global islamic finance magazine february 2012

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February 2012

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THE LEADING ISLAMIC FINANCIAL HUBS

OF THE WORLD: A COMPETITIVE FIELD

P. 68

An Ideal Islamic Financial System: A Gone Case?

P. 32

Risk Management: Islamic Financial Policies Islamic Banking and Its Poten-tial Impact

P. 48

Growth and Prospect of Sukuk in Islamic Finance, part 1

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James Caan on why he thinks Islamic Finance could have prevented the global fi nancial crisis

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Contents;QWERTYUIIOPDFHJUIIOPDFHJJ

15

News

9 Islamic Finance News

Islamic Finance

27 A PARADING SHIFT THE MARKETING DRIVEN APPROACH TO TAKAFULEvery 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, be-comes 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 prin-ciples of Shari’ah. It is difficult to find such people who possess knowledge in all three fields: an essential combination for a successful and articulate marketing strategy...

48 An Ideal Islamic Financial System: A Gone Case?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...

53 Choice of Law and Islamic Finance, part 2The 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…

Risk Management

15 Transforming the Global Market

Islamic Finance Report

53 32 Risk Management: Islamic Financial Policies Islamic Banking and Its Potential ImpactIslamic 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 countries—Iran, Sudan, and Pakistan—all 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.

68 Growth and Prospect of Sukuk in Islamic Finance, part 1Over 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…

Sukuk

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4 Global Islamic Finance February 2012

Market Review

30 2009 A Great Year For Kuwati Banks as Provisions Total $2.6 billionThe 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 dete-rioration of a majority of global economies...

35 Shariah Investments Have Arrived In IndiaHas 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 FinanceIslamic 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…

74 Islamic Banks in Turkey Need Support in FundingTurkey’s 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…

75 Trade Finance to Propel Islamic Banking IndustryIslamic trade finance has benefited from shifting preferences towards Shariah-compliant banking and could serve as one of the key growth...

76 Event Review

80 Events Calendar

82 Business Directory

84 Glossary

86 In the Next Issue

30

42

32

78 Book Review

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42 The Leading Islamic Financial Hubs of the WorldThe 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…

60 Introduction of Islamic Banking in Zimbabwe: Problems and ChallengesIslamic banking provides a great opportunity for the banking sector in developing economies to be effi-cient. The research’s objective was to explore the problems and challenges likely to be faced in introducing interest free banking services in Zimbabwe…


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Editor-in-Chief

Farhad ReyazatPhD in Risk Management

International Editorial Board

Prof Dr Khawaja Amjad Saeed, Principal of The University of the Punjab, PakistanProf Habib Ahmad, Sharjah Chair in Islamic Law and Finance in the School of Government and Inter-national Affairs at University of Durham, United Kingdom Prof Rodney Wilson, Professor in the School of Government and International Affairs at Durham University, United KingdomProf Humayon Dar, Chief Executive Officer at BMB Islamic UK, United KingdomProf Muhammed Shahid Ebrahim, Professor of Islamic Banking and Finance at the Bangor Business School, United KingdomProf Andrew White, Director of International Islamic Law & Finance Centre, Associate Professor of Law, Singapore Management University, SingaporeProf Simon Archer, ICMA Centre, Henley Business School, University of Reading, United KingdomHailey College of Banking & Finance, University of the PunjabDr Majdi Ali Ghaith, King Saudi University Assistant Professor Business Administrator Department, Saudi ArabiaDr Abu Umar Faruq Ahmad, School of Law University of Western Sydney Australia, Australia Dr Julien Pelissier, Lecturer in Islamic economics’ law, FranceDr Alberto Brunoni, Founder and Director of AASAIF, Italy Dr Aznan Hassan, Shariah scholar Bursa Malaysia, Malaysia

Dr Zukifli Hassan, PhD Research Scholar at University of Durham, United KingdomDr Mohammed Obaidullah, Economist at the Islamic Research and Training Institute (IRTI) of the Islamic Development Bank, Saudi ArabiaDr Amal El-Kharouf, Head of Research and Consultancy Department at University of Jordan, JordanDr M.Kabir Hassan, Associate Professor and Associate Chair of the Department, University of New Orleans, USADr Abdelhafid Benamraoui, Westminster Business School, United KingdomDr M. Ishaq Bhatti, Faculty of Law and Management, La Trobe University, AustraliaMughees Shaukat, PHD researcher and Assistant Researcher in INCEIF & ISRA, MalaysiaWarren Edwards, CEO of Delphi Risk Management, United Kingdom John Sandwick, Islamic Wealth & Asset Management Independent Consultant, Switzerland Brian Kettel, Director at Islamic Banking and Finance Training, United Kingdom Salina Hj. Kassim, Department of Economics at International Islamic University Malaysia, Malaysia Kasim Randeree, Saïd Business School, University of Oxford, United Kingdom Abbas J. Ali, School of International Management Eberly college of Business, Indiana University of Pennsylvania, USA

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Tasnim NazeerThomas A. TimbergMohamad Zaid Mohd ZinDennis CoxSalman Ahmed Shaikh

Julio C. ColónSalman Ahmed ShaikhKosmas NjanikeShaher Abbas

Mohammed Ridza AbdullahMohammad RezaSyed Adnan HasanMohammed Amin

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We believe Islamic finance offers insights

into how finance can be better grounded within the “real econo-my”, from which it has grown increasingly disconnected’’

„Goldman Sachs, in October, registered a $2 bil-lion 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 fi-nance which also benefits the conventional coun-terpart?

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 in-creasingly well to cater for the demand of Shari-ah-compliant products and services. As you are in no doubt aware, Islamic finance imposes some pretty serious constraints on its denizens.

For example, there’s a limitation on excessive speculation, there’s a limitation on leverage, there’s a limitation on selling things you don’t own. There’s a limitation on charging interest, there’s a limitation on investing in firms that rely on interest revenue or that carry a lot of debt, there’s the re-quirement that income must be derived as profits from shared business risk and so on.

On the surface, then, you’d expect Islamic finance to be severely constrained. And, you’d be right. But I’d argue that these constraints may offer op-portunities for mainstream finance. In the world of intellectual property, the workarounds that peo-ple 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 im-posed 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 capital-ism (i.e., the profit motive and private ownership remain firmly intact), these constraints (and their workarounds) are compatible with non-Islamic fi-nance as well.

We believe Islamic finance offers insights into how finance can be better grounded within the “real economy”, from which it has grown increas-ingly disconnected. For example, in nominal terms financial markets are four times as big as real markets. Why? Is it for the benefit of the in-

dustry? 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 that’s 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 includ-ing 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 in-sight into the world’s best Islamic financial institu-tions in 2011 and the leading personalities of the Islamic finance industry which are spearheading the industry forward.

Farhad ReyazatPhD in Risk Management Editor in Chief

Editorial Letter

To write the letter to the editor, send an email to [email protected].


Islamic finance newsIslamic finance news

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Strong Investment Demand to QInvest Sha-riah Compliant ‘Equity Protected Note’

It has been reported that QInvest, Qatar’s leading investment bank, has launched the ‘Qatar Equity Protected Note’ that aims to replicate the movements of the most liq-uid Shariah-compliant equities with full capital protection.

The note, which has been met with great enthusiasm by investors, offers exposure to a basket of the most liquid and invest able Shariah-compliant securities listed on the QE. The subscription for the note has been closed. QInvest CEO, Shahzad Shahbaz, said, “We have seen an overwhelming re-sponse from the market as investors look to maximise returns whilst maintaining capital protection.”

He added, “The note is one of a series of investment products QInvest is bringing into the market in the coming months, and demonstrates our strong Shariah-compliant structuring capabilities and commitment to meeting client needs.”

Further commenting on the success of the note, Nader Shenouda, head of Placement & Wealth Management, said “Clients’ positive reaction indicate that they were attracted by the risk return ratio the note offered. With interest rates at historical lows, the note is a much more rewarding alternative to cash deposits.”

Complementing this success, Qinvest an-nounced the dates of its 3rd Annual Qatar Global Investment Forum 2011 which was held on the 16th of November at the Four Seasons Hotel in Doha, Qatar. The event was hosted by Qinvest, organised by Institu-tional Investor Conferences and Lead Spon-sored by Qatar Financial Centre. The focus of the forum was on investment opportuni-ties and risks in Qatar, GCC and the major growth economies surrounding the region including Turkey, India, etc. Among the re-spected speakers and panellists, Nassim Taleb, the author of “The Black Swan and distinguished scientific advisor to Universa Investments LP”, participated delivering a keynote speech.

Capital Management House Pays Q3 Divi-dends to GCC Investors

Capital Management House (CMH) the Bahrain based Islamic investment bank, announced that it has made a 3rd distribu-tion of dividends to GCC investors of its air-craft leasing investment fund for the third quarter ending 30th of September 2011.

Dividends for investors in the fund are paid on a quarterly basis and have been calcu-lated at 10 percent per annum. The fund has been structured around a transaction concluded with Emirates Airlines, one of the world’s leading carriers, which was an-nounced in January 2011 and consists of the acquisition of a Boeing 777-200ER aircraft from the airline and an agreement whereby it has been leased back to Emirates.

The deal, which was undertaken in partner-ship with Novus Aviation and Muzun Partner Ltd., builds on opportunities in the regional aviation sector, which has shown to be resil-ient, and on the leasing sub-segment where strong returns can be achieved and where further growth, both in absolute and relative terms, is expected to continue in light of the Middle East’s position as one of the fastest growing travel hubs in the world.

Commenting on the announcement, Mr. Mo-hamed Aljasim, Chief Investment Officer of CMH said, “We are pleased to announce the payment of third quarter dividends to our investors across the region for our aviation leasing fund.

The fund continues to deliver steady and predictable cash flows for the Bank and our investors and underscores the success of this transaction and CMH’s overall strategy of investing in income yielding assets and growth sectors that can provide for signifi-cant upside potential.”

CMH invests in key sectors of the economy and in particular those that are of funda-mental importance to the development of the region. To date, the Bank has made sig-nificant investments in transportation, infra-structure, energy, power, financial services, real estate and capital markets.

Two New Small Businesses Kick Off in Khorfakan with Emirates Islamic Bank

Al Tomooh Scheme launches two new small businesses in Khorfakan, Sharjah fi-nanced by Emirates Islamic Bank.

In line with Al Tomooh Finance Scheme for Small National Businesses’ commitment to supporting small national enterprises, the National economy, and encouraging UAE Nationals to start their own businesses, Al Tomooh Scheme has inaugurated “Shabab Al Youm Gent. Garment Tailoring- G.2Day” owned by Mr. Saeed Hamdan Al Al Mroshe-di, and “Lamar Ready Made Garments Trad-ing” owned by Mr. Abdul Rahman Abdulla Al Hamadi. The projects that were financed by Emirates Islamic Bank.

The inauguration ceremony was attended by Mr. Majed Al Yousuf, Deputy General Manager and Head of Corporate Banking Unit at Emirates NBD, members of Sharjah Chamber of Commerce, Khorfakan, and Khorfakan Municipality and Khorfakan Min-istry of Labour, Khorfakan Economic Depart-ment together with members of Al Tomooh Scheme.

Following the ceremony, the attendees praised the efforts and the endeavours of Al Tomooh Scheme to encourage the UAE na-tionals from different emirates to establish tourist, technology, handicraft, professional and agricultural enterprises for increasing economic variety in the emirates where the Scheme is operating. Also, the management of the scheme has started the implemen-tation of a new promotional plan aiming to deliver the concept of Al Tomooh Scheme to all male and female locals all over the emir-ates.

In addition, the scheme provides its entre-preneurs the opportunity to choose the funding through Emirates NBD or Emirates Islamic Bank. Worth mentioning, the agree-ment executed between Emirates Islamic Bank and Al Tomooh Scheme has a special importance, as the Scheme’s objectives are fully complying with Emirates Islamic Bank aspiration of serving the society by assisting in forming national institutions to be owned and operated by young UAE nationals.

2012 February Global Islamic Finance 9

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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 mar-ket advice and guidance for making feasibil-ity studies.

Al Tomooh Finance Scheme for Small Na-tional Businesses, one of Emirates NBD’s initiatives and one of its corporate social responsibility activities, is considered a pio-neer 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 of-fered around AED 52 million in financing almost 122 National projects in several sec-tors and in various Emirates of the UAE.

IDB Boosts Financing Cooperation with Turkish Corporate

The Islamic Development Bank (IDB) lat-est $75 million line of financing to Turki-ye Finans Participation Bank, one of the four participation (Islamic) banks in Tur-key and in which Saudi Arabia’s 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 Com-mercial 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, pro-vides long-term financing opportunities to Small and Medium sized Enterprises (SMEs) in Turkey through instalment sale, Ijara (leas-ing) and Istisna (construction financing), and aims further develop key targeted sectors such as agriculture and food security, trans-port, energy and manufacturing.

The financing facility is part of the IDB Group’s Member Country Partnership Strat-egy (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. Tur-key is one of the major beneficiaries of IDB financing to date, and has received financing totalling $4.6 billion, of which trade financ-

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 Interna-tional Islamic Trade Finance Corporation (ITFC), the IDB Group’s 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 dis-bursement.

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 financ-ing 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 Corp’s Proposed RM1 Billion Sukuk

RAM Ratings has assigned respective long- and short-term ratings of AA1 and P1 to Sabah Credit Corporation’s (“SCC” or “the Corporation”) proposed Islamic Me-dium-Term Notes (“IMTN”) program of up to RM1 billion and proposed Islamic Com-merical 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 bil-lion at any time. Concurrently, the respective long- and short-term ratings of the Corpora-tion’s 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 Gov-ernment 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 pur-view 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 al-lowed 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 sub-ordination of SCC’s existing and future loans from the State Government (both principal and interest) to the Corporation’s debt secu-rities.

SCC has also received approval from the State Government to convert the latter’s loan of up to RM100 million into share capi-tal at the option of the Corporation. In addi-tion, 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 Corpora-tion’s existing RM500 million CP/MTN Pro-gramme (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 abid-ed by Islamic rules that forbid investment in collateralised debt obligations and oth-er toxic assets.”

“One of the questions we always ask is if the global economy operated under Shari-ah-compliant finance would we have had a credit crisis?” said Caan, the former star of the BBC series ‘Dragon’s Den’, during an in-terview 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 Dubai’s 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 world’s population today is Muslim, as a business-man I see this as one of the biggest growth market opportunities that is under-exploit-ed,” Caan said.


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“Potentially over the next five or ten years I can see this as being a very attractive posi-tion. I think there is an incredible increase in demand for Shariah-compliant opportuni-ties and products.”

Independent advisory firm 90 North was co-founded by Philip Churchill, formerly of Ku-wait-backed Gatehouse Bank. The company has placed nearly £1.1 billion ($1.7 billion) on behalf of Gulf investors in Islamic-compli-ant real estate assets to date.

Shariah law forbids gambling, investments in alcohol and receipt of interest, so fund man-agers have to select investments deemed Halal, or permissible.

“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 govern-ance, 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 Gulf’s wealthy residents by offering Islamic-compliant property assets with se-

cure long-term returns, Caan said. “We have identified an investment opportunity in the student housing market. Well respected uni-versities 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 accom-modation,” 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 com-panies while on the show, said Dubai re-mained the leading destination for invest-ment among the six Gulf States.

“If I was being pitched in Dragon’s 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 doesn’t 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 analyst’s expectations.

The net income of the Shariah-compliant

financial institution for the three months ending the 30th of September 2011, rose to Dh298 million, compared to Dh270 mil-lion for the same period last year. It shows a 10.5 percent year-on year increase for the third quarter.

The bank’s financial results beat the aver-age estimated profit of Dh245.5 million of the two analysts surveyed. Two more ana-lysts polled by Reuters had estimated third-quarter profit at Dh247 million and Dh283 million.

“DIB remains focused on delivering sustain-able growth through prudent management of costs and a strategy of targeting quality business,” Chairman Mohammed Ibrahim Al Shaibani said in a statement.

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 bal-ance 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 bank’s total assets as of the

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Ashar NazimMENA Islamic Finance Services Leader, Ernst & Young

Islamic financing, once properly under-stood and leveraged, will not only strengthen economic ties between the US and the Middle East, but will prove beneficial to US compa-nies willing to explore alternative financial arrangements,,

President Patrick Theros, US Qatar Business Council

,, 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 ,,

Amjad HussainPartner and Head of Islamic Finance, Eversheds

,, 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 ,,

Gary Carney Treasurer, Islamic Bank of Britain

,,


News gif

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 bank’s customer base continued to ex-pand.

“During the third quarter of 2011, DIB con-tinued to implement its long-term strategy to open more branches in convenient locations such as The Dubai Mall and Sahara Centre. The bank’s total in-mall network now stands at eight branches, bringing the total UAE-wide network to 70 branches,” chief execu-tive officer Abdulla Al Hamli said.

The bank reported a financing-to-deposit ra-tio of 76.8 percent as of the 30th of Septem-

ber 2011, providing a clear indication of the bank’s healthy liquidity position. The bank also reported a healthy capital adequacy ra-tio of 17.9 percent under Basel II, as of the 30th of September 2011.

The DIB also further strengthened its part-nership 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 bank’s share priced closed unchanged at Dh1.96 on Thursday. DIB’s shares have decreased 10 percent this year compared with a 2 percent loss in the Dubai Financial Market Financial Banks Index.

The 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 strat-egy, 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

Economist from Bank Audi sal - Audi Saradar Group will share insight on what’s in store for Middle East banking Industry for 2012 and beyond. According to Dr. Marwan: “The region’s banking sector has been resilient to the various recent crisis episodes, from the global financial turmoil to this year’s global fiscal driven distress, passing through the ongoing Arab regional political unrest.

However the structural profitability of the re-gional banking industry has been adversely impacted, reflecting more conservative structuring of balance sheets, greater regu-latory oversights and a historical low interest rate environment.

Looking ahead, loan growth, credit quality and interest spread improvement are the

key drivers of banks’ earnings. The region’s banks are likewise apt to benefit from solid regional growth fundamentals related to growing demographics, sub-par banking penetration, low leverage and strong liquid-ity at large.”

The summit also highlights a key discus-sion on the growing trends and innovation in the Islamic finance industry featuring ex-perts 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: “Is-lamic Banks and Islamic products market has witnessed enormous development dur-ing 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 Is-lamic finance industry either through estab-lishment of new banks/windows or convert-ing existing conventional institutions as well as increasing the market share of the exist-ing product such as the Sukuk market.”

The first day agenda also features technol-ogy experts from KPMG, IBM, Dubai bank, Al Hilal bank, Qatar Islamic Bank amongst oth-ers discussing how technology and innova-tion go hand in hand and its role from being a driver to an enabler of innovation.

Some of the key issues to be discussed dur-ing the session include: bank 2.0 new era of engagement banking, intelligent e-state-ments, data mining, IT investments and use of social media and multi channel proposi-tions for delivering better customer experi-ence.

Day two focuses on the experience and prod-uct and people management pillars of bank-ing innovation with experts from Citibank, Aj-man Bank, Gulf International bank, National bank of Oman, Abu Dhabi Commercial bank, Bank Muscat, discussing what’s driving in-novation 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.

There is enormous potential for Islam-ic 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 that’s specifically tailored to meet one of the most exciting growth opportunities in the wealth management industry

,,

,,Talal Yassine OAM, Managing Director, Crescent Wealth

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

,,

,,

Ashar NazimMENA Islamic Finance Services Leader, Ernst & Young

Islamic financing, once properly under-stood and leveraged, will not only strengthen economic ties between the US and the Middle East, but will prove beneficial to US compa-nies willing to explore alternative financial arrangements,,

President Patrick Theros, US Qatar Business Council

,, 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 ,,

Amjad HussainPartner and Head of Islamic Finance, Eversheds

,, 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 ,,

Gary Carney Treasurer, Islamic Bank of Britain

,,


Success is not for the timid. It is for those who seek guidance, make decisions, and take decisive action.

www.iiconline.co.uk

International Investment Co (IIC)


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ISLAMIC FINANCENo. 1 / Jan. ’12

James Caan on why he thinks Islamic Finance could have prevented the global fi nancial crisis

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Success is not for the timid. It is for those who seek guidance, make decisions, and take decisive action.

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gif Islamic Finance Report 2 · JANUARY 2012 AN INDEPENDENT SUPPLEMENT BY MEDIAPLANET

Globally, the de-mand for Islam-ic fi nance is clear. The market for IFS rose by 10 per cent to reach US $1,041 billion by

the end of 2009, taking global assets above the US$1,000 billion thresh-old for the fi rst time: a respectable outcome in the context of the diffi -cult economic environment.

Banks, Sukuk listings and man-agement of funds are buttressed by the UK’s uniquely strong infra-structure of professional support for Islamic fi nance transactions. This consists of more than 20 ma-jor law fi rms and many profession-al service organisations including the Big Four accounting practices. All of these have established teams providing specialist Islamic fi nance services covering tax, listings, transactions, regulatory compli-ance, management, operations and IT systems. This extent of expertise has yet to be seriously rivalled by any other Western fi nancial centre.

Sukuks recovered strongly

1 The Sukuk (Islamic notes that represent an alternative

to conventional bonds) market re-covered strongly in 2010 with re-cord issuance of US$50billion. Whilst there have been defaults, the impact on the broader market has not been as extensive as was feared and quality issuers of Sukuk continue to attract de-mand from investors.

Indeed, the London Stock Ex-change has proven to be an at-tractive draw for Sukuk issuance. In the first quarter of 2011, the number of Sukuk listing at the LSE totalled 31 with an aggregate value of US$19billion.

UK leading the wayBank 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 man-agement 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 contin-ues to broaden, there is a grow-ing global demand for education and skills. UK institutions are

CHALLENGES

Excellence in Islamic fi nance

Islamic fi nance is growing as a source of fi nance for both Islamic and other investors around the world. The UK — especially London, is the leading Western centre for Islamic Financial Services (IFS).

‘It would help if there were a global Islamic bank the size of something like HSBC, because that would set the standard for others’

Samer HijaziFinancial Services Audit Director, KPMG London

WE RECOMMEND

PAGE 8

ISLAMIC FINANCE, 1ST EDITIONJANUARY 2012

Managing Director: Chris EmbersonEditorial and Production Manager: Faye GodfreyBusiness Development Manager: Hannah Butler

Responsible for this issue:Project Manager: Soha SulimanPhone: 020 7665 4418E-mail: [email protected]

Distributed with: City AMPrint: City AM

Mediaplanet contact information: Phone: 020 7665 4400Fax: 020 7665 4419E-mail: [email protected]

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Mediaplanet’s business is to create new customers for our advertisers by pro-viding readers with high-quality editorial content that motivates them to act.

today at the forefront of provid-ing qualifications for the glob-al industry. Courses in Islamic finance are now offered by over thirty professional institutions; from school level through voca-tional and career-based qualifi-cations as well as undergraduate and postgraduate degrees.

Great promiseWith all these factors in place, the potential for

growth in UK-based IFS is im-measurable. The UK Financial Services sector represents a springboard for global growth and the partner of choice in the delivery of Islamic finance excel-lence. At the UK Islamic Finance Secretariat, a part of TheCityUK, our goal is to continue with the development of strong partner-ships with other global Islamic finance centres and to support the favourable environment for investment opportunities in Is-lamic finance.

For more information, please visit www.thecityuk.com

Keith PhillipsCommercial Director, TheCityUK and Member of the Board of the UK Islamic Finance Secretariat (UKIFS)

‘The 22 banks in the UK offering Islamic fi nance products now exceed that of any other Western country’

2

3


Contacts

Nadim Khan Global Head of Islamic Finance, Dubai +971 4 428 6305 [email protected]

Adil Hussain Finance, Riyadh +966 1 463 2374 [email protected]

Hammad Akhtar Corporate, London +44 20 7466 2573 [email protected]

Simon Price Real estate, London +44 20 7466 2181 [email protected]

Herbert Smith LLP is a leading international full-service legal practice with

over 1,500 lawyers and offices across Europe, the Middle East and Asia.

We are the firm clients turn to with their most complex and critical work.

With our Global Islamic Finance team, we have Islamic finance expertise

throughout the Herbert Smith network including in Dubai, Abu Dhabi,

Hong Kong, Jeddah, London, Moscow, Paris, Riyadh and Singapore offices.

Our Islamic finance specialists regularly work closely with banks, sponsors,

government entities and corporates on Islamic financing transactions and

also regularly advise on the structuring of new Islamic products.

Our Islamic finance experts recently advised on several “first of their kind”

Islamic financing transactions including: the multi-sourced receivables based

financing of the Salik toll road system in Dubai, which included a novel Islamic

tranche; and the structuring, within the UK Alternative Finance Investment

Rules, of a Shari’ah compliant mezzanine facility for the re-financing for

5 Canada Square, Canary Wharf, London integrated within a senior, junior

and mezzanine financing structure.

Islamic finance - how can we help you?

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



JANUARY 2012 · 5AN INDEPENDENT SUPPLEMENT BY MEDIAPLANET4 · JANUARY 2012 AN INDEPENDENT SUPPLEMENT BY MEDIAPLANET

The growth of Islamic finance in the UK has meant that there is an increased and urgent need to provide training courses and education for participants in the industry. This is to ensure that students and financial ad-visers fully understand Sukuks (bonds), Takaful (insurance), Mu-daraba and Musharaka (types of partnership) and Murabaha (cost plus sale).

London leading the way“There is now an increasing number of programmes from short training courses and con-ferences, to degree and post de-gree programmes, and also pro-

fessional qualifications,” says Ruth Martin, Managing Director, Chartered Institute for Securi-ties & Investment (CISI). “There is no doubt, however, that the combination of the high reputa-tion of the British qualifications system, together with London’s role in Islamic finance puts Lon-don in a strong position to take a lead in this.”

Gaining qualificationsThe Chartered Institute of Man-agement Accountants (CIMA) now offers two levels of profes-sional qualification: a diploma, essentially a broad introduction to the subject, and an advanced diploma, for those who actual-ly want to practise in the mar-ket. “Demand for the qualifica-tions is coming from all over the world,” says John Willsdon, who is CIMA’s 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 un-derstanding of the intricacies of Islamic finance yet.”

The diploma offers four mod-ules — Islamic Commercial Law, Islamic Banking and Takaful,

Islamic Capital Markets (includ-ing Sukuks) and Accounting for Islamic Financial Institutions. Available since July 2011, over 300 people have so far enrolled on CIMA’s new portfolio of Is-lamic Finance qualifications tak-ing the total number enrolled worldwide to over 1000.

Recognised standardsQualifi cations in Islamic fi nance arose from the request of a vari-ety of fi nancial institutions that were looking for a globally recog-nisable benchmark qualifi cation. Being a global brand, CIMA’s qual-ifi cations are recognised world-wide. “While CIMA have three main markets: Malaysia, the Gulf and the UK, we have students in over 66 countries” says Willsdon. “These qualifi cations are now rec-ognised worldwide.”

Ruth MartinManaging Director, Chartered Institute for Securities & Investment (CISI)

EDUCATION IS THE KEY TO ISLAMIC FINANCE

■ Question: How is it possible to become an expert in Islamic fi nance?

■ Answer: Good training is crucial and London now provides some of the best qualifi cations in the world.

NEWS

UNDERSTAND THE

IMPORTANCE OF TRAINING

1STEP

CIMA Certificates in Islamic Finance

CIMA Diploma in Islamic Finance

CIMA Advanced Diploma in Islamic Finance

www.cimaglobal.com/learnIF

CIMA Qualifications inIslamic FinanceLearn today, lead tomorrow

Take advantage of the skills gap; choose from a range of Islamic finance qualifications to suit your needs.

‘The CIMA Diploma in Islamic Finance opens doors to a whole new set of businesses.’

Ganesh PrabhuHead of Finance,

Clifford Chance (Singapore)

VIRGINIA BLACKBURN

[email protected]

The Islamic fi 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 fi nance start-ed as a liquidity management tool for Gulf Islamic banks,” says Rich-ard Thomas OBE, CEO at Gatehouse Bank and Chairman of UK Islam-ic Finance Secretariat (UKIFS). “But we now have fi ve standalone Islamic banks in the UK with a domestic and international presence and action in every sector from trade fi nance to domestic property investment.

“The industry has developed a capital markets capacity and domes-tic sustainability. It’s continuing in a strong growth phase, attracting new inward investment and capital in-to London. Birmingham is also be-coming a regional centre, with the

Islamic Bank of Britain being estab-lished there.”

One of the key features that has made London suitable as a centre for Islamic fi nance is that English law is most suitable for acting as an intermediary in Islamic contracts, which has in turn benefi tted the legal profession, with British fi rms establishing a presence in Dubai. “Islamic finance has developed from a niche to a sustainable sec-tor across the globe,” says Thomas. “There has been a major increase in scope and scale especially in the GCC, Malaysia and Brunei, but al-so in Africa, central Asia, the Unit-ed States and Canada. As the scope has extended, London is an attrac-tive 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, Thom-as believes that in the wake of the credit crunch, Islamic fi nance is more important than ever. “The countries that have been spared the crisis are now wealthier than ever,” he says. “Islamic fi nance is a delev-eraged model and the global econ-omy is going through a period of deleveraging. It is now capable of dealing with world class levels of business and can support the devel-opment of SME businesses.”

Taking to the world stage

VIRGINIA BLACKBURN

[email protected]

■ Question: How has Islamic fi nance developed in the West?

■ Answer: It is now a mainstream area which is fl ourishing in the wake of the credit crunch and providing valuable alternative sources of fi nance.

NEW DEVELOPMENTS

EDUCATION IS ESSENTIALThe need for further training in the area is important in ensuring future growthPHOTO: SHUTTERSTOCK

Richard Thomas OBECEO, Gatehouse Bank and Chairman of UK Islamic Finance Secretariat (UKIFS)

John WillsdonProduct Manager for Islamic fi nance qualifi cations, Chartered institute of Management Accountants (CIMA)

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 increasing-ly popular halal food industry which in the future will see the integration of the halal brand and Islamic fi nance,” says Dr Farhad Reyazat, Editor in Chief of Global Islamic Finance Maga-zine. “In addition, there is much scope for funding for the Islamic fi nance industry. The Sukuk Is-lamic bond industry is also likely to fl ourish as more issuances are being made globally not only in Islamic fi nancial hubs but across many diff erent countries.”

Managing wealth ethicallyEthical considerations also make the market attractive. “The pro-hibition of Riba (interest) is one main factor that diff erentiates Is-lamic fi nance,” says Dr Reyazat. “It gives a way for people to manage their wealth without falling heav-ily into debt through interest.”

VIRGINIA BLACKBURN

[email protected]

Dr Farhad Reyazat, Editor in Chief of Global Islamic Finance Magazine

gif Islamic Finance Report


JANUARY 2012 · 5AN INDEPENDENT SUPPLEMENT BY MEDIAPLANET4 · JANUARY 2012 AN INDEPENDENT SUPPLEMENT BY MEDIAPLANET

The growth of Islamic finance in the UK has meant that there is an increased and urgent need to provide training courses and education for participants in the industry. This is to ensure that students and financial ad-visers fully understand Sukuks (bonds), Takaful (insurance), Mu-daraba and Musharaka (types of partnership) and Murabaha (cost plus sale).

London leading the way“There is now an increasing number of programmes from short training courses and con-ferences, to degree and post de-gree programmes, and also pro-

fessional qualifications,” says Ruth Martin, Managing Director, Chartered Institute for Securi-ties & Investment (CISI). “There is no doubt, however, that the combination of the high reputa-tion of the British qualifications system, together with London’s role in Islamic finance puts Lon-don in a strong position to take a lead in this.”

Gaining qualificationsThe Chartered Institute of Man-agement Accountants (CIMA) now offers two levels of profes-sional qualification: a diploma, essentially a broad introduction to the subject, and an advanced diploma, for those who actual-ly want to practise in the mar-ket. “Demand for the qualifica-tions is coming from all over the world,” says John Willsdon, who is CIMA’s 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 un-derstanding of the intricacies of Islamic finance yet.”

The diploma offers four mod-ules — Islamic Commercial Law, Islamic Banking and Takaful,

Islamic Capital Markets (includ-ing Sukuks) and Accounting for Islamic Financial Institutions. Available since July 2011, over 300 people have so far enrolled on CIMA’s new portfolio of Is-lamic Finance qualifications tak-ing the total number enrolled worldwide to over 1000.

Recognised standardsQualifi cations in Islamic fi nance arose from the request of a vari-ety of fi nancial institutions that were looking for a globally recog-nisable benchmark qualifi cation. Being a global brand, CIMA’s qual-ifi cations are recognised world-wide. “While CIMA have three main markets: Malaysia, the Gulf and the UK, we have students in over 66 countries” says Willsdon. “These qualifi cations are now rec-ognised worldwide.”

Ruth MartinManaging Director, Chartered Institute for Securities & Investment (CISI)

EDUCATION IS THE KEY TO ISLAMIC FINANCE

■ Question: How is it possible to become an expert in Islamic fi nance?

■ Answer: Good training is crucial and London now provides some of the best qualifi cations in the world.

NEWS

UNDERSTAND THE

IMPORTANCE OF TRAINING

1STEP

CIMA Certificates in Islamic Finance

CIMA Diploma in Islamic Finance

CIMA Advanced Diploma in Islamic Finance

www.cimaglobal.com/learnIF

CIMA Qualifications inIslamic FinanceLearn today, lead tomorrow

Take advantage of the skills gap; choose from a range of Islamic finance qualifications to suit your needs.

‘The CIMA Diploma in Islamic Finance opens doors to a whole new set of businesses.’

Ganesh PrabhuHead of Finance,

Clifford Chance (Singapore)

VIRGINIA BLACKBURN

[email protected]

The Islamic fi 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 fi nance start-ed as a liquidity management tool for Gulf Islamic banks,” says Rich-ard Thomas OBE, CEO at Gatehouse Bank and Chairman of UK Islam-ic Finance Secretariat (UKIFS). “But we now have fi ve standalone Islamic banks in the UK with a domestic and international presence and action in every sector from trade fi nance to domestic property investment.

“The industry has developed a capital markets capacity and domes-tic sustainability. It’s continuing in a strong growth phase, attracting new inward investment and capital in-to London. Birmingham is also be-coming a regional centre, with the

Islamic Bank of Britain being estab-lished there.”

One of the key features that has made London suitable as a centre for Islamic fi nance is that English law is most suitable for acting as an intermediary in Islamic contracts, which has in turn benefi tted the legal profession, with British fi rms establishing a presence in Dubai. “Islamic finance has developed from a niche to a sustainable sec-tor across the globe,” says Thomas. “There has been a major increase in scope and scale especially in the GCC, Malaysia and Brunei, but al-so in Africa, central Asia, the Unit-ed States and Canada. As the scope has extended, London is an attrac-tive 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, Thom-as believes that in the wake of the credit crunch, Islamic fi nance is more important than ever. “The countries that have been spared the crisis are now wealthier than ever,” he says. “Islamic fi nance is a delev-eraged model and the global econ-omy is going through a period of deleveraging. It is now capable of dealing with world class levels of business and can support the devel-opment of SME businesses.”

Taking to the world stage

VIRGINIA BLACKBURN

[email protected]

■ Question: How has Islamic fi nance developed in the West?

■ Answer: It is now a mainstream area which is fl ourishing in the wake of the credit crunch and providing valuable alternative sources of fi nance.

NEW DEVELOPMENTS

EDUCATION IS ESSENTIALThe need for further training in the area is important in ensuring future growthPHOTO: SHUTTERSTOCK

Richard Thomas OBECEO, Gatehouse Bank and Chairman of UK Islamic Finance Secretariat (UKIFS)

John WillsdonProduct Manager for Islamic fi nance qualifi cations, Chartered institute of Management Accountants (CIMA)

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 increasing-ly popular halal food industry which in the future will see the integration of the halal brand and Islamic fi nance,” says Dr Farhad Reyazat, Editor in Chief of Global Islamic Finance Maga-zine. “In addition, there is much scope for funding for the Islamic fi nance industry. The Sukuk Is-lamic bond industry is also likely to fl ourish as more issuances are being made globally not only in Islamic fi nancial hubs but across many diff erent countries.”

Managing wealth ethicallyEthical considerations also make the market attractive. “The pro-hibition of Riba (interest) is one main factor that diff erentiates Is-lamic fi nance,” says Dr Reyazat. “It gives a way for people to manage their wealth without falling heav-ily into debt through interest.”

VIRGINIA BLACKBURN

[email protected]

Dr Farhad Reyazat, Editor in Chief of Global Islamic Finance Magazine



6 · JANUARY 2012 AN INDEPENDENT SUPPLEMENT BY MEDIAPLANET

INSPIRATION

Taking account of Islamic fi nance

MODEL OF BANKINGIslamic finance offers a more ethical and less risky way of doing business, in line with the principles of Islamic lawPHOTO: SHUTTERSTOCK

“The major issue is the lack of comparability in fi nancial report-ing,” says Hijazi. “Islamic fi nance is spread around the world in the Gulf, Malaysia and the UK, but many jurisdictions have specifi c local requirements. This often re-sults in reporting under diff erent fi nancial frameworks, and it makes it diffi cult to compare Islamic fi -nancial institutions one on one.”

Standards to abide byIn 1991, the Accounting and Au-diting Organisation for Islamic Financial Institutions (AAOIFI) was established in Bahrain to be the standard setters of the indus-try, across several areas including

accounting, governance and au-diting. However, the AAOIFI standards have not been adopted in all countries with Islamic fi -nancial institutions. As a result of this AAOIFI now almost stands alone as an additional accounting framework which Sharia-compli-ant institutions must adhere to, and which not all actually use.

While international financial reporting standards are being ad-opted all over the world, these have

been specifi cally designed for con-ventional fi nance, never for Islam-ic fi nance, adding a further layer of complication. Typically, banks and accountants that work in Is-lamic fi nance have had to try to ap-ply them to products they were not developed for. This has meant that diff erent accounting treatments have been applied to some Islamic fi nancial instruments producing varying results.

However, as Islamic fi nance has

started to develop globally, this is beginning to change. KPMG is the auditor to the Islamic Bank of Britain (IBB), which was the fi rst Islamic fi nancial institution to be authorised by the FSA in the UK. Four more Islamic banks soon es-tablished themselves in the UK increasing the range of Islamic fi -nancial instruments.

Need for growthThe 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 for-ward, 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 compar-ison. Furthermore, while many global banks also issue Islamic in-struments, there is little disclo-sure around them as they are of-ten not very material in compari-son to the rest of the business.”

But this is changing. As Islam-ic fi nancial institutions develop greater volume and momentum around the world there is more de-mand for consistency in reporting of their performance.

■ Islamic finance is not just about investing — reporting its performance is an important ar-ea too. According to Samer Hija-zi, Financial Services Audit Di-rector at KPMG London, achiev-ing greater consistency around reporting for Islamic fi nance across the world is a major is-sue. Indeed, KPMG will be host-ing a round table with the As-sociation of Chartered Certifi ed Accountants (ACCA) in March, and will be jointly producing a report on the subject, Harmo-nising Financial Reporting of Is-lamic Finance.

VIRGINIA BLACKBURN

[email protected]

CHANGE

‘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 HijaziFinancial Services Audit Director, KPMG London

REAL ESTATE

■ There are two major issues when it comes to Sharia-compli-ant investment in real estate, ac-cording to Mike Rainey, partner at King & Spalding. “The asset it-self 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 fi nancing.

■ One option is a leasing ar-rangement, 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.”

Islamic wealth management – the spirit of ethical entrepreneurshipAs Islamic finance continues to expand, it is the retail wealth management sector which is expected to lead industry growth. The challenge is that only a few wealth management products are currently available.

There are several unique features of Islamic fi nance which diff eren-tiate it from conventional fi nance. Sultan Choudhury, Managing Di-rector of the Islamic Bank of Brit-ain (IBB) explains, “Islamic bank-ing is ethical — it’s the faith-based form of ethical banking.”

“This means that its source of funding, profi ts and business in-vestments cannot be in or from businesses that are considered unlawful, i.e. companies that deal in interest, gambling, pornogra-phy, tobacco and other commod-ities contrary to Islamic values. Interest is considered eff ortless profi t which means no interest is received or paid by customers. Instead Islamic banking is struc-tured on principles of profi t and risk sharing and entrepreneur-ship. Rather than paying inter-est, Islamic banks share profi ts. Another big diff erence is that Is-lamic banking is asset-based and asset-backed.”

Islamic banks, including IBB, ensure Sharia compliance by ap-pointing a Sharia Supervisory Committee. This is comprised of Islamic scholars and experts who oversee the products.

With entrepreneurship as the guiding spirit of Islamic fi nance, IBB has been pioneering Shar-ia compliant and ethical ways for consumers to manage their wealth. Last year it partnered with Pointon York to accredit a range of SIPPs as Sharia compli-ant. It also accredited a Discre-tionary Platform Service by Prae-mium as Sharia compliant.

More products need to be de-veloped but IBB has taken the fi rst important steps. The indus-try as a whole is working with the UK Islamic Finance Secretar-iat (UKIFS) to address this, and other challenges.

VIRGINIA BLACKBURN

[email protected]

Sultan Choudhury, Managing Director, Islamic Bank of Britain and Executive Board Member, UKIFSUNDERSTAND

THE BASICS

2STEP



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The programme is suitable for: graduates with a minimum 2.2 degree or equivalent background in economics, finance, accounting, mathematics, business studies or with relevant work experience.

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The British Government has committed to supporting the UK to become a pivotal centre of Islamic Finance (Islamic Finance & Trade Conference, 2008). Manchester, a leading UK centre for finance, has seen significant growth and investment in this area. To continue growth, trained professionals in all aspects of Finance including Islamic Finance are required to prevent future

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Over the last few years, Ber-muda has become one of the major hubs for Islamic fi-nance. In 2009, General Elec-tric issued a US$500 million Sukuk, the fi rst corporation in the Top 10 Fortune 500 to do so, structured using a Ber-muda limited liability com-pany. This has meant that the island is now seen as an im-portant offshore financial centre for Sharia-compliant instruments as well as more traditional ones. “We are a stable jurisdiction with a well regarded reputation for le-gitimate investments,” says Cheryl Packwood, Chief Ex-ecutive of Business Bermuda.

“We are the number one cen-tre for reinsurance and in the top three for insurance. We didn’t need to change our laws to provide a jurisdiction to

handle and maintain Islam-ic products. There is an enor-mous amount of intellectual capital on the island, in the form of fund administrators, lawyers, accountants, bank-ers and directors, and Bermu-da now represents an impor-tant jurisdiction for takaful and retakaful.”

Promoting growthPackwood has been travel-ling to the Gulf for some years in order to encourage busi-ness in Bermuda, but she was building on ties that were al-ready there.

The former Bank of Bermu-da, now HSBC Bermuda, has had a presence in Bahrain for decades. The Bermudian law fi rm Conyers Dill & Pearman has offi ces in Dubai and the Bermudan Elbow Beach Ho-tel is Saudi-owned. But such

has been the drive to win Is-lamic fi nance business that Bermuda now far outstrips all the other off shore centres in the region. It alone has is-sued 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 Bah-rain every year since 2008 and attending the World Is-lamic Banking conference in November last year. “We un-derstand the culture,” she says. “We pooled minds, put together an Islamic fi nance task force and brought clients to the area.”

Belaid Jheengoor, Direc-tor in the Asset Manage-ment Practice at Pricewater-houseCoopers Bermuda, says that the most popular instru-ment to be issued from the is-land 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 fo-cus, but we are also looking to the growing affl uent Mus-lim population in other parts of the world, most notably the UK, France and Canada. The appeal of these instru-ments is much broader than the Muslim demographic: for some investors, they are seen as socially responsible.”

He also believes that the global Islamic fi nance mar-ket has weathered the glob-al fi nancial storm. “The glob-al market for Sukuk was in-creasing at a signifi cant 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.”

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VIRGINIA BLACKBURN

[email protected]

The magic of Malaysia

One of the most important global centres for Islamic fi -nance is Malaysia, which is also the location of INCEIF, the Global University of Is-lamic Finance, the only insti-tution of its type in the world, which was set up in 2006. The fi rst Islamic bank, Bank Islam Malaysia (now simply Bank Islam) was established there in 1983, followed by Takaful Malaysia in 1984.

Setting the standards“The regulatory framework has also helped establish Ma-laysia as a centre for Islam-ic fi nance,” says Daud Vicary Abdullah, President and CEO of INCEIF. “The Islamic Bank-ing Act of 1983 was followed by the Takaful Act in 1984. In

1994 the sector was liberal-ised by allowing conventional banks to set up Islamic win-dows. International players entered the market, includ-ing Kuwait Finance House, Al-Rajhi and Asian Finance. A strong Sharia and govern-ance framework was also es-tablished via the Apex Shar-ia body at the Central Bank of Malaysia and the Sharia Advi-sory Council at the Securities Commission Malaysia.

Central hubMalaysia 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

Board (IFSB) — the inter-national standards setting agency for institutions off er-ing Islamic fi nancial services.

In 2010, the Internation-al Islamic Liquidity Man-agement Corporation (IILM) was set up to facilitate effi-cient management of liquid-ity by Islamic financial insti-tutions in the international financial system.

The launch of the Bloom-berg-AIBIM-Bursa Malaysia Sovereign Sharia Index (BMS-SI) in early 2011 marked an-other signifi cant milestone in the development of the glob-al Sukuk market. The estab-lishment of the Thomson Re-uters Ideal Ratings Islamic Indices in June 2011 was the fi rst Islamic benchmark that off ers research-based Shariah screening based on globally accepted standards to inves-tors, money managers and an-alysts across a range of Islam-ic instruments.

Education as keyUnsurprisingly, it is also a cen-tre of excellence in education.

“Most universities in Malay-sia, either public or private, provide a wide spectrum of formal Islamic fi nance edu-cation, beginning with Di-ploma, Degree, Master right up to Ph.D. level,” says Daud Vicary Abdullah. “For exam-ple, the Universiti Utara Ma-laysia (UUM) has established Islamic School of Business which off ers degrees at un-dergraduate as well as at Mas-ters level. The International Islamic University Malaysia (IIUM) has the Institute of Islamic Banking & Finance which provides formal edu-cation for undergraduate and graduate levels and IIUM’s Graduate School of Manage-ment off ers MBA with spe-cialisation in Islamic Bank-ing.” INCEIF itself off ers a Chartered Islamic Finance Professional (CIFP) qualifi ca-tion, a Masters in Islamic Fi-nance, a Ph.D. in Islamic Fi-nance and Research, Consul-tancy and Executive Training.

VIRGINIA BLACKBURN

[email protected]

■ Question: Is there an offshore fi nancial centre that specialises in Islamic fi nance?

■ Answer: Yes, the island of Bermuda, which is emerging as a global centre of excellence in the area.

■ Question: What was one of the fi rst international locations to be set up as a hub for Islamic fi nance?

■ Answer: Malaysia, in particular Kuala Lumpur, which is now one of the most advanced Islamic fi nance sectors in the world.

Daud Vicary AbdullahPresident and CEO of INCEIF

Belaid JheengoorDirector in Asset Management, PWC Bermuda

Cheryl PackwoodChief Executive, Business Bermuda

IMPRESSIVE SKYLINEThe Petronas Towers in Kuala Lumpur are the tallest twin buildings in the world and dominate the city’s skylinePHOTO: SHUTTERSTOCK

IDYLLIC SETTINGSThe island of Bermuda is a suprisingly active outpost for Islamic financePHOTO: SHUTTERSTOCK



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PROFESSIONAL INSIGHT

Islamic finance could have averted the global meltdown

As the dust continues to settle in the wake of the global financial crisis, there is a growing percep-tion that had the tenets of Islam-ic finance been more widespread, the damage to the global econo-my would have been nothing like as bad.

Entrepreneur and former drag-on on BBC’s The Dragon’s Den James Caan, who founded the Hamil-ton Bradshaw private equity firm thinks so: “If you look at the basic principles of Sharia-compliant in-vestment, you see that it doesn’t pay interest, but takes a share of the profits,” he says. “That means there must be some underlying profitability in the investment, whereas the crisis was caused by highly complex derivative prod-ucts 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 WestIndeed, following Sharia-compli-ant principles, some of those toxic assets would never have existed in the first place. “If you look at coun-tries that use Islamic finance, 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 finan-cial 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 disciplineWhile he doesn’t believe that all Western financial institutions will adopt Islamic finance as such, Caan does believe that they could learn a lot from Sharia-com-pliant methods. “There is a ques-tion of financial discipline, of rec-ognising the importance of the quality of the underlying assets and their robustness to generate sufficient returns to make finance repayments sustainable,” he says.

“This is a conservative view of building wealth.”

Strengthening TrustAny budding entrepreneurs wish-ing to raise funds from the Middle East should take that different ap-proach on board, according to Nick Judd, Founder Partner of 90 North, the investment firm 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 can’t raise money quick-ly – 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.”

■ Question: Is Islamic finance a more cautious approach to investing than traditional Western methods?

■ Answer: Yes, if the principles had been more widely adopted, it could have stopped the recent financial catastrophe.

VIRGINIA BLACKBURN

[email protected]

CHANGE

‘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

90 North Real Estate Partners, based in Mayfair, is a specialist in Sharia-compliant 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 success-ful real estate acquisition, includ-ing due diligence, financing, legal and tax, all as part of an efficient and Sharia compliant structure.

“Islamic assets under manage-ment 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 sophistica-tion of Islamic finance, relative security of assets and parity of re-turns available compared to con-ventional investment products,” says Caan.

VIRGINIA BLACKBURN

[email protected]

SHOWCASE

PROMOTING GROWTHLeft: Entrepreneur James Caan at the UCI Qatar Investor Conference. He believes Western financial institution could learn a lot from Sharia-compliant methodsPHOTO: PRIVATE



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gifIslamic Finance

Abstract: The importance of marketing in-creases, all the more, when your product is new and unprecedented. Similar is the case with Islamic financial institutions. It’s a con-ceptual product, with an ideology behind it. Most importantly, it has a USP which is its being halal and Shari’ah-compliant. This ar-ticle will outline marketing financial products and the potential for marketing experts from the Takaful industry to unite and discuss the future.

Keywords: Marketing, strategy, Islamic and conventional financial products, Takaful

Every time a financial institution introduces a new product or service it becomes the re-sponsibility of their marketing department to “explain” the product to the masses.

Marketing of financial products, thus, be-comes 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 in-creases as it requires grounding in principles of Shari’ah. It is difficult to find such people who possess knowledge in all three fields: an essential combination for a successful and articulate marketing strategy.

Another challenge is to liaise with ad agen-cies that have people willing to distinguish between conventional and Islamic financial products. Agencies also have to work with constraints when it comes to Islamic financial institutions such as not using human faces in any marketing collateral as it is against sha-riah.

Agencies fall into pitfall of “islamicizing” mar-keting campaigns to an extent which is more than necessary. Their concepts begin from using mosques in collateral and end on Qu-

ranic Ayahs. It becomes a responsibility of marketing departments have to ensure that they are selling “products/services” and not “Islam”.

A stark difference between marketing of Is-lamic and conventional financial products is that in the case of conventional products con-sumers are not interested in knowing back-end functionality. However, many Islamic fi-nancial institution’s clients want to know how things work showing interest in the details of legal contracts involved in financial products.

Conventional financial institutions do not have to promote anything beyond their product or service. While in the case of Islamic financial products the added USP of it being Shari’ah compliant needs to be communicated. Con-sider the case of McDonald’s or KFC: a sim-ple logo reading “halal” on its packaging and billboards will suffice. However, in the case of financial products a simple logo, often, does not suffice. It requires a much more compre-hensive effort.

Considering the effects of the recession the present situation seems bleak. The first thing that gets affected due to economic recession is marketing. The budget allocated for mar-keting activities and services is the first to be slashed in case of any calamity. Companies generally do not consider marketing as their “core” operations. They overlook the potential and capacity for growth that marketing offers in the times of recession.

However, the problem is even deeper. It is not recession that affects marketing activities but it is a general attitude towards marketing in the insurance industry. Throughout this re-gion (Pakistan, India and Bangladesh) insur-ance has been considered a “Sales-based industry” as oppose to “marketing-based

A PARADING SHIFT THE MARKETING DRIVEN APPROACH TO TAKAFULAuthor: Syed Adnan Hasan, Head of Marketing & Communica-tion, Pak-Qatar Family & General Takaful

Syed Adnan Hasan is Master in Business Admin-istration. He holds over 12 years of experience in market-ing, and is responsible for the overall supervision of the mar-keting department, including planning and creating aware-ness about Takaful among the public. Prior to joining Pak-Qatar Family and Gen-eral Takaful Companies, Mr. Hasan was associated with Leo Barnett, an advertising company. Since joining Pak-Qatar, 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.


gif Islamic Finance

With traditional mindset towards insurance or Takaful, it is not possible to increase pen-

etration 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

„industry”. Business strategy of insurance com-panies 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 com-panies, 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 insur-ance industry is heavily relying on sales and completely sidelining marketing activities. This gives an ample opportunity to Takaful compa-nies. They have the option to take lead in the industry with aggressive marketing targeted towards product penetration. Current life insur-ance penetration in Pakistan is 0.3%, leaving a massive untapped market for Takaful compa-nies.

With traditional mindset towards insurance or Takaful, it is not possible to increase penetra-tion without a change in strategy. A field sales force, as big as a few thousand agents, will re-main limited, whereas effective marketing strat-egies have potential to reach out to millions.

Pak-Qatar Family and General Takaful have tak-en lead in this paradigm shift. Even in its nas-cent stage the company developed its Market-ing 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 Taka-ful as an international brand, where consumer and corporate can invest their trust.

Another Pak-Qatar Group’s achievement is it nomination in 2010 CPI Financials “Best Islam-ic 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 interna-tional 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 sepa-rate entity with its own brand identity and niche market.

A similar project can be initiated on a global lev-el where Marketing experts from Takaful indus-try can sit together and devise a plan for future growth and awareness. It can be named World Takaful Association.


Business News gif

second interview…

Mohammed Amin

Islamic finance consultant, United Kingdom

60

Mohammed Amin MA, FCA, AMCT, CTA (Fel-low), is an Islamic finance consultant in the United Kingdom. Before his retirement he was the UK Head of Islamic Finance for Pricewa-terhouseCoopers LLP and a member of PwC’s four-person Global Islamic Finance Leader-ship Team.

Shariah as a choice of law for common law courts and arbitrators is not peculiar to the current era of Islamic finance. What are your thoughts on this statement?

A key goal for both parties within a contract is that, if a dispute arises, it should be capable of being litigated quickly, with minimal cost, and with predictability of outcome. The more predictable the outcome of litigation, the greater the likelihood that the parties will hon-our the contract since the defaulting party can be almost certain that the courts will enforce the contract against him. Given this goal, Sha-riah as a choice of law gives rise to two main difficulties:

There are multiple schools of thought, • so simply specifying that the contract is governed by Shariah is insufficient. One needs to specify which school of fiqh, for example Hanbali fiqh, is to apply. Even then, when it comes down to fine points of law, the school of law chosen may not have a single consistent view.One needs to find a set of courts with • judges who are expert both in the school of fiqh chosen, and also expert in com-mercial matters. Such judges are hard to find.

The lack of certainty when the contract is be-ing made regarding the precise details of Sha-riah 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 popu-lar when dealing with agreements adhering to Islamic principles?

In my opinion English law is the most common choice when agreements are made to govern

Islamic finance transactions. English law is well established, so parties about to make a contract can have a high level of confidence regarding what the law says. Furthermore if a dispute arises, the courts of England have a high reputation for integrity, reasonable speed and acceptable costs, and English judges are skilled in understanding commercial law. There is also a well-established system of ap-peal under English law.

I consider that there is no inconsistency be-tween the desire of the parties to comply with their religious requirements as they un-derstand them and the use of English law to make their contract. It is for each party to satisfy himself that the contract complies with his religious principles, and it is quite possible that the detailed religious views of the parties may differ even when both are Muslims.

For example, one may follow Hanbali fiqh and another Shafi fiqh. When making the contract, each party needs to be happy that the con-tract contains no terms that are inappropriate for his religious views; the choice of governing law is not a religious question, it is a pragmat-ic question as explained.

What are your thoughts on the future of Sha-riah or Islamic law?

Before considering the future, one needs to look at the history of Shariah as a system of law (fiqh, often translated as Islamic law.)

In the first 500 or so years after the Hegirah, Islamic law developed rapidly to accommodate the legal needs of an Islamic empire that had grown rapidly and was engaging in increas-ingly complex commercial transactions. Un-fortunately, with the passage of time increas-ing emphasis was given to complying with the decisions of earlier jurists, with less and less scope for original legal thinking based on di-rect reference to the Quran and Sunnah. This is often referred to as the “closure of the gate of ijtihad” although some argue that ijtihad never ceased entirely. The result was stag-nation of legal thinking, associated with the wider intellectual stagnation of Muslims.

As a result, Islamic law today has insufficient legal content for modern commercial life. For example, I am not aware of any develop-ment of limited liability companies within Is-lamic law, despite their overwhelming utility. Furthermore, Islamic law lacks clear mecha-nisms for developing new law. For example, it is easy to see how the principles of Islamic law would allow one to develop the concept of an intellectual property patent, but I do not see a mechanism within Islamic law for deciding how long the life of a patent should be; in Eng-lish law the number of years patents should last is set arbitrarily by Parliament.

For Islamic law to be developed to the level where it can be used as the law of a modern state for all commercial purposes, in my view, requires the state concerned to set up a leg-islature for Islamic law. The new legislation created needs to avoid conflicting with clear the clear provisions of the Quran and Sunnah, but otherwise will be original innovative legis-lation rather than trying to find all new Islamic law by derivation from existing rulings.

In Indonesia, Islamic banking disputes are decided through a mix of Shariah and civil law. Do you believe a mix or Shariah and civil law works effectively?

In my view mixing Shariah and civil law is not a good idea. It is likely to lead to greater uncer-tainty regarding what the law is when the con-tract is being made. It is also likely to lead to greater inconsistency in how the contract will be enforced by the courts if a dispute arises.

As explained above, I believe that the religious compliance of a contract is something that each party needs to satisfy himself about be-fore signing the contract. The role of the courts should simply be to enforce the contract that the parties have chosen to execute. Although English law will treat certain types of contract as void on public policy grounds, the public policy areas concerned are very limited and do not cause difficulty for normal commercial contracts. The uncertainty created by courts being able to decide whether a contract is Shariah - compliant is much greater.



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 sec-tor, 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’ ef-fect on loans, banks have booked massive provisions as preemptive measures against the elevation in non-performing loans dur-ing Q3-08 and FY-09, which further weighed down on bottom line results.

Soundness of Banks in the GCC RegionBanks’ Performance & ProfitabilityAlthough the GCC Banking sector is seen cur-rently to be far away from the soaring perfor-mance that has seen its total profit grow at a 4-year average of 22.2 per cent, the Sector’s profitability was hit hard by the financial cri-sis 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 sector’s performance lies in the great stress in prop-erty market and the high volatility in equity investments which would force most banks for further provisioning and impairments.

Loan PortfoliosTriggered by the liquidity squeeze along with prevailing tight conditions in the credit mar-

2009

A Great Year For Kuwati Banks as Provisions Total $2.6 billion

TMarket review gif

Source: GlobalIslamicFinanceMagazine.com


ket and deterioration of asset prices, aggre-gate loan portfolio of the GCC Banking Sec-tor 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 Sector’s asset quality indica-tors 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.

Loan Loss Provisions & ImpairmentsThe year 2009 was sturdy on the GCC banks seeing provisions and impairments record-ing 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 provi-sions booked by banks in the GCC region; both sectors added USD 7.03 billion, rep-resenting around 65 per cent of total provi-sions 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 pro-visions 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

the pack with provisions booked represent-ing 18.5 per cent of total GCC banks’ pro-visions, and around 48.5 per cent of total provisions for UAE Banks. KFH has the third highest provisioning in the region, corre-sponding to around 6.5 per cent of total GCC provisions. The top ten banks, as segregated by the amount of provisions booked, repre-sent nearly 55.9 per cent of aggregate provi-sions booked for FY-2009.

Up till recently, Banks and Financial Insti-tutions across the region are in “Balance Sheet Repair’’ mode, with deleveraging, im-pairments 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 re-duce the effect of any potential risk in the future.

Banks’ Capital Adequacy RatiosMoreover, Banks in the GCC are subject to legally-mandated requirements by the Cen-tral 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 high-est ratio relative to the mandated level by SAMA.

Sector’s Liquidity PositionAmid the protracted liquidity bubble, the GCC Banking sector showed no immunity but re-sistance in weathering the financial crisis. Sector’s 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

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 lend-ing 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 cur-rently at 100 per cent. Loan-to-deposit ratio for the banking sector in Abu Dhabi contin-ued its upward trend over the last 2 years to reach a maximum of 101 per cent as of Dec-09 up from 92 per cent at the end of 2007.

This significant increase in the loan-to-de-posit 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 dur-ing 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 Ara-bian 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. More-over, the banking sectors in Dubai and Ku-wait 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-de-posit ratio set by the Central Banks in both countries which stand at 100 per cent (for Dubai) and 85 per cent (for Kuwait) respec-tively.

GCC Banking Sector’s asset quality indicators have seen gradual improvement over the period 2004-2007, yet considerably wors-

ened during 2008 and 2009 with the inevitable increase in non-perform-ing 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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Islamic Banking and Its Potential Impact Islamic banking is a worldwide phenomenon involving a variety of institutions and instru-ments, not one “project” or institution. In the past few decades, Islamic institutions and instruments have developed in many coun-tries, including the United States. In certain countries—Iran, Sudan, and Pakistan—all or most financial intermediation conforms to Islamic Shariah (religious law) as defined by local authorities.

All three of these countries also have bank-ing authorities that govern the general level of charges and returns in the system and these are not usually market-governed sys-tems.

In most other countries, including Indonesia, Islamic transactions and institutions make up a small part of the total and must com-pete with conventional financial institutions. There is even considerable Islamic banking in the United States. If the terms and condi-tions of Islamic transactions differ too much from those of conventional institutions they become hard to sustain. The terms and con-

ditions of Islamic institutions therefore tend to converge with conventional ones. Islamic instruments are simply a narrow group of familiar financing instruments. Any transac-tion, with any distribution of proceeds, can be conducted as a lease, a sale, a partner-ship, a fee-generating transaction, or a loan. Islamic instruments generally avoid loans. Though the scheduled distribution of pro-ceeds 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 pro-moting Islamic banking is to increase the proportion of financing involving such shar-ing. 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 wel-come 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 unob-jectionable 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 protec-tion, bank accounting, and so on. Centres have been developed for all these matters for bank supervision in Malaysia, for ac-counting in Bahrain, and several academic centres, including centres at Harvard and Oxford universities.

RISK MANAGEMENT: ISLAMIC FINANCIAL POLICIES

ISLAMIC BANKING AND ITS POTENTIAL IMPACT

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 Indone-sia, 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

Author: Thomas A. Timberg, Freelance Consultant, Nathan Associates Inc.

Risk Management


The Example of Indonesia Indonesia, with the world’s largest popula-tion of Muslims, has come to Islamic or Sha-riah banking fairly late. Many of Indonesia’s Muslim leaders do not believe that commer-cial 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 Indone-sia demonstrates that Indonesia, especially in particular parts of the country, has consid-erable unmet demand for Islamic banking.

Islamic banking in Indonesia has some unu-sual characteristics. Like most microfinance institutions in Indonesia, Islamic institu-tions, micro or otherwise, are generally pri-vate, for-profit institutions based on the in-termediation of depositor funds secured on a competitive market. In this they are differ-ent from microfinance institutions in almost every other country in the world. They typi-cally have no explicit social goal other than profit maximisation and conformity with Is-lam, 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, par-ticularly the Bait Maal Wat Tamwil (BMT) Islamic savings and loan cooperatives are located in rural areas and provide agricul-tural financing. Nonetheless, the focus of Indonesian Islamic financial institutions is typically urban and geared toward the fi-nancing of trading operations. There has been some discussion of Islamic banking for micro credit, but most documented experi-ence that I know of is in Pakistan, where in-stitutions 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 en-countered only one institution, a BMT in Solo, that provided crop loans. This trans-action, 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 in-struments are particularly According to one source, some particular Islamic financial models were traditionally designed for agri-cultural 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 ex-ample 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

the recapitalisation of these venture capital firms. Islamic financial institutions in Indone-sia include the Bank Muamalat Indonesia, which has been functioning since 1992, sev-eral new Islamic branches of regular com-mercial banks, one other newer commercial bank, 80 Bank Perkreditan Rakyat Shariah (BPRS—smaller banks limited to borrowing and lending in limited areas), and 2,470 BMT (of which a few are reported to be regis-tered with the Ministry of Cooperatives and Small Business). The Islamic commercial banks and BPRS file frequent and detailed reports with Bank Indonesia and thus pro-duce 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 ses-sion, illustrates. Assets in Islamic banks

have grown from US$52 million to US$302 million but still accounts for only 0.26 per-cent 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 Indone-sia 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 Muamalat’s 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 instru-ments as shown in figure 2. About two-thirds of the rupiah financing and half of the for-eign 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 re-turn 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 lend-ing 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 borrowers—again somewhat low by Indonesian standards. Bank Muamalat reports that despite its relatively low payment of 10–12 percent on deposits, while other banks were pay-ing 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 indus-try finance.” Almost 17 percent of its lend-

Risk Management gif

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 Associ-

ates 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 develop-ment 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 Ni-

geria with components concerned with access to finance, business

development services, investment climate, and public private dia-

logue. He is also Chief of Party for a World Bank supported study of

Shariah Finance in Indonesia.


ing goes to small and medium enterprises, which is above average for commercial banks. Bank Muamalat intends to “selec-tively [distribute] its financing with empha-sis on small businesses by using its Shariah financial institution network,” 29 of the 78 BPRS, and 100 of the 2,000 BMT, and as-pires, as well, to serve the kopontren (regis-tered 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 bank-ing 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 fol-low 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 unreg-istered “pre–coops.” Other BMT are associ-ated with other organisations, especially the foundation Dompet Dhuafa and some reli-gious organisations, or are independent.

The registered cooperatives are both free-standing savings and loan cooperatives (Koperasi Simpan Pinjam–KSP) 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 close-ly 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 consen-sus 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 mem-bers in 2,470 BMT with Rp 187 billion in out-standing 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 presum-ably classic NGO group enterprises. The bor-rowers 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 co-operatives. Apparently, no funds came from BPRS, though some funds have come from Bank Negara Indonesia, a government bank, Bank Maumalat, and some govern-ment 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 pe-santren 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 bank-ing. The Islamic financial institutions look on them as an important target market seg-ment, but much of the kopontren leadership does not want to identify solely with Islamic financial institutions. Because the pesant-ren are mostly in rural areas, their coopera-tives and credit are frequently connected with agriculture.

Findings and Recommendations Though Bank Muamalat and the BPRS of-fer 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 mura-baha), though the proportion declines as the partnership or trust provision of work-ing capital (musyarakat and mudharabah) increases. Rates (charged and paid) dif-fer considerably between institutions and from time to time, but the average rates on Islamic credit often approximate those of other institutions. Although Bank Muamalat

Risk Management gif

Dennis Cox, CEO, Risk Reward Lim-ited

What are the advantages and disad-vantages of using risks tools to man-age risks in Islamic Banks?

The only disadvantages are that the tools may not be as effective as in tra-ditional 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 be-tween the risk management in Islam-ic 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 In-stitutions?

Management of liquidity risk in coun-tries where there are limited products available to offset the risks. Secondly there is the risk posed by potentially in-creasing interest rates since Islamic fi-nance to date has not operated in such an environment.


Has India finally reached an inflexion point for Islamic fi-nance or will this be another trial balloon bursting before achieving the right altitude?

The recent launch of an Islam-ic 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 ar-ticle was written.

The Kerala High court also recently «…dismissed a petition challenging the state government’s plans to co-promote an Islamic 8 finance institution…the court

observed that although the institution was based on the principles of a religion, its motive was not to propagate the religion, and the state’s participation in it was purely based on commercial pros-pects. Therefore, there is no

need to object the state’s participation in it,» reported the Times of India.

Levelling the playing field Assuming the matter is re-solved 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 corpo-rate financing and investing sides. If there is no financial cost to being a Muslim, meaning financing or invest-ment returns are conventionally competitive, then Indi-an Muslims and non-Muslims should gravitate towards Islamic finance.

Shariah Investments Have Arrived In India


It w i l l

take time to have an au-thorised deposit-taking Is-

lamic 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

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did not suffer as severely as many large banks from the financial crisis, it did require some management change and has begun healthy growth again. BPRS and BMT have been growing despite the monetary crisis. The BMT have mobilised a great deal of savings and provided financial services to a large constituency, many of whom have never been served before. They have a large prospective market and the advantage of building on the informal network created by the Islamic institutions with which they are associated as well as the moral sanction that comes with that affiliation. However, as largely unsupervised and not guaranteed institutions, many of which are run by relatively inexperienced personnel using new methodolo-gies, they clearly present pruden-tial dangers, though not different in principle from those posed by all savings and loan cooperatives in Indonesia.

In form rather than substance Islamic finance is familiar. Many of its instruments are the same as those used by other financial institutions leasing, advance pur-chase, etc. The difference lies in the first instance in the social impulse for sharing responsibility, risk, and property. Consequently, fixed-interest transactions in which risk is assigned entirely to the borrower are avoided. More important for participants, Is-lamic finance represents part of a divinely sanctioned economic gestalt into which they fit.

Thus Islamic finance Enables financial services to • an otherwise underserved group, including small, rural, and agricultural producers; Furthers a social thrust to • assist smaller producers and consumers and is often

given in the context of a movement to assist them; but Requires some adjustment, mostly for-• mal, of techniques and regulation to take account of Islamic values.

Islamic finance, as part of a financial sec-tor development strategy, ought to be en-couraged, mainstreamed, and adjusted to. An IMF study on the matter concludes that Islamic finance should be encouraged by

regulation and supervision that accommo-date its forms while ensuring that their un-familiarity is not exploited to defraud clients. Normal prudential and supervision norms should be adequate.

The IMF study does, however, suggest that higher capital adequacy ratios and more detailed disclosure requirements may be appropriate. The paper suggests a modi-fied CAMEL (capital adequacy, asset quality,

management, earnings, liquid-ity) system of banking supervi-sion for Islamic banking. Special risks are the generally uncollat-eralized nature of Islamic bank-ing and greater risks in the prof-it-sharing forms of lending. To the extent that Islamic banking is collateralised or does not en-gage in profit-sharing forms, the issues are less serious.

Nonetheless, the Islamic banks are often more comfortable with specialised regulations and in-frastructure that recognise their peculiarities. The BMT in partic-ular need adequate supervision and some guarantee for their depositors, though not as elabo-rate as those provided commer-cial banks and BPRs.

Islamic banking should be mainstreamed by maximising the interaction between Islamic institutions and the rest of the financial system, subject to the constraints of Shariah. The financial system and its regu-lation should be adjusted as necessary to accommodate the other two thrusts.Donors should ensure that their assistance to financial system development includes Islamic financial insti-tutions. This will help include otherwise excluded groups and avoid regulatory loopholes.

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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.pdfPerbankan 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%20print-• engl.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 21–22. •

Risk Management

Bank Assets Credit Deposits Nonperforming Loans (%)

Bank Muamalat 238 190 190 4.8

Bank Mandiri 28,103 7,101 20,444 6.6

Banking System 123,556 45,556 92,778 8.1

Figure 1

Financing Instrument 1998 1997

For Rupiah

Bai Bitsaman AjilMurabahahMudharabahMusyarakahAl Qardhul HasanTotal

1418368131

306

17913029121

351

For Foreign Currencies

Bai Bitsaman AjilMurabahahMudharabahTotal

78717

156

86211

108

Grand Total 462 459

Figure 2: Bank Muamalat Loans by Type of Shariah Instrument (Rp billion)

Savings and Returns 1998 Amount 1998 Returns

Mudharabah Time Deposits 221 28

Securities *** 23

Mudharabah Savings Deposits 103 7

Wadiah Deman Deposits 68 3

Others 3

Figure 3

References and Further Reading


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What are the benefits of Salam and how has it developed?

Tural Mammadov: A Salam contract is charac-terised 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 enti-ties and is widely used to finance the export of commodities by pur-chasing 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.

Financing entities which purchase goods through Salam can also enter into parallel Salam, in order to minimize its price risk expo-sure, 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.

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 pro-duction finance (working capital) needs of the farming community.

It is also worth mentioning that the Cen-tral 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 alu-minium has been used as the underlying asset of the contract.

the Central Bank of Bahrain launched a successful US$750 million Islamic Sukuk the issue was eight-times over-

subscribed, and as a result, the original issue size has been increased to US$750 million from a US$500 million target

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Tural Mammadov,

Board member, WAED

GIFM interviewAn ideal Islamic Financial system: A gone case?“For this issue we had an interview with experts from WAED” :

Interviewgif


What advice would you give to people want-ing 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 un-certain reports, signed ambiguous contracts, made over risky transactions, sold off loans, proposed interest-bearing debt and paid mini-mal 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 atten-tion 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 dif-ferent 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 ex-perienced, and they should actively measure and manage the investment risks and take ac-tions to reduce them.

Moreover, both sides – investor and intermedi-ary – should choose the right instruments to fund their projects with. For this purpose, even ordinary people should have some fundamen-tal 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 Mus-lim 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 in-stitutions 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 institu-tions 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 finan-cial institution’ or ‘trust your financial institu-tion’ systems.

Besides, I think some specific institutions should be introduced to the Islamic finance world, such as pension funds, asset manage-ment companies, venture capital firms, private equity firms, as well an increase in Halal in-dustry 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 in-crease 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 Is-lamic 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 insti-tutions 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 ad-vantages 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 con-tinue to do so now in non-government sectors in Azerbaijan and other Commonwealth of In-dependent States (CIS) countries. In this way, it will be possible to get closer to an ideal Is-lamic financial system in the world where one could put faith and finance together.

Rashad Tanriverdiyev, Board member, WAED

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

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What impacts has Mudarabah made on the Islamic banking industry?

Rashad Tanriverdiyev: Within the Islamic Fi-nance 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 fundamental-ly 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 Mudara-bah instrument, it was practiced by the Arabs long before the advent of Islam, it has even been proved that Muhammad (PBUH) trav-elled before his prophecy to Syria as Mudarib using the capital of the mother of the be-lievers Khadeeja (RA). There is a consensus among Muslims on the legality of Mudarabah over different ages.

Mudarabah is implemented in the two follow-ing 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. where-by 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 facili-ties operating on a Mudarabah principle are more attractive to depositors.

In respect to the second point of the applica-tion area of Mudarabah instrument mentioned above, as a financing facility, IFI’s are widely used as the instrument in financing working capital. Although the principles of Mudarabah are recommended by Islamic scholars, no Is-lamic bank surveyed in this study is channel-ling more than 10% of the total financing port-folio along the rest of the modes of financing.

Nearly all IFI investment companies and in-vestment 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 individ-ual 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 in-vestments made by Islamic banks world-wide. Likewise, the Islamic Development Bank (IDB) has so far not used PLS in its financial busi-ness except in a few small projects.

These distinctive characteristics of Mudara-bah (where fiduciary risk plays a significant part), as specified by classical Islamic juris-prudence, illustrates the underlying reasons why such arrangements are not compellingly attractive to rational financiers on a PLS ba-sis.

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THE LEADING ISLAMIC FINANCIAL HUBS OF THE WORLD:

A COMPETITIVE FIELDAuthor: Tasnim Nazeer, Global Islamic Finance Magazine Editorial Team, United Kingdom

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 Fi-nance 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 com-prehensive 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


Introduction to Islamic Financial HubsDue to the unprecedented growth of Islamic finance there are many Islamic financial hubs which have emerged. However what does it really mean to be an Islamic financial hub? This question is often reiterated and GIF will show you exactly what it means to be a modern day Islamic financial hub. Islamic financial hubs show unprecedented success in the development of Islamic banking and finance. In addition, Islamic financial hubs give investors key opportunities within their individual countries for Islamic finance prod-ucts and services such as Sukuk or Takaful. These Islamic financial commodities have been particularly successful in countries such as Malaysia and the Middle East which is why these countries have been deemed as ‘Islamic financial hubs’. If any country wanted to pursue a title of hub they would have to follow the principles of Shariah fi-nance which is outlined in Figure 1.

As outlined in Figure 1 any country wishing to develop their financial market to cater for Islamic finance and be considered as a hub has to adhere to the principles of Shariah finance. This involves a strict prohibition of interest based investments or transactions, the functions of profit sharing and risk shar-ing, the prohibition of forbidden assets and an existence of an underlying asset. If a country can implement significant changes within the laws of land to accommodate these Shariah-compliant financial rulings then they can further progress in becoming a trustworthy and reliable Islamic financial hub such as the Middle East and Malaysia.

Which countries are considered success-ful Islamic financial hubs?There are many coun-tries around the world that are considered to be successful Is-lamic financial hubs and these countries are listed in Figure 2. One of the major renowned hubs for Islamic finance is Ma-laysia, which has an unprecedented amount of opportunities for Islamic investments and development of Shariah-compliant banks, project finance and more.

Figure 2 outlines some of the successful Islamic financial hubs by country, with Ma-laysia at the top swiftly followed by Qatar and other countries in the Gulf Cooperation Council (GCC). There are many more emerg-ing 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-

tating and developing the industry into what it is today.

Malaysia A World of Opportunities in Is-lamic FinanceMalaysia is undoubtedly the number one Is-lamic financial hub of the world, catering for the demand for Shariah-compliant financing from a predominant Muslim population. In addition, Malaysia opens up many opportu-nities for key investments across the vari-ous sectors of Islamic finance and banking. Many investors choose the hub of Malaysia as a destination for lucrative Shariah-com-pliant deals. Malaysia is a key player in the Islamic financial world, having pioneered in the Sukuk and Takaful sectors.

The country allows investors to utilise their wealth in innovative and interesting projects across various sectors. Malaysia has facili-tated key developments in Islamic finance, launching the Kuala Lumpur Stock Exchange in 1999, and Bursa Malaysia having now launched the new Sharia Index in order to facilitate participation in equity investments that are compatible with the Islamic princi-ples of Shariah. Shariah-based equities are essentially shares of companies meeting Is-lamic jurisprudence criteria.

At the current moment it is possible to invest your wealth in an investment project through the Bursa Malaysia as the company is a sin-gle exchange group, and is designed to meet the growing demands of both foreign and lo-cal investors.

Key Islamic Financial Activities within Ma-laysiaThere are also various opportunities in Ma-laysia 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 excel-lent returns over the years, partially explain-ing its success. The facilitation of key devel-opments 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 Mid-dle EastQatar holds a predominant place as being a successful Islamic financial hub due to the fact that it opens up opportunities in the fol-lowing sectors of Islamic finance as outlined in Figure 4.

From all the sectors that are mentioned in Figure 4 the most profitable areas for invest-ments in Qatar have been from the Sukuk, Takaful, Infrastructure and Real Estate sec-tors. 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 cre-ating more investment deals and has shown their support in funding more projects. Qa-tar Islamic Bank had reportedly said that it would continue to help to fund more projects both regionally and internationally. “QIB has strived to consolidate its participation in the national economy through its funding of

macro-companies in a new trend intended to further consolidate its leading role in financ-ing national projects,” Chairman Sheikh Jasem Hamad Jabor Al Thani said. QIB, Qa-tar’s second-largest lender by market value, signed in the first quar-ter a memorandum of understanding, or MoU, with South Korean bro-ker Woori Investment &

Securities and said it would have 30 domes-tic branches by the end of year, after adding four more to its existing network in 2010”, the bank said in the statement.

“During this first quarter, Qatar Islamic Bank signed a memorandum of understanding with Woori Investment and Securities Inc. with the aim of facilitating mutual coopera-tion between the two parties in the search for suitable financial and investment oppor-tunities in the Korean, Asian and Qatari mar-kets,” QIB said.


Prohibition of Riba (interest) and uncertainty

Prohibition of Forbidden Assets

Existence of underlying asset

Profit Sharing/Risk Sharing

Figure 1: Shariah-Compliant Principles of Islamic Finance for Major Hubs

Malaysia

Qatar

Saudi Arabia

Dubai

Abu Dhabi

Bahrain

Luxembourg

South Africa

Indonesia

Figure 2: Successful Islamic Financial Hubs


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SHARIAH COMPLIANT STOCKS

88% of the securities currently listed on Bursa Malaysia are Shariah - compliant and represent two-thirds of Malaysia’s market capitalisation. At Bursa Malaysia, choices are abundant as investors have access to an extensive selection of Shariah - compliant stocks across diversified industries for broader and deeper investment portfolios.

ISLAMIC EQUITY INDICES

Bursa Malaysia is the world’s only exchange with three comprehensive and transparent Shariah screening processes: FTSE Group, Yasaar Ltd and the SC’s Shariah Advisory Council (SAC). These screening processes that look at both qualitative and quantitative measures help us meet local requirements and align us with international standards. The FTSE Hijrah Shariah index (FBM Hijrah Shariah) and the FTSE Bursa Malaysia EMAS Shariah index (FBM EMAS Shariah) provide a broad benchmark for Shariah compliant investment. These indices are designed for investors who wish to invest in Shariah compliant stocks that are consistent with Shariah principles.

SUKUK (ISLAMIC BONDS)

The Sukuk market has been the driver of growth for the Malaysian Islamic Market with many world’s first issues, cemented by sizable amount and innovative structures. Malaysia is one of the largest Sukuk issuance centres in the world and accounts for approximately two-thirds of the global Sukuk outstanding. Bursa Malaysia also provides a facilitative and progressive environment for Sukuk issuance by local and international issuers. Issuing Sukuk in Malaysia is cost-effective as International Issuers have the flexibility to issue either ringgit or non-ringgit denominated Sukuk using international documentation, based on UK or US laws and the choice of international credit rating agencies.

SHARIAH ETF

ETF has been one of the most innovative investment vehicles over the last two decades. We are the first to list Islamic ETF in Asia. Unlike other conventional ETFs, Shariah ETF is an excellent alterna-tive for investors seeking Shariah compliant investment instruments. The Dow Jones Islamic (DJIM) index tracks the largest blue chip listed Malaysian companies that comply with Shariah investment guidelines. With 88% of the securities listed on Bursa Malaysia being Shariah compliant, we are perfectly placed to create a variety of Islamic ETFs that are transparent and cost-effective, providing greater access for investors to diversify efficiently.

ISLAMIC REITs

To keep pace with the ever-changing appetite of investors, Malaysia proactively provides innovative Islamic market products that best meet the market demand. Apart from being the first to introduce Islamic REITs guidelines, Bursa Malaysia is the world’s first plantation REITs and hospital REITs. Bursa Malaysia is the first jurisdiction in the global Islamic financial market, as well as the first mar-ket in the world, to list an Islamic REITs. These efforts have facilitated the creation of a new asset class for investors and fund managers to diversify investment sources and portfolios.

SHARIAH-BASED UNIT TRUST FUNDS

For industry players who wish to invest in a diversified portfolio of Shariah compliant securities, we have for you the options of Islamic equity funds, Sukuk funds and other funds managed by compe-tent and professional managers in accordance with the Shariah principles.

ISLAMIC STRUCTURED INVESTMENT PRODUCTS

Malaysia’s wide range of Islamic products caters to various investment styles and meets specific risk profiles, attractive return requirements and high market expectations. Via the local and inter-national brokers BM’s innovative Islamic structured investment products offer unique opportunities that allow for better risk management and provide investors with valuable portfolio diversification tools in a vibrant market environment.

OFFSHORE ISLAMIC MARKETS

The Labuan International Financial Exchange (LFX), a web-based financial exchange, provides further impetus to the development of offshore Islamic Markets.This wholly owned subsidiary of Bursa Malaysia is based in Labuan IOFC, a tax haven, and is regu-lated by the Labuan Financial Services Authority (Labuan FSA).LFX offers listing and trading facilities for a wide range of financial and non-financial products, as well as Islamic financial products. The rules of LFX are designed to beliberal and cater to the listing of a variety of multi-currency securities and instruments while offer-ing speedy approval processes and attractive tax benefits.

Figure 3: An outline of the key Islamic financial commodities

Source: Bursa Malaysia klse.com

Qatar has major scope for Sukuk deals es-pecially in 2011 when it is reported to have exhibited a positive outlook for stability. Qa-tar’s largest investment bank QInvest sees Islamic bond issuances stability to benefit movement in 2011 while initial open offer-ings might also see some revival, a compa-ny’s arch executive said. Shahzad Shahbaz pronounced that an organisation is operative with intensity issuers in Qatar who are look-ing to daub an Islamic bond, or Sukuk, mar-ketplace in 2011 after Qatar Islamic Bank’s oversubscribed $750 million Sukuk demon-strated flourishing ardour and set a bench-mark for other corporates to lift collateral on auspicious terms.

Following Qatar’s winning bid for the 2022 World Cup there have been various opportu-nities for Shariah-compliant financing deals, strengthening Qatar’s status as the predomi-nant Islamic financial hub of the Middle East. Takaful Islamic insurance is another sector which has many investment opportunities for investors in Qatar. The renowned insurance provider Allianz Takaful has helped to facili-tate the sector in Qatar making key develop-ments for lucrative investments.

Allianz Takaful is the first Takaful firm to be authorised by the QFCRA and will be prima-rily advising on investments in respect of contracts. Qatar has also made global in-vestment opportunities by joining with other financial establishments around the world to implement Takaful investments. A prime ex-ample of this is the joint company of PakQa-tar which is a collaboration of Pakistan and Qatar Takaful insurance. Qatar can further diversify and develop the Islamic Shariah-compliant finance industry into the $2 trillion dollar estimated sector that is rapidly becom-ing and a major Islamic financial hub.

Bahrain: A Central Hub for Islamic FinanceBahrain has been acclaimed as one of the most popular Islamic financial hubs of the Middle East due to its tremendous scope for opportunities and investments to feed the minds of lucrative investors. Bahrain plays host to a number of organisations central to the development of Islamic finance, includ-ing the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), the general council for Islamic banks and finan-cial institutions, the International Islamic Fi-nancial Market (IIFM) and the International Islamic Rating Agency (IIRA). Bahrain’s Is-lamic Finance sector has averaged a 15-20 percent annual growth rate over the last five years. Bahrain had an oversubscribed demand for the Sukuk market as Bahrain’s $750 million sovereign Sukuk issue at-tracted an order book of about $4 billion with strong demand from the Middle East, a lead manager said, giving a promising sign to



cash-stripped corporates to tap markets. In 2011, Bahrain is a major Sukuk issuer tak-ing the one of the top spots in innovative Su-kuk issuances and is set to thrive in the lu-crative sector. There are many opportunities and investments in the real estate sector of Bahrain. There are many financial insti-tutions in Bahrain today that offer services for real estate investments to cater for the need of investors wishing to utilise ethical investments. Bahraini financial institutions such as First Bahrain, Capivest, The Invest-ment Dar, Bahrain Islamic Bank are just a few of the many institutions which you could consult to provide you with an up to date list of real estate investment opportunities and projects.

Bahrain remains a global hub for Islamic fi-nance and the most stable financial centre in the MENA region, due to the sophistica-tion of the regulatory framework that take into consideration the unprecedented prin-ciples of Sukuk and Takaful industry.

UAE, Abu Dhabi & Dubai Excelling the Is-lamic Financial HubsThe UAE, Abu Dhabi and Dubai are two coun-tries which have an unprecedented amount of opportunities in the Islamic financial sec-tor which is why they are considered the pearls of Islamic finance. The Islamic finance industry alone has seen an increase in de-mand for global invest-

ments from hungry investors willing to tap into the lucrative market and seize invest-ments that come their way. Dubai has shown innovation in establishing Islamic wealth op-portunities in other interesting areas such as the energy sector.

In 2008 Dubai Islamic Bank (DIB) launched two innovative opportunities which are still concurrent. These Islamic wealth opportuni-ties were launched by DIB’s Wealth Manage-ment Division and both products were linked to the DWS New Resources Fund, which tar-gets companies active in water, agrochemi-cals and renewable energies. Abu Dhabi and Dubai are pioneering in developments to create more Islamic Shariah-compliant wealth opportunities for the avid investor.

Many Muslims and non-Muslims alike find Islamic financial commodities a more ethical way of managing their wealth and therefore decide that Islamic wealth management in-vestments are the best way to go. In 2010 Abu Dhabi Islamic Bank launched an array of specialised wealth management serv-ices to cater for the demands of customers. Launching ADIB Wealth Management, Tirad

Mahmoud, CEO of ADIB, said, “ADIB’s growth will be charted with the in-

troduction of new services and wealth management is assigned

to be a key service that will en-rich clients’ port-

folios. Wealth management is central to our plans go-

ing forward and we have allo-

cated suf-ficient re-sources to let it

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, Treas-ury 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 de-velopments in the Sukuk and Islamic bank-ing 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 world’s first Shariah-compliant real estate fund as in 2007 NCB Capital launched Aahli Global Real Estate Fund, a fund that invests in com-panies 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 popu-lation with excellent demand for Shariah-complaint facilities the country can further prosper from becoming major Islamic finan-cial hubs.

South Africa an African Hub for Islamic Fi-nanceAfrica is home to more than 412 million Muslims and the South Africa has much scope for Shariah-compliant project financ-ing 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 upcom-ing future. The only basic banking products include vehicle and asset financing are avail-able. 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 collabora-tion with many other countries such as the Middle East, Asia and African continent was the Equate project. The Equate petrochemi-cal project was a joint venture between Un-ion Carbide and a subsidiary of Kuwait’s na-tional 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.

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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 country’s economy to prosper. The devel-opments 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 FinanceLuxembourg has made significant progres-sion 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 Su-kuk 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. Lux-embourg 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. Se-rene Shtayyeh, PwC Luxembourg partner and head of the Middle East and Islamic Fi-nance group at PwC Luxembourg said that, “The domiciliation of over 40 Shariah-com-pliant 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 Taka-ful Solutions Dubai added that, “I believe that Luxembourg has the first mover advan-

tage in Islamic finance in continental Europe and as a leading cross border provider of fi-nancial services including Shariah-compliant and Socially Responsible Investments (SRI), it offers an attractive gateway for financial institutions in Europe, Middle East and Asia which are interested in expanding their busi-ness in this fast growing sector”. In Septem-ber 2010 there were 37 regulated Shariah-compliant investment funds and sub-funds that had been established in Luxembourg.

Islamic finance in Luxembourg is well sup-ported by the Luxembourg Government, which set up a special Task Force in 2008. The Central Bank of Luxembourg is a mem-ber of the Islamic Financial Services Board (IFSB) in addition to numerous other Lux-embourg companies and cross-functional working groups which are also active in developing and supporting Islamic finance. With further developments, Luxembourg can establish itself as an Islamic financial hub of Europe with facilitations made to accommo-date the Shariah-complaint finance industry in various forms of Takaful and Sukuk. There is much scope for Luxembourg to excel in the Shariah-compliant finance industry.

The Scope for Islamic Financial Hubs around the World

There is a bright future for the scope of Is-lamic financial hubs around the world from Malaysia to the Middle East. Countries are excelling in spurring forward the Islamic fi-nance sector and creating a diverse meth-od of implementing and facilitating Islamic banking and financial products. In addition various countries around the world are tap-ping into the key investments that the Islam-ic 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 prohibi-tion of interest in Islamic finance countries around the world can cater for a new mar-ket 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 Shari-ah-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 invest-ment idea.

The future looks promising for Islamic finan-cial hubs worldwide as many global inves-tors are seeing the benefits of investing and facilitating the industry in a Shariah-compli-ant 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 Is-lamic 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_mar-• ket/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-list-• islamic-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-more-• projects-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.htmlBahrain 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-com-• pliant-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 IPO’S in 2011 Retrieved from: http://theinvestmentauthority.com/banking/qinvest-ceo-sees-• qatar-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-to-• position-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.• jhtmlLuxembourg a prime location for an Islamic finance hub in Europe (2010) Gemengen, Retrieved from:http://www.gemengen.lu/2011/05/16/luxembourg-%E2%80%93-• a-prime-location-for-an-islamic-finance-hub-in-europe/?cat=63Islamic 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


Sukuk

Takaful

Real Estate

Infrastructure

Energy Resources

Figure 4: Key Islamic Financial Commodi-ties that make Qatar a Financial Hub



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A Look at Practiced Islamic FinanceIslamic 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 re-ports suggest that assets held by Islamic fi-nancial 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 financ-ing than the more preferable participatory modes of Mudarabah and Musharakah.

Time Value of Money and Islamic FinanceIn investment for trade (which Islam allows), the investment goes through the entire proc-ess 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 prof-it 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. How-ever, 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 in-teresting, but the money is invested in con-tracts 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 instru-ments enable the bank to provide compen-sation based on tenor.

AN IDEAL

ISLAMIC FINANCIAL SYSTEM: A GONE CASE?Author: Salman Ahmed Shaikh, Project Head, Halal Tamweel, BMC, Pakistan

Abstract: The Islamic finance industry mostly uses London Inter-Bank Offer Rate (LIBOR) linked financial contracts which are akin to debt financing than the more preferable participatory modes of Mudarabah and Musharakah. As per the current orthodox understanding and practice of Islamic finance, the often cited preferable modes like Mudarabah and Musharakah are incapable of operating as the only mode of financing even in a simple model economy. The prevalent Islamic products that are linked with LIBOR are and will predominantly be used and practiced in Islamic finance may remain incapable of providing egalitarian benefits it once promised. Ironically, Islamic values like justice, equality, truth, trust, kindness, honesty and re-sponsibility are often discussed in literature and seminars on Islamic Economics, but in reality, the lack of these values in practice is the major reason why preferable participatory modes remain unusable.

Keywords: Islamic Finance, Islamic Economics, Mudarabah, Musharakah. Salam


Islamic Finance gif

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 con-tracts are separated by way of a unilateral undertaking in place of the actual simulta-neous 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 re-spect to the flow of funds.

Analysis of Risk Taking by BankThere 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 ‘Di-minishing 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 unilat-eral undertaking from the customer to lease or purchase an asset in Ijara/Diminishing Musharakah and Murabaha respectively.

Analysis of MurabahaIt is referred to as a “cost plus profit” trans-action. 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 un-dertaking to buy the asset. This undertak-ing 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


gif Islamic Finance

by locking the price at the outset and avoids taking any market related risk. Undertak-ing to purchase the asset once the asset is bought by the client as an agent of the bank makes the contract conditional. This under-taking is taken from the client before the bank releases funds. This argument is fur-ther substantiated by the fact that if the cli-ent refuses to undertake or promise to buy the asset, the bank will not make contract with him. Furthermore, the promise gives le-gal 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, redistribu-tion 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 obser-vation of the conditions prescribed by Sha-riah.”

Commodity Murabaha used by the Islamic bank’s treasury for asset liability manage-ment (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 transac-tions, 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 trans-action 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 sub-sequently. The lapse of at least one year pe-riod between sale and lease recommended by Shariah scholars is also not a sufficient justification as the Islamic bank takes under-taking from the client beforehand to lease it after one year.

With Murabaha as an alternative, profit-able 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/Mushar-akah, but bank as conservative financial in-stitutions banks will not take risks with these companies. The argument that Mudarabah/

Musharakah financing is not possible due to lack of authentic documentation as well as a poor level of trust. Islamic banks operat-ing 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 Mudara-bah/Musharakah financing. As a matter of fact, Islamic banks do not want to take market and price risk. Default, credit, politi-cal, exchange and other risks are also taken by conventional banks. If Mudarabah and Musharakah are deemed ideal alternatives by Islamic banking experts and scholars fa-voring it, then they would have been better off entering investment banking rather than commercial banking.

Analysis of SalamSalam 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-

action approved by Prophet Muhammad (pbuh) did not involve a financial intermedi-ary. 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 con-tingency in contracts persists.

Analysis of MudarabahOne 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 finan-cial 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 al-lowed to interfere in the affairs of the busi-ness. 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 didn’t create many prob-lems 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 modi-fied, 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 con-tracts, or for the appointment of Shariah Ad-visors 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 partici-pation by all partners across the board is justifiable because all partners are also al-lowed to work. However, due to the condi-tion 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 unjusti-fied in the first place. It is considered that in case of loss, Mudarib loses the compensa-tion to his efforts. But, Mudarib was not an employee. He was a joint partner, more pre-cisely, a working partner. Taking the position that he lost the compensation to his work is

Salman Ahmed Shaikh, Project Head, Halal Tamweel, BMC, Paki-

stanSalman Ahmed Shaikh is currently

working as Project Head, Halal Tamweel at BMC Pakistan. He is also working as an External Re-

viewer for Bankers’ Academy, USA. He is pursuing a PhD in Islamic Eco-

nomics. 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 undergradu-

ate 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.


gifIslamic Finance

inviting opportunity cost which Islamic eco-nomics does not acknowledge apparently.In Mudarabah, the prevalent concept of loss sharing makes it different from a general partnership (in which all partners have un-limited liability) and even with limited part-nership (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 in-strument 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 Mudara-bah.

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 liabili-ty to share losses without having a say in the affairs of the business. Restricted Mudara-bah and clause of willful negligence is insuf-ficient to protect them from losses strictly due to business cycle fluctuations. This ex-ample 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 benefi-cial than an interest based system.

Let us analyse trust deficit and documenta-tion 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 share-holder 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 re-laxed, 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 basi-cally 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 entrepre-neur (who has the ultimate responsibility to

share losses). How is it a participatory mode then? This should not be cited as a par-ticipatory mode with its current structure. Secondly, it is also different from a princi-pal agent relationship in corporate form of organisation. In that, the principal hires the agent only because of his inability/incapac-ity, but the rules do not restrict him not to influence agent’s decisions. Important deci-sions taken by the agent(s) have to be vet-ted 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 participa-tory or preferable one.

With important covenants in place, equity fi-nancing can and is used widely. It is interest-ing to study the size of debts and equity mar-ket 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 Is-lamic finance the way it is practiced for com-mercial reasons.

Securitization, Great Recession & Islamic FinanceThe proponents of Islamic finance argue that the demise of financial institutions in developed markets was due to excessive se-curitisation 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), As-set Backed Security (ABS) etc. Were instru-ments with mortgage loans as their underly-ing assets. The problem was with excessive leveraging and lax regulation and not with securitisation per se. Securitisation in Is-lamic finance, as in Sukuk, also suffered a setback in the Dubai Crisis in 2009/10. As-set 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 RemarksAs per the current orthodox understanding and practice of Islamic finance, the often cited preferable modes like Mudarabah and

Mohammed Ridza Abdullah, Man-aging Partner, Mohamed Ridza & Co, Malaysia

What are your thoughts on the future development of Islamic finance prod-ucts?There is a lot of potential for develop-ment of Islamic products because the industry has not fully exploited the va-rieties of Islamic products. Perhaps it is because of the comfort level of industry players who prefers to piggy back on ex-isting 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 op-portunities?The demand can come in 2 aspects. The first is through the religious choice for Muslims in particular and also for non-Muslims who prefers ethical modes of investing. Second is to ensure the costs of doing business with Islamic finance are also competitive with the conven-tional counterpart.

What Islamic financial instrument do you use the most? In addition, what are the benefits?Murabahah tawarru, ijarah and Bai Bith-amin Ajil, for sukuk based are mostly ijarah due to the global acceptance of ijarah type of products. Reason is be-cause most banks feel comfortable us-ing these products in particular tawarru’ which is cash financing. However recent Sukuk issuances like the global Trust Certificate by Government of Malaysia and Kuwait’s Gulf Investment Corpora-tion 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 fi-nance, future cash flows are the key to the creditworthiness. The assets are just security in case of default.


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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 predomi-nantly be used and practiced Islamic finance may remain incapable of providing egalitar-ian benefits it once promised. Ironically, Islamic values like justice, equality, truth, trust, kindness, honesty and responsibility are often discussed in literature and semi-nars on Islamic Economics; whereas, in real-ity, the lack of these values in practice is the major reason why preferable participatory modes remain unusable.

Islamic Economic System: The Way AheadIn developing Islamic economics, we first need to present the thesis of Islam answer-ing all valid arguments against it and its teachings. Then, we can present the eco-nomic 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 econom-ics and Islamic economics, we can develop and present the foundations, institutions, in-struments, mechanism and delineate role of each in the new economic framework.

In my work on Islamic economics, I have explained it as a blend of natural features present in capitalism i.e. right to private property, private pursuit of econom-ic interest, use of market forces etc used along with some distinct features derived through Islamic economic teachings i.e. interest free economy, moral check on unbridled self-pursuit and provision of socio-economic jus-tice to achieve the goals of Socialism as far as is naturally possible without denying individual free-dom and profit motive. In Islamic corporate finance, I suggested an alternate

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. •

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.•

Ijara with embedded option can solve the paradox of unilateral undertaking and con-vert the sale of put option from the perspec-tive of client into a call option. In Mudarabah, following two covenants can be introduced.

Mudarib can be asked to contribute • some capital. The contract will remain different from Musharakah as only the

Mudarib is the working partner. Mudarib can be asked to share in loss • to some extent.

These two covenants will minimise the prob-lem 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 in-terest 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 in-flation 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 tar-gets 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.

Therefore, all is not lost. But, there is a need to realise weaknesses, only then can we

look for solutions and in search for solutions, we need to be critical, ob-jective, impersonal, un-biased and open to hear and receive all possible solutions and then ac-cepting and rejecting any of them on the basis of authentic Islamic sources i.e. Quran, way of Prophet Muhammad (pbuh) and Sahih Ahadith rather than on the basis of factional affiliations. Only then, can we hope to progress to-wards the goal of an ideal Islamic economic system.

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=1659799Jobst, 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 Ma’ariful Quran.• Usmani, Muhammad Taqi (2003). “Islam Aur Jadid Maeeshat-o-Tijaraht” [Islam and Contemporary Economy and Trade]. Karachi: Maktaba ma’ariful Quran.•


Features Conventional Mortgage Diminishing Musharakah

Benchmark Rate KIBOR KIBOR

Basis of Rent KIBOR KIBOR

Nature of Installment Interest + Principal Repayment Rent + Sale of Units

Prepayment Penalty Yes Sale of Units at Higher Price

Rent + Sale contract Dependent Separated by unilateral promise

In subsequent years Interest decreases Rent payment decreases

In subsequent years Principal repayment increases More Units are purchased

Changes in Rent Based on KIBOR Based on KIBOR

Price and Market Risk No No

Price of Asset Locked at initiation Locked at Initiation

Cost to the borrower Same in both cases Same in both cases

Profit to the bank Same in both cases Same in both cases

Figure 1: Comparison of Conventional Mortgage and Diminishing Musharakah


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CHOICE OF LAW AND ISLAMIC FINANCE, PART IIAuthor: Julio C. Colón, University of Texas School of Law

Abstract: The practice of Islamic finance alternative dispute resolution (ADR) forums shows a consistent re-liance 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 it’s 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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The Future of Islamic Finance Dispute Res-olution 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 refer-ence 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 contem-• plate the choice of a non-state legal system such as Shariah;even if the parties intended to incorpo-• rate 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 Eng-lish court would decide principles of Islamic law.

The Rome Convention has since been re-placed by Regulation (EC) No. 593/2008 of the European Parliament and the Council of the 17th of June 2008 on the Law Applica-ble 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 Conven-tion 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 Ar-ticle 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 sit-uation at the time of the choice are located in a country other than the country whose law has been chosen, the choice of the par-ties shall not prejudice the application of provisions of the law of that other country which cannot be derogated from by agree-ment. 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

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 Eu-ropean 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 Convention’s apparent prohibition of the use of combined-law clauses, arbitrators who are called on to judge under the law of a Eu-ropean 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, un-der English law a Murabaha agreement will be treated the same as an interest-bearing loan, barring contrary contractual stipula-tions. 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

Bank argued that the reference to Shariah be treated as an inclusion of the lex merca-toria of Islamic finance and that the appel-late 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 Shariah’s scope of applicability. However, industry practice shows that the statement is intended to serve as a gap-filler provision because the contractual arrangements of Is-lamic business are often not defined within common law jurisprudence or civil regula-tion.

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 innova-tion, and Shariah may be kept in mind when disputes do arise. Judges and arbitrators should therefore not consider a Shariah-termed, combined-law contract as one in-volving 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 Shariah-based. 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 comprehen-sive social code of conduct that applies out-side of a state’s legal framework should not create so much confusion that application of Shariah becomes untenable. Only such Sha-riah-related legal issues that are logically re-lated to the terms of the contract need to be entertained. Obviously, the judge need not consider principles related to personal be-havior 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 gate-keeper. 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 de-termining 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-

Julio C. Colón, Student, University of Texas School of Law

Julio C. Colón, 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.


tives of the parties in choosing to use Islam-ic 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 work-ing 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 cus-tomers as an “Islamic bank.”

Because the appellate court made its deci-sion without reference to the commercial ends of a murabaha contract in Islamic fi-nance, 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 refer-ence to Shariah in Islamic financial transac-tions 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 exi-gencies 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 insti-tution, 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 an-other 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. Experi-enceThere is a concern amongst U.S. scholars that a choice of law that necessitates look-ing into Shariah law will conflict with the First Amendment prohibition of state en-dorsement 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 en-forcing courts.

Use of the First Amendment as a weapon against enforcement of an arbitration award is not an unfounded fear in the case of Is-lamic finance. The Ann Arbor-based Thomas More Law Center is involved in federal litiga-

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-com-pliant 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 Michi-gan 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 jurisdic-tions. In Canada, for example, the govern-ment of Ontario amended their Arbitration Act to make family dispute arbitration deci-sions based on religious principles unen-forceable. This amended legislation, enact-ed 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 agree-ments 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 aris-ing from or related to this agreement shall

be settled by biblically based mediation.” In one case, Encore Productions sued Prom-ise Keepers over a dispute concerning their contract to provide production services for Promise Keepers conferences. The contract contained a clause that stated that arbitra-tion 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 Produc-tions challenged the arbitral decision claim-ing that the religious dispute resolution vio-lated 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 enforce-ment of the arbitration award because inter-pretation 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 be-fore Shariah tribunals even in the controver-sial family law setting. In Jabri v. Qaddura, a Texas Appellate Court enforced an agree-ment 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 arrange-ments, 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 couple’s home and $40,000 of her dowry. During divorce pro-ceedings, 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 arbitrator’s authority. The wife motioned the district court to stay proceed-ings and compel arbitration, which the court denied. The Court of Appeals ruled that the district court abused its discretion by find-ing 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 ar-bitration. However, the Court of Appeals did not mention any public policy concerns that would prevent it from enforcing an agree-ment to arbitrate issues concerning conser-vatorship of children, child support, division of property, and even a protective order be-fore an Islamic tribunal.

Enforcement of Islamic arbitration awards has proven to be relatively uncontrover-sial 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 com-pany, contracted Lucent Technologies to as-sist in a multi-million dollar project to design, engineer, and install emergency and pay tel-ephones throughout Saudi Arabia.

Lucent Technologies terminated its subcon-tract, and National Group was forced to liq-uidate its Project Department, which it had created specifically to implement the tel-ecommunications contract. National Group then brought suit against Lucent Technolo-gies seeking actual and expectation dam-ages.

Both National Group and Lucent Technolo-gies 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 plaintiff’s Projects Depart-ment; in doing so, the court analysed tenets of Shariah.

In its opinion, the district court recited some rules from the “Basic Regulation of the King-dom 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 indi-cations 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 under-standing 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 de-termination.”

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 Muhammed’s 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 purchas-es food shall not sell it until he weighs it.

The district court then resolved the dispute in favor of the defendants, finding that ex-pectation 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 plaintiff’s valuation of the Projects De-partment “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 judge’s 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 en-forcement of decisions to arbitrate, nor has it prevented the actual awards on public policy grounds. This is all the more signifi-cant 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 ap-plication does not necessitate an unaccept-able intrusion by the judge in pronouncing what is right or wrong in matters of worship.

Advice for Seeking Arbitration in Islamic Financial DisputesThe choice of law clause could be short-hand 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 resolu-tion, 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-estab-lished systems, such as those of the United Kingdom. Because the terms of the contract are Shariah-based, the parties must supple-ment the choice of law clause to address that fact and cater to the parties’ prefer-ences and the spirit of the transaction. Oth-


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erwise, the writing of the agreement may be-come 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 Shariah-compliant business transactions have both accommodated and propagated the com-bined-law contract, it has not been well re-ceived 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 fo-rum.

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 en-forcement of the award of an arbitrator to be purely discretionary by the judge. The Med-jella 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 par-ties.” Decisions by arbitrators were not en-forceable except upon confirmation by the judge, and then only if made “in accordance with law.”

From the perspective of the current transna-tional 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 arbitrator’s 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 particu-

lar school of classical jurists that an agree-ment to arbitrate is binding upon the parties and cannot be revoked. Arbitration in Is-lamic financial disputes has improved in re-cent 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 KL-RCA 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 concern-ing its own jurisdiction (“competence”). The view that an agreement to arbitrate is bind-ing 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 com-mentators reflect the nearly global consen-sus 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 pro-cedure of the arbitration was not Shariah-compliant. 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 con-cern for a lawyer seeking to protect the cli-ent’s interests, even though the issues have not yet presented themselves. A judge that must entertain such an argument should proceed with the understanding that Shari-ah 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 in-terference 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. En-forcement can be refused if the agreement is not valid or if the composition of the ar-bitral 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 Ara-bia’s Law of Arbitration states that “an arbi-trator 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 judge’s 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 Corpo-ration (SABIC) stated that no U.S. court pos-sesses the qualifications to engage in legal analysis under Saudi Arabian law.

The court pointed out that had the expert’s opinion been the true belief of SABIC, then it was quite strange that SABIC did not at-tack the trial court’s 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 purpose-fully selected this forum instead of a Saudi Court, knowing the United States legal sys-tem 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 SABIC’s vehement argument that this case should be tried by a U.S. judge. Therefore, in light of the potential for tactical use of Shari-ah-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 Finan-cial 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 pub-lished an arbitration standard that is expect-ed 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-

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KLRCA Rules for Islamic Banking and Finan-• cial Services Arbitration rule 1(3) (2007), available at http://www.klrca.org.my/upload/Islamic_Banking_ Rules_for_Islamic_Bank-ing_&_FS_2007.pdf Abu Dhabi Commercial Conciliation and Ar-• bitration 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 Int’l Arb. Cen-• tre. 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 Tri-• bunal rule 8(2), Retrieved from: http://www.matribunal.com/procedure_rules.html Increase in Non-Muslims Opting for Shari’ah • Courts, Christian Inst. (Mar. 16, 2010) Re-trieved from: http://www.christian.org.uk/news/increase-in-non-muslims-opting-for-Shari’ah-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. Re-trieved from: International Arbitration and the Islamic World: The Third Phase, 97 Am. J. Int’l L. 643, n.16 (2003)).Sanghi Polyesters Ltd. (India) v. Int’l Investor • KCFC (Kuwait), [2000] 1 Lloyd’s Rep. 480, 480 (2000).Al-Bashir & Al-Amine, supra note 46 (describ-• ing the application of istina’a in Islamic bank-ing transactions).Alan Redfern et al., Law and Practice of Inter-• national 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 Shari’ah 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 Arbitra-• tion and Shari’ah Law, BC C.L. Ass’n, 2. Retrieved from: http://www.bccla.org/othercontent/07Shari’ahlaw.pdf (last visited Mar. 30, 2011). Jehan Aslam, Judicial Oversight of Islamic • Family Law Arbitration in Ontario: Ensuring Meaningful Consent and Promoting Multicul-tural Citizenship, 38 Int’l L. & Pol. 841, 843

(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) Nat’l Grp. for Commc’ns & Computers v. Lu-• cent Techs. Int’l, 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 Is-lamic Fin. Monthly, Apr. 2008, at 21, 22, Re-trieved 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 • Shari’a 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 Arbi-• tration 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 & Audit-• ing 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 AAOIFI’s New Standards, Westlaw Business Currents (July 27, 2010). Retrieved from: http://currents.westlawbusi-ness.com/Articles/PDF/A%20Brief%C20Examination%C20of%C20AAOIFI%CE2%C80%C99s%C20New%Standards.pdf Bill Maurer, Anthropological and Accounting • Knowledge in Islamic Banking and Finance: Rethinking Critical Accounts, 8 J. Royal An-thropological Inst. 645 (2002). Retrieved from: http:// www.anthro.uci.edu/faculty_bios/maurer/Maurer-JRAI.pdf.Oxford Analytica, International Islamic Fi-• nance Moves Toward Common Standards, Forbes.com (Mar. 9, 2010). Retrieved from: http://www.forbes.com/2010/03/08/islam-finance-Shari’ah-business-oxford-analytica.html

plaint that qualified arbitrators in Islamic fi-nance 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 liter-acy in Islamic law, as the AAOIFI standards “do not provide ‘secondary rules’ for unfore-seen circumstances or non-performance of either party to the transaction.”

ConclusionThe rapid growth of Islamic finance will re-quire the international legal system to de-velop an understanding of the foundations of Shariah-compliant business transactions. Judges in countries that do not have a his-tory of dealing with Islamic law must com-pare the case before them to the general practice of the Islamic financial sector to judge the commercial purpose of Shariah-compliant 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 con-tracts 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 in-fluenced by Islamic law have had success in judging Shariah issues with experts. Par-ties 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 transac-tion’s 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 special-ises in Islamic finance. Arbitration is pre-ferred 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.

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INTRODUCTION OF ISLAMIC BANKING IN ZIMBABWE: PROBLEMS AND CHALLENGESAuthor: Kosmas Njanike, Senior Lecturer, Bindura University, Zimbabwe

Abstract: Islamic banking provides a great opportunity for the banking sector in developing economies. The research’s objective was to explore the problems and challenges likely to be faced in introducing interest - free banking services in Zimbabwe. The readiness and awareness of such challenges will ensure Islamic banking system to utilise its potential. The research found that Islamic banking could not operate with its full efficiency level if it operates under a conventional banking framework. It also revealed that there may be resistance to change as Christianity dominates and Muslims from a small group. The education and dis-semination of information will be hampered by the bureaucratic nature in the organisations expected to spearhead the program. Personal interviews and doc-ument reviews were used to gather data for the research. It is still possible to in-troduce full-fledged institutions with the cooperation of the central bank, Ministry of Finance, research institutions, media, and the banking community. Keywords: Islamic Banking; Efficiency; Effectiveness; Problems; Challenges



The implementation of an interest-free bank-ing 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 Zimba-bwe requires a different way of doing busi-ness. 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-in-terest system will bridge this problem. The interest rate regime has caused financial disintermediation in the economy, contrib-uting to it’s collapse and the contraction of Zimbabwe’s Gross Domestic Product.

This article will explain the reasons and make recommendations for the introduction of Is-lamic finance to Zimbabwe. An Islamic bank is an intermediary and trustee of other peo-ple’s 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 imple-mentation 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 suc-cessful in devising an interest-free mecha-nism to place their funds on a short-term ba-sis. 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 li-quidity.

In Zimbabwe, problems may include politi-cal 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 imple-mentation of Islamic finance in investment projects. Potential problems on implementa-tion 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:

INTRODUCTION OF ISLAMIC BANKING IN ZIMBABWE: PROBLEMS AND CHALLENGES


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Is the introduction of Islamic finance • feasible in Zimbabwe?What are the problems and challenges • that Islamic banking faces on its imple-mentation?

Document reviews and personal interviews were used to gather data for the article. Research papers on Islamic banking, text-books, 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 intro-ductory statement explaining what Islamic finance is all about. Of the total of 40 inter-views, 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 Bang-ladesh, Malaysia, and Kuwait. Those inter-viewed include economists, researchers, financial analysts, and bankers.

Islamic finance will go a long way in solv-ing problems associated with inappropri-ate or ineffective interest rate regimes. The Islamic-based system of finance has proven itself entirely feasible and sound. Islam pro-hibits 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 of the Islamic banking system promotes. Siddiqui argues that interest based loans (under conventional banking) do not neces-sarily go to finance projects expected to be the most productive (profitable), resulting in an inefficient system. Problems and challengesAccording to Sarker, Bangladesh faced many challenges in it’s infancy. There was a lack of success in devising an inter-est - free mechanism to place funds on a short-term basis. The risk involved in profit-sharing 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 nomen-clature of their transactions.

Islamic banks did not have the legal sup-port of the central bank in Bangladesh. They did not have the necessary expertise

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 bor-rowers, 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

so on, have a major influence, causing poor implementation in investment projects.

Problems in India include a lack of capital markets and interest-free financial instru-ments as well as insufficient legal protec-tion. The lack of unified Shariah rulings and the absence of an Islamic inter-bank money market can hinder the development of Islam-ic banking in its infancy. Severe competition in the financial sector, economic slowdown, and the political situation of the country af-fected the development of Islamic banking in Bangladesh. The lack of inter-country studies on the practical operations of Islam-ic banking, as well as coordinated research work on Islamic economics, banking, and fi-nance, may have also hindered the success of Islamic banking in an economy. RelevanceAfter explaining the background issues and relevance of Islamic background, a question was asked whether Islamic banking would be relevant to a developing country, such as Zimbabwe. The majority of the respondents (96%) agreed that Islamic banking would help solve some problems being faced by the economy. Only 4% of the respondents thought it unecessary, as the present bank-ing system is capable of solving other prob-lems. They also pointed out the need to ad-dress other factors affecting the economy, rather than changing or introducing a non-interest based system.

Upon the subject of issues created by the interest rate regime, 90% of the respond-ents agreed that Islamic banking will solve many of these problems. They pointed out

that as many firms (borrowers) could not borrow, due to prohibitive interest rates, this certainly was the only way to boost and resuscitate production in the economy. On savings, the non-interest banking system would be boosted, according to the major-ity (84%) of the respondents. The current conventional banking system has discour-aged savings, due to negative real returns, causing financial disintermediation in the economy.

Seventy-five percent of the respondents be-lieved that the introduction of Islamic bank-ing will see improvement or growth in Gross

Domestic Product (GDP). Forty-eight percent noted that the manufacturing sector would be the greatest beneficiary, especially in the infancy stages with progress being made in other sectors with time. The agriculture sec-tor, as many pointed out, had heavy reliance on direct government sponsorship or fund-ing for most of its activities and projects. Thirty percent of the respondents agreed that with the vast opportunities in the agri-culture sector, Islamic banking would be a great booster.

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 work-ing on his PhD and specialising in

Islamic finance.

Respondents Total Foreigner Zimbabwean

Economists 10 3 7

Researchers 12 10 2

Financial Analysts 4 1 3

Bankers 6 6 0

Others 8 0 8

40

Figure 1: Profile of respondents



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On the attraction of investors, all respondents agreed that it will at-tract investors seeking Halal (Muslim Law compliant) investment distinctions for their funds. Of the 20 people out of Zimbabwe interviewed, all agreed that Islamic finance would attract surplus funds in the oil rich countries, who are seeking diversification of their funds. Ninety percent of the foreign interviewees pointed that as Islamic banking would be introduced, it will attract more players in the financial sector, thereby increasing competition in the sector. All agreed that efficiency would increase, improving the effectiveness of the sector in the economy.

All respondents agreed that with proper policies and guidelines, the Islamic banking system will go a long way in turning around the fortunes of the economy. Half (50 percent) of the respondents pointed out a number of problems and challenges that are likely to be encountered with the introduction of Islamic banking. The problems and challenges pointed out are both micro and macro, in their nature. This article focuses mainly on the macro problems and challenges encountered from the implementation stage up to the full operational stage in an economy.

Problems and challengesAll respondents pointed out that the political intervention in the selection of borrowers may hinder the progress of Islamic bank-ing in the economy. A directive of the government to lend to a pri-ority sector may reduce the flexibility and the innovation of Islamic banking. One respondent gave an example of where the bank is forced to lend to a certain group or sector with low yields at the cost of high yielding (more profitable) projects.

Sixty-eight percent noted the issue for shock of financial instabil-ity associated with the introduction or the initial stages of Islamic banking in the economy. However, seventy percent believed that the inability of the government to restore law and order in the country, especially on framing law regarding the recovery of bad debts, may hamper Islamic banking in achieving its objectives. Law should not be selective and no one should be immune to prosecution, as there is a problem of bulldozing by political heavy-weights in countries such as Zimbabwe.

About ninety percent noted that there may be resistance from the banking community because of the the dominance of con-ventional banking. Christianity dominates in Zimbabwe and any institution with attachments to another religion will find an easy welcome. It was also pointed out that there may also be disrup-tions from the existing conventional banking institutions for fear of competition in the country. The fear of competition from inter-national banks bringing in a new philosophy of doing business may make the entrance of new players very difficult.

A majority of the respondents (60%) pointed out the lack of infra-structure for information dissemination to the public to be one of the problems likely to be experienced by the development of Is-lamic banking in Zimbabwe. With many systems having degener-ated, with the need for reconstruction or resuscitation in most of them, it may not be easy to penetrate the market. All respondents pointed out that the immature introduction of Islamic banking in Zimbabwe before economic recovery may not only lead to slow development, but to a total failure.

The regulations and laws governing the Islamic banking institu-tions may be an uphill task for the monetary authorities of Zimba-bwe who have made numerous blunders in the past. More than fifty percent of the respondents had no confidence in the mon-etary authorities, judging from the management and formulation of policies in the period of 2000 to September 2008.



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The lack of consistency in policy making and implementation of the fiscal and mon-etary 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 perform-ance 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 survey’s respondents also pointed out that judging from the manner in which the central bank has been conducting it’s 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 in-terbank 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 counterpar-ties 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 Is-lamic 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 at-tract any international investors. The major-ity 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.

DiscussionIslamic banks can provide efficient banking services to the nation if they are supported with appropriate banking laws and regula-

tions. For distributional efficiency, the task is more challenging for Islamic banks, as they have to promote it from all directions, including its profitability. Upon establish-ment, Islamic banks have to be converted into profit-loss-sharing banks by increasing their percentage share of investment financ-ing through profit and loss (PLS) modes. The Islamic banks, to do that, can be selective in choosing clients for financing under PLS modes. They should establish direct func-tional relationship between the income of the depositors and the income of the bank and the entrepreneurs.

For the Islamic financial institutions to with-stand competition, the challenge will be to promote the image of Islamic banks. Strat-egies have to be carefully devised so that the image of Islamic character and solven-cy as a bank is simultaneously promoted. Pilot schemes, in some selected areas or projects, should be started to test innova-tive ideas with profit-loss-sharing modes of financing as a major component. Islamic banks would clearly demonstrate through their actions that their banking practices are guided by a criteria of profitability criterion, thereby establishing that only Islamic bank-ing practices ensure efficient allocation of resources and provide true market sig-nals through PLS modes.

Islamic banks should continuously moni-tor and disseminate, through various means, the impact of their operations on the distri-bution of income, prima-rily between the bank and two other parties: the depositors and the entrepreneurs, and then on different in-come groups of the society. These presup-pose establishments of a fully equipped re-search academy in each Islamic bank.

Islamic banks, with a view to facing up to the growing competition either from fellow Islamic banks or from conventional banks which have launched Islamic banking practices, will have to adapt their functioning in line with modern business prac-tices, through the improve-ment and expansion of the range of products dealing in the banking sector. It will be necessary for them to pro-vide comprehensive bank-ing and investment services to clients and simultane-

ously take advantage of modern technologi-cal breakthrough in areas such as electron-ics, communication and computerisation. According to Khan the banking, industry is changing fast. Khan stated that the following factors are believed to be responsible for the changing dynamics of the industry: changing client needs for financing and investment; cost reduction strategies and technologies; emerging new potential markets with differ-ent demographic and social characteristics; technology - based financial service prod-ucts, and regulatory reforms aligning with financial modernisation. It was argued that each one of these factors is contributing dynamism in the industry and, hence, intro-ducing a new competitive environment and making the environment more and more challenging for the Islamic banking move-ment. There seems to be a gap between the ideals and actual practice of Islamic banks in many countries that it is in existence. In their reports, booklets, bulletins, and post-ers, banks express their commitment to striving for establishing a just society free from exploitation. This study showed that little progress has been achieved so far in this direction. Although this failure is mainly

attributed to the pervasive influence of the conventional banking

system, a lack of vigi-



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. 51-• 69.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. International Journal of Islamic Financial Services, 5(2). Pp. 111-126. •

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 ac-tions. 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 sec-tors, such as mining, agriculture, small and medium enterprises, and export-led indus-tries, 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 allo-cating 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 establish-ment of training institutions in the countries where they are working. Professional invest-ment training is costly and there has to be huge government capital investment sup-port 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 dis-satisfaction, coupled with their confusion on whether present day interest is riba or not, tends to attract them to the riba-based sys-tem.

For profits and transparency in firms benefit-ing from Shariah loans, the introduction of profit-related pay for managers and employ-ees - shared ownership plans will increase public confidence in the system. Islamic banks should play a role similar to that of in-stitutional investors. This requires adequate changes in the business operations and in-

vestment strategies of the Islamic banks to accommodate their dual role as investors and shareholders in the business of the bor-rowing firms.

Banking regulations would need serious overhauling. Regulations in Zimbabwe pro-hibit banks from taking controlling rights in corporations or structures so that managers of the borrowing firms control their decision-making. The name “Islamic” can be done away with as it develops and becomes ac-ceptable worldwide. Islamic banking prod-ucts used different names for their product and it has caused several difficulties and misunderstandings by customers. Some claimed that it is a religious product and only meant for Muslims, and others just find it too difficult to learn the names, therefore eschewing Islamic financing. In its introduc-tory phase in Zimbabwe, the Islamic banker should ensure that things become easy for customers. There is nothing wrong in using product names that are more acceptable to the rest of the world.

In Bangladesh, two professional bodies, the Islamic Economics Research Bureau and the Bangladesh Islamic Bankers Associa-tion, took practical steps to provide training on training on Islamic economics and bank-ing to a group of bankers. They were also involved in arranging some national and in-ternational seminars/workshops to mobilise local and foreign people and attract inves-tors to come forward to establishing Islamic banking in that country. 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.

For investment, Islamic banks should take position only after the technical, economic, and financial viability has been examined and appraised. A professionally equipped Islamic bank needs to invest in assets, pro-viding a return in excess of the cost of the funds tied up. For this purpose, it is impor-tant to ascertain the cost of capital, which is equivalent to the required rate of return.

Below which a company may not undertake investment without producing its present net worth and the wealth of its owners or equity shareholders.

ConclusionWhat was discussed are some of the burn-ing problems confronting the Islamic banks in all countries that they are operational in. However, for Zimbabwe, it is felt that much operational work and in-depth research has to be undertaken to allow the Islamic banks to reach their highest quality and strength. The government of Zimbabwe should should take an active role in promoting Islamic banking within the country pro-development role. It should amend existing financial laws, acts, and regulations to create a favorable environment conducive to the smooth op-eration of Islamic banks. A commission may be entrusted to draft an Islamic Banking Act. The government should also allow the es-tablishment of Islamic insurance and other subsidiary companies in order to facilitate their operation.

The Reserve Bank of Zimbabwe would have to develop some Islamic monetary and sav-ing instruments, create a separate window for transactions with the Islamic banks, and establish a full-fledged Islamic banking de-partment for analyzing, supervising, moni-toring, and guiding purposes, thereby equip-ping Islamic banks for smooth development in Zimbabwe. The world is becoming weary of the instabilities, inflation, and poverty that are a gift of the present economic system. The non-interest system gives us an eco-nomic system for sustainable development, and slowly and gradually, without realising it, the world is moving towards discovering the concepts that form the bases of Islamic economics. Finally, a problem may arise in the name, “Islamic” but with time hopefully these preconceptions will change. We could find that only if we do enough research and use the intellect and wisdom that was gifted to us, these problems and challenges will be overcome.




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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 identi-fied 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 prac-tice 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, understand-ing 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

GROWTH AND PROSPECT OF SUKUK IN

ISLAMIC FINANCEAuthor: Mohamad Zaid Mohd Zin, Centre for Islamic Thought and

Understanding, University Technology Mara, Malaysia


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Years ago, Islamic finance was considered as wishful thinking. However, serious re-search 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 intermedia-tion. The development of the Sukuk market has accompanied the transformation of the economy that has now become more diversi-fied and private sector driven.

The market, initially dominated by the Gov-ernment debt securities, now reflects the growing demand for the long term financing requirements of the private sector. In this highly competitive environment, the pres-ence of a deep and liquid of Sukuk market thus contributes towards the stability of the financial system. Sukuk also proved to be

implemented during the economic down-turn, or seeks to develop an economy. For example, Sukuk or Islamic bond is issu-anced, by the World Bank in 2005 for the redevelopment of Acheh following the tsu-nami 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 se-curities 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 organisa-tions 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 princi-ples of structuring Islamic securities.

Sukuk may be defined as certificates of equal value that represent an undivided interest (proportional to the investor’s interest) in the ownership of an underlying asset (both tangible and intangible), usufruct, services or investments in particular projects or spe-cial investment activities.

Through this concept, Sukuk enjoy the bene-fit of being backed by assets, thereby afford-ing the Sukuk holder or investor a level of protection which may not be available from conventional debt securities.

Furthermore, unlike conventional debt se-curities 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 as-sets 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 SukukAl-Jarhi and Abozaid impose rules and condi-tions (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 as-• sets (‘ayn) or services, then this issu-ance implies the sale of these assets to the Sukuk holders in return for cash money based on current values of as-sets or services, and therefore the Su-kuk 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 hold-ers in return for cash money, and these Sukuk are not tradable until the deliver-ability of assets or services.

If Sukuk are not issued against assets • or services, but for the purpose of uti-lising 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 val-ue representing undivided pro-rata owner-ship of tangible assets, usufruct or services. Although Sukuk are in principle nonrecourse asset-backed instruments, the Originator typically undertakes to repurchase the un-derlying assets at a fixed or referenced price, rendering the Sukuk asset-based and giving certificate holders exposure to the credit risk of the Originator.

GROWTH AND PROSPECT OF SUKUK IN

ISLAMIC FINANCEAuthor: Mohamad Zaid Mohd Zin, Centre for Islamic Thought and

Understanding, University Technology Mara, Malaysia


Although in principle, Sukuk are required to represent underlying assets that are tangi-ble (‘ayn) as opposed to a debt (dayn), there have been Sukuk issuances in which the un-derlying assets are a mix of cash and tangi-ble 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 Istisna’a Sukuk), business (Al Musyarakah Sukuk) or investment (Al Istithmar Sukuk). Recently, there is one type of Sukuk intro-duced, 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 (Ija-rah) of real estate and has been a pop-ular 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 under-takes to repurchase the real estate at maturity or upon early settlement at the original purchase price. The Issuer is re-quired 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 agree-ment between two parties that inves-tors and managers of capital. Mudhara-bah Sukuk are investment Sukuk that represent common ownership of units of equal value in the Mudharabah eq-uity; the holders of Mudharabah Sukuk are the suppliers of capital (Rabb al-mal) and own shares in the Mudhara-bah equity and its returns according to the percentage of ownership share. Mudharabah Sukuk holders have the right to transfer the ownership by sell-ing 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 capi-tal 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 in-volves the cooperation of two parties to incorporate a capital for a motivation. Al-Musyarakah Sukuk was a popular

structure among corporate issuers until the Accounting and Auditing Organisa-tion for Islamic Financial Institutions (AAOIFI) ruling on Sukuk at the begin-ning of 2008 clarified the prohibition of the use of nominal value Purchase Undertakings in such Sukuk. In an al-Musyarakah Sukuk, the Issuer contrib-utes 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 capi-tal contributed. Besides that, the AAOIFI ruling confirmed that while it is permis-sible in an al Ijarah Sukuk for the lessee to undertake to purchase the Sukuk assets at nominal value upon redemp-tion, it is not permissible for a Sharik (partner) in an al Musyarakah Sukuk or a Wakil (agent) in a Sukuk al Wakalah

bil Istithmar to undertake to do so. The Shariah considers such undertakings to effective guarantees of principal which are not permitted by Shariah in partner-ship and agency contracts. The AAOIFI ruling created a significant dent in the issuance of al Musyarakah Sukuk and al Mudharabah Sukuk.

Istisna’a Sukuk: Absale and purchase • agreement in order to finance a project item. Istisna’a 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 real-ised from subscription are the cost of the product. The Islamic bank funding the manufacturer during the construc-tion of the asset, acquires title to that asset and up on completion either im-mediately passes title to the developer on agreed deferred payment terms or, possibly, leases the asset to the devel-oper under an Ijarah Sukuk. Shariah prohibits these certificates to be traded in the secondary market.

Murabahah Sukuk: In the case of Mu-• rabahah Sukuk, the issuer of the cer-tificate 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 sub-sequent 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 Istisna’a, 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-Istisna’a sukuk. The hybrid Sukuk structure rep-resents the potential of new structures and benefits to the investors.

Sukuk Market in MalaysiaIn this decade, greater focus was particular-ly given to the institutional arrangements to develop the Sukuk market. The Sukuk mar-ket now accounts for more than fifty percent of Malaysia’s bond market. The market has drawn the participation from a wide range of

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Mohamad Zaid Mohd Zin, Mara University of Technology, Malaysia

Mohamad Zaid Mohd Zin is a lectur-er 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 Islam-ic Studies (Syariah) from Malaysia National University (2005). His re-search interests in Islamic finance

are in the areas Syariah issues and Sukuk. He is a member of Interna-

tional 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.


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international corporations and multilateral agencies in raising funds and investing in the Sukuk issuances out of Malaysia. More recently, there has also been continuous in-novation and an increasing number of issu-ances 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.

Malaysia’s 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 development is evident in the largest Su-kuk issue recently valued at RM15.4 billion (USD4.7 billion) by Binariang GSM Sdn. Bhd. Now, the Sukuk market in Malaysia is among the fastest grow-ing in the world, with an average an-nual growth of 22% issued for the period 2001-2007.

After introducing the first sovereign global Sukuk in the world in 2002, Malaysia has continued it success by introducing innovative Sukuk struc-tures such as convertible musyar-akah Sukuk by Khazanah Nasional Berhad, the Malaysian government investment holding company. This is a historic issue and the first of its kind in the world, which combines the features of the first full convert-ibility, usually for conventional equi-ty-linked transactions.

For 2010, Malaysia remains a front-runner in the global Sukuk issuance, contributing 77.7% of the total Su-kuk issued in 2010. Meanwhile, for countries that do not have a major-

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 Su-kuk for Malaysia’s domestic funding needs. The Government’s investment arm, Khaz-anah Berhad, recently issued a Singapore dollar Sukuk out of Malaysia through its ex-isting 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 Government’s Department of Finance is proposing to launch a multi-currency Sukuk programme soon. Malaysia, therefore, is

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 develop-ment 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 Interna-tional Shariah Research Academy (ISRA) was established to conduct applied Sha-riah research on the contemporary Islamic finance issues and to provide a platform for active international engagement among Shariah scholars.

Malaysia will also continue to collaborate with other regulatory authorities to ensure financial stability in the Islamic financial sys-

tem. This will be through Malaysia’s active involvement in the Islamic Financial Services Board (IFSB), the Islamic Financial Stability Forum (IFSF), the initiatives by the Islamic Development Bank (IDB), and finally in the newly formed International Islamic Liquidity Management Cor-poration (IILM).

Secondary trading in the Malay-sian Sukuk market has increased the depth and liquidity of the mar-ket with the participation of more companies, including foreign-owned companies continued use of this market for funding purposes. A large number of corporate issu-ance is to finance long-term funding needs. The diversity and size of the Sukuk transaction and the increas-ing value proposition is attractive to investors who want to diversify their asset portfolios, thus creating a vi-brant secondary market.

Ayman H. Abdel-Khaleq and Peter Young, Vinson & Elkins RLLP, (2008) “Structuring and Offering Sukuk Products Involving Assets in the US: Chal-• lenges and Opportunities”, pp 56.Abozaid, A & Al-Jarhi Mabid, (2010), “Reasons for Failure of Some Sukuk Issuances”, International Fiqh Academy, IRTI & Islamic Economics Research • Center Conference, Islamic Sukuk: Examination & Reevaluation, King Abdul Aziz University & Westin Hotel, Jeddah, Saudi Arabia, May 24-25.Central Bank of Malaysia Financial Stability and Payment Systems Report (2007), pp 56-57, website: http://www.bnm.gov.my/files/publication/• fsps/bm/2007/cp02_rencana_01.pdf General Council for Islamic Banks and Financial Institution, Islamic Financial Industry News Centre, website: http://www.cibafi.org/newscenter/• english/SpecificProductsAndServicesNews.aspx?SubC=70 (accessed on 4th February 2011)Islamic Financial Training, “Sukuk & Islamic Capital Markets: Products & Documentation”, website: http://www.islamicfinancetraining.com/sukukp-• dnov.php Muhammad Taqi Usmani, president of the AAOIFI Shariah Council, “ Sukuk and Their Contemporary Applications, website: http://www.failaka.com/• downloads/Usmani_SukukApplications.pdf (accessed on 6th February 2011)Malaysian Debt Securities and Sukuk Market, (2009). “A Guide for Issuer and Investor”, A joint Publication by Central Bank of Malaysia and Securities • Commission Malaysia, pp 29-34.

Indonesia 6.0%

Saudi Arabia 5.8%

Qatar4.1%

UAE 2.1%

Pakistan 1.9%

Bahrain 1.4%

Brunei Darussalam 0.5%Japan 0.2%

Turkey 0.2%Pakistan 1.9%

Gambia 0.0%

Pakistan 1.9%

United Kingdom 0.0%

Malaysia 77.7%

Source: Zawya Sukuk Monitor.

Figure 1: Breakdown of Global Sukuk Issues by Country for year 2010



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Islamic finance in the European Union in countries such as Spain have a greater chance of spearheading the industry for-ward especially in collaboration with Islamic financial hubs such as Saudi Arabia.

Similarly, London’s role as a hub for Islamic finance, investment and trade - the declared ambition of the previous Labour government and the current Conservative-Liberal Demo-crat Coalition - is stalling because of the disappointment of the UK Treasury deciding not to raise funds in the wholesale sterling market through a debut sovereign Sukuk. Luxembourg and France have also intro-duced tax neutrality measures to facilitate Sukuk and other Islamic financial products, but have yet to commit to issuing a debut Sukuk. Claiming as the UK does it is not the right timing nor at the right price.

Southern Europe has hardly had a look in. The reality is that Spain, from a historical context, should be spearheading the dia-logue and cooperation with Islamic finance. And yet it is the UK that has been leveraging its vast colonial experience with the Muslim world and its pre-eminent position as the world’s largest financial center. Not surpris-ingly, London in the early 1980’s emerged as the major center for structuring Islamic financial transactions such as commodity Murabaha and structured finance out of Eu-rope.

Perhaps times are changing. A new collabo-ration between the prestigious Instituto de Empressa Business School in Madrid and the Jeddah-based King Abdul Aziz Univer-sity got a second wind in the Spanish capi-tal with the re launch of the Saudi-Spanish Center for Islamic Economics and Finance (SCIEF), which was formerly the Center for Islamic Economics and Finance.

The launch was held in conjunction with a one-day conference on “Islamic Finance in the 21st Century” at the Instituto de Em-pressa Business School in Madrid which was inaugurated by Professor Osama Tayeb,

president of King Abdul Aziz University and Professor Rafael Puyol, chairman of the board of directors of Instituto de Em-pressa. Ahmad Mo-hamed Ali, president of the Islamic Devel-opment Bank, gave the keynote address.

Perhaps it is perti-nent that the pro-ceedings will also see the launch of a timely book, titled “Islamic Economics and Fi-

nance: A European Perspective” edited by Professor Cristina Trullols, director of SCIEF, and Professor Abdullah Turkistani, acting dean, Islamic Economics Institute, King Ab-dulaziz 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 criti-cal economic situation of the world and par-ticularly Europe. The sovereign debt crises in different European countries call for not only liquidity but also for a new way of finance. Is-lamic 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 re-sources 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-

late ambition into a coherent and pragmatic program of independent education, research and development.

One area beckoning to be leveraged is his-torical research. Muslims, for instance, ruled Spain for centuries. During this time, rela-tions between the three Abrahamic faiths - Judaism, Christianity and Islam - flour-ished. So did scholarship, the arts and yes business and trade. At the same time there were extensive links with other rulers in Da-mascus, Istanbul and Baghdad. One project for SCIEF could be to research the Islamic fi-nancial 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 today’s Spain.

Turkish academics are doing valuable work on similar financial transactions used dur-ing the Ottoman Empire especially relating to Waqf and Ushr (agricultural taxes). This has resulted in some pioneering books be-ing 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

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 finance’s 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 bank-ing major. Some 50 percent of profits were generated from the US and South American markets; and the other 50 percent from re-tail Spain, Germany and the EU. Not a single euro was generated from the Middle East, Asia let alone Islamic finance.

SAUDI ARABIA AND SPAIN Collaborate to Boost Islamic FinanceSource: GlobalIslamicFinanceMagazine.com

„The reality is that Spain, from a historical context, should be spearheading the dialogue and cooperation with Is-lamic finance

Market Review


Turkey’s Islamic banks are lagging behind their non Sha-riah-compliant counterparts because of investor concern slowing economic growth will hurt the lenders’ ability to gen-erate income from loans. While Turkey’s overall banking index gained 19% since reaching a 20-month low on the 10th of Au-gust, Asya Katilim Bankasi and Albaraka Turk Katilim Bankasi, the nation’s two listed Islamic banks, also known as Partici-pation banks, gained 12% and 4.9%, respectively.

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 nation’s 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 Ltd’s 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.”

The nation’s economy will grow 2.2% next year after 6.6% in 2011, the International Monetary Fund forecasts, as expansion stalls in the euro region, Turkey’s biggest ex-port market. Renaissance Capital, the bro-ker 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 ac-

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

partner of Sardis Securities Inc in Istanbul, said. Their performance shows investors are concerned about the health of those busi-ness loans, Acun said. Turkey’s constitution, written by generals in 1980, mandates that religion be kept out of politics. The coun-try 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 net-work 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 de-partment of Bank Asya Kuveyt Turk, which hasn’t 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 it’s 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 lender’s Islamic bonds was little changed at 4.51% on Albaraka Turk and is in the process of hiring banks to man-age 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.

ISLAMIC BANKS IN TURKEYNEED SUPPORT IN FUNDING


gif

„The n a -

tion’s economy will grow 2.2% next year after

6.6% in 2011, the Interna-tional Monetary Fund fore-casts, as expansion stalls

in the euro region, Tur-key’s biggest export

market

gif Market Review


Islamic trade finance has ben-efited from shifting preferenc-es 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 Foun-dation. “Trade finance is the lifeblood of global commerce, underpin-ning 60% to 80% of the US$12 to US$13 trillion trade in global merchandise,” the WIEF Foun-dation said at a briefing.

While Islamic banking and Is-lamic bonds, or Sukuk were expected to lead growth, bank-ers 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 Organisa-tion of the Islamic Conference (OIC), which includes Saudi Arabia, Malaysia and Turkey, is expected to reach US$4 tril-lion.

The global Islamic finance in-dustry, 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 Afri-can 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-

ister of international relations and coopera-tion. But with growth, comes the inevitable challenges, and according to the WIEF Foun-dation, African countries have found them-selves at a critical juncture in their develop-ment trajectories.

“Confronted by internal challenges of re-ducing poverty and unemployment, the re-source bases of many productive sectors

are facing threats of environmen-tal damages such as deforesta-tion, soil erosion, desertification, loss of biodiversity and effects of climate change,” the foundation said. Furthermore, hindrances like unhelpful politics, weak long-term national planning and slow regional integration, continue to cast a shadow.

“Elections consume far too much of the nation’s money, and accord-ing to a recent article, Nigeria’s 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 pros-per, we must tear down the walls between our nations. Currently, only 10 cents in every dollar, ex-ported from an African country goes to another African country, compared to 50 cents in every dollar for their east-Asian coun-terparts.

More intra-Africa trade is essen-tial to increase prosperity,” said Evelyn Mungai, executive chair-man 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 articu-late new strategies and policies

that refocus investments in economic sec-tors able to drive sustainable growth, create employment, and improve living conditions.

“Africa is on the launching pad of an eco-nomic take-off,” said Birama Sidibe, vice president of the Islamic Development Bank.

TRADE FINANCE TO PROPEL ISLAMIC BANKING INDUSTRY


gif

„T h e global Is-

lamic 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 rep-resents the second largest Mus-

lim population in the world, is set to share in the lar-

gesse of this

gifMarket Review


Islamic Finance Ltd.Islamic Finance Ltd offers a comprehensive rangeof Islamic finance solutions to help expedite yourinternational business, trade and risk mitigation.Islamic Finance Ltd is committed to providing its

business customers with a range of innovativeIslamic banking solutions. We do our best to arrange

a wide range of financing that you can be certain your finance is structured in full accordance with Shariah

requirements.

Visit our website for more information:www. ukislamicfinance.co.uk

GIF header.indd 1 20/05/2010 14:40:30

Event Review gif

The 18th Annual World Islamic Banking Con-ference (WIBC 2011) opened its doors to leaders within the Islamic finance Industry. The theme of the 2011 conference was ‘com-peting for global growth’ focusing on topics such as expanding the internationalisation of the industry, accessing new markets, creat-ing new products and improving cross-board-er 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 part-nership 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 spon-sors attended the prestigious conference covering all market areas globally. Delegates from over 50 countries attended and dis-cussed strategies for managing the chal-lenges of industry globalisation and ensur-ing 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 inter-national 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 compo-nent 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 collabora-tion between these geographies that will fa-cilitate significant cross-border activities and deal flow.”

World Islamic Banking Conference the world’s largest gather of industry leaders

Author: Tajah Brown, Global Islamic Finance Magazine Editorial Team, United Kingdom

Islamic Finance Ltd.Islamic Finance Ltd offers a comprehensive rangeof Islamic finance solutions to help expedite yourinternational business, trade and risk mitigation.Islamic Finance Ltd is committed to providing its

business customers with a range of innovativeIslamic banking solutions. We do our best to arrange

a wide range of financing that you can be certain your finance is structured in full accordance with Shariah

requirements.

Visit our website for more information:www. ukislamicfinance.co.uk

GIF header.indd 1 20/05/2010 14:40:30

Event Review gif

H.E. Rasheed Mohammed Al Maraj an-nounced the Central Bank of Bahrain’s part-nership 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 industry’s geographic footprint expands, it is becoming increasingly vital to develop appropriate global frameworks and over-come the challenges of globalisation faced by Islamic finance. We believe that the World Islamic Banking Conference will play a mean-ingful 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, Assur-ance and Advisory Busi-ness services, Ernst & Young. It was the main part of the WIBC 2011 with CEOs and decision-makers participating. The debate included leaders in the industry such as Toby O’Connor, CEO of the Islamic Bank of Asia, Asad A Ahmed, CEO of Gulf African Bank, Syed Abdull Aziz Jailani Bin Syed Kechik, CEO of OCBC Al-Amin Bank Berhad, Tirad Mahmoud, CEO of Abu Dhabi Islamic Bank and Dr Salah Addeen A Qadar Saeed, Gen-eral Manager, Credit & Risk Management at Bahrain Islamic Bank. The keynote was ad-dressed by Prof. Kishore Mahbubani, Dean and Professor , Public Policy at the Lee Kuan Yew School of Public Policy on ‘Competing for

Global Growth: Preparing for the Asian Cen-tury’ which take place on the last day of the event. Dr. Jamil El-Jaroudi, CEO of Elaf Bank supported the WIBC 2011 saying, “as a gold strategic partner of the 18th Annual WIBC, we welcome you to the Kingdom of Bahrain, to be part of the discussions that will define the next stage of evolution for the global Is-

lamic finance industry.” The long awaited World Islamic Banking Competitiveness Re-port 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 in-ternational opportunities in the high growth markets within Islamic finance. The Country Focus Roundtable covered opportunities in countries such as Luxembourg, United King-dom, Bahrain and Singapore. gif

Islamic finance is no longer a niche mar-ket and is rapidly becoming an important component of the mainstream financial

system. As various jurisdictions seek to intensify efforts in developing their respective Islamic bank-ing and finance markets, it is vital to strengthen the global framework for greater collaboration be-tween these geographies that will facilitate signifi-cant cross-border activities and deal flow

„

gif Business NewsBookReview

Part 1: Islamic Project Financing Setting the Agenda for Innovative OpportunitiesPart 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 financ-ing 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 prohi-bition of interest and many other benefits.

Innovative Shariah Compliant Rankings A Comprehensive System for Islamic Banks Part of Article Collection, individual article/ £4.99

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 Is-lamic banks and this is a must read for any business professional or employee joining the industry in addition to CEO’s 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.

Choice of Law and Islamic Finance, part 1Part of Article Collection, individual article/ £4.99

The past decade has seen the rapid growth of Islamic finance on both international and domestic levels. Accompanying that growth is a rise in the number of disputes that implicate Islamic law. This remains true even when the primary law of the contract is that of a common law or civil law country. If judges and lawmakers do not understand the reasoning of Islamic finance professionals in incorporating Shariah law, the result could be precedents and codes that hamper the growth of a multi-trillion dollar industry. Choice of Law and Islamic Finance, part 1 compares the reasoning of the English court in Shamil Bank v. Beximco Pharmaceu-ticals to the practice of forums specialising in Islamic finance dispute resolution. Part 1 of the article also addresses other perceived difficul-ties in applying Islamic law in common law and civil law courts.

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-Diwany1st Ethical Charitable Trust, 1st edition/ £51.00

This text has been designed for use by profes-sionals 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-eco-nomic factors affecting the modern world of Islamic banking and finance and is organised into four main sections: Islam and the Shariah, Tradi-tional Contract Forms, Contemporary Practices, and A Response to Capi-talism. 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 schol-ars 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: 0956518605ISBN-13: 978-0956518606

Islamic Finance Banking Systemby Sudin Haron, Wan NurosofizaMcGraw-Hill Professional, 1st edition/ £54.14

With global assets expected to reach over a tril-lion dollars in the next few years, Islamic finance is the fastest growing segment of the interna-tional financial services industry. This introduc-tory guide takes readers on an in-depth tour of this exciting new world of opportunity, with profiles of the many diverse players, projections of Islam’s hottest growth markets, and a much-needed focus on theory and other key concepts.

ISBN-10: 9833850618ISBN-13: 978-9833850618

Order Number:

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‘Islamic Banking-Differences, Growth and Future Challeng-• es’: Find out what Islamic banking is, what it’s achieved and where it’s heading.‘The Rise of Islamic Bank of Britain-Interview with Steven • Amos’: Gain a fascinating insight into the UK’s most fa-mous 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 regu-lation and how it affects Islamic banking.‘The Suitability of HSBC Bank Mauritius as a Test Case for • Shariah-compliant Banking Services on the Island’: Discov-er 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 Britain’s biggest banking events from the Islamic finance perspective.

Looking for a Job in Islamic Banking?: Dip into the Global Islamic Finance Magazine

Article CollectionBored of your bank? Facing redundancy? Looking for a change of career direction? If you work in banking and you’re looking for a fresh challenge, Islamic banking may be for you. The Global Islamic Finance Magazine Article Collection December 2009-June 2010 is out now and features many articles to help get your Islamic banking career started. Each article is available to buy separately so you can mix and match to find the formula that will open up Islamic banking to you.

The banking sector took a heavy blow during the financial crisis and is still recovering. There were many redundancies and they’re still not many vacancies. It’s no longer a guarantee that you’ll 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 finance. 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 arti-cles 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:

www.globalislamicfinancemagazine.com/article-collectionSee catalogue at http://www.yudu.com/item/details/171412/I

All of these articles are available to order NOW for just £4.99 each! Get them delivered straight to your inbox in PDF format or, for the extra charge of just £10.00, we will send you a CD with all your ordered articles on it!

Untitled-1 1 16/06/2010 16:04:37

Bored of your bank? Facing redundancy? Looking for change of career directed? If you work in banking and you’re looking for a fresh challenge, Islamic banking may be for you. The Global Islamic Finance Magazine Article Collection December 2009-December 2011 is out now and features many articles to help get your Islamic banking career started. Each article is available to buy separately so you can mix and match to find the formula that will open up Islamic banking to you.

For more information and full events details, please visit www.globalislamicfinancemagazine.com/events

International Conference on Business & Finance [ICBF] 20126th- 7th January 2012India

Campus for Finance - Research Confer-ence 201211th – 12th January Vallendar Germany

Academy of International Business MENA Chapter Conference13th – 15th JanuaryDubai, UAE

3rd Global Islamic Marketing Confer-ence (GIMC): Putting Ethics Back into Business16th – 18th JanuaryDhabi, UAE

Scalable Business Models For Islamic Microfinance30th January – 1st February 2012 Istanbul, Turkey

6th Quality Conference in the Middle East30th- 2nd JanuaryDubai, UAE

January 2012December

Event Calendar

Commodities Week Middle East5th – 7th December 2011Dubai, UAE

International Conference on Islamization in Modern Science and Scientification of Islamic Studies19th – 21st December 2011Selangor, Malaysia

gif Event

February

FONDS - Switzerland’s Financial Exhibi-tion 20122nd- 3rd FebruaryZurich, Switzerland

11th Annual Islamic Finance Summit 21 February 2012 - 22 February 2012London, United Kingdom

March

7th Caspian International Conference and Showcase13th -14th MarchBaku Azerbaijan

International Management Accounting Conference26th – 27th MarchMalaysia

Where excellence is

a tradition

Professional Accountants Group is a UK provider of accounting and business services for small and medium companies. Our aim is to assist and support our customers, whether they

are just making first steps in the business environment or are well established entities in their environment. Professional and reliable service ensures the highest quality standards

in order to help your business run smoothly and without unnecessary hassle.

www.pagroupltd.co.uk

Where excellence isWhere excellence is

Morison Menon

Address:204 Tower- A, Gulf Towers, Oud Metha, P. O. Box 55535, Dubai, UAETelephone: +971 4 33 66 990Fax: +971 4 33 66 992 E-mail: [email protected]: 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 Con-sulting, 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.

gifGlossary gifBusiness Directory

Business DirectoryBanks

European Islamic Investment Bank

Contact person/ department: Keith McLeod Address: European Office 131 Finsbury Pavement London EC2A 1NT EnglandTelephone: +44 20 78479900Fax: +44 20 78479901E-mail: [email protected] Website: www.eiib.co.uk

Description: EIIB seeks to service a market for Sharia’a 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.

Arab Banking Corporation

Contact person/ department: Nadia Mehdid Address: Station House, Station Court, RawtenstallRossendale BB4 6AJ, UKTelephone: +44 1706237900Fax: +44 1706237909E-mail: [email protected] Website: www.arabbanking.co

Description: Arab Banking Corporation, popularly known as ABC, is an international Universal bank headquartered in Manama, Kingdom of Bahrain. Our network spreads over 21 countries in the MENA and GCC, Europe, the Americas and Asia. ABC is a leading regional bank in Trade Finance & Forfaiting, Treasury, Project & Structured Finance, Syndications, Corporate & Institutional Banking as well as Islamic Banking. We also provide Retail Banking services in the MENA region

Bank of London and Middle East

Contact person/ department: Michelle ArnoldAddress: Sherborne House119 Cannon StreetLondon, EC4N 5ATUnited KingdomTelephone: +44 20 7618 0000Fax: +44 20 7618 0001E-mail: [email protected] Website: www.blme.com

Description: Bank of London and The Middle East plc (BLME) is a fully Sharia’a compliant wholesale bank in the heart of the City of London. BLME is managed by a quality team bringing together a combination of highly experienced inter-national financiers and leading experts in Islamic finance. The majority of our Corporate Banking client base is located mainly in the UK, US and Europe.

ABN AMRO Bank N.V.

(ABN AMRO Bank N.V. is an authorised agent of The Royal Bank of Scotland plc.) Contact person: Abbas Yousafzai - Head of Islamic Banking Address: Khalid Bin Waleed Road, PO Box 2567, Dubai, UAE Telephone: +971 4 506 2260 Fax: +971 4 506 2028 E-mail: [email protected] Website: www.rbsbank.ae Description: RBS within its Retail Banking Unit offers its clients competitive Islamic Banking Solutions. They have one of the largest options for Islamic Wealth Management Products and are also a distributor of the Takaful Product developed by Aman (Dubai Islamic Insurance & Re-Insurance Company). They are presently engaged in launching a full Retail Banking proposition with a Shariah Based Credit Card and Liability Accounts in 2010.

Dubai Islamic Bank PSJ

Address:P.O.Box 1080 Dubai United Arab Emirates Telephone: + 9714 2953000Fax: +971 4 295 411E-mail: [email protected] Website: www.alislami.ae/en/

Description: Dubai Islamic Bank has the unique distinction of being the world’s first fully-fledged Islamic bank, a pioneering institution that has combined the best of traditional Islamic values with the technology and innovation that characterise the best of modern banking. Since its formation in 1975, Dubai Islamic Bank has established itself as the undisputed leader in its field, setting the standards for others to follow as the trend towards Islamic banking gathers momentum in the Arab world and internationally.

Al Baraka Islamic Investment Bank

Al Baraka Tower , P.O. Box 1882Manama , BahrainTelephone: + 973 250 363Fax: + 973 274 364E-mail: [email protected]: www.albaraka.com

Description: Al Baraka Banking Group offers retail, corporate and investment banking and treasury services strictly in accordance with the principles of the Shari’a. The authorized capital of ABG is US$1.5 billion, while the total equity amounts to about US$1.52 billion. The Group has a wide geographical presence in the form of banking Units and representative offices in twelve countries, which in turn provide their services through 300 branches.

Abbas Accounting

Address:ABBAS ACCOUNTING P.O.Box : 78142 Dubai, U.A.ETelephone: +971 4 2820300Fax: +971 4 2820322E-mail: [email protected] 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.

Baker Tilly MKM

Address:Epico “Safar” Building Liwa Street Abu Dhabi United Arab Emirates Telephone: +97 1506226719Fax: +971 26226088E-mail: [email protected]: www.bakertillymkm.com

Description: We offer a wide range of service including auditing, accounting, consultancy, financial-management, profit-enhancement, feasibility studies, company-secretarial, offshore-company registration, and trademark-registration. You will receive a prompt response to every question or request. We serve our clients as a partner in order to help them make the best possible decisions for their business.

HLB HAMT Chartered Accountants

Address:106, Al Nayali Building Abuhail Road, P.O. Box: 32665 Dubai - United Arab EmiratesTelephone: +97142627147Fax: +971 4 2627148E-mail: [email protected]: www.hlbhamt.com/

Description: We have a full range of accounts and audit services to meet your business needs. A professional firm with regional focus and having global repre-sentation, HLB Hamt, Chartered Public Accountants spectrum of services cover all aspects of doing business in the UAE and the GCC countries. While based in the UAE, we offer comprehensive services for doing business in the Middle East including all the Free Trade Zones, right from company formation.

Accountancy firms

BDO International

Address:BDO - London 55 Baker Street London W1U 7EUTelephone: +44 207 486 5888Fax: +44 0207 487 3686E-mail: [email protected] Website: www.bdo.uk.com/

Description: BDO is an award-winning, UK Member Firm of BDO International, the world’s 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, we’ve developed a robust understanding of the factors that govern business growth.

Our objective is to use this to help our clients maximise their potential.

Barber Harrison and Platt

Address:2 Rutland Park Sheffield S10 2PDTelephone: +44 114 266 7171Fax: +44 114 2669846E-mail: [email protected] Website: www.bhp.co.uk

Description: Barber Harrison & Platt is committed to building professional relationships founded on the personal responsibility of a partner for a client’s affairs. As a Top 60 firm and the largest independent firm of chartered acco-untants in South Yorkshire and Derbyshire our continued success owes much to our dynamic approach and ability to fulfil client demands. This requires the highest level of commitment and performance. Barber Harrison & Platt provide advice to plc’s, private companies, partnerships, sole traders, individuals and trusts. The close working relationship we enjoy with clients provides a deep insight into a far wider range of business situations and problems than are traditionally associated with accountancy.

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Norton Rose (Middle East) LLP

Contact person/department: Neil D. Miller, PartnerAddress:4th Floor, Gate Precinct Building 3, Dubai International Financial Centre, Dubai, UAE PO Box 103747Telephone: +971 (0)4 369 6300Fax: +971 (0)4 369 6350Email: [email protected]: 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

Lawrence Graham LLP (LG)Contact person/ department: James Foster, head of LG’s Dubai officeAddress: PO Box 33090 8th Floor Convention Tower Zabeel Road Dubai, UAE Telephone: +971 4 329 2420Fax: +971 4 329 2430E-mail: [email protected] Website: www.lg-legal.com

Description: LG is a firm of business lawyers, advising clients around the world. The opening of the firm’s Dubai office at the end of 2007 and the Moscow office earlier this year cemented its global growth and focus on clients internationally.

Trowers & HamlinsContact person/ department: Nicholas EdmondesAddress:Sceptre Court 40 Tower Hill London EC3N 4DXTelephone: +44 20 7423 8000 Fax: +44 20 7423 8000 E-mail: [email protected] Website: www.trowers.com

Description: We believe lawyers exist to serve their clients - not vice versa. We also believe that every task we undertake on your behalf is unique.We expect to be judged on results, on the added value we provide, the quality of our service, and our cost-effectiveness. These attributes have led to us being voted Law Firm of the Year 2007 by the Lawyer.

King and SpaldingContact person/ department: Jawad l AliAddress:125 Old Broad Street LondonEN EC2N 1ARTelephone: +44 2075517500Fax: +44 2075517575E-mail: [email protected]: www.kslaw.com

Description: King & Spalding has provided the highest quality legal services to its clients for over a century. Today, with more than 800 lawyers and offices in Abu Dhabi, Atlanta, Austin, Charlotte, Dubai, Frankfurt, Houston, London, New York, Paris, Riyadh (affiliated office), San Francisco, Silicon Valley and Washington, D.C.

Allen & OveryContact person/ department: Michael DuncanAddress:Bishops Square Allen & Overy LLP One Bishops Square London E1 6AD United KingdomTelephone: +44 20 3088 4197E-mail: [email protected] Website: www.allenovery.com

Description: Allen & Overy is one of a small group of truly international and integrated law firms with approximately 5,000 staff, including over 450 partners, working in 31 major centres worldwide. Allen & Overy also operates in regions where we do not have an office via our network of International Desks.

Clifford Chance

Contact person/ department: Anna WardAddress: 10 Upper Bank Street Canary Wharf London E14 5JJTelephone: +44 20 7006 1000E-mail: [email protected] Website: www.cliffordchance.com

Description: Clifford Chance is one of the world’s 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.

Overseas Trade Finance Ltd

Address:Bilton TowerLondonW1h 7LETelephone: + 207 859 8201Fax: +44 845 862 1220E-mail: [email protected]: www.otfonline.co.uk

Description: Specialises in sourcing trade finance, and arrange funding for export transactions on behalf of exporters, and international trade finance professionals world wide. Company arrange the finance for Trade related bu-siness and forfeiting. Specialise also in arranging non-recourse discounting of domestic and export receivables, based on the purchase of Bills of Exchange, Promissory Notes and invoices. Overseas Trade Finance is dealing with Trade Finance related business and Forfeiting

Chahine Capital Group

Contact person/ department: Andrew PellAddress: 43, Avenue MontereyLuxembourg, L-2163Telephone: +44 20 7 1270001 +352 260 955Fax: +44 20 7127 4611E-mail: [email protected] Website: www.chahinecapital.com

Description: Specialists in quantitative equity investment strategies. Digital Stars Europe (Bloomberg: BILDSCELX) available as Chahine Islamic Stars Eu-rope, with Fatwa from Sharia board headed by Dr Elgari. Bespoke investment strategies under mandate and client branded funds also available.

Advisory and Consultancy firms

Malaysia International Islamic Financial Centre (MIFC)

Address:MIFC SecretariatBank Negara MalaysiaJalan Dato’ Onn50480 Kuala LumpurMalaysiaTelephone: +603 2692 3481Fax: +603 2692 6024E-mail: [email protected]: www.mifc.com/

Description: In August 2006, the Malaysia International Islamic Financial Centre (MIFC) initiative was launched to promote Malaysia as a major hub for international Islamic finance. The MIFC initiative comprises a community network of financial and market regulatory bodies, Government ministries and agencies, financial institutions, human capital development institutions and professional services companies that are participating in the field of Islamic finance. Malaysia has also the distinction of being the world’s first country to have a full-fledged Islamic financial system operating in parallel to the conventional banking system.

Qatar Financial Centre

Address:P.O. Box : 23245, DohaTelephone: +974 496 7777Fax: +974 496 7676E-mail: [email protected]: www.qfc.com.qa

Description: Qatar is one of the world’s fastest growing economies, and the we-althiest country in the world measured by GDP per capita. The Qatar Financial Centre (QFC) lies at the heart of this small but dynamic country’s ambitious investment and development strategy.By attracting many of the world’s leading financial institutions to establish operations in Qatar, the QFC is supporting both the development of Qatar’s economy. The QFC Authority is committed to maintaining the highest international standards in its operations and activities. We welcome firms who will contribute to the development and success of Qatar’s financial sector and we will support them in achieving success.

Dubai International Financial Centre (DIFC)

Address:The Gate, Level 14P.O. Box 74777, Dubai, UAETelephone: +971 4 362 2222 Fax: +971 4 362 2333 E-mail: [email protected] Website: www.difc.ae

Description: DIFC Authority establishes and develops a suitable Quality Management System that is the foundation of the ‚Service Excellence’ strategic theme, focusing on DIFC’s journey towards achieving its vision ‚To shape tomorrow’s financial map as a global gateway for capital and investment.DIFC Authority is committed to meeting and exceeding customer’s expectations in providing consistent and competitive high quality services, through continuously improving the effectiveness of the Quality Managements System as per ISO 9001. This is carried out in compliance with DIFC Law and applicable statutory and regulatory requirements.

If you would like to list your company in Financial Directory, please send your order to [email protected]. Claim your 25% discount by giving the following discount code: X10G01. Please note that only limited space is available in the directory.

Law firms

AR Business Consultants Chartered Certified Accountants

Tel: + 44 (0) 208 776 9500Fax: + 44(0) 208 778 8966Regent House Business CentreSuite No: 209291 KirkdaleLondon SE26 4QD U.K.Web: www.arconsultants.co.uk

Description: Saving tax & building business. We providing a personalised service to business owners and individuals. For help with any of your accountancy and tax needs, please give us a call. All initial consultations are free of charge.


Prosperitus Capital Partners

Contact person/department: Kamran H. Khan Co-Managing Partner Address:Berkeley Square House LondonW1J 6BD

Telephone: +44 207 193 5755 Mobile: +44 7943 866 552 E-mail: [email protected]

They are the first of their kind to launch a private equity fund. Their ideal drive and focus is centred on Sharia complaint funding and connecting the markets in the west to the markets in the Middle East. They are doing this by translating the message of Islamic Finance. Prospertious business approach is connected to both inno-vation and management of the individual asset classes. They intend to foster operations in the Middle East, North Africa. Porsperitus, also have a parallel conventional platform.

Commander Fund Asset Management Ltd

Contact person/department: Mark RandallAddress: 4 Creed Court5 Ludgate HillLondon EC4M 7AA Telephone: +44 (0) 20 7246 9940Fax: +44 (0) 20 7246 9944

E-mail: [email protected]: www.commanderfund.co.ukCommander fund is primarily a conventional based asset mana-gement and operations corporation. Yet, in recent years they have been working on pioneering the closes thing to a Sharia compliant Hedge fund. They are also promoting the Middle East and develo-ping a strong client base and market presence there.

Capitala

Contact Person. Department : Patricia AssaadAddress: Al Moroor Street PO Box 30398 Email: [email protected] Telephone: +971 2 412 1111Fax: +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

gif

Capital Broadly, all the money and other property of a corporation or other enterprise used in transacting its business.

Capitalisation Long-term debt, preferred stock and net worth. The loan capital of a community development loan fund; includes that which has been borrowed from and is repayable to third parties as well as that which is earned or owned by the loan fund (i.e. “permanent capital”).

Capital Markets

A financial market where debt or equity securities are traded by institutions and individuals; the market for trading long-term debt instruments (those that mature in more than one year). Also used in a more general context to refer to the market for stocks, bonds, derivatives and other investments. A capital market is made up of three major parts: (1) stock market, (2) bond market, and (3) money market. It also works as an exchange for trading existing claims on capital in the form of shares. T he generic term for markets used to raise longer term funds from various investors. As opposed to money markets where short-term securities are traded, capital markets are more specifically understood as the markets for medium- to long-term financial products such as shares and bonds. Capital market instruments include fixed-income instruments such as index-linked bonds, asset backed securities, mortgage backed securities and related products. Capital market instruments include fixed-income instruments such as index-linked bonds, asset backed securities, mortgage backed securities and related products.

Cash Flow Financing Short-term loan providing additional cash to cover cash shortfalls in anticipation of revenue, such as the payment(s) of receivables.

Collateral Assets pledged to secure the repayment of a loan.

Commodity Murabaha See Murabaha, commodity

CommutativeRelating to, involving, or characterised by substitution, interchange, or exchange. Legal term in which one in which each of the contracting parties gives and, receives an equivalent. The contract of sale is of this kind. The seller gives the thing sold, and receives the price, which is the equivalent. The buyer gives the price and receives the thing sold, which is the equivalent.

Cost-plus Financing See Murabaha.

CovenantAn agreement or promise to do or not to do a particular thing; to enter into a formal agreement; a promise incidental to a deed or contract. The following are functional objectives guiding most covenants: full disclosure of information, preservation of net worth, maintenance of asset quality, maintenance of adequate cash flow, control of growth, control of management, assurance of legal existence and concept of going concern, provision for lender profit or program goals.

Current Asset Assets that will normally be turned into cash within a year.

Current Liability Liability that will normally be repaid within a year.

Current Ratio Current assets divided by current liabilities -- a measure of liquidity. Generally, the higher the ratio, the greater the “cushion” between current obligations and a firm’s ability to meet them.

Islamic Finance GlossaryB


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