted volume, this year would mirror the quiet market seen in 2008 and 2009 during the global financial crisis. Volume plunged in the third quarter to US$10.5bn from 2Q12's US$17.7bn. Going forward, bankers expect the rest of the year to be subdued as many companies have already refinanced maturing loans via bonds or bilateral deals. However, despite the muted demand for corporate loans, the main staple of the Hong Kong market, the city is witnessing one of its most exciting years for acquisition and leveraged buyout activity.

In the pipeline, there is an up to US$1.7bn three-part LBO financing backing the privatisation of Nasdaq-listed Chinese display-advertising company Focus Media, and a US$6-8bn facility for AIA Group's bid for Asian insurance assets from ING. Hong Kong has already seen several large bridge loans this year, including the US$2bn bridge for Alibaba's privatisation plan and a US$2bn facility for Hong Kong Exchanges and Clearing's acquisition of the London Metal Exchange.

Meanwhile, Hong Kong-listed Chinese firms and some top-tier Hong Kong names have been going to Taiwan to raise funds, contributing to loss of dealflow in the Hong Kong market. Cathay Pacific Airways, for example, got an upsized US$260m five-year bullet loan from Taiwan in May, while China Resources (Holdings) sealed a US$200m three-year deal in September that targeted only Taiwanese lenders. Besides this impact from Taiwan, some market players said a couple of Chinese banks, to secure assets on their new loan books, were offering borrowers attractive terms on bilateral loans.

So, with the loss of dealflow to bonds, bilaterals and Taiwan, the rest of the year could be quiet for the Hong Kong loan market. A bright spot, however, has been the increasing number of offshore Rmb or Dim Sum loans, with more than 10 so far in 2012 and all of them well received. Pedro Cheung, Bank of China Hong Kong's deputy general manager and head of corporate finance, said this new product was still in its early phase of development and there were many unpredictable factors which could affect it, such as changes in policy."We of course hope this type of loan will become more popular," Cheung said, "but deals that have surfaced so far were successful for individual reasons and this product has not become a mainstream phenomenon yet."