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Islamic Finance Pakistan

Islamic Finance Industry Newsletter

Volume 4, Issue 4, May 2013

Islamic finance and its laws are being derived from Shariah laws where its regulations are being deduced from Quran and Hadith. When the word Islamic finance appears to our mind, we are somehow confused with many products such as Modaraba, Musharaka, and Ijarah etc. Understanding these products is way out of the league for a common man to comprehend because the diversification of the products at high level is too much complicated, and people may not be able to understand even a word. Since last decade what we have simply comprehended is that Islamic finance has come on mainstream from niche market to the main profit business. According to AT Kearney reports on Islamic finance, which has somehow elaborated that Islamic finance today is on its rise with around 21% of growth. However, unfortunately, the employees within an organization who are related to Islamic finance industry has a weak or very little knowledge of Islamic finance and its products. Similarly, this is more prominent in Islamic Banking on occasions where a customer needs more explanation on the Shariah compliant product's structure and functionality. The problem still exists due to fact that employers of the Islamic finance industry don't polish and enhance the required skills of their staff regularly. So from this we can easily elaborate and conclude that Islamic finance is basically a puzzle of profits, which only requires ample of time to understand its product structure with a dedicated team in place. Happy Reading!

Ayat of Month:
And among men there is one who worships Allah (standing) on the verge: so if some good thing happens to him, he is satisfied with it, and if a trial befalls him, he turns his face back. He loses both this world and the Hereafter. That is the manifest loss. [AlHajj: 11]

Hadith of Month:
Narrated 'Umar bin Al-Khattab: Allah's Apostle said, "The bartering of gold for silver is Riba (usury), except if it is from hand to hand and equal in amount, and wheat grain for wheat grain is usury except if it is form hand to hand and equal in amount, and dates for dates is usury except if it is from hand to hand and equal in amount, and barley for barley is usury except if it is from hand to hand and equal in amount." [Sahih al-Bukhari, Volume 3, Book 34, Number 344:]

Advisory Board
Mufti Irshad Ahmed Aijaz Mufti Najeeb Khan Anwar Ahmed Meenai Mohammad Aslam Mujeeb Baig Faizan Memon Syed Abdul Rafay Ather

Nusrat Ullah Khan

Associate Editors
Shakil Khan Muhammad Shahzad Hussain Arshad Hussain Zubairi Rima Farooq

IFP is an initiative of IFP Forum and Hidaya Islamic Business Support Services (IBSS)

News Story
Shariah Standard on Shirkat-ul-Milk and Diminishing Musharaka
State Bank of Pakistan is actively promoting and developing Islamic Banking industry in Pakistan as a parallel system and this sector has so far witnessed remarkable growth and increased recognition amongst the stakeholders. In order to guarantee effective Shariah compliance in the Islamic Banking industry and maintain trust of the stakeholders, a proper Shariah compliance mechanism has been put in place by SBP. Recently compliance with certain paragraphs of Shariah Standard No. 12 of Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) on Shirkat-ul-Milk and Diminishing Musharaka were made mandatory by State Bank of Pakistan with effect from June 2013 issued in their circular no. 2 of 2013. It should be noted that the compliance with Shariah Standard is in addition to the prudential regulations and guidelines issued by the Islamic Banking Division of State Bank of Pakistan. The idea behind this is the harmonization of Shariah practices across the board. Moreover, from June onwards the non-compliance with any of these requirements may result in a penalty to Islamic Financial Institutions (IFI). Diminishing Musharaka is amongst those products which is frequently offered by Islamic Banks and have a high market share, requiring a framework to enhance its acceptability and uniformity. Diminishing Musharaka is a form of coownership in which two or more persons share the ownership of a tangible asset in an agreed proportion and one of the co-owners undertakes to buy in periodic installments the proportionate share of the other co-owner until the title to such tangible asset is completely transferred to the purchasing co-owner. The purchasing co-owner also pays monthly rentals to the other co-owner against his proportionate share in the asset. Diminishing Musharaka can be created only in tangible assets. Diminishing Musharaka shall be limited to the specified asset (s) and not to the whole enterprise or business. Joint owners in diminishing Musharaka may agree on a premature withdrawal of their share by way of gift or sale to a third party. The disposal may be at either the face value, market value or agreed value. A withdrawal by one of the joint owners may not lead to the termination of diminishing Musharaka between the remaining joint owners. Basic Structure of Diminishing Musharaka Process flow or basic structure of DM may be as follows: The customer approaches the Bank with the request for financing of an asset; The Bank enters into a Musharaka (Joint Ownership) agreement with the customer and both of them pay their respective shares to the seller of the asset; Client pays rentals to the Bank for Banks share as per ratio of ownership; Client promises to purchase Banks share (units) over the tenure of transaction with the help of Undertaking to Purchase; and Ownership of the asset is gradually transferred to the customer upon payment of asset price (with the help of a sale transaction between Bank and customer at the end of each period). As a Mode of Fixed Asset Financing Diminishing Musharaka is commonly used by various Islamic banks for the purpose of financing of following: House financing; Car Financing; Plant and machinery financing; and All other fixed assets.

Significance of Musharaka in Islamic finance

Compiled by Muhammad Usman Uppal
The history of Musharaka dates back to 1500 AD where Arabs use to practice this financial structure. The meaning of Musharaka is a joint ownership of two or more persons in a particular asset or property with or without common intention to engage in business with respect to such asset or property. The term Musharaka used in our contemporary books was derived from Shirkat, found in old literature. Musharaka means relationship established under a contract by the mutual consent of the parities for sharing of profits and losses arising from a joint enterprise or venture. Profits shall be distributed in the proportion mutually agreed in the contract, but loss will always be borne according to the ratio of investment. Musharaka with commercial intent is known as Shirkat-ul-Aqd while without this intent is called Shirkat-ul-Milk.

Key Principles Underlying Profit Determination of Musharaka

Rules for Profit Determination Profit will be agreed according to percentage and not in lump sum. Agreed percentage must be a percentage of profit and not of capital. The profit can be distributed at any ratio agreed with mutual consent. Ratio of profit may differ from ratio of capital / investment. The ratio of profit of the sleeping partner should never be more than the ratio of his investment. Loss will be suffered according to the ratio of investment. No guarantee can be given by the partners for the payment of profit or capital. Third party can guarantee the profit or capital subject to: Third party has no relation with the business; This guarantee will not be the part of Shirkat contract; and Third party will not charge any fee for the guarantee. Different partners may be given different weightages according to amount and period of their investment. Both partners can agree that their profit sharing ratio will be different for different periods. Partners may also agree that any profit above the expected profit will be distributed at some other ratio.

Significance of Musharaka in Islamic finance (Contd.)

Musharaka has its own significance, especially in those economies where the distribution of wealth is unequal and there is a huge disparity between the income level of individuals. The poorer gets poorer where as the wealth gets concentrated in the hands of elite class. Musharaka arrangement provides an opportunity for the small enterprises to obtain finance and in return sharing their profits or losses with the financier. While it is equally important for the large enterprises to get large funding in the capacity of partner rather than borrower. It allows both the parties to get equally benefited from their share of investment. From previous experiments it is witnessed that Musharaka has resulted in profitable ventures. The working mechanism of Musharaka simply concludes that every person included in the partnership has its right to take part in the management of the enterprise. But, one condition that can be implemented is, that all of the partners may mutually agree upon a fact that one of them will carry out the administration of whole assignment. Shariah has clearly indicated all the rights and responsibilities of the partners along with the rules of administration and management for the engagement of the assignment. Moreover, if there is a silent partner, he should also be taken into account, but his share of profit should not exceed his share of investment. Profits can easily be generated through trading activities where partners can earn the profits made on actual amount in which risks were also undertaken on the transaction. But one thing has to be clearly understood that if no risks were involved then the profits generated represents Riba instead of Halal income. One of the most important factors that is vital for the working mechanism related to the profit sharing is that, it is necessary for the legitimacy of Musharaka that each and every partner gets the profit exactly in the percentage of profit as per mutual agreement between them. So from this we can elaborate that Musharaka is a product in which the probability of earning profit increases for both of the financers by availability of excess liquidity for tapping profitable opportunities. This product by large have been used and practiced in Middle East and many business financial transactions have been made so far for this purpose.

A brief comparison...

Musharaka and its comparison with its interest based alternatives Interest based alternatives In interest based financing arrangements, the lender lends its money to the borrower and feels free, as he demand for the risk free return on his investment. Musharaka In Shirkat both parties remain conscious and alert regarding risks and returns of the business.

Interest based lending system is such that in this system The Shirkah is based on justice, where both the partners the lender never considers the fact that the borrower enjoys the earned profits and also the losses suffered. may fail to generate the profits. Borrower is totally bound to return principal along with interest, even if he has suffered losses. And in case if borrower earns huge profits, they are only liable to pay the fixed return to the lender while the remaining profit can be wholly enjoyed by them. In interest based financing system the money circulates While in Shirkah money disperse / circulates in the in few hands, thats why poor gets poorer and vice society. versa (rich become richer).

Global News
Kenyas sole Shariah compliant insurer to expand in region
Takaful Insurance of Africa Ltd., Kenyas only Shariah-compliant insurer, plans to expand its operations into five East African nations, Chief Executive Officer Hassan Bashir said. Under Takafuls five-year plan spanning 2013-2017, it will expand into Ethiopia, Tanzania, Uganda, Somalia and the autonomously governed enclave of Somaliland, where it was granted a license this year, he said.

Dubai supremacy challenged as global banks move to rivals

Saudi Arabia was not initially my first choice, but I found Dubai had contracted, said the, a director of project finance at Riyadh Bank (RIBL), the nations third-biggest lender. Saudi Arabia and Qatar are where the deals are, he said. Riyadh climbed 32 places to 33rd in the Global Financial Centers Index published by London based consulting firm Z/Yen that made the Saudi capital the biggest gainer on an index led by London and New York list.

U.S. backed bonds planned by Tunisia amid IMF talks

Tunisia will seek a U.S. guarantee for its bonds for the second consecutive year and will sell Islamic debt in June as the North African nation mobilizes funds to shield the economy from Europes crisis and domestic turmoil. The government may sell $500 million of U.S. backed notes in the second half, Finance Minister Elyes Fakh said in an interview. The yield on $485 million of similarly guaranteed debt due July 2019 fell 21 basis points this year to 1.48 percent.

Albaraka Turk early price talk 7.75-8.00 percent for Sukuk

Albaraka Turk has revised price thoughts to 7.75-8.00 percent from an initial 8 percent area on its 10year non-call 5 Sukuk. BNP Paribas is global coordinator and is joined on the book by Al Hilal Bank, Barwa Bank, Emirates NBD Capital and Nomura.

Al Hilal Islamic Bank introduces chip based Visa debit card

Ahli Bank's Al Hilal Islamic Banking Services has become one of the first Islamic Banks in Oman to introduce a chip-based debit card for its customers. The new Shariah-compliant debit card can be used worldwide for withdrawing cash as well as at merchant outlets based on International Banking standards, the Al Hilal debit card is tailored to meet the needs of Islamic Banking customers.

Qatar set to become key global hub for Shariah-compliant products

Qatar is set to become a "key international distribution hub" for Shariah-compliant products as the Islamic finance market continues to emerge, a new report has shown. While infrastructure projects will feed new alternative fund structures and boost public-private partnerships, Qatar also has a longterm interest in developing as a centre for Islamic finance.

Dubai Islamic Bank (DIB) repays Ministry of Finance AED 3.752 billion deposit in full
DIB announced that having received the necessary regulatory and Government approvals, the bank has repaid the AED 3.752 billion deposit, in full and well ahead of contractual maturity, which it received from the Ministry of Finance in 2008 citing robust financial position and strong liquidity as the key drivers for the decision.

The news included here is on the basis of information obtained from local and international print and electronic media sources. IFP and Hidaya IBSS team does not accept any responsibility about their bona-fide.

Global News
Barwa Bank first quarter 2013 profits at QAR 156 million, 53% up on first quarter 2012
Barwa Bank has announced its financial results for the period ended March 31, 2013. Total assets increased by 12.8% to QAR 28.5 billion (QAR 25.3 billion as at 31st December 2012), a growth in the customer financing portfolio to QAR 16 billion vs QAR 15.3 billion as at the of 2012. Total income increased to QAR 364 million, up by 36% compared with the first quarter of 2012 Net profits increased by 53% compared with the first quarter of 2012 to reach QAR 156.7 million.

Islamic finance a catalyst for driving an integrated Islamic economy

The 3rd Annual Middle East Islamic Finance and Investment Conference which was held at the Dusit Thani, Dubai, saw more than 250 leaders in the international and regional Islamic banking and finance industry engage in critical discussions that focused on building the Islamic economy and strengthening Islamic finances links to the real economy. Co-located with the 8th Annual Takaful Conference , the event was opened with a special inauguration.

Islamic Bank of Britain beats the big banks with best-buy ethical savings deals
Islamic Bank of Britain plc (IBB), has extended its reign over the long term savings Best Buy tables, compiled by The Bank has been topping the Best Buy tables since December 2012 with its 24 month Fixed Term Deposit (FTD) account. Now its entire range of Shariah compliant long-term savings accounts, consisting of 12, 18 and 24 month FTDs, are offering market-leading profit rates. Its 2 year FTD is even beating the returns on offer from the three year fixed term bonds .

United Arab Bank hires Minhaj Advisory for Islamic banking arm
The Islamic Banking Division of United Arab Bank has signed a memorandum of understanding with Minhaj Advisory. The services extended by Minhaj Advisory will include introduction of Shariah compliant products, contracts, supervision, auditing and training. Minhaj will form a Shariah Supervisory Board (SSB) with three Islamic scholars at the helm to extend their guidance regarding principles of Shariah related products and services.

UAE Banks lead surge in share value revival

Dubai Islamic Bank has kicked off earnings season for commercial lenders with a sharp increase in net profits for the quarter, as investors bet on bumper profits for Banks. Bank shares have surged as Banks repay government life support extended to cover the financial damage from the Dubai property crash of 2009. Money set aside by banks to cover bad loans is widely expected to have peaked.

Sukuk issuance to hit USD 275 billion by 2013 - end

The volume of Sukuk (Islamic bonds) issued by end of the first quarter of 2013 reached USD 34.2 billion, increasing on a quarterly basis rate at 21.5 percent, after an abundant year that witnessed a 54 percent increase in issuance, Kuwait Finance House (KFH) Research said Sunday. Sovereign issuances continue to dominate Sukuk issuance, followed by issuances of corporate, then sub sovereign authorities.

Dubai Islamic Bank (DIB) eyes double digit profit growth, acquisitions
Dubai Islamic Bank (DIB) has dealt with much of its balance sheet weakness and should see profits for 2013 grow in the high double digits, allowing it to eye acquisitions in new markets in Asia, officials said on Wednesday. Leaders at the world's oldest Shariah-compliant lender told Reuters it had put aside around AED 5 billion (USD 1.36 billion) against the sort of soured property loans and transactions which drew into question Dubai's future as a financial hub in 2009.

The news included here is on the basis of information obtained from local and international print and electronic media sources. IFP and Hidaya IBSS team does not accept any responsibility about their bona-fide.

Local News
Meezan Bank Limited holds its 17th Annual General Meeting of the Shareholders
The 17th Annual General Meeting (AGM) of Meezan Bank Limited was held on March 28, 2013 at its Head Office Meezan House, Karachi. Mr. Irfan Siddiqui informed the shareholders that Meezan Banks performance remained outstanding in all areas of its business activities. The Bank recorded a Profit-after-tax of Rs. 3.5 billion in 2012 (2011: Rs. 3.4 billion), earnings per share (EPS) for the year increased to Rs. 3.88 (2011: Rs. 3.75) and deposits grew by 35% to Rs. 230 billion as at December 2012 (2011: Rs 170 billion).

Agreement to standardize FX and interbank Musharaka agreements amongst Banks

Meezan Bank, Pakistans first and largest Islamic bank, took the initiative of inviting senior Shariah scholars to a meeting to discuss the challenges in Islamic Treasury Operations. The meeting was held on 18th April 2013 at Meezan House, Meezan Banks Head Office, and was attended by several prominent Shariah scholars. The participants held detailed discussion over recent issues in FX trading and interbank products and agreed to standardize the FX and interbank Musharaka agreements amongst Islamic banks and Islamic banking windows.

Dubai Islamic Bank (Pakistan) reports Rs. 501 million profit

Dubai Islamic Bank Pakistan Limited has reported a year end profit before tax of Rs. 501 million. Furthermore, a 38 percent deposit growth was achieved in comparison to 2011, taking total deposits to Rs. 53.11 billion in 2012. The BoD of Bank held a meeting to approve its financial statements for the year ended Dec 31, 2012. A press release said that on the asset side, DIBPLs asset base rose by 32% in contrast to 2011 increasing the asset base to Rs 63.5 billion in 2012. The Banks investments grew substantially by 65% over the year, taking total investments to Rs 21.33 billion. DIBPL opened 25 new branches in 2012, increasing the total branch network to 100 in 35 cities.

Burj Bank conducts Earth Day CSR Activity at TCF Qayyumabad

Recognizing every employee as a powerful agent of positive change, Burj Bank has launched an employee driven CSR initiative "Giving beyond the Workplace Campaign". As part of the program, Burj Bank Employees along with the Senior Management team visited the TCF (The Citizens Foundation) Qayyumabad campus. The campus itself like all other TCF initiatives is a state of the art facility designed to deliver world class education to the underprivileged children of the society.

Inauguration of Al Baraka House

An important day in the Al Baraka global fraternity, as Al Baraka Bank Pakistan formally unveiled its Head Office, Al Baraka House in the city of Karachi, Pakistan. Inaugurated by Chairman Al Baraka Bank Pakistan, Mr. Adnan Ahmed Yousuf, who is also the President and Chief Executive of Al Baraka Banking Group, (ABG) on Saturday, April 20, 2013 marks a new beginning in a spirit of hope and optimism for future growth and progress in the current economic mayhem.

The news included here is on the basis of information obtained from local and international print and electronic media sources. IFP and Hidaya IBSS team does not accept any responsibility about their bona-fide.

Book in the Spotlight

Accounting, Auditing and Governance for Takaful Operations By Dr. Sheila Nu Nu Htay, Mohammad Arif, Dr. Younes Soualhi Hanna Rabittah Zaharain, Ibrahim Shaugee Publisher: Wiley Finance
As the global demand for Islamic insurance product increases, a thorough understanding of Takaful principles is vital for accountants, auditors, and leaders of companies offering these products. This book covers the basic accounting principles and practices of Takaful operations, including the segregation of assets, liabilities, income, and expenditures between the Takaful operator and participants; the setting aside of cash reserves for meeting outstanding claims and future claims; and the management of revenue and expenditure. The book features extensive case studies from real-world situations, this book is the perfect premier for Islamic finance students and practitioners unfamiliar with Islamic finance and Takaful operations. Written by experts from the International Islamic University Malaysia, the leading organization in research in Islamic finance. Covers all the major accounting principles and practices. Based on real-world experience and packed with illustrative case studies. For practicing accountants and business leaders, this book offers a thorough edification in Takaful operations while also serving as an excellent guide for undergraduate students and researchers. The book consist of six chapters encompassing all the major areas regarding accounting, auditing and governance issues related to Takaful operations.

About the Authors

Dr. Sheila Nu Nu Htay - PHD: Is PhD Program Coordinator at the Institute of Islamic Banking and Finance, International Islamic University Malaysia (IIUM). Mohammad Arif: Was CEO of Takaful Indonesia from 2001 to 2004. From 1985 to 2000, he was General Manager Finance and Administration/Company Secretary of Takaful Malaysia. Assoc. Prof. Dr. Younes Soualhi - PHD: Is an Associate Professor at the International Islamic University Malaysia (IIUM), Chairman of the Shariah Board of HSBC Amanah Malaysia and Chairman of the Shariah board of Munich Re Takaful. He is also a founding member of the French Council of Islamic Finance (COFFIS), Paris. Hanna Rabittah Zaharain: Is an audit assistant with AFTAAS Corporate Advisory. Ibrahim Shaugee: Is a consultant in Islamic Finance accounting system and taxation, based in the Republic of Maldives.

Ask Us
Questions / Answers
Question We came to know that combining more than one contract is not permitted in Shariah rules of financial contracts. On the other hand it is observed that when an Islamic financial product is executed, different contracts are presented to the client in one set of documents. Is it not the violation of above said Shariah principle? Answer It is permissible in Shariah to combine more than one contract in one set of document, without imposing one contract as a condition in the other, and provided that each contract is permissible on its own. Combining contracts in this manner is acceptable unless it encounters a Shariah restriction that entails its prohibition on exceptional basis. Question What are Shariah instructions about issuance of bonds? Answer The issuance of all kinds of bonds is prohibited when these bonds include stipulations for the return of the amount of loan and excess in any form, whether such excess is paid at the time of the satisfaction of the principal amount of loan, is paid in monthly or yearly installments or in another manner and whether this excess represents a percentage of the value of the bond, as in the case with most types of bonds, or a part of it, as is the case with zero-coupon bonds. Likewise, prize bonds are also prohibited. This applies irrespective of the bonds being private, public or governmental.

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Article: Usman Uppal Ask Us: Mufti Ibrahim Essa and Mufti Javed Ahmed Book in the Spotlight: Accounting, Auditing and Governance for Takaful Operations News: Local and Global news

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