Monday, March 28, 2011

Sri Lanka Islamic equity rules still evolving: practitioner

Mar 28, 2011 (LBO) - Islamic finance principles in Sri Lanka are still evolving and there is vigorous debate on deciding stocks compliant with Sharia or Islamic law both in the island and abroad, a practitioner has said.

Broadly under Islamic finance sectors such as gambling, non compliant meats like pork, entertainment, conventional banks or finance companies, defence, entertainment, alcohol, tobacco, pornography and even hotels are excluded.

However there is ongoing debate on what is permitted and not.

"Some scholars hold that investing in stocks is totally impossible," Ishrat Rauff, chief executive of ADL Capital, an Islamic finance firm said.

"Some scholars say defence is okay, some say tobacco is okay."

Rauff was addressing a forum organized by the Bar Association of Sri Lanka, the country's top organization representing lawyers and the Chartered Institute of Management Accountants, an accounting body.

Rauff said his firm followed guidelines set by international consensus by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), a Bahrain based industry body.

Leisure is excluded mostly because hotels serve liquor which is a key source of revenue.

Islamic finance discourages charging of interest.

Monetary history shows that before central banking, when gold and silver was money, there was no sustained inflation in the world and even bank depositors did not expect interest from banks.

Economic analysts say that modern inflating paper fiat money is not 'money' as envisaged in the past.

After the 1971 break-up of the Bretton Woods and the Federal Reserve's exit from the gold standard, today's paper money is totally backed by interest bearing credit (government Treasury bills).

Equity of banks and finance companies are specifically excluded under AAOIFI rules. Firms which get more than 5.0 percent of their revenues from non core business such as interest income have to be excluded.

Rauff said some maintain that all interest income must be excluded whatever the percentage, but when Islamic financing is still evolving it was difficult.

But investors could 'purify' the proceeds by giving the same percentage away to charity from the dividends received from the stocks. Some held that the rule should also hold to capital gains from shares, he said.

Highly leveraged institutions based on ratio of debt to market capitalization, those that have high cash balances or accounts receivables are also excluded.

Rauff said his firm used a Sharia advisor from South Africa who helped resolve debatable cases. Among recent initial public offers, Odel, PC House, Pan Asia Hydro Power were deemed to be Sharia compliant by his firm.

But firms like Singer Finance, Heladiv and Free Lanka Capital Holdings were excluded. In the case of Heladiv its ratios changed after the listing when market capitalization improved, he said.

Free Lanka Capital Holdings were excluded because of its proposed involvement in leisure. Though the firm was not yet in the business, Rauff said the firm's Sharia advisor had held that the money raised from the public offer would go to leisure.

He said the list screened by his firm would be published in the near future. The 'white list' would be revised as new information came indicating any changes in the approved businesses.

"We have to revise the list based on market capitalization and also after analyzing quarterly accounts," he said.

source - www.lbo.lk

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