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ISLAMIC FINANCIAL HUBS OF THE WORLD:
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Risk Management: Islamic Financial Policies Islamic Banking and Its Potential Impact An Ideal Islamic Financial System: A Gone Case? Growth and Prospect of Sukuk in Islamic Finance, part 1
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ISLAMIC FINANCE
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TRANSFORMING THE GLOBAL MARKET
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Islamic Finance
27 A PARADING SHIFT THE MARKETING DRIVEN APPROACH TO TAKAFUL
James Caan on why he thinks Islamic Finance could have prevented the global nancial crisis
Every time a financial institution introduces a new product or service it becomes the responsibility of their marketing department to explain the product to the masses. Marketing of financial products, thus, becomes challenging because your team has to be well versed in the field of finance as well as in marketing; additionally, in the case of Islamic financial products the skill set increases as it requires grounding in principles of Shariah. It is difficult to find such people who possess knowledge in all three fields: an essential combination for a successful and articulate marketing strategy...
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Islamic finance is a growing industry which is constantly evolving and has its growth amid even the great recession and beyond. Assets of the global Islamic finance industry are estimated to grow to around $1.6 trillion by 2012. Lately, the Vatican said that banks should look at the rules of Islamic finance to restore confidence amongst their clients at a time of global economic crisis...
The practice of Islamic finance alternative dispute resolution (ADR) forums shows a consistent reliance on the use of national laws coupled with Shariah. Also, there are cases showing that U.S. courts and European arbitrators are willing to use Islamic law
Sukuk
68 Growth and Prospect of Sukuk in Islamic Finance, part 1
Over the past decade, Islamic finance has been growing at an average rate of more than 30 percent per year. This impressive performance has greatly benefited many national economies, irrespective of faith or race, by fostering significant growth and increased employment opportunities
Risk Management
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32 Risk Management: Islamic Financial Policies Islamic Banking and Its Potential Impact
Islamic banking is a worldwide phenomenon involving a variety of institutions and instruments, not one project or institution. In the past few decades, Islamic institutions and instruments have developed in many countries, including the United States. In certain countriesIran, Sudan, and Pakistanall or most financial intermediation conforms to Islamic Shariah (religious law) as defined by local authorities. All three of these countries also have banking authorities that govern the general level of charges and returns in the system and these are not usually market-governed systems. In most other countries, including Indonesia, Islamic transactions and institutions make up a small part of the total and must compete with conventional financial institutions. There is even considerable Islamic banking in the United States. If the terms and conditions of Islamic transactions differ too much from those of conventional institutions they become hard to sustain. The terms and conditions of Islamic institutions therefore tend to converge with conventional ones.
February 2012
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Islamic banking provides a great opportunity for the banking sector in developing economies to be efficient. The researchs objective was to explore the problems and challenges likely to be faced in introducing interest free banking services in Zimbabwe
Market Review
30 2009 A Great Year For Kuwati Banks as Provisions Total $2.6 billion
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The financial turmoil has put most of the markets and firms across the globe under a test of endurance and buoyancy. The unforeseen crisis hit sectors harder than ever expected and thereby resulted in a deterioration of a majority of global economies...
Has India finally reached an inflexion point for Islamic finance or will this be another trial balloon bursting before achieving the right altitude?...
72 Saudi Arabia and Spain Collaborate to Boost Islamic Finance 74 Islamic Banks in Turkey Need Support in Funding
Islamic finance in the European Union in countries such as Spain have a greater chance of spearheading the industry forward especially in collaboration with Islamic financial hubs such as Saudi Arabia Turkeys Islamic banks are lagging behind their non Shariah-compliant counterparts because of investor concern slowing economic growth will hurt the lenders ability to generate income from loans
Islamic trade finance has benefited from shifting preferences towards Shariah-compliant banking and could serve as one of the key growth...
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76 Event Review 78 Book Review 80 Events Calendar 82 Business Directory 84 Glossary 86 In the Next Issue
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February 2012
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Editorial Letter
Goldman Sachs, in October, registered a $2 billion Islamic bond program. There is a growing frustration with the traditional theories of finance among institutional investors and bankers around the world. But is there any potential in Islamic finance which also benefits the conventional counterpart? Many countries around the world are tapping into the lucrative opportunities of Islamic finance and banking. Many banks worldwide have even opened up Islamic windows which are doing increasingly well to cater for the demand of Shariah-compliant products and services. As you are in no doubt aware, Islamic finance imposes some pretty serious constraints on its denizens. For example, theres a limitation on excessive speculation, theres a limitation on leverage, theres a limitation on selling things you dont own. Theres a limitation on charging interest, theres a limitation on investing in firms that rely on interest revenue or that carry a lot of debt, theres the requirement that income must be derived as profits from shared business risk and so on. On the surface, then, youd expect Islamic finance to be severely constrained. And, youd be right. But Id argue that these constraints may offer opportunities for mainstream finance. In the world of intellectual property, the workarounds that people come up with to avoid infringing a patent are sometimes more sophisticated and valuable than the originally patented concept. We might argue perhaps the constraints imposed on Islamic financiers will lead to creative innovations and products that ultimately improve finance generally. Why? Because the constraints listed actually sound reasonable. And, moreover, since Islamic finance is firmly rooted in capitalism (i.e., the profit motive and private ownership remain firmly intact), these constraints (and their workarounds) are compatible with non-Islamic finance as well. We believe Islamic finance offers insights into how finance can be better grounded within the real economy, from which it has grown increasingly disconnected. For example, in nominal terms financial markets are four times as big as real markets. Why? Is it for the benefit of the industry? Or is the size of finance for the benefit of finance? Because every transaction has to have an asset earmarked with it, the Islamic financial sector cannot distance itself too far from the real sector. Perhaps thats something worth exploring in the mainstream. We argued in GIF that innovation must be at the forefront if Islamic finance wants to compete with its conventional counterpart, with the need to combine technology and financial management and banking becoming greater in recent years. One cannot simply rely on the traditional form of visiting your local bank branch or insurance provider any longer consumers and industry professionals are demanding more freedom and organisations operating within Islamic finance are recognising this. From mobile banking to internet transactions, Islamic finance just got a lot more accessible during the current year we have tried to highlight these new services which can benefit you in several occasions. In this issue we will be giving you The Ultimate Islamic Finance Review 2011. GIF will give you a comprehensive analysis into the various lucrative sectors of the Islamic finance industry. We will be looking at the growing sectors of Sukuk, Takaful, capital markets, retail and investments. In addition, we will also be looking at the latest innovative developments in the industry including the latest countries participating in the sector and the key products, organisation and influential leaders paving the way for the industry to further advance. GIF will also give you an exclusive insight into the worlds best Islamic financial institutions in 2011 and the leading personalities of the Islamic finance industry which are spearheading the industry forward.
We believe Islamic finance offers insights into how finance can be better grounded within the real economy, from which it has grown increasingly disconnected
Farhad Reyazat
PhD in Risk Management Editor in Chief
February 2012
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ing accounts for $3.5 billion. This figure represents a staggering 10 percent of total gross trade financing approved by the IDB. Following the establishment of the International Islamic Trade Finance Corporation (ITFC), the IDB Groups standalone trade finance fund, two years ago, the annual approval level for trade financing in favour of Turkish companies and banks rose from $50 million to $200 million. IDB/ITFC trade financing disbursement in Turkey until a few years ago was limited to Letters of Credit, but more recently the two entities started to implement documentary collection as an alternative method of disbursement. The limitation on the source of supply by allowing only imported goods is also being overcome albeit most of the trade finance clients of ITFC in Turkey procure their goods from domestic sources instead of imports. As such, ITFC has started to provide financing for purchasing from free trade zones within Turkey, and lines of financing which can be used for pre-export purposes. RAM Ratings assigns AA1/ P1 ratings to Sabah Credit Corps Proposed RM1 Billion Sukuk RAM Ratings has assigned respective long- and short-term ratings of AA1 and P1 to Sabah Credit Corporations (SCC or the Corporation) proposed Islamic Medium-Term Notes (IMTN) program of up to RM1 billion and proposed Islamic Commerical Papers (ICP) Programme of up to RM1 billion (collectively, the Proposed Securities). The aggregate outstanding nominal value of the ICP and/or IMTN cannot exceed RM1 billion at any time. Concurrently, the respective long- and short-term ratings of the Corporations RM500 million CP/MTN Programme (2007/2014) have been reaffirmed at AA1 and P1. Both long-term ratings have a stable outlook. The ratings reflect the strong commitment and support expected from the State Government of Sabah (State Government, whose debt facility is rated AAA/Stable/P1 by RAM Ratings). Wholly owned by the State Government and operating under the purview of the Sabah State Ministry of Finance, SCC provides financing to employees of both the State and Federal Governments, with repayment effected through direct salary deductions. Given its close relationship with the State Government, the Corporation has been allowed the privilege of making direct salary deductions for state employees repayments on personal loans via the State Treasury. Direct salary deductions for employees of the Federal Government are conducted via Biro Angkasa. Meanwhile, support from the State Government is further underlined by its board representation, as well as the subordination of SCCs existing and future loans from the State Government (both principal and interest) to the Corporations debt securities. SCC has also received approval from the State Government to convert the latters loan of up to RM100 million into share capital at the option of the Corporation. In addition, the State Government has extended a Letter of Support (LOS) for the Proposed Securities. We note that this LOS is not as strongly worded as the one for the Corporations existing RM500 million CP/MTN Programme (2007/2014). Nevertheless, we believe that the State Government will readily lend its support if needed, given the strategic link between both entities. Islamic Finance May Have Prevented the Credit Crunch in Middle East Entrepreneur James Caan had reported to have said that, The global financial crisis could have been avoided if banks had abided by Islamic rules that forbid investment in collateralised debt obligations and other toxic assets. One of the questions we always ask is if the global economy operated under Shariah-compliant finance would we have had a credit crisis? said Caan, the former star of the BBC series Dragons Den, during an interview in Dubai. I think the answer is no actually. Shariah-compliant banks fared better than conventional lenders during the downturn, thanks to rules that forbid speculation and insist loans must be backed by collateral. Banks are also deterred from repackaging debts, as financial instruments generally have to be sold for face value. Caan, who recently purchased an apartment in Dubais Burj Khalifa, is touring the Gulf in a bid to drum up interest in a 45m ($69m) student housing product, offered through the Islamic investment firm 90 North, in which he holds a stake. When you think today that half the worlds population today is Muslim, as a businessman I see this as one of the biggest growth market opportunities that is under-exploited, Caan said.
Emirates Islamic Bank shall continue its support to Al Tomooh Scheme projects by extending finance up to AED 2 Million per project free of profit for 3 years in addition to many other benefits such as providing market advice and guidance for making feasibility studies. Al Tomooh Finance Scheme for Small National Businesses, one of Emirates NBDs initiatives and one of its corporate social responsibility activities, is considered a pioneer scheme in the United Arab Emirates; the scheme was established by a resolution of the board of Emirates NBD. It was launched in 1998 and has so far offered around AED 52 million in financing almost 122 National projects in several sectors and in various Emirates of the UAE. IDB Boosts Financing Cooperation with Turkish Corporate The Islamic Development Bank (IDB) latest $75 million line of financing to Turkiye Finans Participation Bank, one of the four participation (Islamic) banks in Turkey and in which Saudi Arabias National Commercial Bank has a controlling stake, underlines the proactive involvement of the multilateral development bank of the Muslim world in Turkey over the last three decades. The facility signed in mid-October 2011, on the sidelines of the 27th meeting of the Standing Committee for Economic and Commercial Cooperation of the Organisation of Islamic Cooperation, (COMCEC), in Istanbul, by IDB Group President. Ahmad Mohamed Ali and Turkiye Finans Chief Executive Officer Deya Gurerk, provides long-term financing opportunities to Small and Medium sized Enterprises (SMEs) in Turkey through instalment sale, Ijara (leasing) and Istisna (construction financing), and aims further develop key targeted sectors such as agriculture and food security, transport, energy and manufacturing. The financing facility is part of the IDB Groups Member Country Partnership Strategy (MCPS) program for Turkey which was launched in 2010 and covers the period of 2010-2013. The program envisages a total financing envelope of $2 billion from IDB Group to Turkey. The IDB Group has long been supporting the development of the Turkish private sector through project and trade finance as well as insuring export and import operations. Turkey is one of the major beneficiaries of IDB financing to date, and has received financing totalling $4.6 billion, of which trade financ10 Global Islamic Finance
February 2012
We are a bespoke finance and banking branding practice, able to offer expert practical advice on building brands which will appeal to both Muslim and non- Muslim consumers globally. We have years of experience in promoting Islamic banks, institutions, and developers from organising of events and road shows to advanced branding strategy. Business Media Group (BMG) will assign you your own corporate brand management team, who will work tirelessly to make sure that you receive the best possible results on your investment. Our specialisation includes marketing & branding services for: Bourses and Stock Exchanges Financial Centres Takaful and Retakaful companies Sukuk Issuers Islamic Banks Islamic Universities Asset Management Firms
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cure long-term returns, Caan said. We have identified an investment opportunity in the student housing market. Well respected universities are still getting more applications than they can cater for so the demand side is very high but most universities are not able to meet the demand in terms of accommodation, he said. You have predictability of income. In Dragons Den, Caan was one of panel of entrepreneurs courted by start-up firms in a bid to secure their investment in return for an equity share. Caan, who invested $1.5 million in 14 companies while on the show, said Dubai remained the leading destination for investment among the six Gulf States. financial institution for the three months ending the 30th of September 2011, rose to Dh298 million, compared to Dh270 million for the same period last year. It shows a 10.5 percent year-on year increase for the third quarter. The banks financial results beat the average estimated profit of Dh245.5 million of the two analysts surveyed. Two more analysts polled by Reuters had estimated thirdquarter profit at Dh247 million and Dh283 million. DIB remains focused on delivering sustainable growth through prudent management of costs and a strategy of targeting quality business, Chairman Mohammed Ibrahim Al Shaibani said in a statement.
Potentially over the next five or ten years I can see this as being a very attractive position. I think there is an incredible increase in demand for Shariah-compliant opportunities and products. Independent advisory firm 90 North was cofounded by Philip Churchill, formerly of Kuwait-backed Gatehouse Bank. The company has placed nearly 1.1 billion ($1.7 billion) on behalf of Gulf investors in Islamic-compliant real estate assets to date. Shariah law forbids gambling, investments in alcohol and receipt of interest, so fund managers have to select investments deemed Halal, or permissible.
Competing for mainstream customers is not all about products; banks need to think about service as being the differentiator. People will pay a small premium if they know their needs will be met. The fact of the matter is that you will see customers going for the best bank in town, not the best conventional or Islamic bank in town
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Ashar Nazim
Most of the product that we have sourced is UK-based, Caan said. The UK is a natural place that I think Middle East investors find very comfortable, because of the governance, the laws and the transparency. Islamic banking assets with commercial lenders will reach $1.1trn in 2012, a jump of 33 percent from their 2010 level of $826bn, Ernst & Young said last week. Islamic banking assets in the Middle East and North Africa (MENA) region increased to $416 billion in 2010, representing a five-year annual growth of 20 percent compared to less than 9 percent for conventional banks, the consultancy said. 90 North hopes to tap into the Gulfs wealthy residents by offering Islamic-compliant property assets with se12 Global Islamic Finance
February 2012
If I was being pitched in Dragons Den by Abu Dhabi, by Qatar, by Dubai which one would I back? [Dubai] has the least and has made the most out of it, he said. Look at the region, Dubai probably has the least natural resources so it doesnt have an option. Its drive and determination is much greater than somewhere like Qatar. Dubai Islamic Bank Posts 10.5% Profit Growth Dubai Islamic Bank (DIB) declared more than 10 percent year-on-year increase in its net profit for the third quarter that beat analysts expectations. The net income of the Shariah-compliant
Total income during the quarter reached Dh1.2 billion compared to Dh1.1 billion in the third quarter of 2010, an increase of 7.6 percent. The bank continued to strengthen its balance sheet with additional provisions for impairment of Dh216.8 million identified during the third quarter, taking the overall provisions for impairment for the nine-month period to Dh718.2 million. With a stable, well-diversified funding base in place, the bank will continue to play a key role in the UAE economy, Al Shaibani said. For the first nine months of 2011, the bank reported a net profit of Dh850 million, up 10.3 percent compared to the same period of 2010. The banks total assets as of the
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There is enormous potential for Islamic funds, from the Australian community and from abroad, mirroring the significant growth that we have seen in similar funds overseas. Crescent Wealth is proud to be the leading Australian pioneer in Islamic investing, and we are very pleased to offer an innovative new product thats specifically tailored to meet one of the most exciting growth opportunities in the wealth management industry
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Islamic financing, once properly understood and leveraged, will not only strengthen economic ties between the US and the Middle East, but will prove beneficial to US companies willing to explore alternative financial arrangements
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30th of September 2011 stood at Dh93.5 billion compared to Dh90.1 billion on the 31st of December 2010. Customer deposits stood at Dh68.6 billion compared to Dh63.4 billion as of the 31st of December 2010, as the banks customer base continued to expand. During the third quarter of 2011, DIB continued to implement its long-term strategy to open more branches in convenient locations such as The Dubai Mall and Sahara Centre. The banks total in-mall network now stands at eight branches, bringing the total UAEwide network to 70 branches, chief executive officer Abdulla Al Hamli said. The bank reported a financing-to-deposit ratio of 76.8 percent as of the 30th of SeptemThe bank has a $750 million floating rate Islamic bond maturing in March 2012, of which $657.5 million is outstanding. Middle East Banking Innovation Summit 2012 It had been reported that more than 150 C level delegates from banking institutions across the region will be attending the Middle East Banking Innovation Summit set to open in Dubai. The two day agenda focuses on the four key pillars of innovation excellence namely strategy, technology, experience and products and people management integration in the current times. Setting the scene for the two day agenda, Dr Marwan Barakat, Group Chief
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key drivers of banks earnings. The regions banks are likewise apt to benefit from solid regional growth fundamentals related to growing demographics, sub-par banking penetration, low leverage and strong liquidity at large. The summit also highlights a key discussion on the growing trends and innovation in the Islamic finance industry featuring experts from Sharjah Islamic Bank and Dubai Islamic Bank. Speaking about the Islamic finance thought leaders panel, Ahmed Saad Ibrahim, Deputy CEO, Sharjah Islamic Bank explained: Islamic Banks and Islamic products market has witnessed enormous development during the last few years and proven to be a strong model of finance during the current financial crises and still Islamic banks have a great room to grow in the future. I believe new players will be joining the Islamic finance industry either through establishment of new banks/windows or converting existing conventional institutions as well as increasing the market share of the existing product such as the Sukuk market. The first day agenda also features technology experts from KPMG, IBM, Dubai bank, Al Hilal bank, Qatar Islamic Bank amongst others discussing how technology and innovation go hand in hand and its role from being a driver to an enabler of innovation. Some of the key issues to be discussed during the session include: bank 2.0 new era of engagement banking, intelligent e-statements, data mining, IT investments and use of social media and multi channel propositions for delivering better customer experience. Day two focuses on the experience and product and people management pillars of banking innovation with experts from Citibank, Ajman Bank, Gulf International bank, National bank of Oman, Abu Dhabi Commercial bank, Bank Muscat, discussing whats driving innovation in the banking world and improving the overall customer experience. The main sponsors for the summit include: Intertech, Backbase, Ubanquity, IBM, KPMG, Unitech, Exodus and Thinksoft Global.
With the World Cup 2022 spending expected to start, Islamic banks in Qatar are likely to remain busy for the coming years. This will provide them with an opportunity to take the leadership role in the development of Islamic finance industry
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Amjad Hussain
Partner and Head of Islamic Finance, Eversheds
ber 2011, providing a clear indication of the banks healthy liquidity position. The bank also reported a healthy capital adequacy ratio of 17.9 percent under Basel II, as of the 30th of September 2011. The DIB also further strengthened its partnership with Dubai eGovernment in the third quarter of 2011 by enabling customers to use Al Islami Online Banking to quickly and securely make payments for more than 20 government entities. The banks share priced closed unchanged at Dh1.96 on Thursday. DIBs shares have decreased 10 percent this year compared with a 2 percent loss in the Dubai Financial Market Financial Banks Index.
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It is true there is a relative lack of liquid short-term Islamic instruments so it is therefore even more imperative for an institution like IBB to establish and maintain robust liquidity management systems and controls in order to assess funding requirements and to ensure that at all times there is sufficient liquidity to meet its obligations
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Gary Carney
Economist from Bank Audi sal - Audi Saradar Group will share insight on whats in store for Middle East banking Industry for 2012 and beyond. According to Dr. Marwan: The regions banking sector has been resilient to the various recent crisis episodes, from the global financial turmoil to this years global fiscal driven distress, passing through the ongoing Arab regional political unrest. However the structural profitability of the regional banking industry has been adversely impacted, reflecting more conservative structuring of balance sheets, greater regulatory oversights and a historical low interest rate environment. Looking ahead, loan growth, credit quality and interest spread improvement are the
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Success is not for the timid. It is for those who seek guidance, make decisions, and take decisive action.
www.iiconline.co.uk
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ISLAMIC FINANCE
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James Caan on why he thinks Islamic Finance could have prevented the global nancial crisis
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CHALLENGES
Islamic nance is growing as a source of nance for both Islamic and other investors around the world. The UK especially London, is the leading Western centre for Islamic Financial Services (IFS).
WE RECOMMEND
Samer Hijazi Financial Services Audit Director, KPMG London
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It would help if there were a global Islamic bank the size of something like HSBC, because that would set the standard for others
Great promise
We make our readers succeed! ISLAMIC FINANCE, 1ST EDITION JANUARY 2012 Managing Director: Chris Emberson Editorial and Production Manager: Faye Godfrey Business Development Manager: Hannah Butler Responsible for this issue: Project Manager: Soha Suliman Phone: 020 7665 4418 E-mail: soha.suliman@mediaplanet.com Distributed with: City AM Print: City AM Mediaplanet contact information: Phone: 020 7665 4400 Fax: 020 7665 4419 E-mail: info.uk@mediaplanet.com Mediaplanets business is to create new customers for our advertisers by providing readers with high-quality editorial content that motivates them to act.
Bank revenues also picked up in 2010. The 22 banks in the UK offering Islamic finance products now exceed that of any other Western country. 2010 also saw the global Islamic fund management industry increase by 7.6 per cent to US$58 billion, bucking a relatively flat growth trend of previous years. As Islamic finance expands and the range of products continues to broaden, there is a growing global demand for education and skills. UK institutions are
Keith Phillips Commercial Director, TheCityUK and Member of the Board of the UK Islamic Finance Secretariat (UKIFS)
The 22 banks in the UK offering Islamic nance products now exceed that of any other Western country
February 2012
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Project Finance Team of the Year Project Finance Deal of the Year (Shuweihat 3 IPP) IFLR Middle East Awards 2011 European Deal of the Year (ITT Sukuk) Qatar Deal of the Year (QIB Sukuk) Islamic Finance News Awards 2010
Contacts
Nadim Khan Global Head of Islamic Finance, Dubai +971 4 428 6305 nadim.khan@herbertsmith.com Adil Hussain Finance, Riyadh +966 1 463 2374 adil.hussain@herbertsmith.com Hammad Akhtar Corporate, London +44 20 7466 2573 hammad.akhtar@herbertsmith.com Simon Price Real estate, London +44 20 7466 2181 simon.price@herbertsmith.com
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NEWS
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UNDERSTAND THE IMPORTANCE OF TRAINING
STEP
Gaining qualifications
There is now an increasing number of programmes from short training courses and conferences, to degree and post degree programmes, and also proRuth Martin Managing Director, Chartered Institute for Securities & Investment (CISI)
The Chartered Institute of Management Accountants (CIMA) now offers two levels of professional qualification: a diploma, essentially a broad introduction to the subject, and an advanced diploma, for those who actually want to practise in the market. Demand for the qualifications is coming from all over the world, says John Willsdon, who is CIMAs Product Manager for Islamic finance qualifications, having been recruited in 2006 to oversee the new courses. There is a general agreement that not enough people have a proper understanding of the intricacies of Islamic finance yet. The diploma offers four modules Islamic Commercial Law, Islamic Banking and Takaful,
Recognised standards
Qualications in Islamic nance arose from the request of a variety of nancial institutions that were looking for a globally recognisable benchmark qualication. Being a global brand, CIMAs qualications are recognised worldwide. While CIMA have three main markets: Malaysia, the Gulf and the UK, we have students in over 66 countries says Willsdon. These qualications are now recognised worldwide.
VIRGINIA BLACKBURN info.uk@mediaplanet.com
CIMA Qualications in
Learn today, lead tomorrow
Take advantage of the skills gap; choose from a range of Islamic nance qualications to suit your needs.
Islamic Finance
CIMA Certicates in Islamic Finance CIMA Diploma in Islamic Finance CIMA Advanced Diploma in Islamic Finance
The CIMA Diploma in Islamic Finance opens doors to a whole new set of businesses.
Ganesh Prabhu Head of Finance, Clifford Chance (Singapore)
www.cimaglobal.com/learnIF
18 Global Islamic Finance
February 2012
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JANUARY 2012 5
NEW DEVELOPMENTS
The Islamic nance industry has existed in the UK for the best part of 30 years, but it is only more recently that it has been making its way into the mainstream. Initially, Islamic nance started as a liquidity management tool for Gulf Islamic banks, says Richard Thomas OBE, CEO at Gatehouse Bank and Chairman of UK Islamic Finance Secretariat (UKIFS). But we now have ve standalone Islamic banks in the UK with a domestic and international presence and action in every sector from trade nance to domestic property investment. The industry has developed a capital markets capacity and domestic sustainability.Its continuing in a strong growth phase,attracting new inward investment and capital into London. Birmingham is also becoming a regional centre, with the
Richard Thomas OBE CEO, Gatehouse Bank and Chairman of UK Islamic Finance Secretariat (UKIFS)
EDUCATION IS ESSENTIAL The need for further training in the area is important in ensuring future growth
PHOTO: SHUTTERSTOCK
Islamic Bank of Britain being established there. One of the key features that has made London suitable as a centre for Islamic nance is that English law is most suitable for acting as an intermediary in Islamic contracts, which has in turn benetted the legal profession, with British rms establishing a presence in Dubai. Islamic finance has developed from a niche to a sustainable sector across the globe, says Thomas. There has been a major increase in scope and scale especially in the GCC, Malaysia and Brunei, but also in Africa, central Asia, the United States and Canada. As the scope has extended, London is an attractive destination as an intermediary, for the City of London has a cluster of skills and services including the law and accounting. As a system that focuses on hard assets and tangible business,Thomas believes that in the wake of the credit crunch, Islamic nance is more important than ever. The countries that have been spared the crisis are now wealthier than ever, he says. Islamic nance is a deleveraged model and the global economy is going through a period of deleveraging. It is now capable of dealing with world class levels of business and can support the development of SME businesses.
VIRGINIA BLACKBURN info.uk@mediaplanet.com
The Islamic finance industry is rapidly expanding worldwide and there are unprecedented future developments in the pipeline. Food for thought
New sectors for investment have included the increasingly popular halal food industry which in the future will see the integration of the halal brand and Islamic nance, says Dr Farhad Reyazat, Editor in Chief of Global Islamic Finance Magazine. In addition, there is much scope for funding for the Islamic nance industry. The Sukuk Islamic bond industry is also likely to ourish as more issuances are being made globally not only in Islamic nancial hubs but across many different countries.
Ethical considerations also make the market attractive. The prohibition of Riba (interest) is one main factor that differentiates Islamic nance, says Dr Reyazat.It gives a way for people to manage their wealth without falling heavily into debt through interest.
VIRGINIA BLACKBURN info.uk@mediaplanet.com
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INSPIRATION
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STEP UNDERSTAND THE BASICS
Sultan Choudhury, Managing Director, Islamic Bank of Britain and Executive Board Member, UKIFS
MODEL OF BANKING Islamic finance offers a more ethical and less risky way of doing business, in line with the principles of Islamic law
PHOTO: SHUTTERSTOCK
While many global banks also issue Islamic instruments, there is little disclosure around them as they are often not very material in comparison to the rest of the business
Samer Hijazi Financial Services Audit Director, KPMG London
started to develop globally, this is beginning to change. KPMG is the auditor to the Islamic Bank of Britain (IBB), which was the rst Islamic nancial institution to be authorised by the FSA in the UK. Four more Islamic banks soon established themselves in the UK increasing the range of Islamic nancial instruments.
CHANGE
The major issue is the lack of comparability in nancial reporting, says Hijazi. Islamic nance is spread around the world in the Gulf, Malaysia and the UK, but many jurisdictions have specic local requirements. This often results in reporting under different nancial frameworks, and it makes it difficult to compare Islamic nancial institutions one on one.
accounting, governance and auditing. However, the AAOIFI standards have not been adopted in all countries with Islamic nancial institutions. As a result of this AAOIFI now almost stands alone as an additional accounting framework which Sharia-compliant institutions must adhere to, and which not all actually use. While international financial reporting standards are being adopted all over the world, these have
been specically designed for conventional nance, never for Islamic nance, adding a further layer of complication. Typically, banks and accountants that work in Islamic nance have had to try to apply them to products they were not developed for. This has meant that different accounting treatments have been applied to some Islamic nancial instruments producing varying results. However, as Islamic nance has
REAL ESTATE
There are two major issues when it comes to Sharia-compliant investment in real estate, according to Mike Rainey, partner at King & Spalding. The asset itself must be compliant, and while the building may be, the tenants may not, he says. Banks are not compliant and nor are hotels that sell alcohol, or cinemas. Then there is the nancing. One option is a leasing arrangement, in which the bank buys the property and leases it to the customer. The customer makes lease payments to the bank and when the last payment is made the property is transferred into his name. The amount of the rental is substantially the same as if the customer had borrowed a loan and repaid it with interest.
Standards to abide by
In 1991, the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) was established in Bahrain to be the standard setters of the industry, across several areas including
The accounting treatment of those instruments was precedent setting at the time in the UK. We had to consult technically with some of the most senior people in KPMG, says Hijazi. Going forward, it would help if there were a global Islamic bank the size of something like HSBC, because that would set the standard for others, but many Islamic banks are small and regional in comparison. Furthermore, while many global banks also issue Islamic instruments, there is little disclosure around them as they are often not very material in comparison to the rest of the business. But this is changing. As Islamic nancial institutions develop greater volume and momentum around the world there is more demand for consistency in reporting of their performance.
VIRGINIA BLACKBURN info.uk@mediaplanet.com
February 2012
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8 JANUARY 2012
NEWS
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STEP LOOK AT FINANCIAL HUBS AROUND THE WORLD
Setting the standards The regulatory framework has also helped establish Malaysia as a centre for Islamic nance, says Daud Vicary Abdullah, President and CEO of INCEIF. The Islamic Banking Act of 1983 was followed by the Takaful Act in 1984. In
Central hub Malaysia has the largest Sukuk market in the world with a 65 per cent share US$96 billion in 2010 and an Islamic interbank money market (IIMM) established in 1994 and hosted by BNM. Malaysia is also home to the Islamic Financial Services
Daud Vicary Abdullah President and CEO of INCEIF
Board (IFSB) the international standards setting agency for institutions offering Islamic nancial services. In 2010, the International Islamic Liquidity Management Corporation (IILM) was set up to facilitate efficient management of liquidity by Islamic financial institutions in the international financial system. The launch of the Bloomberg-AIBIM-Bursa Malaysia Sovereign Sharia Index (BMSSI) in early 2011 marked another signicant milestone in the development of the global Sukuk market. The establishment of the Thomson Reuters Ideal Ratings Islamic Indices in June 2011 was the rst Islamic benchmark that offers research-based Shariah screening based on globally accepted standards to investors, money managers and analysts across a range of Islamic instruments.
Most universities in Malaysia, either public or private, provide a wide spectrum of formal Islamic nance education, beginning with Diploma, Degree, Master right up to Ph.D. level, says Daud Vicary Abdullah. For example, the Universiti Utara Malaysia (UUM) has established Islamic School of Business which offers degrees at undergraduate as well as at Masters level. The International Islamic University Malaysia (IIUM) has the Institute of Islamic Banking & Finance which provides formal education for undergraduate and graduate levels and IIUMs Graduate School of Management offers MBA with specialisation in Islamic Banking. INCEIF itself offers a Chartered Islamic Finance Professional (CIFP) qualication, a Masters in Islamic Finance, a Ph.D. in Islamic Finance and Research, Consultancy and Executive Training.
VIRGINIA BLACKBURN info.uk@mediaplanet.com
IMPRESSIVE SKYLINE The Petronas Towers in Kuala Lumpur are the tallest twin buildings in the world and dominate the citys skyline
PHOTO: SHUTTERSTOCK
Promoting growth Packwood has been travelling to the Gulf for some years in order to encourage business in Bermuda, but she was building on ties that were already there. The former Bank of Bermuda, now HSBC Bermuda, has had a presence in Bahrain for decades. The Bermudian law rm Conyers Dill & Pearman has offices in Dubai and the Bermudan Elbow Beach Hotel is Saudi-owned. But such
Cheryl Packwood Chief Executive, Business Bermuda
IDYLLIC SETTINGS The island of Bermuda is a suprisingly active outpost for Islamic finance
PHOTO: SHUTTERSTOCK
has been the drive to win Islamic nance business that Bermuda now far outstrips all the other offshore centres in the region. It alone has issued guidance notes for the setting up of Islamic funds and disclosures and the role of responsibilities of the Sharia governing board, which were brought out by the Bermuda Monetary Authority last year. Packwood works hard to maintain the relationship, travelling to Dubai and Bahrain every year since 2008 and attending the World Islamic Banking conference in November last year. We understand the culture, she says. We pooled minds, put together an Islamic nance task force and brought clients to the area. Belaid Jheengoor, Director in the Asset Management Practice at PricewaterhouseCoopers Bermuda, says that the most popular instrument to be issued from the island is the GE Capital sukuk. Our customer base comes in two segments, he says. In terms of the target market,
the GCC is our primary focus, but we are also looking to the growing affluent Muslim population in other parts of the world, most notably the UK, France and Canada. The appeal of these instruments is much broader than the Muslim demographic: for some investors, they are seen as socially responsible.
Belaid Jheengoor Director in Asset Management, PWC Bermuda
He also believes that the global Islamic nance market has weathered the global nancial storm. The global market for Sukuk was increasing at a signicant rate until 2007, after which there was a tail off, he says. But it picked up in 2010 and by the end of this year we should see global issuances exceed the 2007 peak.
VIRGINIA BLACKBURN info.uk@mediaplanet.com
February 2012
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PROFESSIONAL INSIGHT
PROMOTING GROWTH Left: Entrepreneur James Caan at the UCI Qatar Investor Conference. He believes Western financial institution could learn a lot from Shariacompliant methods
PHOTO: PRIVATE
SHOWCASE
90 North Real Estate Partners, based in Mayfair, is a specialist in Shariacompliant real estate investment. In partnership with James Caan, fellow Founder Partners Philip Churchill and Nicholas Judd have concluded approximately 1.1billion of Sharia compliant transactions over the last decade.
The organisation establishes an investment strategy, then leads the purchase process, covering all aspects of achieving a successful real estate acquisition, including due diligence, nancing, legal and tax, all as part of an efficient and Sharia compliant structure. Islamic assets under management are rapidly approaching a $1trillion worldwide and I expect this to continue growing strongly - not just due to the rapid growth of the global Muslim population but the increasing sophistication of Islamic nance, relative security of assets and parity of returns available compared to conventional investment products, says Caan.
VIRGINIA BLACKBURN info.uk@mediaplanet.com
Had Sharia principles been more widespread, the crisis would not have been as catastrophic and would have been easier to manage
James Caan, Entrepreneur and Founder of Hamilton Bradshaw
CHANGE
As the dust continues to settle in the wake of the global nancial crisis, there is a growing perception that had the tenets of Islamic nance been more widespread, the damage to the global economy would have been nothing like as bad. Entrepreneur and former dragon on BBCs The Dragons Den James Caan, who founded the Hamilton Bradshaw private equity rm thinks so: If you look at the basic principles of Sharia-compliant investment, you see that it doesnt pay interest, but takes a share of the prots, he says. That means there must be some underlying protability in the investment, whereas the crisis was caused by highly complex derivative products often far removed from the underlying assets. Had Sharia principles been more widespread, the crisis would not have been as catastrophic and would have been easier to manage.
Crisis worse in the West Indeed, following Sharia-compliant principles, some of those toxic assets would never have existed in the rst place. If you look at countries that use Islamic nance, the crisis is not as severe as it is in the West, he says. The investment is in an underlying security, such as property or commodities, which is easy to understand, whereas with highly leveraged complex nancial instruments, the underlying quality is questionable. There is
also the question of transparency. The credit agencies were giving all these junk bonds AAA ratings, whereas under Sharia, there is a far greater system of checks and balances.
Financial discipline While he doesnt believe that all Western financial institutions will adopt Islamic finance as such, Caan does believe that they could learn a lot from Sharia-compliant methods. There is a question of nancial discipline, of recognising the importance of the quality of the underlying assets and their robustness to generate sufficient returns to make nance repayments sustainable, he says.
Strengthening Trust Any budding entrepreneurs wishing to raise funds from the Middle East should take that different approach on board, according to Nick Judd, Founder Partner of 90 North, the investment rm specialising in Sharia compliant real estate, of which James Caan is Chairman. The Middle East is risk-averse, he says. Business relations are based on trust and can take a long time to build. You cant raise money quickly it takes months, if at all. People also want to see businesses with an established management whom they can trust. In the Middle East, you have to be introduced the prospect of cold calling is no good, adds James Caan. If you want access, it is less about transactions, and far more about relationships. In the West, you produce a business plan, have a meeting and expect a response, but that will not work in the Gulf. Your approach must be very different from the West.
VIRGINIA BLACKBURN info.uk@mediaplanet.com
February 2012
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February 2012
Islamic Finance
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Syed Adnan Hasan is Master in Business Administration. He holds over 12 years of experience in marketing, and is responsible for the overall supervision of the marketing department, including planning and creating awareness about Takaful among the public. Prior to joining Pak-Qatar Family and General Takaful Companies, Mr. Hasan was associated with Leo Barnett, an advertising company. Since joining PakQatar, he has spearheaded many innovative marketing campaigns which have been geared towards introducing the concept of Takaful to the masses, a project which has met with outstanding success.
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Islamic Finance
industry. Business strategy of insurance companies includes massive sales team spread nationwide with very limited role of marketing. Marketing departments have been restricted to produce brochures and fliers, having no role in company direction and business strategy. A shift has been seen in India though, where private companies have taken lead to convert the industry into marketing-driven. Private companies, in India, in order to compete with giant such as LIC, initiated a series of aggressive marketing and promotional activities. A similar need exist in Pakistan where insurance industry is heavily relying on sales and completely sidelining marketing activities. This gives an ample opportunity to Takaful companies. They have the option to take lead in the industry with aggressive marketing targeted towards product penetration. Current life insurance penetration in Pakistan is 0.3%, leaving a massive untapped market for Takaful companies. With traditional mindset towards insurance or Takaful, it is not possible to increase penetration without a change in strategy. A field sales force, as big as a few thousand agents, will remain limited, whereas effective marketing strategies have potential to reach out to millions. Pak-Qatar Family and General Takaful have taken lead in this paradigm shift. Even in its nascent stage the company developed its Marketing and Corporate Communications department with seasoned marketers. Through their efforts they received Brand of the Year award in 2009 in recognition of that campaign and were able to establish Pak-Qatar Family and General Takaful as an international brand, where consumer and corporate can invest their trust. Another Pak-Qatar Groups achievement is it nomination in 2010 CPI Financials Best Islamic Branding award. It shows how a change is in process where a company from Pakistan has managed to bring the marketing standards to the level where they can compete with international brands. Efforts are being carried out under the umbrella of Takaful Association of Pakistan to promote Takaful as brand. A unified effort towards a comprehensive marketing strategy to promote Takaful is underway. Such measures will help promote Islamic financial institutions as a separate entity with its own brand identity and niche market. A similar project can be initiated on a global level where Marketing experts from Takaful industry can sit together and devise a plan for future growth and awareness. It can be named World Takaful Association.
February 2012
With traditional mindset towards insurance or Takaful, it is not possible to increase penetration without a change in strategy. A field sales force, as big as a few thousand agents, will remain limited, whereas effective marketing strategies have potential to reach out to millions
Business News
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Mohammed Amin
60
second interview
The lack of certainty when the contract is being made regarding the precise details of Shariah and the poor availability of high quality courts are the key reasons in my view why few contracting parties specify Shariah as their choice of law. Do you believe English law is the most popular when dealing with agreements adhering to Islamic principles? In my opinion English law is the most common choice when agreements are made to govern
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Market review
T
2009
30 Global Islamic Finance
he financial turmoil has put most of the markets and firms across the globe under a test of endurance and buoyancy. The unforeseen crisis hit sectors harder than ever expected and thereby resulted in a deterioration of a majority of global economies. The snow ball effect of the bubble revealed the vulnerabilities in the financial sector, requiring countries to undertake exceptional stabilization measures to prevent its financial systems from crashing and minimize the losses brought about by the downturn.
Consequently, similar to all industries in the GCC region, the Banking Sector witnessed a slump in its performance as a consequence of the deterioration in the banks investment portfolios and real estate exposure along with impairments of investments. Moreover, in order to mitigate the risk of the crisis effect on loans, banks have booked massive provisions as preemptive measures against the elevation in non-performing loans during Q3-08 and FY-09, which further weighed down on bottom line results.
Although the GCC Banking sector is seen currently to be far away from the soaring performance that has seen its total profit grow at a 4-year average of 22.2 per cent, the Sectors profitability was hit hard by the financial crisis during Q4-08 and FY-09. The Sector remained profitable, liquid and sound even though net profit recorded a contraction of 16.5 per cent and 7.9 per cent during FY-08 and FY-09 respectively, which was mainly due to high provisioning and impairment on investments. However, the foremost worries of the banking sectors performance lies in the great stress in property market and the high volatility in equity investments which would force most banks for further provisioning and impairments.
Loan Portfolios
Triggered by the liquidity squeeze along with prevailing tight conditions in the credit mar-
February 2012
Market review
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ket and deterioration of asset prices, aggregate loan portfolio of the GCC Banking Sector experienced a drop in annual growth rate from a record high of 36.6 per cent in 2007 to 30.3 per cent in 2008 and 3.0 per cent in 2009. This decline has been a direct result of banks implementation of conservative and stricter lending policies to avoid further provisions and impairments. GCC Banking Sectors asset quality indicators have seen gradual improvement over the period 2004-2007, yet considerably worsened during 2008 and 2009 with the inevitable increase in non-performing loans. Non- performing loans (NPLs) to gross loans improved from 2.27 per cent in 2006 to 1.91 per cent in 2007, well below the 4-year average of 2.67 per cent, yet worsened to 2.27 per cent and 4.04 per cent at the end of 2008 and 2009 respectively. Similarly, the Sector has maintained a high coverage ratio of its non-performing credit facilities (Provisions/Non-performing loans) over the same period with an average of around 119 per cent. However, the NPL coverage ratio decreased to 107 per cent in 2008 and further deteriorated to 82 per cent in 2009 compared to 121 per cent in 2007 as banks were forced to book additional provisioning amid the financial turbulence in the credit market.
The year 2009 was sturdy on the GCC banks seeing provisions and impairments recording USD 10.9 billion, out of which USD 4.12 billion were booked during Q4-09, while USD 6.76 billion during 9M-09. Provisions booked by Saudi & Emirati Banks contributed to the bulk of the whole provisions booked by banks in the GCC region; both sectors added USD 7.03 billion, representing around 65 per cent of total provisions booked during FY-2009. Moreover, provisions booked by Kuwaiti Banks amounted for USD 2.6 billion and represented 23.9 per cent of the total provisions during the same year. It is worth to note that the majority of the provisions were concentrated among few banks in the region as indicated in the table below. Abu Dhabi Commercial Bank and Emirates NBD lead
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GCC Banking Sectors asset quality indicators have seen gradual improvement over the period 2004-2007, yet considerably worsened during 2008 and 2009 with the inevitable increase in non-performing loans. Non- performing loans (NPLs) to gross loans improved from 2.27 per cent in 2006 to 1.91 per cent in 2007, well below the 4-year average of 2.67 per cent, yet worsened to 2.27 per cent and 4.04 per cent at the end of 2008 and 2009 respectively
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the pack with provisions booked representing 18.5 per cent of total GCC banks provisions, and around 48.5 per cent of total provisions for UAE Banks. KFH has the third highest provisioning in the region, corresponding to around 6.5 per cent of total GCC provisions. The top ten banks, as segregated by the amount of provisions booked, represent nearly 55.9 per cent of aggregate provisions booked for FY-2009. Up till recently, Banks and Financial Institutions across the region are in Balance Sheet Repair mode, with deleveraging, impairments and massive provisioning taking place everywhere. Banks that are going to not only survive but thrive will need to adopt more stringent risk management policies to improve its asset quality indicators and reduce the effect of any potential risk in the future.
to 24.0 per cent as of Dec-09 after declining to 19.8 per cent in 2008 from a high of 26.9 per cent in 2007. The improvement in GCC banks liquidity measure assures the strong and healthy position that the sector enjoys given the effect of the financial crisis. The loan-to-deposit ratio, set by Central Banks in the GCC region, varies among countries and plays a vital role in the lending policy of commercial and Islamic banks; In Abu Dhabi, the loan-to-deposit ratio as of Dec-09 has exceeded the mandated level set by the Central Bank of UAE which is currently at 100 per cent. Loan-to-deposit ratio for the banking sector in Abu Dhabi continued its upward trend over the last 2 years to reach a maximum of 101 per cent as of Dec09 up from 92 per cent at the end of 2007. This significant increase in the loan-to-deposit ratio has been fuelled by the growth in credit to finance real estate sector and the infrastructure projects along with the low growth rate in deposits over the same period; the surge in loan-to-deposit ratio during the period is mainly explained by the 38 per cent increase in credit facilities versus a 26 per cent increase in deposit base with banks. Fuelled by the economic boom in the country, Qatari Banks have also exceeded the limit set by the Central Bank of Qatar, which currently stands at 90 per cent, by around 760 bps. On the other hand, Saudi banks enjoy the lowest loan-to-deposit ratio which recorded 72.1 per cent as of 31 Dec-09 compared to a ceiling of 80 per cent set by the Saudi Arabian Monetary Authority (SAMA). This gives the Banking sector in Saudi Arabia an edge to expand its credit portfolio with a room to lend an additional USD 22.4 billion. Moreover, the banking sectors in Dubai and Kuwait both enjoy a room to extend additional credit of USD 9.2 billion and USD 6.3 billion without breaching the limit for loan-to-deposit ratio set by the Central Banks in both countries which stand at 100 per cent (for Dubai) and 85 per cent (for Kuwait) respectively. gif
Moreover, Banks in the GCC are subject to legally-mandated requirements by the Central Banks, intended to help them avoid a liquidity crisis and maintain an adequate capital to risk ratio (CAR) to ensure that Banks can absorb a reasonable amount of loss and are complying with their statutory Capital requirements. In this context, GCC Banking sectors measure of capital to risk weighted assets as indicated by the capital adequacy ratio (CAR) implies that Banks are well capitalized as they have a CAR above the level specified by its respective Central Banks; Saudi banking sector holds the highest ratio relative to the mandated level by SAMA.
Amid the protracted liquidity bubble, the GCC Banking sector showed no immunity but resistance in weathering the financial crisis. Sectors Liquid assets, which comprise cash and cash equivalents, deposits with banks and other financial institutions, public debt instruments amounted to USD 181 billion as of Dec-09 compared to USD 143 billion in 2008, and represented around 18.2 per cent of Banks total asset base. GCC Banks Liquid assets to total deposits ratio indicates that Banks are well handling the liquidity problem as the ratio stepped up
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Risk Management
Author: Thomas A. Timberg, Freelance Consultant, Nathan Associates Inc. Abstract: Since the representatives of the Shariah Bureau of Bank Indonesia responsible for the supervision and development of Islamic finance will focus on the experience and progress of Islamic banking in Indonesia, this article will focus on some questions about the impacts of that banking, particularly in rural areas, and aspects that the Bank Indonesia representatives will not focus on. Keywords: Islamic Banking, Indonesia, Bank Muamalat, Islamic Finance
Islamic Banking and Its Potential Impact Islamic banking is a worldwide phenomenon involving a variety of institutions and instruments, not one project or institution. In the past few decades, Islamic institutions and instruments have developed in many countries, including the United States. In certain countriesIran, Sudan, and Pakistanall or most financial intermediation conforms to Islamic Shariah (religious law) as defined by local authorities. All three of these countries also have banking authorities that govern the general level of charges and returns in the system and these are not usually market-governed systems. In most other countries, including Indonesia, Islamic transactions and institutions make up a small part of the total and must compete with conventional financial institutions. There is even considerable Islamic banking in the United States. If the terms and conditions of Islamic transactions differ too much from those of conventional institutions they become hard to sustain. The terms and con32 Global Islamic Finance
February 2012
ditions of Islamic institutions therefore tend to converge with conventional ones. Islamic instruments are simply a narrow group of familiar financing instruments. Any transaction, with any distribution of proceeds, can be conducted as a lease, a sale, a partnership, a fee-generating transaction, or a loan. Islamic instruments generally avoid loans. Though the scheduled distribution of proceeds may be the same as for a conventional loan, the legal risk in case of default is often different in the different forms of financing. Those who promote Islamic finance often prefer partnership arrangements in which profits or turnover is shared because this conforms more fully to the goals of Islamic banking. One goal of Bank Indonesia in promoting Islamic banking is to increase the proportion of financing involving such sharing. Nonetheless, more than 80 percent of Indonesian Islamic financing is in fixed-term forms, mirroring the pattern throughout the world. Many involved in Islamic banking would like to minimise the differences between Islamic
and conventional banking and thus they welcome fixed-term forms. However, because the instruments differ in some degree they typically require some adjustment from their conventional counterparts. For example, in Islamic transactions, the bank often holds the title of the property concerned. U.S. banking authorities have ruled this unobjectionable provided that title holding is only a matter of form to accommodate Islamic structures. Although U.S. and other banking supervision authorities have accommodated Islamic banking with few changes in procedures, some countries consider that this is not enough. They have moved to develop national and international Islamic institutions, money markets, bank regulators, deposit protection, bank accounting, and so on. Centres have been developed for all these matters for bank supervision in Malaysia, for accounting in Bahrain, and several academic centres, including centres at Harvard and Oxford universities.
Risk Management
The Example of Indonesia Indonesia, with the worlds largest population of Muslims, has come to Islamic or Shariah banking fairly late. Many of Indonesias Muslim leaders do not believe that commercial interest in its modern form is prohibited, although others do. After some false starts, Islamic financial institutions are developing rapidly and have the enthusiastic support of many young people and intellectuals. The work of the Shariah Bureau of Bank Indonesia demonstrates that Indonesia, especially in particular parts of the country, has considerable unmet demand for Islamic banking. Islamic banking in Indonesia has some unusual characteristics. Like most microfinance institutions in Indonesia, Islamic institutions, micro or otherwise, are generally private, for-profit institutions based on the intermediation of depositor funds secured on a competitive market. In this they are different from microfinance institutions in almost every other country in the world. They typically have no explicit social goal other than profit maximisation and conformity with Islam, though in some cases a social element is present, as we will see. Social impacts are thus the result of the market impacts of the Islamic institutions. Many Islamic institutions in Indonesia, particularly the Bait Maal Wat Tamwil (BMT) Islamic savings and loan cooperatives are located in rural areas and provide agricultural financing. Nonetheless, the focus of Indonesian Islamic financial institutions is typically urban and geared toward the financing of trading operations. There has been some discussion of Islamic banking for micro credit, but most documented experience that I know of is in Pakistan, where institutions charge a service fee to cover their costs, something that is not permitted now in many Islamic banking systems. In terms of agricultural finance, I have encountered only one institution, a BMT in Solo, that provided crop loans. This transaction, which involved a fixed repayment in kind, also might not meet the standards of many Islamic lenders. I am sure other crop loans exist. A couple of Islamic financial instruments are particularly According to one source, some particular Islamic financial models were traditionally designed for agricultural purposes. The lending of the various venture capital firms in Indonesia, the Modal Ventura, did support a number of agribusiness ventures on an Islamic, profit-sharing basis. The example is not necessarily an attractive one, however, because although repayment was frequently high, the profit-sharing element, in which low profits were reported, and the devaluation of the Indonesian rupiah, led to
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have grown from US$52 million to US$302 million but still accounts for only 0.26 percent of assets in the banking system. The figure is somewhat higher if we exclude the considerable assets of conventional banks that represent government recapitalisation bonds of one sort or another. Bank Indonesia has been moving to ensure that support institutions are developed for Islamic banks. I will present some data on the largest and oldest Islamic bank, Bank Muamalat, and the BMT. Bank Muamalat Bank Muamalats position as of December 31, 2002 can be seen in figure 1. Various small approximations were made; precise concepts are specified in Bank Indonesia sources. Bank Muamalat loans, according to its recent annual audited reports, are distributed among Islamic financial instruments as shown in figure 2. About two-thirds of the rupiah financing and half of the foreign currency financing are for less than one year. This is a high level of longer-term financing for a commercial bank. There is a trend toward Mudharabah. The average return on loans seems to be a little more than 10 percent, which is not high by Indonesian standards. Bank Muamalat splits gross revenues with borrowers, not net profit as in other Islamic institutions, and almost always insists on collateral. Its sharing, non-fixed term lending is thus easier for it to manage than it would be in some other countries. The bank made a profit when many Indonesian banks were losing money. It used to have a higher percentage of non performing loans, but the situation appears to be improving. The pattern of outside funds deposited in Bank Muamalat by instrument can be seen in the following figures. The cost of outside funds seems to be roughly half that charged borrowersagain somewhat low by Indonesian standards. Bank Muamalat reports that despite its relatively low payment of 1012 percent on deposits, while other banks were paying in the mid-20s, the nominal amount of deposits declined by only 15 percent. This reflects the strong customer loyalty enjoyed by all Islamic financial institutions. In recent months a number of banks have opened or announced that they will shift to Islamic principles or open Shariah branches, so competition for Bank Muamalat is likely to increase. Bank Muamalat has a specifically social focus, as noted in its 1998 annual report. Its mission is to become the catalyst for Islamic financial institution development, and enhance its role in small scale industry finance. Almost 17 percent of its lend2012 February Global Islamic Finance
Thomas A. Timberg, Freelance Consultant, Nathan Associates Inc. Dr. Timberg has more than 40 years of experience concerning issues of economic and social development. For more than twenty years he was employed by Nathan Associates Inc., with whom he continues to work as a freelance consultant since his retirement. He has been particularly associated with work on the financial sector, SME development and microfinance. He is at present Senior Adviser and Access to Finance Specialist for the World Bank supported Micro, Small and Medium Enterprise Project in Nigeria with components concerned with access to finance, business development services, investment climate, and public private dialogue. He is also Chief of Party for a World Bank supported study of Shariah Finance in Indonesia.
the recapitalisation of these venture capital firms. Islamic financial institutions in Indonesia include the Bank Muamalat Indonesia, which has been functioning since 1992, several new Islamic branches of regular commercial banks, one other newer commercial bank, 80 Bank Perkreditan Rakyat Shariah (BPRSsmaller banks limited to borrowing and lending in limited areas), and 2,470 BMT (of which a few are reported to be registered with the Ministry of Cooperatives and Small Business). The Islamic commercial banks and BPRS file frequent and detailed reports with Bank Indonesia and thus produce reliable and current statistics. This is not yet the case with BMT. The amount of funds in Islamic institutions has been growing rapidly, as the paper, The Blueprint of Islamic Banking in Indonesia, which is also being presented at this session, illustrates. Assets in Islamic banks
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Risk Management
Dennis Cox, CEO, Risk Reward Limited ing goes to small and medium enterprises, which is above average for commercial banks. Bank Muamalat intends to selectively [distribute] its financing with emphasis on small businesses by using its Shariah financial institution network, 29 of the 78 BPRS, and 100 of the 2,000 BMT, and aspires, as well, to serve the kopontren (registered multipurpose cooperatives connected with pesantren, Islamic school dormitories), which often have a savings and credit unit. Bank Perkreditan Rakyat Shariah The roughly 80 Shariah BPRS have Rp 80.5 billion in total assets. They were created as a legal category under the 1988 banking reforms. They are permitted to borrow and lend money but do not have access to the payments system, have lower capital requirements than commercial banks, and are subject to inspection by Bank Indonesia. BPRS have been growing rapidly (as noted in the Bank Indonesia Blueprint) although they still constitute a small portion of the total. Bait Maal Wat Tamwil Islamic Savings and Loan Cooperatives The BMT savings and loan cooperatives follow Islamic procedures as well. So far only a few of these are registered with the Ministry of Cooperation and Small Enterprise and are subject to its rules. The BMT, like the BPRS, more or less follow the general rules for savings and loan co-ops. Most BMT are associated with Induk Koperasi Syariah BMT (Inkopsyah BMT), which was established by 18 registered Islamic BMT and 2,200 unregistered precoops. Other BMT are associated with other organisations, especially the foundation Dompet Dhuafa and some religious organisations, or are independent. The registered cooperatives are both freestanding savings and loan cooperatives (Koperasi Simpan PinjamKSP) or units in broader cooperatives (Unit Simpan Pinjam USP). I visited one Islamic USP that was part of a multipurpose cooperative that operated a store and garment factory as well as the USP; another was part of a kopontren. BMT, even free-standing ones, typically are closely associated with other Islamic institutions. The Mohamadiya Polyteknik in Karaganyar told us that it has five BMT associated with it. The legal status of BMT, unless they are registered as cooperatives, is ambiguous, although the Ministry of Cooperatives and local governments often work with them. Pusat Inkubasi Bisnis Usaha Kecil (Center for Incubating Small Businesses [PINBUK]) has helped develop a regulatory system for them, and USAID contributed to a national seminar on the subject. A strong consensus exists on the need for some regulatory scheme to be developed, but the form that such a scheme would take is still unclear. As of June 1998, there were 330,000 members in 2,470 BMT with Rp 187 billion in outstanding loans in this network. The number of BMT rose from 300 at the end of 1995 to 700 at the end of 1996 and 1,501 at the end of 1997. The BMT currently have 8,253 paid staff, mostly university graduates, who have been trained by PINBUK. As of June 1998, of the $20 million of outstanding BMT loans, the overwhelming amount was short term, averaged $100 per loan, and went to micro enterprises. About half of the borrowers are reported to be micro enterprise groups. Some of these are possibly guarantee groups of individual micro entrepreneurs, but most are presumably classic NGO group enterprises. The borrowers are predominantly small traders. This $20 million of small lending was 83 percent funded by the savings of members, and 14 percent from the capital of the cooperatives. Apparently, no funds came from BPRS, though some funds have come from Bank Negara Indonesia, a government bank, Bank Maumalat, and some government enterprises, especially Pertamina. The BMT appear to be 100 percent lent up, with no liquid funds in bank accounts or cash. So far, overdue amounts are negligible; less than one-third of amounts due are more than a month overdue. Kopontren Cooperatives Connected with Pesantren The 1,500 kopontren connected with pesantren are registered with the Ministry of Cooperatives. Most of their savings units do not follow the Islamic system, although some are beginning to do so: One hundred to 300 of the kopontren savings units are estimated to have shifted to Islamic banking. The Islamic financial institutions look on them as an important target market segment, but much of the kopontren leadership does not want to identify solely with Islamic financial institutions. Because the pesantren are mostly in rural areas, their cooperatives and credit are frequently connected with agriculture. Findings and Recommendations Though Bank Muamalat and the BPRS offer a full range of Islamic deposit and credit products, most Islamic credit in Indonesia has taken the form of trade finance (bai al salaam, bai bitsama ajil, istishna, or murabaha), though the proportion declines as the partnership or trust provision of working capital (musyarakat and mudharabah) increases. Rates (charged and paid) differ considerably between institutions and from time to time, but the average rates on Islamic credit often approximate those of other institutions. Although Bank Muamalat
What are the advantages and disadvantages of using risks tools to manage risks in Islamic Banks? The only disadvantages are that the tools may not be as effective as in traditional banks due to the limited ability to validate the output to ensure that the model has good predictive ability. However this should not reduce usage, rather it should lead to a review of all output. What are the main differences between the risk management in Islamic Institutions and those appropriate for conventional banks? The key difference is that the Shariah committee are involved throughout the product process. The risk function needs to ensure that any conclusion that they come to also incorporates the Shariah element and therefore solutions need to be compliant with the rules in the country. Of course the variation in what is acceptable globally does make this more complex for the institution operating globally. What are the most challenging issues with risk management in Islamic Institutions? Management of liquidity risk in countries where there are limited products available to offset the risks. Secondly there is the risk posed by potentially increasing interest rates since Islamic finance to date has not operated in such an environment.
February 2012
Market Review
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Has India finally reached an inflexion point for Islamic finance or will this be another trial balloon bursting before achieving the right altitude?
It will take time to have an authorised deposit-taking Islamic bank in India. Appropriate authorities should be studying the experience of non-Muslim countries, like the UK, Singapore, France, Hong Kong, Luxembourg, among others which have achieved prominence as wholesale Islamic finance hubs
The recent launch of an Islamic equity index by the Bombay Stock Exchange (BSE), TASIS Sharia 50, received more media coverage globally than India Islamic indexes from the index providers. A Google search of Islamic index India provides 279,000 results, comparable to Islamic index Malaysia (270,000), Pakistan (274,000), Saudi Arabia (272,000) and Turkey (259,000), and almost ten times more than the GCC (36,500), at the time this article was written. The Kerala High court also recently dismissed a petition challenging the state governments plans to co-promote an Islamic 8 finance institutionthe court
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observed that although the institution was based on the principles of a religion, its motive was not to propagate the religion, and the states participation in it was purely based on commercial prospects. Therefore, there is no need to object the states participation in it, reported the Times of India.
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Levelling the playing field Assuming the matter is resolved and no further appeals are filed, the real work now starts of levelling the regulatory and tax playing fields for Islamic finance for consumers, and the corporate financing and investing sides. If there is no financial cost to being a Muslim, meaning financing or investment returns are conventionally competitive, then Indian Muslims and non-Muslims should gravitate towards Islamic finance. gif
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Risk Management
did not suffer as severely as many large given in the context of a movement to regulation and supervision that accommobanks from the financial crisis, it did require assist them; but date its forms while ensuring that their unsome management change and has begun Requires some adjustment, mostly for- familiarity is not exploited to defraud clients. healthy growth again. BPRS and BMT have mal, of techniques and regulation to Normal prudential and supervision norms been growing despite the monetary crisis. take account of Islamic values. should be adequate. The BMT have mobilised a great deal of savings and provided financial services to Islamic finance, as part of a financial sec- The IMF study does, however, suggest that a large constituency, many of whom have tor development strategy, ought to be en- higher capital adequacy ratios and more never been served before. They have a large couraged, mainstreamed, and adjusted to. detailed disclosure requirements may be prospective market and the advantage of An IMF study on the matter concludes that appropriate. The paper suggests a modibuilding on the informal network created by Islamic finance should be encouraged by fied CAMEL (capital adequacy, asset quality, the Islamic institutions with which management, earnings, liquidthey are associated as well as the Figure 1 ity) system of banking supervimoral sanction that comes with sion for Islamic banking. Special that affiliation. However, as largely risks are the generally uncollatNonperforming Bank Assets Credit Deposits Loans (%) unsupervised and not guaranteed eralized nature of Islamic bankinstitutions, many of which are ing and greater risks in the profBank Muamalat 238 190 190 4.8 run by relatively inexperienced it-sharing forms of lending. To Bank Mandiri 28,103 7,101 20,444 6.6 personnel using new methodolothe extent that Islamic banking Banking System 123,556 45,556 92,778 8.1 gies, they clearly present prudenis collateralised or does not ential dangers, though not different gage in profit-sharing forms, the in principle from those posed by Figure 2: Bank Muamalat Loans by Type of Shariah Instrument issues are less serious. all savings and loan cooperatives (Rp billion) in Indonesia. Nonetheless, the Islamic banks Financing Instrument 1998 1997 are often more comfortable with For Rupiah In form rather than substance specialised regulations and inBai Bitsaman Ajil 141 179 Islamic finance is familiar. Many frastructure that recognise their Murabahah 83 130 of its instruments are the same peculiarities. The BMT in particMudharabah 68 29 as those used by other financial ular need adequate supervision Musyarakah 13 12 institutions leasing, advance purand some guarantee for their Al Qardhul Hasan 1 1 chase, etc. The difference lies depositors, though not as elaboTotal 306 351 in the first instance in the social rate as those provided commerFor Foreign Currencies impulse for sharing responsibility, cial banks and BPRs. Bai Bitsaman Ajil 78 86 risk, and property. Consequently, Murabahah 71 21 fixed-interest transactions in Islamic banking should be 7 1 Mudharabah which risk is assigned entirely to mainstreamed by maximising Total 156 108 the borrower are avoided. More the interaction between Islamic Grand Total 462 459 important for participants, Isinstitutions and the rest of the lamic finance represents part of financial system, subject to Figure 3 a divinely sanctioned economic the constraints of Shariah. The Savings and Returns 1998 Amount 1998 Returns gestalt into which they fit. financial system and its regulation should be adjusted as Mudharabah Time 221 28 Thus Islamic finance necessary to accommodate the Deposits Enables financial services to other two thrusts.Donors should Securities *** 23 an otherwise underserved ensure that their assistance to Mudharabah Savings group, including small, rural, financial system development 103 7 Deposits and agricultural producers; includes Islamic financial instiWadiah Deman Furthers a social thrust to tutions. This will help include 68 3 Deposits assist smaller producers otherwise excluded groups and Others 3 and consumers and is often avoid regulatory loopholes. References and Further Reading
Financial Times, March 25, 2003, inter alia. Mahmoud Amin El-Gamal, A Basic Guide to Contemporary Islamic Banking and Finance, June 2000, at http://www.ruf.rice.edu/~elgamal/files/primer.pdf Zamir Iqbal, Islamic Financial Systems, Finance and Development, June 1997 V. Sunderarajan and Luca Errico, Islamic Financial Institutions and Products in the Global Financial System: Key Issues in Risk Management and Challenges Ahead, IMF Working Paper No. WP/02/192, Washington, D.C.: IMF, 2002, at http://www.imf.org/external/pubs/ft/wp/2002/wp02192.pdf Perbankan Shariah: Islamic Banking Statistics, Bank Indonesia, December 2002. Bank Indonesia, Blueprint of Islamic Banking Development in Indonesia, http://www.bi.go.id/bank_indonesia2/utama/publikasi/upload/syariah%20blue%20printengl.pdf Comptroller of the Currency, Administrator National Banking, Office of the Counsel, NY. Interpretative Letter #867, November 1999, 12 USC 34 (7), 12 USC 29; No. 806, December 1997, 12 USC (7), 12 USC 371. From bibliography at http:/www.failaka. com/Failaka/20Research.html Dr. Amin Aziz, The Development of Micro Enterprise Institutions in Indonesia: The Case of National Board of Revenue Sharing Micro Enterprise Cooperatives (Induk Koperasi Syariah Bmt, Baitul Maal Wat Tamwil), presented at the Symposium of the APEC Center for Entrepreneurship, Jakarta, August 10, 1999. Luca Errico and Mitra Farahbaksh, Islamic Banking: Issues in Prudential Regulations and Supervision, IMF Working Paper, March 1998. Operations and Government Debt Management under Islamic Banking, IMF Working Paper, September 1998. These documents can be accessed at http://www.imf. org/external/pubind.html V. Sundararajan and Luca Errico, op. cit., pp 2122.
February 2012
Interview
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What are the benefits of Salam and how has it developed? Tural Mammadov: A Salam contract is characterised by the seller agreeing to supply specific goods to the buyer at a future date in exchange for an advanced price fully paid in cash at spot. Salam is beneficial to the seller, because he receives the price in advance, and for the buyer also, because normally, the price used in Salam is lower than the price in spot sales. The Salam sale has the flexibility to cover the needs of various entities and is widely used to finance the export of commodities by purchasing commodities on Salam and then selling at higher prices upon receipt. Salam can also be used as a hedging instrument, if an increase in prices is expected and traders would like to minimize this risk.
Additionally, it is securitised under Islamic bonds (Sukuk). As an example, State Bank of Pakistan announced in October 2011 that it has developed a model Islamic product based on the concept of Salam to meet the production finance (working capital) needs of the farming community.
Financing entities which purchase goods through Salam can also enter into parallel Salam, in order to minimize its price risk exposure, using same kind of commodity, without making one contract depending on the other. Salam has also spread among Micro Finance Institutions, as a means of financing farmers.
the Central Bank of Bahrain launched a successful US$750 million Islamic Sukuk the issue was eight-times oversubscribed, and as a result, the original issue size has been increased to US$750 million from a US$500 million target
It is also worth mentioning that the Central Bank of Bahrain launched a successful US$750 million Islamic Sukuk denominated in US dollars, which was the first sovereign Islamic Sukuk issued in the region in 2009. The issue was eight-times oversubscribed, and as a result, the original issue size has been increased to US$750 million from a US$500 million target. They were aimed at broadening the depth and liquidity of the market and aluminium has been used as the underlying asset of the contract.
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Interview
February 2012
As financial institutions apply know your customer systems, I think, in turn, investors also should apply know your financial institution or trust your financial institution systems
What advice would you give to people wanting to invest in Islamic finance? Mahir Humbatov: Islamic Finance - I would call it F&F: a great combination of Faith and Finance. The recent financial crises showed the world what happened to over-leveraged firms that produced volatile returns, gave uncertain reports, signed ambiguous contracts, made over risky transactions, sold off loans, proposed interest-bearing debt and paid minimal attention to prudential regulation, making Islamic finance very attractive to non-Muslim as well as Muslim investors. For these reasons I think that Islamic financial products may be of interest nowadays to cautious investors burned by the crises. The main thing investors should understand is that Islamic finance is not a replacement for conventional finance, but rather an alternative. It should be noted that paying minimal attention to prudent regulation would affect any form of finance Islamic or conventional. That is why in addition to the advantages of Islamic Finance and its success over the crises there also should be considered prudential and methodology issues both globally and in different countries. The majority of defaults that happened in Islamic Finance were the result of a lack of prudence, methodology and control over those investments. In this regard, Islamic financial institutions should be more careful while considering projects submitted to them. Professional investors should invest in areas where they are highly knowledgeable and experienced, and they should actively measure and manage the investment risks and take actions to reduce them. Moreover, both sides investor and intermediary should choose the right instruments to fund their projects with. For this purpose, even ordinary people should have some fundamental understanding in Islamic financial matters. They should not be scared from Arabic terms used in Islamic finance and should try to learn them not only by heart but with some degree of depth also. In my experience, I met some Muslim bankers who could engineer new types of Islamic financial instruments like muharaba, mudafaa and so on. I feel some reluctance, unwillingness and unawareness of people in the Muslim world in regards to Islamic finance.
It would be beneficial for Islamic financial institutions to have some money allocated for training of local personal and scholars in some Muslim or enlightened non-Muslim countries. Moreover, investors would do better to keep in close touch with their Islamic financial institutions in order to understand their progression or regression. As financial institutions apply know your customer systems, I think, in turn, investors also should apply know your financial institution or trust your financial institution systems. Besides, I think some specific institutions should be introduced to the Islamic finance world, such as pension funds, asset management companies, venture capital firms, private equity firms, as well an increase in Halal industry related activities. If investors would be willing to invest in these types of institutions, I think, the early bird investors could create some awareness and attract others and increase demand. Further, I think, Halal industry may have a great impact on the development of Islamic finance. Islamic finance and Halal terms should be developed side by side as they are two halves of a whole. Today, there are too many small sized Islamic financial institutions around the world, which I believe is not good for the industry. If an Islamic financial institution declares bankruptcy it may actually result in a systemic risk for the young Islamic finance industry. Therefore, I would advise that owners of these small institutions to get together and deal with mergers and acquisitions. Accordingly, it can create new investment opportunities in the industry. Even though Islamic finance could show its advantages during the crisis I do not believe that one cannot basically say, here is the future for any new investments, and the world will react to him/her. For this purpose, in addition to building the industry, one has to also promote it, and then continually promote it again and again as I did whilst in government, and continue to do so now in non-government sectors in Azerbaijan and other Commonwealth of Independent States (CIS) countries. In this way, it will be possible to get closer to an ideal Islamic financial system in the world where one could put faith and finance together.
Interview
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Mahir Humbatov, Co-founder, WAED (World Association for Ethics and Development)
Whatever the degree of success of individual Islamic banks, they have so far failed in adopting PLS-based modes of financing their businesses
What impacts has Mudarabah made on the Islamic banking industry? Rashad Tanriverdiyev: Within the Islamic Finance System framework, the most active alternative formula to conventional banking, based on charging and receiving interest, is the financing arrangements on the profit and loss sharing (PLS) partnership basis, which is called Mudarabah. This is essentially an agreement fundamentally complying with Islamic principles (primarily through a basis of trust) in between at least 2 parties, with one of them providing whole capital fund, called rab-al-mal/principal, and another is providing its financial knowledge in accordance with technical and business skills, called Mudarib. However, the expected profit is divided upon previous agreements and in case of losses, the whole responsibility is on the principle side only if proved that agent used the deal for wrong purposes. If we look at the brief history of the Mudarabah instrument, it was practiced by the Arabs long before the advent of Islam, it has even been proved that Muhammad (PBUH) travelled before his prophecy to Syria as Mudarib using the capital of the mother of the believers Khadeeja (RA). There is a consensus among Muslims on the legality of Mudarabah over different ages. Mudarabah is implemented in the two following different ways: 1) Mudharabah is considered as an essential mode of finance adopted by Islamic banks in dealing with their depositors who tender their money to be invested by banks as Mudharib; 2) Islamic Finance Institutions (IFI) use this mode with the investors who are able to work like engineers, traders, craftsmen, etc. whereby banks provide the adequate finance as a capital owner in exchange of an agreed-upon share in the profit. As per to the 1st point shown above, the Mudarabah deposit are divided into 2 groups restricted and unrestricted investment ac-
counts which are practiced more by the IFI and give more advantages despite the high level risks associated with the instrument. As for the investment accounts facilities, the principle of Mudarabah is the only principle used by the IFI in all countries not depending on Sharia attitudes. Savings accounts facilities operating on a Mudarabah principle are more attractive to depositors. In respect to the second point of the application area of Mudarabah instrument mentioned above, as a financing facility, IFIs are widely used as the instrument in financing working capital. Although the principles of Mudarabah are recommended by Islamic scholars, no Islamic bank surveyed in this study is channelling more than 10% of the total financing portfolio along the rest of the modes of financing. Nearly all IFI investment companies and investment funds offer trade and project finance on mark-up, commissioned manufacturing, or on leasing bases. PLS features marginally in the practice of Islamic banking and finance. Whatever the degree of success of individual Islamic banks, they have so far failed in adopting PLS-based modes of financing their businesses. Even specialized Islamic firms, like Mudarabah Companies in Pakistan, which are supposed to be functioning purely on a PLS basis, have a negligible proportion of their funds invested on a Mudarabah basis. According to the International Association of Islamic Banks, PLS covers less than 20% of investments made by Islamic banks world-wide. Likewise, the Islamic Development Bank (IDB) has so far not used PLS in its financial business except in a few small projects. These distinctive characteristics of Mudarabah (where fiduciary risk plays a significant part), as specified by classical Islamic jurisprudence, illustrates the underlying reasons why such arrangements are not compellingly attractive to rational financiers on a PLS basis.
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THE LEADING
Abstract: The race to become a leading global Islamic financial hub is being exhibited by many countries around the world, who wish to tap into the lucrative opportunities of Islamic banking and finance. In this article Global Islamic Finance magazine (GIF) will take you through the most unprecedented countries in the Islamic finance industry, following the successes and various opportunities that the industry presents. There have been many developments of facilities in the Islamic banking and finance arena and GIF will give you a comprehensive insight into the major Islamic financial hubs of today, in addition to giving you the knowledge of what it means to be an Islamic financial hub in the 21st century. There are many Islamic financial hubs around the world from Malaysia to the Middle East and there are various opportunities for the expansion and growth of these potential countries. Even developing countries around the world have shown interest in the ethical Shariah-compliant methods of financing which have spurred renewed interest around the world. The Islamic finance and banking industry is estimated to be worth over $2 trillion by 2012 and this number is set to increase with the unprecedented growth rate of the industry. This article is a must read for any business professional, CEO or investor wishing to tap into the major Islamic financial hubs. Keywords: Islamic Finance Hubs, Islamic Banking, Malaysia, Middle East, Europe, Sukuk, Takaful, Shariah Compliancy, Opportunities, Investments
February 2012
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Key Islamic Financial Activities within Malaysia There are also various opportunities in Malaysia for Shariah-compliant investments in the sectors of real estate, infrastructure and many more. In Malaysia the CIMB Wealth Advisory has managed Islamic investment trust funds which have proven to have excellent returns over the years, partially explaining its success. The facilitation of key developments and investments make Malaysia a competitive player in the Islamic finance and banking field and with number one hub for the Islamic financial world. Qatar: The Major Financial Hub of the Middle East Qatar holds a predominant place as being a successful Islamic financial hub due to the fact that it opens up opportunities in the following sectors of Islamic finance as outlined in Figure 4.
From all the sectors that are mentioned in Figure 4 the most profitable areas for investments in Qatar have been from the Sukuk, Takaful, Infrastructure and Real Estate sectors. There is also scope for the energy and resources field which has been developing rapidly in recent years. Qatar Islamic Bank (QIB) also demonstrated an emphasis on creAt the current moment it is possible to invest ating more investment deals and has shown your wealth in an investment project through their support in funding more projects. Qathe Bursa Malaysia as the company is a sin- tar Islamic Bank had reportedly said that it gle exchange group, and is designed to meet would continue to help to fund more projects the growing demands of both foreign and lo- both regionally and internationally. QIB has cal investors. strived to consolidate its participation in the national economy through its funding of macro-companies in a Which countries are new trend intended to Figure 1: Shariah-Compliant Principles of Islamic Finance for Major Hubs considered successfurther consolidate its ful Islamic financial leading role in financhubs? ing national projects, Prohibition of Riba (interest) There are many counChairman Sheikh and uncertainty tries around the world Jasem Hamad Jabor that are considered Al Thani said. QIB, Qato be successful Istars second-largest lamic financial hubs lender by market value, Profit Sharing/Risk Prohibition of Existence of underlying and these countries signed in the first quarSharing Forbidden Assets asset are listed in Figure ter a memorandum of 2. One of the major understanding, or MoU, renowned hubs for with South Korean broIslamic finance is Maker Woori Investment & Figure 2: Successful Islamic Financial laysia, which has an unprecedented amount Securities and said it would have 30 domesHubs of opportunities for Islamic investments and tic branches by the end of year, after adding development of Shariah-compliant banks, four more to its existing network in 2010, Malaysia project finance and more. the bank said in the statement.
Qatar
Figure 2 outlines some of the successful Islamic financial hubs by country, with Malaysia at the top swiftly followed by Qatar and other countries in the Gulf Cooperation Council (GCC). There are many more emerging hubs but figure 2 outlines the currently predominant hubs of Islamic finance. GIF magazine will now look at these successes of the major Islamic financial hubs in facili-
Saudi Arabia Dubai Abu Dhabi Bahrain Luxembourg South Africa Indonesia
During this first quarter, Qatar Islamic Bank signed a memorandum of understanding with Woori Investment and Securities Inc. with the aim of facilitating mutual cooperation between the two parties in the search for suitable financial and investment opportunities in the Korean, Asian and Qatari markets, QIB said.
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spread its wings not only in the UAE but also globally. Both Abu Dhabi and Dubai have a bright future ahead in the market for Islamic wealth management services. Currently Abu Dhabi Islamic Bank as well as Dubai Islamic bank offer excellent services which cover most Islamic wealth management areas. These areas include Sukuk, Equities, Treasury Markets, Commodities, Mutual Funds, Real Estate Advisory, Trust, Private Equity and other Shariah-compliant opportunities worldwide. The UAE such as countries like Saudi Arabia is also spearheading in the race for Islamic financial hub. The UAE holds innovative developments in the Sukuk and Islamic banking sector which is why it provides the ideal portal for profitable investments which could see major returns in years to come. The UAE was also responsible for the worlds first Shariah-compliant real estate fund as in 2007 NCB Capital launched Aahli Global Real Estate Fund, a fund that invests in companies whose activities are in real estate development across the world. The UAE, Abu Dhabi and Dubai provide the perfect abode located in a predominantly Muslim population with excellent demand for Shariahcomplaint facilities the country can further prosper from becoming major Islamic financial hubs. South Africa an African Hub for Islamic Finance Africa is home to more than 412 million Muslims and the South Africa has much scope for Shariah-compliant project financing deals. South Africa has one fully-fledged Islamic bank at the time of writing and the major four South African banks currently have existing Islamic finance offerings or are looking to establish an offering in the upcoming future. The only basic banking products include vehicle and asset financing are available. While investment products are limited, a number of Shariah investment funds are available in the South African market. One of the largest Islamic project financing deals made with South Africa in collaboration with many other countries such as the Middle East, Asia and African continent was the Equate project. The Equate petrochemical project was a joint venture between Union Carbide and a subsidiary of Kuwaits national oil company. KFH created the Islamic tranche using the Istisna Islamic financial instrument in July 2005. South Africa is well-positioned to promote the development of this industry in Africa given our robust regulatory and legislative structures, strict risk management frameworks as well as governance and compliance structures, says Zuhdi Abrahams, Director in Financial Services at PwC.
2012 February Global Islamic Finance
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South Africa has significant scope to make further project financial deals in the sectors of infrastructure and energy as well as health and education which is much needed for the countrys economy to prosper. The developments and facilitation of Islamic finance so far in the country give South Africa the potential to develop itself as a predominant Islamic financial hub of the African continent and further spur success of Islamic finance in the African region. Luxembourg leading the way for Islamic Finance Luxembourg has made significant progression in leading the way for the Islamic finance and banking sector in order to establish a sound platform for Islamic project financing. Luxembourg was the first European stock market in the whole of Europe to launch Sukuk on the stock market. Luxembourg was also the first to be admitted to the European Member State to the council of the Islamic Financial Services Board. Luxembourg have implemented ways to ensure jurisdiction issues are dealt with by affirming the tax authorities which have confirmed the tax treatment of Islamic finance techniques by a tax circular on January 12th 2010. Serene Shtayyeh, PwC Luxembourg partner and head of the Middle East and Islamic Finance group at PwC Luxembourg said that, The domiciliation of over 40 Shariah-compliant funds, more than any other European country, and the listing of 16 Sukuk on the stock exchange, second in Europe only to the UK. Sohail Jaffer, Deputy CEO, FWU Global Takaful Solutions Dubai added that, I believe that Luxembourg has the first mover advanReferences and Further Reading
There is a bright future for the scope of Islamic financial hubs around the world from Malaysia to the Middle East. Countries are excelling in spurring forward the Islamic finance sector and creating a diverse method of implementing and facilitating Islamic banking and financial products. In addition various countries around the world are tapping into the key investments that the Islamic financial and banking world has to offer. Many Muslim and non-Muslims alike prefer the ethical methods of Islamic finance and banking as a highly ethical alternative to conventional debt ridden finance options, which involve interest. Due to the prohibition of interest in Islamic finance countries around the world can cater for a new market and many countries such as the Islamic financial hubs mentioned in this article have successfully promoted the sector. As an investor, business professional or CEO you can start looking for ways in which you could utilise your wealth to make key Shariah-compliant investments in your preferred country of choice and subsequently you can balance out which country you feel has the most opportunities for your specific investment idea. The future looks promising for Islamic financial hubs worldwide as many global investors are seeing the benefits of investing and facilitating the industry in a Shariah-compliant manner in comparison to conventional financing and banking which has often left investors heavily in debt. GIF has given you a comprehensive insight into the major Islamic financial hubs and their individual successes and hopefully there will be more developments of Shariah-compliant hubs around the world in the years to come.
Bursa Malaysia (2011) Islamic Markets, Website and source article Retrieved from: http://www.klse.com.my/website/bm/products_and_services/islamic_capital_market/ AME Info (2010) Abu Dhabi Islamic Bank Launches Wealth Management Service Retrieved from: http://www.ameinfo.com/243199.html Investing in Real Estate Investment Trust: REIT Islamic Funds in Malaysia (2010) Retrieved from: http://www.horlic.com/investing-in-real-estate-investment-trust-reit-listislamic-fund-in-malaysia-2010/ Z. Jones, Qatar Islamic Bank to finance more projects (2010) Gulf News, Retrieved from: http://gulfnews.com/business/banking/qatar-islamic-bank-to-finance-moreprojects-1.613023 AME Info (2008) Shariah-compliant investments bode well for investors in the MENA region, say experts at HSBC Amanah seminar, Retrieved from: http://www.ameinfo. com/146682.html Bahrain Sukuk Attracts $4 Billion, Trade Arabia (2009) Article Retrieved from http://www.tradearabia.com/news/BANK_162833.html Kipp Report (2010) Dubai Islamic Bank in Shariah-compliant REIT joint venture Retrieved from: http://www.kippreport.com/2010/11/dubai-islamic-bank-in-sharia-compliant-reit-joint-venture/ AME Info (2009) Rasmala Investments Saudi launches Shariah Compliant Saudi Equity Fund. Retrieved from: http://www.ameinfo.com/204999.html Sino Gulf (2011) Investment Strategy Retrieved from: http://www.sinogulf.com/en/section/portfolio/investment-strategy Ido Shariah (2010) Top Performing Shariah Investment Funds Retrieved from: http://www.ido-sharia.com/ido_group_tier.aspx?gid=22 AME Info (2009) Khalijia Invest commence activities as Shariah compliant investment company Retrieved from: http://www.ameinfo.com/218533.html The Investment Authority (2011) QInvest CEO Sees Qatar Sukuk, Probably IPOS in 2011 Retrieved from: http://theinvestmentauthority.com/banking/qinvest-ceo-seesqatar-sukuk-possible-ipos-in-2011/ South Africa Positioning Itself As Islamic Finance Hub (2010) How we made it in Africa Retrieved from: http://www.howwemadeitinafrica.com/south-africa-trying-toposition-itself-as-africas-islamic-finance-hub/9461/ South Africa Ideally Positioned as Gateway to Islamic Finance (2010) PWC Retrieved from: http://www.pwc.com/za/en/press-room/gateway-to-islamic-finance-in-africa. jhtml Luxembourg a prime location for an Islamic finance hub in Europe (2010) Gemengen, Retrieved from:http://www.gemengen.lu/2011/05/16/luxembourg-%E2%80%93a-prime-location-for-an-islamic-finance-hub-in-europe/?cat=63 Islamic Finance in Europe: Opportunities, Trends and Challenges (2011) Amerella Legal Consultants, Retrieved from:http://vae.ahk.de/fileadmin/ahk_vae/Events/ Veranstaltungen_Dubai/Workshops/Amereller_Presentation__Compatibility_Mode_.pdf
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AN IDEAL
A Look at Practiced Islamic Finance Islamic finance is a growing industry which is constantly evolving and has its growth amid even the great recession and beyond. Assets of the global Islamic finance industry are estimated to grow to around $1.6 trillion by 2012. Lately, the Vatican said that banks should look at the rules of Islamic finance to restore confidence amongst their clients at a time of global economic crisis. Some reports suggest that assets held by Islamic financial institutions may rise five-fold to more than $5 trillion. However, the Islamic finance industry mostly uses LIBOR linked financial contracts, which are akin to debt financing than the more preferable participatory modes of Mudarabah and Musharakah.
Time Value of Money and Islamic Finance In investment for trade (which Islam allows), the investment goes through the entire process of a commercial activity that involves risk taking at each stage and any compensation on investment is strictly dependent upon the outcome of the commercial activity. The profit for the business person strictly depends upon the actual profit realised after taking market risk including price risk. It does not depend upon time. Time value of money is the basis of interest. Time value of money is the problem for the investor to avoid keeping his money idle and to avoid forgoing the use of money that may bring positive value to his investment. However, it does not mean that the investor can demand an arbitrary increase (or is given
as the case may be) as the cost of using money without taking the market and price risk. Assigning weight age to investment based on the tenor of investment through which horizontal distribution of profit takes place in Islamic banking creates the same yield curve as in the case of term deposits of conventional banks. The situation where losses are incurred would have been very interesting, but the money is invested in contracts in which the chance of loss is remote. Also, the arrangement is such that the bank makes sure that it gets comparable returns taking LIBOR as the benchmark rate. Now a discussion on those instruments (assets of the bank) will inquire that how these instruments enable the bank to provide compensation based on tenor.
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Analysis of Diminishing Musharakah In Diminishing Musharakah, two contracts i.e. tenancy and sale are included as two separate components of a Diminishing Musharakah contract. Both of these contracts are separated by way of a unilateral undertaking in place of the actual simultaneous sale/purchase of units of the asset/ property. The rent is calculated and charged on the basis of LIBOR. The rent increases when the LIBOR increases. Upon closer inquiry, one can notice that the words undertaking or promise still leaves the contract conditional. This argument is further substantiated by the fact that if the client refuses to undertake or promise to buy the asset (in units), the bank will not make a contract with him. Furthermore, the
promise gives the legal cover to the bank and is acceptable in a court of law. Figure 1 compares the conventional mortgage and Diminishing Musharakah. It can be seen in figure 1 that there is hardly any difference between the two modes of financing with respect to the flow of funds. Analysis of Risk Taking by Bank There are several types of risks. The most relevant risk is the market risk, including price risk i.e. the risk that the goods will not be sold or will be sold at lower prices that may not cover costs. In Murabaha and Diminishing Musharakah, price and market risk is not taken by the bank. Insurance, import duty, levies, and all other expenses are indirectly charged from the customer through transfer pricing. Had the tenancy
and sale contract been made separately, the bank would have had to bear the market risk. The bank avoids this by taking a unilateral undertaking from the customer to lease or purchase an asset in Ijara/Diminishing Musharakah and Murabaha respectively. Analysis of Murabaha It is referred to as a cost plus profit transaction. In this transaction, if a person needs a machine worth 100,000 Indian Rupees (Rs.). The bank appoints the person as an agent to buy it and before it pays the amount (Rs. 100,000) to the supplier, the bank makes sure that the customer signs an undertaking to buy the asset. This undertaking by the customer is later used to sell the asset to the customer at a profit. The bank makes sure that it gets the required profit
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action approved by Prophet Muhammad (pbuh) did not involve a financial intermediary. Ideally, we have to eliminate the need of excessive financial intermediation and look for the alternative methods, some of which are suggested later in this article, as well as in my book Proposal for a New Economic Framework Based on Islamic Principles. Still, more research is required in this area. In parallel Salam, the same problem of contingency in contracts persists. Analysis of Mudarabah One of the major impediments in the use of Mudarabah on the asset side of a bank i.e. for financing, is that only the Rabb-ul-Maal (investor) is considered to bear all the financial losses. Therefore, if an Islamic bank enters into the Mudarabah contract as a Rabb-ul-Maal, only the Islamic bank would have to bear all the losses. The Mudarib (fund manager) bears no loss while he has the complete authority in running the affairs of the business. The Rabb-ul-maal is not allowed to interfere in the affairs of the business. When a loss occurs, the Mudarib acts like an employee of the business and when the profit occurs, he shares in the profit. This juristic viewpoint didnt create many problems during the early Islamic era when for the most part the Mudarib was a poor and resourceless person in financial need with limited incentive to enter in corruption and no capacity to participate in loss sharing if the loss was caused by any reason other than negligence on his part. The principle that loss sharing should be based upon and limited to the amount of capital invested is not a condition mentioned in Quran or Hadith. Fuqaha recommended it, but it does not mean that it cannot be modified, especially if doing so is necessary and will make the preferable Islamic modes of financing more applicable. When we make terms and conditions for employment contracts, or for the appointment of Shariah Advisors etc, any condition not in violation with Islamic principles is allowed and is used. Similarly, limiting loss sharing up to the amount of capital invested is not the only way loss sharing could take place. Furthermore, in Musharakah, loss participation by all partners across the board is justifiable because all partners are also allowed to work. However, due to the condition in Mudarabah that the working partner is the sole authority to make decisions on business, making Rabb-ul-Maal completely responsible for sharing all losses is unjustified in the first place. It is considered that in case of loss, Mudarib loses the compensation to his efforts. But, Mudarib was not an employee. He was a joint partner, more precisely, a working partner. Taking the position that he lost the compensation to his work is
by locking the price at the outset and avoids taking any market related risk. Undertaking to purchase the asset once the asset is bought by the client as an agent of the bank makes the contract conditional. This undertaking is taken from the client before the bank releases funds. This argument is further substantiated by the fact that if the client refuses to undertake or promise to buy the asset, the bank will not make contract with him. Furthermore, the promise gives legal remedy to the bank and is acceptable in a court of law. Respected Scholar Mufti Taqi Usmani, then describing the less than ideal nature of Murabaha with in to contributing to the goals of socio-economic, redistribution wrote in his book titled Introduction to Islamic Finance: The instruments of leasing and Murabaha are sometimes criticised on the ground that their net result is often the same as the net result of an interest-based borrowing. This criticism is justified to some extent, and that is why the Shariah supervisory Boards are unanimous on the point that they are not ideal modes of financing and they should be used only in cases of need with full observation of the conditions prescribed by Shariah. Commodity Murabaha used by the Islamic banks treasury for asset liability management (basing their actions on the opinion of scholars that Murabaha is allowed, even if not ideal) took the allowance to the extreme whereby in Commodity Murabaha transactions, the subject matter is not genuinely required by both financial institutions, but each of them takes ownership literally for some minutes and execute a complex sale resulting in a profit for one and fulfillment of liquidity requirement for the other. Similarly, use of sale and lease back transaction in house construction finance and in commercial finance is also a transaction in which the Islamic bank purchases the asset without any need of its own from the same customer to whom the asset is leased subsequently. The lapse of at least one year period between sale and lease recommended by Shariah scholars is also not a sufficient justification as the Islamic bank takes undertaking from the client beforehand to lease it after one year. With Murabaha as an alternative, profitable companies will not opt for Mudarabah/ Musharakah because they are opposed to sharing profits, and are more likely to go for cheaper ways of sourcing funds i.e. debt financing. Less profitable companies are more likely to go for Mudarabah/Musharakah, but bank as conservative financial institutions banks will not take risks with these companies. The argument that Mudarabah/
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Salman Ahmed Shaikh, Project Head, Halal Tamweel, BMC, Pakistan Salman Ahmed Shaikh is currently working as Project Head, Halal Tamweel at BMC Pakistan. He is also working as an External Reviewer for Bankers Academy, USA. He is pursuing a PhD in Islamic Economics. He is a published author with 3 books, 20 research papers including 8 published papers and 9 working papers along with three dozen research articles. Mr. Shaikh has taught courses in Islamic finance at undergraduate and graduate level at various national universities in Pakistan. He is a visiting faculty member at Szabist, PAF-KIET and Biztek. He has supervised 12 masters theses to date and refereed 2 Journals.
Musharakah financing is not possible due to lack of authentic documentation as well as a poor level of trust. Islamic banks operating in developed markets (it is to be noted that the developed countries are the hub of Islamic banking) where such problems are not found have also not gone for Mudarabah/Musharakah financing. As a matter of fact, Islamic banks do not want to take market and price risk. Default, credit, political, exchange and other risks are also taken by conventional banks. If Mudarabah and Musharakah are deemed ideal alternatives by Islamic banking experts and scholars favoring it, then they would have been better off entering investment banking rather than commercial banking. Analysis of Salam Salam is an alternative for short selling. Its allowance is confirmed from an authentic Hadith. It is a sale in which payment (in full) is made on the spot but delivery is deferred. However, it should to be noted that the trans-
Islamic Finance
inviting opportunity cost which Islamic economics does not acknowledge apparently. In Mudarabah, the prevalent concept of loss sharing makes it different from a general partnership (in which all partners have unlimited liability) and even with limited partnership (in which some or all have limited liability). In Mudarabah, Rabb-ul Maal not only has unlimited liability, but no authority to participate in the business. Consider an Islamic economy with Mudarabah on asset and liability side and there is no other instrument used, Mudarib (usually blue chip companies) with no liability to share loss can obtain financing from banks who would be Rabb-ul-Maal in asset side use of Mudarabah. On the liability side, the bank will be Mudarib and the small savers and investors will be Rabb-ul-Maal. So, any loss incurred by blue chip companies is ultimately paid by small savers and investors who have all the liability to share losses without having a say in the affairs of the business. Restricted Mudarabah and clause of willful negligence is insufficient to protect them from losses strictly due to business cycle fluctuations. This example shows that with the current structure, even Mudarabah used alone in an economy is insufficient to bring about any egalitarian change, let alone prove to be more beneficial than an interest based system. Let us analyse trust deficit and documentation problems, which are cited as reasons why Mudarabah is not being used widely. Relax these assumptions and now consider there is no trust deficit and documentation problem in the economy. If a loss occurs due to the business cycle fluctuations, no part of the loss is borne by the business that had all the authority to run the business. The loss is borne not by the bank because the bank is Mudarib on the liability side. All loss is borne by the small savers and investors. Now consider if the government prohibited interest - based lending and borrowing too. Will investors want to be the Rabb-ul-Maal in the Mudarabah with the bank or the shareholder in a blue chip company which is in a position to take all the money, invest it, earn from it, and if a loss occurs, pass it onto the small savers. Mudarabah (with its current structure), even when assumptions of trust deficit and documentation problem are relaxed, and even when there is no competing conventional banking system, is ineffective to say the least. If we look at Mudarabah as it is currently understood, Mudarib is basically an employee who would get a normal salary (Ujrat-e-Misl) if Mudarabah is void, and if not he will share in the profit, and not the loss. This way he is not liable to bear any loss. Rabb-ul-Maal is basically the entrepreneur (who has the ultimate responsibility to share losses). How is it a participatory mode then? This should not be cited as a participatory mode with its current structure. Secondly, it is also different from a principal agent relationship in corporate form of organisation. In that, the principal hires the agent only because of his inability/incapacity, but the rules do not restrict him not to influence agents decisions. Important decisions taken by the agent(s) have to be vetted in Annual General Meeting. Mudarabah rules do not allow that much participation. In my humble opinion, firstly, it needs to be justified that Mudarabah is a just mode of financing, and then whether it is a participatory or preferable one. With important covenants in place, equity financing can and is used widely. It is interesting to study the size of debts and equity market in developing countries. For instance, in Pakistan, the corporate bond markets hardly exists, whereas equity financing is more prevalent and widely used. Equity financing through shares will forever deny the claims of bankers in general and Islamic bankers in particular who hide behind trust deficit and documentation problems. Why do people invest in shares of companies without any guarantee over par value let alone dividend? This is an important question to answer, even if some financial tycoons promote Islamic finance the way it is practiced for commercial reasons. Securitization, Great Recession & Islamic Finance The proponents of Islamic finance argue that the demise of financial institutions in developed markets was due to excessive securitisation and this crisis has exposed the weaknesses in the interest - based financial system. However, securitisation in Islamic finance is also possible and has been used frequently in recent times. The argument that the asset - backed nature of financing would ensure effective risk management is also weak as Collateral Mortgage Organisations (CMOs), Mortgage Backed Securities (MBSs), Asset Backed Security (ABS) etc. Were instruments with mortgage loans as their underlying assets. The problem was with excessive leveraging and lax regulation and not with securitisation per se. Securitisation in Islamic finance, as in Sukuk, also suffered a setback in the Dubai Crisis in 2009/10. Asset backed financing also lacks the potential to provide loans for education, marriage, financing to pay short term debt, salaries, other accrued expenses to third parties etc. Concluding Remarks As per the current orthodox understanding and practice of Islamic finance, the often cited preferable modes like Mudarabah and Mohammed Ridza Abdullah, Managing Partner, Mohamed Ridza & Co, Malaysia
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What are your thoughts on the future development of Islamic finance products? There is a lot of potential for development of Islamic products because the industry has not fully exploited the varieties of Islamic products. Perhaps it is because of the comfort level of industry players who prefers to piggy back on existing products which have been proven in the market. The regulatory authorities efforts in enacting relevant guidelines and legislations to keep up with new products are an added incentive. What are your thoughts on the demand for Shariah-compliant investment opportunities? The demand can come in 2 aspects. The first is through the religious choice for Muslims in particular and also for nonMuslims who prefers ethical modes of investing. Second is to ensure the costs of doing business with Islamic finance are also competitive with the conventional counterpart. What Islamic financial instrument do you use the most? In addition, what are the benefits? Murabahah tawarru, ijarah and Bai Bithamin Ajil, for sukuk based are mostly ijarah due to the global acceptance of ijarah type of products. Reason is because most banks feel comfortable using these products in particular tawarru which is cash financing. However recent Sukuk issuances like the global Trust Certificate by Government of Malaysia and Kuwaits Gulf Investment Corporation utilised the wakala concepts. What advice would you give to those wanting to invest in Shariah-compliant project finance? They need to ensure that the Islamic product is suitable for the type of project invested. This is because in project finance, future cash flows are the key to the creditworthiness. The assets are just security in case of default.
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approach to corporate finance in an interest free economy by looking beyond practiced Islamic finance and suggested alternatives for corporate finance in sourcing funds i.e. Ijara with embedded options, limited liability partnership, equity modes like Musharakah and Mudarabah income bonds and convertible income bonds. Mudarib is the working partner. Mudarib can be asked to share in loss to some extent.
Musharakah are incapable even in a simple model economy with them as the only mode of financing. Hence, they are not used and will not be used due to the reasons discussed above. The prevalent Islamic products which are linked with LIBOR are and will predominantly be used and practiced Islamic finance may remain incapable of providing egalitarian benefits it once promised. Ironically, Islamic values like justice, equality, truth, trust, kindness, honesty and responsibility are often discussed in literature and seminars on Islamic Economics; whereas, in reality, the lack of these values in practice is the major reason why preferable participatory modes remain unusable. Islamic Economic System: The Way Ahead In developing Islamic economics, we first need to present the thesis of Islam answering all valid arguments against it and its teachings. Then, we can present the economic teachings of Islam which will act as broad guidelines for appropriate conduct in economic pursuits. Then, given the limits and constraints at the outset, utilising both the literature and practice of classical economics and Islamic economics, we can develop and present the foundations, institutions, instruments, mechanism and delineate role of each in the new economic framework.
Then, I suggested alternatives for corporate finance in using funds (investments) i.e. Islamic income funds, Islamic REITs, GDP growth rate linked sovereign bonds, income bonds convertible income bonds, foreign currency reserves, making strategic expansion, and equity investments in other companies.
These two covenants will minimise the problem of adverse selection, moral hazard and agency problem. In methods of valuation in Islamic financial management, I suggested an alternate means of pricing capital in interest free economy and use of appropriate discount rate i.e. Nominal GDP growth rate in public finance and corporate finance in CAPM, dividend discount model, project valuation, calculating NPV, valuing income bonds and stocks. I also discussed in my book Proposal for a New Economic Framework Based on Islamic Principles that how savings would feature despite discontinuation of interest, how inflation will be checked with central banks not having at their disposal the conventional OMO, how liquidity will be managed in the banking sector when a central bank wants to inject liquidity or mop up funds. How and to what extent the institution of Zakat would enable the government to meet its fiscal targets and does not crowd out private sector with public borrowing and how the balance of payments and exchange rate stability can be managed in an interest free economy.
Ijara with embedded option can solve the paradox of unilateral undertaking and convert the sale of put option from the perspective of client into a call option. In Mudarabah, following two covenants can be introduced.
Mudarib can be asked to contribute In my work on Islamic economics, I have some capital. The contract will remain Therefore, all is not lost. But, there is a need explained it as a blend of natural features different from Musharakah as only the to realise weaknesses, only then can we present in capitalism i.e. look for solutions and in right to private property, Figure 1: Comparison of Conventional Mortgage and Diminishing Musharakah search for solutions, we private pursuit of economneed to be critical, obFeatures Conventional Mortgage Diminishing Musharakah ic interest, use of market jective, impersonal, unforces etc used along with biased and open to hear Benchmark Rate KIBOR KIBOR some distinct features and receive all possible Basis of Rent KIBOR KIBOR derived through Islamic solutions and then acNature of Installment Interest + Principal Repayment Rent + Sale of Units economic teachings i.e. cepting and rejecting any interest free economy, of them on the basis of Prepayment Penalty Yes Sale of Units at Higher Price moral check on unbridled authentic Islamic sources Rent + Sale contract Dependent Separated by unilateral promise self-pursuit and provision i.e. Quran, way of Prophet In subsequent years Interest decreases Rent payment decreases of socio-economic jusMuhammad (pbuh) and In subsequent years Principal repayment increases More Units are purchased tice to achieve the goals Sahih Ahadith rather than of Socialism as far as is on the basis of factional Changes in Rent Based on KIBOR Based on KIBOR naturally possible without affiliations. Only then, can Price and Market Risk No No denying individual freewe hope to progress toPrice of Asset Locked at initiation Locked at Initiation dom and profit motive. In wards the goal of an ideal Cost to the borrower Same in both cases Same in both cases Islamic corporate finance, Islamic economic system. I suggested an alternate Profit to the bank Same in both cases Same in both cases References and Further Reading
El-Gamal, Mahmoud A. Islamic Finance: Law, Economics & Practice. Cambridge: United Kingdom. Foster, John (2009). How Shariah Compliant is Islamic Banking?. BBC News. December 11, 2009. Ghamidi, Javed A. (2007). Meezan. Lahore: Dar-ul-Ishraq. Herwany, Aldrin, A Value at Risk Analysis on the Performance of Sukuk and Conventional Bonds: The Case of ASEAN Markets (August 16, 2010). Retrieved from: SSRN: http://ssrn.com/abstract=1659799 Jobst, Andreas A., Kunzel, Peter, Mills, Paul S. and Sy, Amadou N. R., Islamic Bond Issuance - What Sovereign Debt Managers Need to Know (July 1, 2008). International Journal of Islamic and Middle Eastern Finance and Management, Vol. 1, No. 4, pp. 330-344, 2008; Islamic Law and Law of the Muslim World Paper No. 09-63. Osservatore. Vatican. (March 04, 2009). Islamic Banking May Help Overcome Crisis. Press Release. Saleem, Shehzad (1992). Islamic Concept of Taxation. Renaissance. Vol 02, Issue 10. Shaikh, Salman (2010). Proposal for a New Economic Framework Based on Islamic Principles. Karachi: Islamic Economics Project. Usmani, Dr. Imran A. (2007). Ghair Soodi Bainkari [Interest Free Banking]. Karachi: Maktaba Maariful Quran. Usmani, Muhammad Taqi (2003). Islam Aur Jadid Maeeshat-o-Tijaraht [Islam and Contemporary Economy and Trade]. Karachi: Maktaba maariful Quran.
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CHOICE OF LAW
Abstract: The practice of Islamic finance alternative dispute resolution (ADR) forums shows a consistent reliance on the use of national laws coupled with Shariah. Also, there are cases showing that U.S. courts and European arbitrators are willing to use Islamic law. Research indicates that the decision in Shamil Bank v. Beximco Pharmaceuticals was not consistent with the intentions of the parties or the commercial goals of Islamic finance. Finally, Choice of Law and Islamic Finance, part 2 concludes that its not unreasonable for a Western court to judge a case if the dispute arises out of an Islamic finance agreement. Keywords: Islamic financial transactions, Shariah compliant, contract, Shamil Bank, First Amendment
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Bank argued that the reference to Shariah be treated as an inclusion of the lex mercatoria of Islamic finance and that the appellate court applies to those principles, which relate to Murabaha contracts. The appellate court still found this reasoning too much to bear, demanding even greater specificity as to Shariahs scope of applicability. However, industry practice shows that the statement is intended to serve as a gap-filler provision because the contractual arrangements of Islamic business are often not defined within common law jurisprudence or civil regulation. Terms such as Riba, Murabaha, and Gharar are still novel items in the jurisprudential and financial systems of many countries, and Islamic law nations have not codified the extent of each financial instrument; this allows parties the freedom of innovation, and Shariah may be kept in mind when disputes do arise. Judges and arbitrators should therefore not consider a Shariahtermed, combined-law contract as one involving two legal systems. This is because, according to the practice of parties involved in Islamic financial transactions, the terms of the contract they are inherently Shariahbased. Thus, reference to Islamic law does not stack two systems of law against each other, but states the intention of the parties in realising the transaction and ensuring that their business relationship continues to be Shariah-compliant. The argument that Shariah is a comprehensive social code of conduct that applies outside of a states legal framework should not create so much confusion that application of Shariah becomes untenable. Only such Shariah-related legal issues that are logically related to the terms of the contract need to be entertained. Obviously, the judge need not consider principles related to personal behavior in as much as these did not affect the free will of parties in forming the agreement. In this respect, a judge can serve as a gatekeeper. In doing so, the judge should apply the chosen law of the parties, and when an issue is raised concerning a Shariah matter, the judge should allow both sides to present their experts or to agree to send the issue to an expert chosen by the parties. All of this means to say that the reasoning of the court in Shamil Bank was hasty. In determining the obligations of parties, courts should look to the intentions of parties and their understanding of the meaning of the contract. A court should do its best to give effect to those intentions without breaching legal principles. In interpreting the intention of the parties, the appellate court in Shamil Bank did not look to the prior negotiations between the parties, the common practices of the Islamic financial industry, or the mo-
The Future of Islamic Finance Dispute Resolution in the West Shamil Bank v. Beximco: A Tragedy for Choice of Law Jurisprudence? Several holdings from the case of Shamil Bank are worth highlighting. The first is that the English appellate court prohibited the use of a combined-law clause based on the principle that a contract cannot be governed by two systems of law and the statement in the Rome Convention on the Law Applicable to Contractual Obligations that a contract shall be governed by the law chosen by the parties. The second important holding of the Shamil Bank court was that the reference to Shariah in the disputed contract was nothing more than a non-binding statement of intent. In arriving at this conclusion, the appellate court argues that the Rome Convention does not contemplate the choice of a non-state legal system such as Shariah; even if the parties intended to incorporate some aspects of Shariah, they did not stipulate which principles should be applied; and although Muslim scholars differ on the application of Shariah, it is unlikely that the parties wished that a secular English court would decide principles of Islamic law. The Rome Convention has since been replaced by Regulation (EC) No. 593/2008 of the European Parliament and the Council of the 17th of June 2008 on the Law Applicable to Contractual Obligations (Rome I). In declaring that the law of a contract must be a national system, the court in Shamil Bank relied on Articles 1(1), 3(1), and 3(3) of the Rome Convention. In doing so, the Appellate Court draws attention to the statement in Article 1(1) that the rules of this Convention shall apply to contractual obligations in any situation involving a choice between the laws of different countries and to the text of Article 3(3), which references foreign law. The correlating articles in Rome I have been revised, and the reference to the laws of different countries no longer appears in Article 1(1). However, the text of Article 3(3) of Rome I still allows for the same construction in Shamil Bank, as it currently states: Where all other elements relevant to the situation at the time of the choice are located in a country other than the country whose law has been chosen, the choice of the parties shall not prejudice the application of provisions of the law of that other country which cannot be derogated from by agreement. Article 3(1) remains unchanged, and still reads, a contract shall be governed by the law chosen by the parties. Thus, the continued use of the singular form of law is in tension with clauses that subject a
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Julio C. Coln, Student, University of Texas School of Law Julio C. Coln, holds a Juris Doctorate from the University of Texas School of Law. His research focuses on utilising existing legal frameworks to produce innovative Shariah-compliant financial products for the U.S. market. He has also clerked at the Inter-American Court of Human Rights and advocates for responsible corporate growth based on the model of community partnership.
national law to Islamic financial principles. These clauses will be viewed as violating the rule that only one system of law may govern a contract. Even outside of the European community and without reference to their treaties regarding the law governing contracts, the legal rulings of Shamil Bank are likely to appear in other systems. Some commentators believe that other common law and civil law jurisdictions would arrive at the same conclusion as the court in Shamil Bank given similar facts. Also, with particular concern to the Rome Conventions apparent prohibition of the use of combined-law clauses, arbitrators who are called on to judge under the law of a European Union country may find themselves compelled to disregard Shariah provisions in a contract. This is problematic because the law of England and Wales is currently the most favored choice of law for international finance, and according to Shamil Bank, under English law a Murabaha agreement will be treated the same as an interest-bearing loan, barring contrary contractual stipulations. This result is unnecessary, however; the statement in a contract that a national law shall be subject to Shariah is not in fact equivalent to two laws governing a contract. Indeed, the appellants in Shamil
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tives of the parties in choosing to use Islamic banking procedures. Instead, the Shamil Bank court claimed to interpret the contract in light of the commercial goals that it served to accomplish, as English law requires. In doing so the appellate court explained that the goal of Beximco was but to acquire working capital through an agreement couched in Islamic terms. This construction implies significant insincerity on the part of both parties, while it assumes that Beximco was acquainted with the intricacies of Islamic law. The result was that the words subject to the principles of the Glorious Shariah are rendered superfluous, but Shamil Bank is still left to represent itself to its British customers as an Islamic bank. Because the appellate court made its decision without reference to the commercial ends of a murabaha contract in Islamic finance, it essentially made its own decision as to what constitutes a Murabaha agreement without reference to any Islamic source. If it had inquired otherwise, the appellate court may have found that in practice the reference to Shariah in Islamic financial transactions is not intended to reflect a choice of a separate and distinct system, but that it is a clause commonly employed by the Islamic finance sector to ensure that deals remain Shariah-compliant even throughout the exigencies of litigation. Furthermore, if one party holds itself out to be an Islamic bank, and the other party chooses to conduct business with it rather than a conventional Western financial institution, it would be illogical to conclude, as did the appellate court in Shamil Bank, that either party to a Shariah-compliant deal is indifferent to the form of the agreements . . . or the impact of Sharia law upon their validity. If that were a logical statement, then it raises the question: why not just seek another more traditional, less cumbersome, and widely available form of financing rather than deal with an Islamic bank from the Kingdom of Bahrain? Judging Under Shariah: The U.S. Experience There is a concern amongst U.S. scholars that a choice of law that necessitates looking into Shariah law will conflict with the First Amendment prohibition of state endorsement of a particular religion. From an arbitration standpoint, the fear is that the recognition of an arbitration award will be attacked on public policy grounds in the enforcing courts. Use of the First Amendment as a weapon against enforcement of an arbitration award is not an unfounded fear in the case of Islamic finance. The Ann Arbor-based Thomas More Law Center is involved in federal litiga-
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tion protesting the federal bailout of financial institutions. The Center, self-described as dedicated to the defense and promotion of the religious freedom of Christians, claims that the federal appropriation of funds to AIG violates the Establishment Clause because the money is used to finance Shariah-compliant products. This conveys a message of disfavor of and hostility toward Christians, Jews, and those who do not follow or abide by Islamic law. While it is still being litigated in the courts, the Eastern District of Michigan has so far denied a motion to dismiss by defendant Timothy Geithner. Enforcement of an arbitration award is not safe from similar attacks in other jurisdictions. In Canada, for example, the government of Ontario amended their Arbitration Act to make family dispute arbitration decisions based on religious principles unenforceable. This amended legislation, enacted after decades of Canadian enforcement of the arbitral decisions of the Jewish Beit Din, was in reaction to a campaign by the Islamic Institute for Civil Justice to increase the recognition and enforceability of Muslim personal law arbitral decisions in Ontario. The United States, for the most part, has not reacted with the same fervor against religious arbitration. To the contrary, U.S. courts are rather consistent in enforcing agreements to arbitrate though the agreement may specify that the arbitration take place in a religious court and under religious law. Courts have frequently enforced the validity of agreements to arbitrate before the U.S. Institute for Christian Conciliation; these agreements typically include a clause stating that the parties agree that any claim or dispute arising from or related to this agreement shall
be settled by biblically based mediation. In one case, Encore Productions sued Promise Keepers over a dispute concerning their contract to provide production services for Promise Keepers conferences. The contract contained a clause that stated that arbitration would be conducted in accordance with the Rules of Procedure for Christian Conciliation of the Institute for Christian Conciliation; these rules in turn require that the Holy Scriptures (the Bible) shall be the supreme authority governing every aspect of the conciliation process. Encore Productions challenged the arbitral decision claiming that the religious dispute resolution violated the First Amendment. The court in that case held that the arbitration award was a secular contractual right, and that neutral, non-religious principles called for enforcement of the arbitration award because interpretation of the arbitration clause itself did not require inquiry into or a determination of religious doctrine. Bad publicity of Islamic law in the United States has not prevented even state courts from enforcing agreements to arbitrate before Shariah tribunals even in the controversial family law setting. In Jabri v. Qaddura, a Texas Appellate Court enforced an agreement to arbitrate on behalf of a woman in a divorce. The wife, Jabri, was seeking the fulfillment of what is often labeled in Islamic law as a deferred mahr. In such arrangements, a dowry is agreed upon, but a portion of it is deferred from payment unless there is a divorce. Jabri claimed she was owed one-half the value of the couples home and $40,000 of her dowry. During divorce proceedings, the parties submitted the dispute to the Texas Islamic Court, but during the arbitration, a disagreement arose as to the
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scope of the arbitrators authority. The wife motioned the district court to stay proceedings and compel arbitration, which the court denied. The Court of Appeals ruled that the district court abused its discretion by finding that the agreement was not valid, in part because the court found that arbitration is strongly favored by state and federal law and that doubts should be resolved in favor of arbitration. However, the Court of Appeals did not mention any public policy concerns that would prevent it from enforcing an agreement to arbitrate issues concerning conservatorship of children, child support, division of property, and even a protective order before an Islamic tribunal. Enforcement of Islamic arbitration awards has proven to be relatively uncontroversial in U.S. courts. More compelling is that the application of Islamic Law is not out of bounds for a U.S. court to apply. In National Group for Communications & Computers v. Lucent Technologies International, National Group filed suit against Lucent Technologies in a U.S. district court for breach of contract. National Group, a Saudi Arabia-based company, contracted Lucent Technologies to assist in a multi-million dollar project to design, engineer, and install emergency and pay telephones throughout Saudi Arabia. Lucent Technologies terminated its subcontract, and National Group was forced to liquidate its Project Department, which it had created specifically to implement the telecommunications contract. National Group then brought suit against Lucent Technologies seeking actual and expectation damages. Both National Group and Lucent Technologies agreed that Saudi Arabian law governed the terms of the dispute. The district court acknowledged that in order to judge the case it would first have to determine how Saudi Arabian law would decide the claim for loss of the plaintiffs Projects Department; in doing so, the court analysed tenets of Shariah. In its opinion, the district court recited some rules from the Basic Regulation of the Kingdom of Saudi Arabia, including Article 48, which states that the courts shall apply in cases brought before them the rules of the Islamic Shariah in agreement with the indications in the book the Quran X 2 and the Sunna and the regulations issued by the ruler that do not contradict the Book or the Sunna. The district court stated its understanding that Shariah is the Islamic divine law and that in deciding disputes, a Saudi Arabian judge will turn to the Quran X 2, the Sunnah, and fiqh to guide his legal determination.
Turning to the parties dispute, the district court began to analyse the issue of whether expectation damages would be allowable against Lucent Technologies under Saudi Arabian law. In doing so, the district court heard expert witnesses from both parties and detailed its own research concerning damages under Islamic law. The district court stated, several historical...statements of the Prophet Muhammed...are instructive on this issue, and then proceeded to quote the Prophet Muhammeds prohibition of gharar transactions: Do not buy fish in the sea, for it is gharar. The Prophet forbade sale of what is in the wombs, sales of the contents of the udders, sale of a slave when he is runaway . . . . The Messenger of God forbade the sale of the copulation of the stallion. He who purchases food shall not sell it until he weighs it. The district court then resolved the dispute in favor of the defendants, finding that expectation damages under Saudi Arabian law, and thus Shariah, constitute a form of gharar. The district court went on to say that to award expectation damages based on the plaintiffs valuation of the Projects Department would be equivalent to placing a value on fish in the sea, or purchasing food that has not yet been weighed. Moreover, book value is an accounting convention that would not produce an accurate picture of actual losses as defined under Islamic law. It has been argued that the judges use of Islamic law violated the First Amend-
ment. Despite the window of opportunity, there was no argument on appeal to this effect. In conclusion, the use of Shariah in U.S. arbitration has not prevented the enforcement of decisions to arbitrate, nor has it prevented the actual awards on public policy grounds. This is all the more significant because the United States maintains a rigid wall of separation between church and state. Furthermore, as demonstrated by the district court in National Group, Shariah is not so diverse or insufficiently codified as to prevent its application through the opinions of experts and learned treatises, and its application does not necessitate an unacceptable intrusion by the judge in pronouncing what is right or wrong in matters of worship. Advice for Seeking Arbitration in Islamic Financial Disputes The choice of law clause could be shorthand for the parties expression of intention for all matters not in the contract. Parties to a contract should be able to completely divorce themselves from a national system. However, in Islamic financial dispute resolution, the choice of law is unique compared to other areas. Parties in Islamic financial transactions are not asking to abandon the law of a particular country, but are putting their confidence in the laws of well-established systems, such as those of the United Kingdom. Because the terms of the contract are Shariah-based, the parties must supplement the choice of law clause to address that fact and cater to the parties preferences and the spirit of the transaction. Oth-
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lar school of classical jurists that an agreement to arbitrate is binding upon the parties and cannot be revoked. Arbitration in Islamic financial disputes has improved in recent years. In 2009, for example, Malaysia passed the Bank Negara Malaysia Act 2009, which makes the decisions of the Shariah Advisory Council, a popular Islamic finance ADR forum, binding upon the courts. The KLRCA Rules for Islamic Banking and Finance Arbitration state specifically that the award of the arbitrator is binding, and the tribunal has the power to judge on matters concerning its own jurisdiction (competence). The view that an agreement to arbitrate is binding is almost a consensus among states heavily involved in Islamic finance. This is reflected in Saudi Arabian Law of Arbitration and also in the UAE Civil Procedure Code. The views of most modern Shariah commentators reflect the nearly global consensus that a valid agreement to arbitrate is binding. However, courts called on to refuse recognition of an arbitration award from a combined-law, Shariah-compliant contract should be wary of arguments that the procedure of the arbitration was not Shariahcompliant. There are still differing opinions concerning the validity of an agreement to arbitrate that is made before the actual dispute arises. Moreover, an unhappy party might opportunistically object to the religion or gender of the arbitrator. These problems should be cause for concern for a lawyer seeking to protect the clients interests, even though the issues have not yet presented themselves. A judge that must entertain such an argument should proceed with the understanding that Shariah law is intended only to apply to the terms of the contract that are Shariah-based and to the legal arguments, which apply directly to those concepts. A lawyer working in Islamic finance must constantly inquire as to whether Shariah applies, and this is equally important for procedural matters involving arbitration. Usually, the site of the arbitration will govern the arbitration process, and this determines the likelihood of receiving either help or interference from the local courts. Therefore, the importance of the place of arbitration should not be underestimated. A problem could arise in jurisdictions where combined-law contracts would be repugnant to their choice of law doctrine. Nevertheless, the law of the place of arbitration can be evaded by agreeing to make a country with a favorable procedure the place of arbitration, but agreeing to meet in another country. Enforcement can be refused if the agreement is not valid or if the composition of the arbitral tribunal is not in accordance with the chosen law. As mentioned above, there are opinions derived from Shariah that can be used to attack the arbitral awards because of faulty procedure. For example, Saudi Arabias Law of Arbitration states that an arbitrator is required to be experienced and of good conduct and reputation and full legal capacity. Derived from the Islamic legal opinion that an arbitrator should possess qadi (a judge who rules in accordance with Islamic Law) -like qualities, this requirement could be mischievously employed to attack the composition of the arbitral tribunal. In fact, in Saudi Basic Industries Corporation v. Mobil Yanbu Petrochemical Company, the appellants challenged the trial court judges qualifications to employ Shariah in order to judge under Saudi Arabian law. In denying that the trial court engaged in a standard less determination of Saudi Arabian law, the Delaware Supreme Court mentioned that the expert of Saudi Basic Industries Corporation (SABIC) stated that no U.S. court possesses the qualifications to engage in legal analysis under Saudi Arabian law. The court pointed out that had the experts opinion been the true belief of SABIC, then it was quite strange that SABIC did not attack the trial courts competence until after it received an adverse jury verdict. Further highlighting the contradictory behavior of the appellants, the court stated: It is remarkable that SABIC, having purposefully selected this forum instead of a Saudi Court, knowing the United States legal system is dramatically different than the Saudi legal system, comes forward after a verdict against it to claim that no American judge is qualified to interpret and apply Saudi law. This is particularly incredible in light of SABICs vehement argument that this case should be tried by a U.S. judge. Therefore, in light of the potential for tactical use of Shariah-based procedural considerations, parties may want to specify within the contracts that the choice of law be applied only as to its substantive requirements. Finally, the time is arriving where parties need not leave all to chance. The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) produces important publications relating to financial accounting and Shariah standards. These standards are widely acknowledged in the industry as the criteria that must be met in Islamic financial instruments. The AAOIFI has recently published an arbitration standard that is expected to assist in the development of Islamic finance ADR forums. AAOIFI guidelines cover the standards of Shariah-compliant transactions better than any national system. One solution to the com-
erwise, the writing of the agreement may become unduly complicated by taking account of situations that may never arise and cannot be properly judged until the after the fact. Shariah-compliant transactions bring about the challenge of churning abstract concepts into actual deals; a major impediment to the growth of Islamic finance is the amount of legal fees associated with the process. Although arbitral panels with experience in adjudicating disputes arising from Shariahcompliant business transactions have both accommodated and propagated the combined-law contract, it has not been well received in the United Kingdom. A forum that wishes to judge under a particular form of law should discover how a judge from that state would decide the question. Some judges and arbitrators find themselves unwilling to proceed in this way when asked to make a decision concerning Shariah law, whether because the forum is considered secular or because the arbitrator prefers to refer the question to an expert. For these reasons and others, some Islamic finance professionals conclude that the divergence of industry practice can only be reconciled through the creation of an Islamic ADR forum. In the world of Shariah-compliant finance, there has never been more of an openness to settle disputes through arbitration. In previous times, and to some extent today, scholars of Islamic law considered the enforcement of the award of an arbitrator to be purely discretionary by the judge. The Medjella is considered the first attempt to codify Islamic law and represents the endeavor of the Ottoman Empire. The Medjella dedicated an entire chapter to arbitration, stating within it that a decision validly given by the arbitrators in accordance with the rules of law is binding on all parties. Decisions by arbitrators were not enforceable except upon confirmation by the judge, and then only if made in accordance with law. From the perspective of the current transnational commercial arbitration system, it is even more problematic that an agreement to arbitrate was not binding, and parties could dismiss the arbitrator any time before the award was handed down. The Medjella was highly influential throughout the Muslim world and still forms the basis of the laws of Jordan and Kuwait. Even in the classical period of Islamic jurisprudence, there were opinions that a freely chosen arbitrators decision was binding upon the parties and required judicial enforcement. That opinion has gained much traction in modern times, along with the statement from that particu58 Global Islamic Finance
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plaint that qualified arbitrators in Islamic finance are too scarce would be to specify in the contract that arbitrators should decide questions relevant to Shariah-compliancy based on AAOIFI standards. However, this would not be a complete substitute for literacy in Islamic law, as the AAOIFI standards do not provide secondary rules for unforeseen circumstances or non-performance of either party to the transaction. Conclusion The rapid growth of Islamic finance will require the international legal system to develop an understanding of the foundations of Shariah-compliant business transactions. Judges in countries that do not have a history of dealing with Islamic law must compare the case before them to the general practice of the Islamic financial sector to judge the commercial purpose of Shariahcompliant business. The rules of specialised forums for Islamic finance indicate that statements that give legal effect to Islamic law are more than mere statements of purpose, and such contracts should only be enforceable insofar as they are consistent with Shariah. Referring to both Islamic and a national law together need not violate the principle that there cannot be more than one law that governs a contract. Contracts themselves contain rules other than the law to which the parties bind themselves. Reference to Shariah is similar, and it is necessary in order to codify the parties intentions without bargaining for every unforeseen contingency, which would be unfavorable to industry growth. Courts in countries that are not legally influenced by Islamic law have had success in judging Shariah issues with experts. Parties continue to request that Shariah-based laws be adjudicated in non-Islamic courts despite the concerns the court in Shamil Bank had expressed. Unfortunately, due to the precedent that it creates, a decision in a common law court that does not reference Islamic law risks defining for decades the extent of a Shariah-compliant product while never endeavoring to discover that transactions basis in Shariah. Parties who are more comfortable with U.K or U.S laws will find a friendlier environment in the several arbitral tribunals that specialises in Islamic finance. Arbitration is preferred in the international business world, but domestic parties may lack the means to exploit such institutions. Consequently, domestic parties may prefer to incorporate the standards published by the AAOIFI or another institution that publishes standards on Shariah-compliant transactions. References and Further Reading
KLRCA Rules for Islamic Banking and Financial Services Arbitration rule 1(3) (2007), available at http://www.klrca.org.my/upload/ Islamic_Banking_ Rules_for_Islamic_Banking_&_FS_2007.pdf Abu Dhabi Commercial Conciliation and Arbitration Centre Charter art. 13 (emphasis added) (on file with author). Dubai International Arbitration Centre Rules & Procedures art. 33.1 (2007), Retrieved from: http://www.diac.ae/idias/rules/Arb. Rules%202007/4THE% 20PROCEEDINGS/ Why Arbitrate at DIAC?, Dubai Intl Arb. Centre. Retrieved from: http:// www.diac.ae/ idias/services/diac (last visited Mar. 30, 2011). Types of Cases, Muslim Arbitration Tribunal. Retrieved from: http:// www.matribunal.com/ cases.html (last visited Mar. 27, 2011). Procedure Rules of the Muslim Arbitration Tribunal rule 8(2), Retrieved from: http://www. matribunal.com/procedure_rules.html Increase in Non-Muslims Opting for Shariah Courts, Christian Inst. (Mar. 16, 2010) Retrieved from: http://www.christian.org.uk/ news/increase-in-non-muslims-opting-forShariah-courts/ Saudi Arabia v. Arabian Am. Oil Co. (ARAMCO), reprinted in 27 I.L.R. 117, 169 (1958). Gemmell, supra note 15, at 179 (quoting Charles N. Brower & Jeremy K. Sharpe. Retrieved from: International Arbitration and the Islamic World: The Third Phase, 97 Am. J. Intl L. 643, n.16 (2003)). Sanghi Polyesters Ltd. (India) v. Intl Investor KCFC (Kuwait), [2000] 1 Lloyds Rep. 480, 480 (2000). Al-Bashir & Al-Amine, supra note 46 (describing the application of istinaa in Islamic banking transactions). Alan Redfern et al., Law and Practice of International Commercial Arbitration 115 (Sweet & Maxwell 4th ed. 2004) (1986). Rome Convention on the Law Applicable to Contractual Obligations, art. 3, June 19, 1980, 19 I.L.M 1492, 1493 (1980). Chuah, supra note 34, at 126 (stating that the case decision has generally confirmed commentators beliefs that the applicable law of contract must be that of a country). Handbook of Islamic Banking, supra note 23, at 39-40 (defining gharar as speculation). Trumbull, supra note 44, at 615 (stating that judicial enforcement of contracts raises First Amendment concerns). Graham Kozak, AIG and Shariah Law, Mich. Rev. (Apr. 7, 2009) Retrieved from: http:// www.michiganreview.com/archives/615 Murray v. Geithner, 624 F. Supp. 2d 667, 677 (E.D. Mich. 2009) Larry Resnick, Family Dispute Arbitration and Shariah Law, BC C.L. Assn, 2. Retrieved from: http://www.bccla.org/ othercontent/07Shariahlaw.pdf (last visited Mar. 30, 2011). Jehan Aslam, Judicial Oversight of Islamic Family Law Arbitration in Ontario: Ensuring Meaningful Consent and Promoting Multicultural Citizenship, 38 Intl L. & Pol. 841, 843
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(2006). Encore Prods., Inc. v. Promise Keepers, 53 F. Supp. 2d 1101, 1102 (D. Colo. 1999). Jabri v. Qaddura, 108 S.W.3d 404, 413 (Tex. App.--Fort Worth 2003, no pet.). Mona Siddiqui, Mahr: Legal Obligation or Rightful Demand?, 6 J. Islamic Stud. 14, 20 (1995) Natl Grp. for Commcns & Computers v. Lucent Techs. Intl, 331 F. Supp. 2d 290, 292 (D.N.J 2004). Russell J. Weintraub, Commentary on the Conflict of Laws 534 (2006). Ahmad Lufti Abdull Mutalip, Practical Legal Issues in Islamic Banking, Malaysian Islamic Fin. Monthly, Apr. 2008, at 21, 22, Retrieved from: http:// www.mifmonthly.com/ pdf/2008/April.pdf Id. at 175; Al-Medjella, Retrieved from: http:// www.iiu.edu.my/deed/lawbase/al_majalle/ al_majalleb16.html Andrew Smolik, Comment, The Effect of Sharia on the Dispute Resolution Process Set Forth in the Washington Convention, 2010 J. Disp. Resol. 151, 157 n.89 (2010) Gemmell, supra note 15, at 182. KLRCA Rules for Islamic Banking and Finance Arbitration, supra note 92, Rules 26 & 38. Royal Decree No. M/46, Saudi Arabia Law of Arbitration, July 3, 1983, Retrieved from: http://www.commerce.gov.sa/english/moci. aspx?Type=8&PageObjectId=748 UAE Civil Procedure Code, Federal Law No. (11) of 1992, ch. 3, art. 203(5), Retrieved from: http://www.diac.ae/idias/rules/uae/ chapter3/ Lee Ann Bambach, The Enforceability of Arbitration Decisions Made by Muslim Religious Tribunals: Examining the Beth Din Precedent, 25 J. L. & Religion 379, 388 (2009) Royal Decree No. M/46, Saudia Arabia Law of Arbitration art. 4, July 3, 1983. Retrieved from: http://www.commerce.gov.sa/english/ moci.aspx? Type=8&PageObjectId=748 AAOIFI Key Publications, Accounting & Auditing Org. for Islamic Fin. Inst. Retrieved from: http://www.aaoifi.com/keypublications.html (last visited Mar. 9, 2011) Muddassir Siddiqui, Guest Analysis: A Brief Examination of AAOIFIs New Standards, Westlaw Business Currents (July 27, 2010). Retrieved from: http://currents.westlawbusiness.com/Articles/PDF/A%20Brief%C20Exa mination%C20of%C20AAOIFI%CE2%C80%C 99s%C20New%Standards.pdf Bill Maurer, Anthropological and Accounting Knowledge in Islamic Banking and Finance: Rethinking Critical Accounts, 8 J. Royal Anthropological Inst. 645 (2002). Retrieved from: http:// www.anthro.uci.edu/faculty_ bios/maurer/Maurer-JRAI.pdf. Oxford Analytica, International Islamic Finance Moves Toward Common Standards, Forbes.com (Mar. 9, 2010). Retrieved from: http://www.forbes.com/2010/03/08/islamfinance-Shariah-business-oxford-analytica. html
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INTRODUCTION
Author: Kosmas Njanike, Senior Lecturer, Bindura University, Zimbabwe
February 2012
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The implementation of an interest-free banking system raises a number of questions and potential problems. For Islamic banking to be successfully introduced in Zimbabwe, it is necessary to educate the public on its nature, opportunities and strength. The status of the banking system in Zimbabwe requires a different way of doing business. One effect of this may be to solve the economic problems faced by the country. With many businesses having collapsed due to prohibitively high cost of funds, a non-interest system will bridge this problem. The interest rate regime has caused financial disintermediation in the economy, contributing to its collapse and the contraction of Zimbabwes Gross Domestic Product. This article will explain the reasons and make recommendations for the introduction of Islamic finance to Zimbabwe. An Islamic bank is an intermediary and trustee of other peoples money, with no interest being charged on loans and deposits. All the activities are done in accordance to Shariah law. Islamic banks across the world have been facing a number of challenges. The implementation of interest-free banking raises a number of challenges, which can be seen from a number of perspectives. For example, in Bangladesh they have not yet been successful in devising an interest-free mechanism to place their funds on a short-term basis. They face the same problem in financing consumer loans and government deficits. There was also a problem of a lack of legal support of the central bank. They did not have the necessary expertise and trained manpower to appraise, monitor, evaluate, and audit the projects that were required to be financed. As a result, they cannot expand, despite having a huge excess of financial liquidity. In Zimbabwe, problems may include political intervention in a selection of borrowers, financial instability, and the inability of the government to restore law and order this can have a major influence in the implementation of Islamic finance in investment projects. Potential problems on implementation can be seen from the macro and micro operational point of view; this paper focuses on the macro operations. The article seeks to answer the following questions:
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Document reviews and personal interviews were used to gather data for the article. Research papers on Islamic banking, textbooks, magazines, and websites were used to analyse information as well. Interview questions were prepared with the help of some banking experts and structured to enable everyone answering it to contribute something. The article contains an introductory statement explaining what Islamic finance is all about. Of the total of 40 interviews, 30 were face to face and 10 were via the internet by using Facebook. Half of the respondents were from countries that have Islamic finance in existence, such as Bangladesh, Malaysia, and Kuwait. Those interviewed include economists, researchers, financial analysts, and bankers.
Kosmas Njanike, Senior Lecturer, Bindura University, Zimbabwe Kosmas Njanike started his career with African Banking Corporation in Zimbabwe. He has also worked for CFX Bank in Zimbabwe as a Credit Analyst; and the Reserve Bank of Zimbabwe as a Research Analyst. Currently he is the Chairman of Simbank Financial Savings and Credit Union in Zimbabwe. He is a Senior Lecturer in the department of banking and finance at Bindura University. He has published a number of articles on banking and finance related issues. He is working on his PhD and specialising in Islamic finance.
Islamic finance will go a long way in solving problems associated with inappropriate or ineffective interest rate regimes. The Islamic-based system of finance has proven itself entirely feasible and sound. Islam prohibits doing business with riba, or usury/ interest, with emphasis placed upon profit and loss sharing (PLS). According to Khan the beauty of equity-based finance is the emphasis on the expected profitability of business ventures. Siddiqui maintains this emphasis that entrepreneurs from all social classes, regardless of their asset-base, can successfully obtain credit. The sharing of risks, the sharing of profits and the sharing of losses lead to a more equitable outcome for all of society. This is what the structure Figure 1: Profile of respondents of the Islamic banking system promotes. Siddiqui argues that interest based loans Respondents Total Foreigner Zimbabwean (under conventional banking) do not necesEconomists 10 3 7 sarily go to finance projects expected to be Researchers 12 10 2 the most productive (profitable), resulting Financial in an inefficient system. 4 1 3
Analysts Bankers Others
Problems and challenges According to Sarker, Bangladesh faced many challenges in its infancy. There was a lack of success in devising an interest - free mechanism to place funds on a short-term basis. The risk involved in profitsharing seemed to be so high that almost all of the Islamic banks in Bangladesh had resorted to those techniques of financing, which brought them a fixed and assured return. There was a lot of genuine criticism that these banks had not abolished interest; they had, in fact, only changed the nomenclature of their transactions. Islamic banks did not have the legal support of the central bank in Bangladesh. They did not have the necessary expertise
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6 8 40
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and trained manpower to appraise, monitor, evaluate, and audit the projects that they were required to finance. The moral integrity of the entrepreneurs of Bangladesh may be assumed to observe the huge amount of bad debts that have caused serious problems for clean Islamic banking. Political intervention in the selection of borrowers, the shock of financial instability, the inability of the government to restore laws and order in the country, especially framing law regarding the recovery of bad debts, and
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The lack of consistency in policy making and implementation of the fiscal and monetary authorities may be a major problem/ challenge to be faced by the Islamic finance institution in Zimbabwe. It was also noted that the divided attention on the current and new Islamic banking institutions in the economy may be enough for the leadership in the central bank to resist it. Only 10% of the respondents noted that the coexistence of the different banking systems may not be the best environment for optimal performance of Islamic banking. The controlling and supervision of Islamic banking on the basis of Shariah Law by the central bank of Zimbabwe, which has no background of dealing with Islamic finance, may be a big problem in the running of these institutions. The majority of the surveys respondents also pointed out that judging from the manner in which the central bank has been conducting its business, it may be a daunting task for the authorities to find a solution which will resolve this tension. More than eighty percent of respondents pointed out that the absence of Islamic interbank money market may be an obstacle in the trading or success of Islamic banks. When a single institution is running in the country, there will be no other counterparties to trade with in Islamic short term and long term securities. This may hinder the success or quick penetration of the market by the Islamic banking system. It was also noted that the absence of supportive and well connected institutions may hinder the development of the non-interest banking system in Zimbabwe. and the absence of Islamic studies in local academic institutions was also highlighted. The lack of skilled and trained manpower in Islamic banking will certainly hinder progress. The other problem that was cited by more than eighty percent of the respondents was the association of the term Islamic, with terrorism. The challenge is to change the perception of people Islamic economics and emphasise on the relevance of the concept in itself. All respondents pointed out the current economic and political situation as the major hindrance in the development of Islamic banking in Zimbabwe. Unless the situation improves, the current situation does not warrant new business nor will it attract any international investors. The majority of the respondents also pointed out that there is a problem of default culture that will certainly hinder the development of Islamic banking in Zimbabwe. Discussion Islamic banks can provide efficient banking services to the nation if they are supported with appropriate banking laws and regula64 Global Islamic Finance
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lance on the part of the promoters of Islamic banking, in realising the objective, is no less to blame. In such cases, there should be a thorough review of policies being pursued by the institutions. Points of departure have to be identified to redesign their course of actions. The problem of allocating efficiency can be improved by satisfying social welfare conditions in the following manner; firstly, they should allocate a reasonable portion of their investible funds in social priority sectors, such as mining, agriculture, small and medium enterprises, and export-led industries, like garment manufacturing. Secondly, when the percentage shares of allocation of investible funds are determined among the sectors of investment financing, profitability of projects should be the criterion for allocating investment funds. The criterion would be best satisfied if more and more projects were financed under PLS modes. A highly desired assurance in regards to the growth of Islamic banking is the establishment of training institutions in the countries where they are working. Professional investment training is costly and there has to be huge government capital investment support for the program to be a success. Some efforts for by Muslim countries to create a riba-free Islamic society have been largely unsuccessful due to some borrowers who are selfish and greedy. They will borrow on non-riba basis and not disclose profits completely. The problem is compounded when other honest people see such people earning much better returns than they earn under their non-riba system, and their dissatisfaction, coupled with their confusion on whether present day interest is riba or not, tends to attract them to the riba-based system. For profits and transparency in firms benefiting from Shariah loans, the introduction of profit-related pay for managers and employees - shared ownership plans will increase public confidence in the system. Islamic banks should play a role similar to that of institutional investors. This requires adequate changes in the business operations and inReferences and Further Reading
Ahmed, S.A. (2000). Global need for a New Economic Concept: Islamic Economics. International Journal of Islamic Financial Services, 1(4).pp. 13-27. Alam, M.M. (2000). Islamic Banking in Bangladesh: A case Study of IBBL. International Journal kf Islamic Financial Services, 1(4).pp. 71-84. Anouar, H. (2002). Profitability of Islamic Banks. International Journal of Islamic Financial Services, 4(2).pp. 93-105 Institute of Islamic Banking and Insurance (IIBI).Islamic Banking: What is Islamic Banking? (2008). Retrieved from: http://www.Islamic-banking.com/ Khan, O. (2004). A Proposed Introduction of Islamic Banks in India. International Journal of Islamic Financial Services, 5(4).pp. 117-130. Njanike, K. (2008). Effects of Interest Rate Regime on the Intermediary Role of Banks in Zimbabwe. Journal of Sustainable Development in Africa, Vol. 10 No. 3. 5169. Nordin, M. & Hamid, H. (2001). A study on Islamic Banking Education Experience and The Strategy for the New Millennium- A Malaysian Evidence. International Journal of Islamic Financial Services, 2(4). Pp. 149-161. Presley, J.R. & Dar, A.H. (1999). Islamic Finance: A Western Perspective. International Journal of Islamic Financial Services, 1(1).pp.1-14. Presley, J. R. & Dar, A. H. (2000). Lack of Profit Loss Sharing in Islamic Banking: Management and Control Imbalances. International Journal of Islamic Financial Services, 2(2).pp. 218-232. Sarker, A. (1999). Islamic Banking in Bangladesh: Performance Problems and Prospects. International Journal of Islamic Financial Services, 1(3).pp. 39-51. Sarker, A. (2000). Regulation of Islamic Banking in Bangladesh: Role of Bangladesh Bank. International Journal of Islamic Financial Services, 2(1). Pp. 171-187. Siddiqui, M.N. (2003). Islamic Banking in Indian Context: Scopes and Challenges. Islamic Banking in India. New Delhi: Institute of Objective Studies. pp 80. Yamirudeng, K. & Haron, S. (2003). Islamic Banking in Thailand: Prospects and Challenges.
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Sukuk
Abstract: Over the past decade, Islamic finance has been growing at an average rate of more than 30 percent per year. This impressive performance has greatly benefited many national economies, irrespective of faith or race, by fostering significant growth and increased employment opportunities. No doubt, Islamic finance has been identified as one of the important growth areas for the National Key Economic Activities. Today, Sukuk (Islamic bond) is among the most successful Islamic financial product in the industry and one of the fastest-growing sectors in the global financial landscape. But, this sufficient operation is still new in the market, only a few research have been undertaken on this topic. In view of this limitation, this article aims to explore the practice and prospect of the Sukuk market in Malaysia. The application and mechanics of Sukuk market will also be discussed. The article also aims to look at the differences between the Sukuk market and the conventional market. Subsequently, understanding among the investors was also examined and opportunities and challenges that need to be addressed will be reviewed. As will be evident in this article, this system has its own advantages and value added which would make it the system of choice in meeting specific investment interests and needs. Keywords: Effectiveness, Financing, Sukuk, Bond, Islam
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implemented during the economic downturn, or seeks to develop an economy. For example, Sukuk or Islamic bond is issuanced, by the World Bank in 2005 for the redevelopment of Acheh following the tsunami and The Kuala Lumpur International Airport in Sepang, Malaysia through which many foreign delegates arrived here today, was financed by Sukuk in 1996. Nowadays, Sukuk or Islamic fixed-income securities that have emerged over the past 15 years become as an increasingly important asset class. These products have a number of objectives which is to enable organisations to raise capital in a Shariah-compliant fashion, whilst at the same time expanding the investor base and offering investment opportunities to new groups. Considering their relative infancy, Islamic securities can be structured in a number of increasingly complex ways. Indeed, new products are being consistently developed and introduced. Therefore, it is essential to remain conversant with the important principles of structuring Islamic securities. Sukuk may be defined as certificates of equal value that represent an undivided interest (proportional to the investors interest) in the ownership of an underlying asset (both tangible and intangible), usufruct, services or investments in particular projects or special investment activities. Years ago, Islamic finance was considered as wishful thinking. However, serious research and development of Islamic products has shown that the Islamic finance is not only feasible and viable but it is also efficient and a productive way of financial intermediation. The development of the Sukuk market has accompanied the transformation of the economy that has now become more diversified and private sector driven. The market, initially dominated by the Government debt securities, now reflects the growing demand for the long term financing requirements of the private sector. In this highly competitive environment, the presence of a deep and liquid of Sukuk market thus contributes towards the stability of the financial system. Sukuk also proved to be Through this concept, Sukuk enjoy the benefit of being backed by assets, thereby affording the Sukuk holder or investor a level of protection which may not be available from conventional debt securities. Furthermore, unlike conventional debt securities that mirror debts or loans on which interest is paid, Sukuk can be structured based on innovative applications of Islamic principles and concepts. Nonetheless, Sukuk share some similarities with conventional debt securities, in that they are similarly structured based on assets that generate revenue. The underlying revenue from these assets represents the source of income for the payment of profit on the Sukuk.
Regulations Framework of Sukuk Al-Jarhi and Abozaid impose rules and conditions (ahkam) related to the tradability of the Sukuk in primary and secondary markets. To begin with, Sukuk must be issued against some tangible assets and not against cash or debts. Therefore, the tradability of Sukuk at the time of issuance (primary market) as well as in the secondary market must follow these rules: If Sukuk are issued against specific assets (ayn) or services, then this issuance implies the sale of these assets to the Sukuk holders in return for cash money based on current values of assets or services, and therefore the Sukuk becomes tradable. If Sukuk are issued against described assets or services to be manufactured or constructed in the future (mausuf fii zimmah), then this issuance implies the sale of these assets to the Sukuk holders in return for cash money, and these Sukuk are not tradable until the deliverability of assets or services. If Sukuk are not issued against assets or services, but for the purpose of utilising the proceeds to acquire some assets, then Sukuk do not become tradable until the stage at which those assets or services are purchased. This is because the Sukuk up to that point represent liquid proceeds, i.e. cash money, and money cannot be sold against money unless the Shariah rules of sarf are observed. If there is any mixture between ayn and dayn, then ayn must dominate dayn in Sukuk issuance.
Products of Sukuk In theory, Sukuk are certificates of equal value representing undivided pro-rata ownership of tangible assets, usufruct or services. Although Sukuk are in principle nonrecourse asset-backed instruments, the Originator typically undertakes to repurchase the underlying assets at a fixed or referenced price, rendering the Sukuk asset-based and giving certificate holders exposure to the credit risk of the Originator.
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bil Istithmar to undertake to do so. The Shariah considers such undertakings to effective guarantees of principal which are not permitted by Shariah in partnership and agency contracts. The AAOIFI ruling created a significant dent in the issuance of al Musyarakah Sukuk and al Mudharabah Sukuk. Istisnaa Sukuk: Absale and purchase agreement in order to finance a project item. Istisnaa Sukuk are certificates that carry equal value and are issued to mobilise funds required for production of goods products that will be owned by the certificate holders. The issuer of these certificates is the manufacturer; the subscribers are the buyers of the intended product, while the funds realised from subscription are the cost of the product. The Islamic bank funding the manufacturer during the construction of the asset, acquires title to that asset and up on completion either immediately passes title to the developer on agreed deferred payment terms or, possibly, leases the asset to the developer under an Ijarah Sukuk. Shariah prohibits these certificates to be traded in the secondary market. Murabahah Sukuk: In the case of Murabahah Sukuk, the issuer of the certificate is the seller of the Murabahah commodity, the subscribers are the buyers of that commodity, and they are entitled to its final sale price upon the re-sale of the commodity. Murabahah Sukuk cannot be legally traded at the secondary market, as the certificates represent a debt owing from the subsequent buyer of the commodity to the Sukuk holders and such trading in debt on a deferred basis is not permitted by Shariah. Hybrid Sukuk: The innovative structures. Based on various demands of investors, a more diversified kind of hybrid Sukuk or mixed Sukuk emerged in the market. The assets can comprise of Istisnaa, Murabahah as well as Ijarah. Islamic Development Bank issued the first Hybrid Sukuk for US$400 million. The assets comprised 66% al-Ijarah Sukuk, 31% Murabahah and 3% al-Istisnaa sukuk. The hybrid Sukuk structure represents the potential of new structures and benefits to the investors.
Although in principle, Sukuk are required to represent underlying assets that are tangible (ayn) as opposed to a debt (dayn), there have been Sukuk issuances in which the underlying assets are a mix of cash and tangible assets. There have also been issuances of convertible and exchangeable Sukuk. Sukuk can be structured alongside different techniques. While a conventional bond is a promise to repay a loan, Sukuk constitutes partial ownership in a debt (Murabahah Sukuk), asset (Al Ijarah Sukuk), project (Al Istisnaa Sukuk), business (Al Musyarakah Sukuk) or investment (Al Istithmar Sukuk). Recently, there is one type of Sukuk introduced, the hybrid Sukuk. Ijarah Sukuk: It is divided into Purchase agreement, lease agreement, servicing agreement and purchase undertaking. It is based on letting property rights to any other benefits based on the agreed price. Al Ijarah Sukuk is issued on a sale and leaseback arrangement (Ijarah) of real estate and has been a popular structure for sovereign issuers in particular. The issuer applies the Sukuk proceeds to purchase real estate from the Originator and then leases it back to the Originator. The Originator undertakes to repurchase the real estate at maturity or upon early settlement at the original purchase price. The Issuer is required by Shariah law to undertake the major maintenance of the asset but will often appoint the Obligor to carry out such activity on its behalf. Mudharabah Sukuk: It is divided into Mudharabah agreement and purchase undertaking. It is a cooperation agreement between two parties that investors and managers of capital. Mudharabah Sukuk are investment Sukuk that represent common ownership of units of equal value in the Mudharabah equity; the holders of Mudharabah Sukuk are the suppliers of capital (Rabb almal) and own shares in the Mudharabah equity and its returns according to the percentage of ownership share. Mudharabah Sukuk holders have the right to transfer the ownership by selling the deeds in the securities market. Mudharabah Sukuk also should not contain a guarantee from the issuer or the manager for the fund, for the capital or a fixed profit, or a profit based on any percentage of the capital. Musyarakah Sukuk: It is divided into Musyarakah agreement, management agreement, purchase undertaking, it involves the cooperation of two parties to incorporate a capital for a motivation. Al-Musyarakah Sukuk was a popular
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Mohamad Zaid Mohd Zin, Mara University of Technology, Malaysia Mohamad Zaid Mohd Zin is a lecturer at Centre for Islamic Thought and Understanding, Mara University of Technology, Malaysia. He received his B.S degree in Syariah From Al Azhar University, Cairo, Egypt (1999) and Master Degree in Islamic Studies (Syariah) from Malaysia National University (2005). His research interests in Islamic finance are in the areas Syariah issues and Sukuk. He is a member of International Economics Development and Research Center (IEDRC) and joined over 10 International Conference as a presenter at Malaysia, Indonesia, Singapore and Dubai. Currently, he is a PhD student at Malaysia National University under Faculty of Islamic Studies.
structure among corporate issuers until the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) ruling on Sukuk at the beginning of 2008 clarified the prohibition of the use of nominal value Purchase Undertakings in such Sukuk. In an alMusyarakah Sukuk, the Issuer contributes the subscription proceeds to enter into a joint venture with the Originator who contributes either his own capital/ asset or makes a contribution in kind. The Issuer and the Originator share the profits according to an agreed ratio but Shariah requires that any losses must be shared according to the ratio of capital contributed. Besides that, the AAOIFI ruling confirmed that while it is permissible in an al Ijarah Sukuk for the lessee to undertake to purchase the Sukuk assets at nominal value upon redemption, it is not permissible for a Sharik (partner) in an al Musyarakah Sukuk or a Wakil (agent) in a Sukuk al Wakalah
Sukuk Market in Malaysia In this decade, greater focus was particularly given to the institutional arrangements to develop the Sukuk market. The Sukuk market now accounts for more than fifty percent of Malaysias bond market. The market has drawn the participation from a wide range of
Sukuk
international corporations and multilateral agencies in raising funds and investing in the Sukuk issuances out of Malaysia. More recently, there has also been continuous innovation and an increasing number of issuances in foreign currency. Malaysia offers international participation in the Islamic financial system and also offers to be an international gateway, particularly in strengthening the link between the two important dynamic growth regions of Asia and the Middle East. ity Muslim population, also showed interest, such as the United Kingdom and Japan to engage in global Sukuk issuance. The Government of Malaysia recently issued the second benchmark dollar sovereign Sukuk for Malaysias domestic funding needs. The Governments investment arm, Khazanah Berhad, recently issued a Singapore dollar Sukuk out of Malaysia through its existing multi-currency programme. The Islamic Development Bank has also closed the book-building exercise for a 500 million US dollar benchmark Sukuk issue in Malaysia for developmental projects of member countries. In addition, the Dubai Governments Department of Finance is proposing to launch a multi-currency Sukuk programme soon. Malaysia, therefore, is
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Malaysias Sukuk market started with a simple issue size of RM125 million by Shell MDS Sdn. Bhd... In 1990 and is now growing in size and increasingly sophisticated. This Malaysia will also continue to collaborate development is evident in the largest Suwith other regulatory authorities to ensure kuk issue recently valued at RM15.4 billion financial stability in the Islamic financial sys(USD4.7 billion) by Binariang GSM tem. This will be through Malaysias Sdn. Bhd. Now, the Sukuk market in Figure 1: Breakdown of Global Sukuk Issues by Country for active involvement in the Islamic Malaysia is among the fastest growFinancial Services Board (IFSB), the year 2010 ing in the world, with an average anIslamic Financial Stability Forum Brunei Darussalam 0.5% nual growth of 22% issued for the (IFSF), the initiatives by the Islamic Japan 0.2% period 2001-2007. Development Bank (IDB), and finally Turkey 0.2% in the newly formed International Pakistan 1.9% Gambia 0.0% After introducing the first sovereign Islamic Liquidity Management CorUnited Kingdom 0.0% Bahrain 1.4% global Sukuk in the world in 2002, poration (IILM). Pakistan 1.9% Malaysia has continued it success by UAE 2.1% introducing innovative Sukuk strucSecondary trading in the Malaytures such as convertible musyarsian Sukuk market has increased Qatar4.1% akah Sukuk by Khazanah Nasional the depth and liquidity of the marBerhad, the Malaysian government Saudi Arabia 5.8% ket with the participation of more investment holding company. This companies, including foreign-owned is a historic issue and the first of its companies continued use of this kind in the world, which combines Indonesia 6.0% market for funding purposes. A the features of the first full convertlarge number of corporate issuibility, usually for conventional equiance is to finance long-term funding ty-linked transactions. needs. The diversity and size of the Sukuk transaction and the increasFor 2010, Malaysia remains a fronting value proposition is attractive to runner in the global Sukuk issuance, investors who want to diversify their contributing 77.7% of the total Suasset portfolios, thus creating a vikuk issued in 2010. Meanwhile, for brant secondary market. Malaysia 77.7% countries that do not have a majorSource: Zawya Sukuk Monitor.
well-positioned as a multi-currency issuance platform for Sukuk. In the area of capacity building, Malaysia has also given priority to two areas, one is in human capital development and the second, in catalysing mutual recognition of Shariah interpretations. The International Centre of Education in Islamic finance (INCEIF) was established in 2006 for advanced education for practitioners in Islamic finance, and in 2008, the International Shariah Research Academy (ISRA) was established to conduct applied Shariah research on the contemporary Islamic finance issues and to provide a platform for active international engagement among Shariah scholars.
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president of King Abdul Aziz University and Professor Rafael Puyol, chairman of the board of directors of Instituto de Empressa. Ahmad Mohamed Ali, president of the Islamic Development Bank, gave the keynote address. late ambition into a coherent and pragmatic program of independent education, research and development. One area beckoning to be leveraged is historical research. Muslims, for instance, ruled Spain for centuries. During this time, relations between the three Abrahamic faiths - Judaism, Christianity and Islam - flourished. So did scholarship, the arts and yes business and trade. At the same time there were extensive links with other rulers in Damascus, Istanbul and Baghdad. One project for SCIEF could be to research the Islamic financial transactions prevalent in Al-Andalus and elsewhere in Spain during the rule of the Muslims, and to see what relevance they may or may not have for todays Spain. Turkish academics are doing valuable work on similar financial transactions used during the Ottoman Empire especially relating to Waqf and Ushr (agricultural taxes). This has resulted in some pioneering books being published on this work. The Ottomans through its Mejelle were also the first to try to codify the Shariah, or at least some parts of it. Perhaps in the Saudi-Spanish context, the challenge is even more daunting. Despite the fact that Saudi Arabia is arguably the largest market for Islamic finance and has the largest liquidity, Islamic finance and Fiqh
Perhaps it is pertinent that the proceedings will also see the launch of a timely book, titled Islamic Economics and Finance: A European Perspective edited by Professor Cristina Trullols, director of SCIEF, and Professor Abdullah Turkistani, acting dean, Islamic Economics Institute, King Abdulaziz University. There was also a panel discussion on the role of Islamic finance in universities and its development and expansion; a presentation on investment opportunities for the Islamic finance sector in the Spanish economy; and a summing up by Celia de Anca, director, center for diversity in global management and a specialist in the Arabic language, and Hisham Bardesi, dean of distance learning at Instituto de Empressa.
Turkistani, explained that comes in a critical economic situation of the world and particularly Europe. The sovereign debt crises in different European countries call for not only liquidity but also for a new way of finance. Islamic finance could be one possible solution. However, it is a long run process to benefit fully from the principles of Islamic finance. Education, in fact is one important channel through which knowledge and awareness of these principles could be built, operated and transferred into the new generation of people and institutions. The Saudi Spanish Center for Islamic Economics and Finance is a collaboration between parties, one with the state of the art in technical know how and the other party with a rich natural resources of values and principles. Together they can draw a road map for economics and finance of the next century. He also explained that one of the maikn challenges of SCIEF would be how to trans-
The reality is that Spain, from a historical context, should be spearheading the dialogue and cooperation with Islamic finance
Al-Muamalat (Islamic law relating to financial transactions) still needs to be demystified to both regulators and ordinary customers. In Spain the task is even bigger especially in the context of the growing Islam phobia that has swept Europe and North American the post 9/11 era which wrongly associates Islamic finance with political extremism. But the extent of Islamic finances Spanish challenge at the frontline business level could not be better illustrated by the latest first half 2011 attributable profit of Banco Santander, the only Spanish global banking major. Some 50 percent of profits were generated from the US and South American markets; and the other 50 percent from retail Spain, Germany and the EU. Not a single euro was generated from the Middle East, Asia let alone Islamic finance.
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Turkeys Islamic banks are lagging behind their non Shariah-compliant counterparts because of investor concern slowing economic growth will hurt the lenders ability to generate income from loans. While Turkeys overall banking index gained 19% since reaching a 20-month low on the 10th of August, Asya Katilim Bankasi and Albaraka Turk Katilim Bankasi, the nations two listed Islamic banks, also known as Participation banks, gained 12% and 4.9%, respectively.
partner of Sardis Securities Inc in Istanbul, said. Their performance shows investors are concerned about the health of those business loans, Acun said. Turkeys constitution, written by generals in 1980, mandates that religion be kept out of politics. The country allowed companies in April 2010 to issue debt in accordance with Islamic financing rules. Concerns about deterioration of asset quality are exaggerated, Albaraka Turk said. The bank plans to increase its branch network to 200 from 119 and the Islamic banking industry has the potential to grow its market share in Turkey to 10% from 4.3% it said, The investor relations department of Bank Asya Kuveyt Turk, which hasnt listed shares, applied to the regulator to sell a $350 million Sukuk. There will be interest in Islamic debt out of Participation banks, based on anecdotal evidence, Giyas Gokkent, Abu Dhabi-based group chief economist at National Bank of Abu Dhabi PJSC, said In general, there should be demand for Islamic issuance, but its just a matter of pricing. If you look at the global context, the spread is going up, so when they tap the market, the costs will be higher. Kuveyt Turk sold a 5.25% dollar Sukuk last year. The yield on the lenders Islamic bonds was little changed at 4.51% on Albaraka Turk and is in the process of hiring banks to manage the sale of about $200 million in Sukuk by November, Adnan Ahmed Yousif, the chief executive officer of its Bahrain-based parent, said on the 24th of September. gif
T he n a tions economy will grow 2.2% next year after 6.6% in 2011, the International Monetary Fund forecasts, as expansion stalls in the euro region, Turkeys biggest export market
cording to Shariah law. The secular nation, where almost all of the 79 million people are Muslim, has four Participation banks, Bank Asya, Albaraka Turk, Turkiye Finans Katilim Bankasi and Kuveyt Turk Katilim Bankasi. The last three are at least part owned by Arabian Gulf lenders. Islamic banks high dependence on lending gives them more exposure to small businesses, which usually have higher non-performing loans and may suffer more in economic downturns than non-Islamic banks, Haydar Acun, managing
The nations economy will grow 2.2% next year after 6.6% in 2011, the International Monetary Fund forecasts, as expansion stalls in the euro region, Turkeys biggest export market. Renaissance Capital, the broker half-owned by Russian billionaire Mikhail Prokhorov, forecast last week that the value of non-performing loans in the country will surge 73% next year to 4.1% of total loans. Islamic banks are prohibited from issuing or buying interest-bearing securities ac74 Global Islamic Finance
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The ratio of loans to assets at Albaraka Turk is 77% and 76% at Bank Asya, compared with 54% for Turkiye Garanti Bankasi AS, the nations biggest bank by market value. Participation banks are very much levered to economic growth due to high credit concentration in their balance sheets. Ercan Uysal, head of research at Standard Bank Group Ltds unit in Turkey, said in response, Thus if the market expects a slowdown or recession these guys are more vulnerable than conventional banks and bad loans can easily pile up.
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Islamic trade finance has benefited from shifting preferences towards Shariah-compliant banking and could serve as one of the key growth drivers to help the nearly US$1 trillion Islamic finance industry double in size, according to the World Islamic Economic Forum Foundation. Trade finance is the lifeblood of global commerce, underpinning 60% to 80% of the US$12 to US$13 trillion trade in global merchandise, the WIEF Foundation said at a briefing. While Islamic banking and Islamic bonds, or Sukuk were expected to lead growth, bankers believe that Islamic trade finance could serve as the dark horse emerging to propel the industry further. Total trade finance among the 57 members of the Organisation of the Islamic Conference (OIC), which includes Saudi Arabia, Malaysia and Turkey, is expected to reach US$4 trillion. The global Islamic finance industry, which has been growing by 15% to 20% a year, is widely expected to reach US$2 trillion in the next three to five years, and the African continent, which represents the second largest Muslim population in the world, is set to share in the largesse of this. Africa is on the threshold of coming into its own as a product of global evolution and political and economic transformation, said Ebrahim Ismail Ebrahim, the SA deputy min-
are facing threats of environmental damages such as deforestation, soil erosion, desertification, loss of biodiversity and effects of climate change, the foundation said. Furthermore, hindrances like unhelpful politics, weak longterm national planning and slow regional integration, continue to cast a shadow. Elections consume far too much of the nations money, and according to a recent article, Nigerias election cost the state US$580 million. Leaders also promote their ethnic and personal interest over national development. If the people of Africa are to prosper, we must tear down the walls between our nations. Currently, only 10 cents in every dollar, exported from an African country goes to another African country, compared to 50 cents in every dollar for their east-Asian counterparts. More intra-Africa trade is essential to increase prosperity, said Evelyn Mungai, executive chairman for Speedway Investments, Kenya. The WIEF Foundation said that as in other parts of the world, countries in Africa were seeking to take the opportunity to articulate new strategies and policies that refocus investments in economic sectors able to drive sustainable growth, create employment, and improve living conditions. Africa is on the launching pad of an economic take-off, said Birama Sidibe, vice president of the Islamic Development Bank. gif
The global Islamic finance industry, which has been growing by 15% to 20% a year, is widely expected to reach US$2 trillion in the next three to five years, and the African continent, which represents the second largest Muslim population in the world, is set to share in the largesse of this
ister of international relations and cooperation. But with growth, comes the inevitable challenges, and according to the WIEF Foundation, African countries have found themselves at a critical juncture in their development trajectories. Confronted by internal challenges of reducing poverty and unemployment, the resource bases of many productive sectors
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Event Review
World Islamic Banking Conference the worlds largest gather of industry leaders
Author: Tajah Brown, Global Islamic Finance Magazine Editorial Team, United Kingdom
The 18th Annual World Islamic Banking Conference (WIBC 2011) opened its doors to leaders within the Islamic finance Industry. The theme of the 2011 conference was competing for global growth focusing on topics such as expanding the internationalisation of the industry, accessing new markets, creating new products and improving cross-boarder transactions. More than 1,200 industry leaders, senior decision makers and key regulators will gathered to shape the future of the Islamic banking industry. With the partnership of the Central Bank of Bahrain and support from the Economic Development Board of Bahrain, the conference took place at the Gulf International Convention Centre, Gulf Hotel from the 21st to 23rd of November 2011. More than 60 partners, exhibitors and sponsors attended the prestigious conference covering all market areas globally. Delegates from over 50 countries attended and discussed strategies for managing the challenges of industry globalisation and ensuring stronger international opportunities for
Islamic banking and finance. WIBC 2011 was inaugurated by H.E. Rasheed Mohammed Al Maraj, Governor of the Central Bank of Bahrain. The session covered topics such as regulatory frameworks to accelerate the international development of Islamic finance. David McLean, Managing Director of the World Islamic Banking Conference revealed the launch of the annual conference saying,
Islamic finance is no longer a niche market and is rapidly becoming an important component of the mainstream financial system. As various jurisdictions seek to intensify efforts in developing their respective Islamic banking and finance markets, it is vital to strengthen the global framework for greater collaboration between these geographies that will facilitate significant cross-border activities and deal flow.
Event Review
H.E. Rasheed Mohammed Al Maraj announced the Central Bank of Bahrains partnership with WIBC 2011 saying, the growing internationalisation of Islamic finance reflects its ability to be competitive and respond to the complex needs of businesses globally. As the industrys geographic footprint expands, it is becoming increasingly vital to develop appropriate global frameworks and overcome the challenges of globalisation faced by Islamic finance. We believe that the World Islamic Banking Conference will play a meaningful role in facilitating dialogues to prepare the international Islamic finance industry to Compete for Global Growth. The Industry Leaders Power debate was moderated by Ashar Nazim, Partner, Assurance and Advisory Business services, Ernst & Young. It was the main Islamic finance is no longer a niche marpart of the WIBC 2011 ket and is rapidly becoming an important with CEOs and decisionmakers participating. component of the mainstream financial The debate included system. As various jurisdictions seek to intensify leaders in the industry efforts in developing their respective Islamic banksuch as Toby OConnor, ing and finance markets, it is vital to strengthen CEO of the Islamic Bank of Asia, Asad A Ahmed, the global framework for greater collaboration beCEO of Gulf African tween these geographies that will facilitate signifiBank, Syed Abdull Aziz cant cross-border activities and deal flow Jailani Bin Syed Kechik, CEO of OCBC Al-Amin Bank Berhad, Tirad Global Growth: Preparing for the Asian CenMahmoud, CEO of Abu Dhabi Islamic Bank tury which take place on the last day of the and Dr Salah Addeen A Qadar Saeed, Genevent. Dr. Jamil El-Jaroudi, CEO of Elaf Bank eral Manager, Credit & Risk Management at supported the WIBC 2011 saying, as a gold Bahrain Islamic Bank. The keynote was adstrategic partner of the 18th Annual WIBC, dressed by Prof. Kishore Mahbubani, Dean we welcome you to the Kingdom of Bahrain, and Professor , Public Policy at the Lee Kuan to be part of the discussions that will define Yew School of Public Policy on Competing for the next stage of evolution for the global Is-
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lamic finance industry. The long awaited World Islamic Banking Competitiveness Report 2011/2012 was launched at the WIBC 2011 in an exclusive session on the 22nd of November 2011. The report outlined the key trends and successful strategies used by Islamic banks and also covered issues such as the projection of 100 new Islamic banks by 2020 and local currency Sukuks in the spotlight. A panel of international experts also gathered at the Country Focus Roundtable to discuss the how well Islamic banks can explore international opportunities in the high growth markets within Islamic finance. The Country Focus Roundtable covered opportunities in countries such as Luxembourg, United Kingdom, Bahrain and Singapore. gif
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Part 1: Islamic Project Financing Setting the Agenda for Innovative Opportunities
Part of Article Collection, individual article/ 4.99 Global Islamic Finance Magazine will present part 1 of the Islamic Project Finance Series which will discuss the key components of project financing in adherence to the Shariah. This article aims to raise awareness of the functions and Islamic financial instruments used in Islamic Project financing along with an overview of the various opportunities presented in the sector primarily focusing on the UAE in Part 1 and then looking at various other countries around the world throughout the series. Islamic Project Financing is a growing sector and provides the avid investor with an excellent alternative to indulge in profitable projects through Islamic financial transactions which have the advantage of dealing with a prohibition of interest and many other benefits. Order Number:
Islamic Banking and Finance: What It Is and What It Could Be By T. El Diwany, T. Ahmad, A. Fazel, H. Al-Haddad, S. Hasan, S. Ismail, M. Kholwadia, N. Siddiqi, B. Timol, S. Zainuddin, Tarek El-Diwany
1st Ethical Charitable Trust, 1st edition/ 51.00
This text has been designed for use by professionals new to the field of Islamic banking and finance, and by students at undergraduate level or above. It covers the historical, theological, commercial, legal, institutional and macro-economic factors affecting the modern world of Islamic banking and finance and is organised into four main sections: Islam and the Shariah, Traditional Contract Forms, Contemporary Practices, and A Response to Capitalism. Views both for and against the current direction of the Islamic banking and finance industry are presented and a number of reforms are suggested at the institutional and contractual levels. Traditional and contemporary interpretations of Islam are contrasted, along with differences of opinion among the various schools of thought, so that the reader can better understand current discourse among scholars of Shariah. In a section devoted entirely to the modern application of Islamic contract law, fourteen case studies provide a detailed analysis of the extent to which modern Islamic financial products adhere to the legal principles outlined elsewhere in the book. Particular attention has been paid to clarity of expression in order that complex concepts can be absorbed quickly. To aid the learning process, an extensive index and table of contents allows ease of reference, and suggestions for further advanced reading are provided at the end of each section. Self tests allow students to keep pace with their progress, and these also act as a guide on content for more experienced readers. An extensive Arabic glossary is provided, and key terms are transliterated in the main body of the text. ISBN-10: 0956518605 ISBN-13: 978-0956518606
Global Islamic Finance Magazine will take you through the innovative approaches to ranking Islamic banks around the world which have been recently developed. There are various approaches to analysing the Shariah-compliant banking system and GIF magazine will give you a comprehensive insight into the methodology. In addition there are varied methods to analyse the rankings of Islamic banks and this is a must read for any business professional or employee joining the industry in addition to CEOs and investors wishing to learn more about the Islamic banking market. Islamic banking is a sector which is being acknowledged globally by hungry investors who want a slice of the lucrative industry.
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McGraw-Hill Professional, 1st edition/ 54.14 With global assets expected to reach over a trillion dollars in the next few years, Islamic finance is the fastest growing segment of the international financial services industry. This introductory guide takes readers on an in-depth tour of this exciting new world of opportunity, with profiles of the many diverse players, projections of Islams hottest growth markets, and a muchneeded focus on theory and other key concepts. ISBN-10: 9833850618 ISBN-13: 978-9833850618
February 2012
Looking for a Job in Islamic Banking?: Dip into the Global Islamic Finance Magazine Article Collection
Bored of your bank? Facing redundancy? Looking for a change of of your bank? Facing redundancy? Looking for change of directed? If you work in banking and youre looking for a career direction? If you work in banking and youre looking for a fresh challenge, Islamic banking may be for you. The Global Islamic you. The Global Islamic Finance Magazine Article Collection December 2009-June 2010 is Magazine Article Collection December 2009-December 2011 is and features many articles articles to your Islamic Islamic out now out now and features many to help get help get yourbanking banking career Each article article is available to buy separately career started. started. Eachis available to buy separately so you so mix and match match to formula that will open up Islamic canyou can mix and to nd thefind the formula that will open up Islamic to you. bankingbanking to you. The banking sector took a heavy blow during the nancial crisis and is still recovering. There were many redundancies and theyre still not many vacancies. Its no longer a guarantee that youll land a new job in the conventional banking industry even if you have all the credentials. Islamic banking, in comparison, is an up and coming alternative form of ethical nance. This exciting new industry is in real need of genuine talent and there are numerous vacancies and opportunities to choose from. Global Islamic Finance Magazine Collection features several articles that bring you up to speed on Islamic banking and give you all the information you need to break into the industry. Articles that are essential for any future Islamic banker include:
Islamic Banking-Differences, Growth and Future Challenges: Find out what Islamic banking is, what its achieved and where its heading. The Rise of Islamic Bank of Britain-Interview with Steven Amos: Gain a fascinating insight into the UKs most famous standalone Islamic bank through this interview with its Head of Marketing. An Introduction to Risk Management in Islamic Banking: Learn why risk management is as vital to Islamic banking as it is to conventional banking. What is Basel II?: What it means for Islamic Banking. Part I: Get to grips with the most iconic symbol of banking regulation and how it affects Islamic banking. The Suitability of HSBC Bank Mauritius as a Test Case for Shariah-compliant Banking Services on the Island: Discover through this case study how Islamic banking is breaking into brand new markets. The British Bankers Association Seminar: From Amanah to Iijhara: A candid look at one of Britains biggest banking events from the Islamic nance perspective.
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Event
Event Calendar
December
Commodities Week Middle East 5th 7th December 2011 Dubai, UAE International Conference on Islamization in Modern Science and Scientification of Islamic Studies 19th 21st December 2011 Selangor, Malaysia
January 2012
International Conference on Business & Finance [ICBF] 2012
6th- 7th January 2012 India
3rd Global Islamic Marketing Conference (GIMC): Putting Ethics Back into Business
16th 18th January Dhabi, UAE
February
FONDS - Switzerlands Financial Exhibition 2012
2nd- 3rd February Zurich, Switzerland
March
7th Caspian International Conference and Showcase
13th -14th March Baku Azerbaijan
For more information and full events details, please visit www.globalislamicfinancemagazine.com/events
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Business Directory
Banks
European Islamic Investment Bank
Contact person/ department: Keith McLeod Address: European Office 131 Finsbury Pavement London EC2A 1NT England Telephone: +44 20 78479900 Fax: +44 20 78479901 E-mail: reception@eiib.co.uk Website: www.eiib.co.uk Description: EIIB seeks to service a market for Shariaa compliant investment banking services in Europe, the Middle East and Asia that it believes has been under-exploited by conventional and Islamic banks, and by non-banking institutions. EIIB intends to become a major participant in the market for Islamic securities, treasury and investment products, which is currently experiencing rapid growth.
Accountancy firms
Abbas Accounting
Address: ABBAS ACCOUNTING P.O.Box : 78142 Dubai, U.A.E Telephone: +971 4 2820300 Fax: +971 4 2820322 E-mail: info@abbasaccounting.com Website: www.abbasaccounting.com Description: sad Abbas & Co is an audit and accounting consultancy firm in Dubai, United Arab Emirates. Services rendered by the firm include statutory, external and internal audit, accounting and financial management consultancy, accounting and finance outsourcing, project evaluation, feasibility studies and allied services. The firm is led by a team of qualified and widely experienced professionals dedicated to practice of the profession in the highest standards and committed to providing the best services to the clients.
Morison Menon
Address: 204 Tower- A, Gulf Towers, Oud Metha, P. O. Box 55535, Dubai, UAE Telephone: +971 4 33 66 990 Fax: +971 4 33 66 992 E-mail: dubai@morisonmenon.com Website: www.morisonmenon.com/ Description: Morison Menon Group is a group of firms offering professional advisory services in Financial Audit, Compliance and Accounting, Consulting (Business Plan, Company setup and business incorporation, Financial Consulting, Property Consulting, HR Solutions, BPO, IT and Web Solutions) since the year 1994. Headquartered in Dubai,UAE armed with a license to operate in DIFC, Dubai. The group has offices in Abu Dhabi, Jebel Ali, Sharjah and Ras Al Khaimah apart from overseas operations in Oman, Qatar, Bahrain, Iran and India. Morison Menon currently is a team of over 150 Professionals.
BDO International
Address: BDO - London 55 Baker Street London W1U 7EU Telephone: +44 207 486 5888 Fax: +44 0207 487 3686 E-mail: j.polin@bdo.co.uk Website: www.bdo.uk.com/ Description: BDO is an award-winning, UK Member Firm of BDO International, the worlds fifth largest accountancy network with more than 1,000 offices in over 100 countries, including affiliates. We specialise in helping businesses, whether start-ups or multinationals, to achieve their goals. Through our own professional expertise and by working directly with organisations, weve developed a robust understanding of the factors that govern business growth. Our objective is to use this to help our clients maximise their potential.
February 2012
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Law firms
Norton Rose (Middle East) LLP
Contact person/department: Neil D. Miller, Partner Address: 4th Floor, Gate Precinct Building 3, Dubai International Financial Centre, Dubai, UAE PO Box 103747 Telephone: +971 (0)4 369 6300 Fax: +971 (0)4 369 6350 Email: neil.d.miller@nortonrose.com Website: www.nortonrose.com Description: We offer a full business law service and work in teams that cut across national and jurisdictional boundaries. In everything we work on, we provide expert advice, innovation and a commercial outlook. Our practice areas cover banking and Islamic finance, construction, corporate finance, dispute resolution, PPP, project finance, real estate
Clifford Chance
Contact person/ department: Anna Ward Address: 10 Upper Bank Street Canary Wharf London E14 5JJ Telephone: +44 20 7006 1000 E-mail: info@cliffordchance.com Website: www.cliffordchance.com Description: Clifford Chance is one of the worlds leading law firms, helping clients achieve their goals by combining the highest global standards with local expertise. The firm has unrivalled scale and depth of legal resources across the three key markets of the Americas, Asia and Europe and focuses on the core areas of commercial activity. Clifford Chance lawyers advise internationally and domestically.
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2012 February Global Islamic Finance
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Capitala
Contact Person. Department : Patricia Assaad Address: Al Moroor Street PO Box 30398 Email: patricia.assaad@capitala.ae Telephone: +971 2 412 1111 Fax: +971 2 412 1222 Description: Capitala are the masterminds behind some of the most beautiful and nubile real estate development in the Middle East. They are focused on striking the balance between community cohesion and good business decision making. There main project Arzanah, is a US$6 billion development on Abu Dhabi island. Located in the Zayed Grand Mosque District
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Liability that will normally be repaid within a year. Current assets divided by current liabilities -- a measure of liquidity. Generally, the higher the ratio, the greater the cushion between current obligations and a firms ability to meet them.
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February 2012
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