september 2011 global islamic finance

Ethical

Banking & FinanceEthical

Banking & Finance

IN ISLAMIC FINANCE AND BANKINGBEST FRANCHISES UK: £6.00

P. 24

Turning to Traditional Methods of Marketing your Islamic Financial Institution

P. 28

Takaful Concept, Challenges and Opportunities

P. 65

An exclusive interview on the larg-est dual-tranche global sovereign Sukuk issuance

September - October 2011

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Contents;QWERTYUIIOPDFHJUIIOPDFHJJFranchising

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14 The Best Global Franchising Opportunities in Islamic FinanceThe Islamic finance sector is growing at a phenomenal rate. Its diverse expansion is providing investors with lucrative opportunities to tap into franchise businesses across the various sectors of Islamic finance. It is important first to establish the main purpose of a franchise, which is the practice of using another firm’s successful model of business. The franchise works as an investment model whereby the owner of the franchise has a direct stake in the business…

News

9 Islamic Finance News

Interview

24 An exclusive on the largest dual-tranche global sovereign Sukuk issuance Interview with Clifford Chance’s head of Islamic finance, Qudeer Latif and senior associate, Gregory ManThe industry experts gave GIF magazine an exclusive interview about the largest dual-tranche global sovereign US dollar Sukuk. The dual-tranche consisted of US$1.2 billion five year 2.991% Sukuk-al-wakala certificates and US$800 million 10 year 4.646% Sukuk-al-wakala certificates. The Sukuk certificates were issued through Wakala Global Sukuk Berhad and received a rating of A- by Standard and Poor’s and A3 by Moody’s. Qudeer Latif and Gregory Man share their views with GIF magazine…

Takaful

28 Takaful (Islamic Insurance): Concept, Challenges and Opportuni-tiesMuslims account for around 25% of the world’s total population, but despite rapid growth in recent years, insurance sales within the Muslim population remain a small fraction of the total insurance market. Historically, the incompatibility between conventional insurance and key tenets of the Islamic faith has acted as a significant barrier to sales. These differences have led to very low penetration rates and have left many Muslims with little external protection for their dependents or possessions…

Islamic Finance Instruments

56 Identifying and Mitigating Moral Hazard Problem in Murabaha Financing Islamic equity-based financing is an Islamic investment engaging at least two parties to do business together under Shariah principles. Examples of this are Mudarabah (trustee partnership), Musharakah (joint venture), Muzara’ah (Harvest Yield Profit Sharing) and Musaqot (Plantation Management Fee Based on Certain Portion of Yield)…

42

28

Islamic Finance

39 Shining the Spotlight on GIF’s Brand Ambassadors

42 The Rise of Retakaful Spurring Islamic Finance Retakaful is the reinsurance of Takaful business which adheres to the principles of Shariah financing. Retakaful or reinsurance is a method of insurance whereby an insurance company or syndicate can trans-fer all or part of its liabilities in respect of claims arising under the contracts of insurance that it writes to another insurer (the reinsurer). This will enable an insurance company (reinsured or direct insurer) to protect itself against any risks that may be incurred in its total claim costs or in any one year for example wipe out its profits, or even cause it to be insolvent…

65 Turning to Traditional Methods of Marketing your Islamic Financial InstitutionThe Islamic finance industry is expanding rapidly and the nature of marketing strategies has also given light to many companies seeking new innovative ways to target the growing market. However not every company wants to folk out on highly expensive digital modern technological techniques and many suc-cessful Islamic financial institutions rely on traditional ways of marketing to grab their target audience…

4 Global Islamic Finance September - October 2011

Market Review

22 Belgium Economic Expert says Islamic Finance to Grow in the WestA Belgian academic and economist launched a global network last December which included Islamic Finance lawyers to give legal advice in all aspects of Islamic Finance…

48 Islamic Development Bank Governors Seek More Action in Pro-moting Islamic FinanceAt the 36th annual meeting of the Board of Governors of the Islamic Development Bank (IDB) which con-cluded on the 30th of June in Jeddah there had been no progressive resolutions as many of its member countries are experiencing crucial challenges to their political and economic governance and in real need of economic reforms…

72 Malaysia Fluctuating Sukuk SalesMalaysia’s success in attracting US$9bil of orders for a US$2bil sale of sukuk reflects a one-year drought in global issuance by sovereign borrowers…

74 Pakistan Progresses in Islamic Banking with Meezan BankPakistan is progressing, its Islamic Banking sector with the implementation of new banking products to cater for the demand for Shariah-complaint services…

75 Thailand to Prosper in Islamic FinanceThailand has an increased potential to tap into the investment and trade sector of Islamic finance and fur-ther expand their economy through the facilitation of Islamic financial institutions, products and services…

76 Event Review

80 Events Calendar

82 Business Directory

84 Glossary

86 In the Next Issue

75

49

56World Islamic Finance Review

49 Islamic Finance gains Momentum in Europe, part IIIn addition to offering mudaraba accounts which entitle the depositor to a share in the bank’s profits, a number of Islamic banks provide specified mudaraba accounts where the funds deposited are allocated to a single company with the agreement of the depositor. The Islamic bank in these cases acts as an agent, charging an arrangement and annual management fee, with the depositor sharing in the profits of the specified company…

62 Islamic Microfinance the Key to Help Somalia in the Famine CrisisIslamic Microfinance is becoming an increasingly popular mechanism for alleviating poverty especially in developing countries around the world. Islamic Microfinance relies upon adherence to the principles of Islam and the Shariah as it is socially responsible form of investing and only involves itself in projects such as Zakat which are charity based projects or economic projects to develop an individual country’s economy...

78 Book Review

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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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Jabran NoorDr. Rifki IsmalGregory ManQudeer LatifAmjad Khan Suri

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Major Islamic financial hubs such as those

found in the Middle East, Asia and Eu-rope are tapping into Islamic franchising opportunities around the world and collabo-rating working on a united front to further spur the Islamic finan-cial industry forward

„For a company with a product or service to sell, franchising provides an excellent opportunity for rapid expansion without an enormous outlay of capital. It is a distribution system that allows a business to conserve capital, and at the same time achieve fast market penetration making it a very attractive proposition to most business own-ers. One of the greatest advantages to them is that they get 100% commitment from their fran-chisees who have a stake in the business rather than staff or managers who simply work for a sal-ary and may be less motivated. Franchising ena-bles them to utilise the entrepreneurial skills of the franchisee network to achieve better results than might otherwise be achieved.

There are many benefits of franchising. In respect to retail business where competition is relatively high, franchise ensure business success through advertising word of mouth and creating brand awareness. In order to attract customers and build image quality, size and loyalty franchising is a tool widely used. Franchising in the Islamic fi-nance field could be a necessary step to develop-ing Islamic finance products. The franchising sys-tem in this field needs to be done very clearly and carefully to be successful. You could ask yourself how many of the franchise systems in the Islamic finance industry, are able to claim that their mar-keting information is credible and reliable? By this I mean to be successful they have to:

1. Define their markets and quantify their market segments clearly?

2. Identify the brands value proposition and ad-vise staff on how the value proposition will be delivered?

3. Monitor what’s been done and how well, when rolling out their franchise strategy?

4. In their due diligence information up to date and able to pass strict professional scrutiny?

To sum up the most profitable businesses which exhibit success under franchises are those that have an excellent record of profitability in addi-tion to those businesses that can easily replicate Islamic financial services and products success-fully. It is important that any franchise adheres to the principles of the Shariah which is governed by

the Shariah regulatory body of the country. There are many opportunities worldwide for franchise businesses in the areas of Takaful, Sukuk, Infra-structural Development, Islamic banking and the very popular Halal brand sector which runs chains of Halal foods under Islamic finance instruments. Major Islamic financial hubs such as those found in the Middle East, Asia and Europe are tapping into Islamic franchising opportunities around the world and collaborating working on a united front to further spur the Islamic financial industry for-ward.

Every investor or entrepreneur wishing to start up a franchise must adhere to the principles of the Shariah firstly and there are various principles that an individual has to ensure when dealing with any Islamic financial institution, project or investment. It must ensure that every franchise is compliant with the conditions.

In this issue of Global Islamic Finance Magazine we will be looking at the best global franchising opportunities in Islamic finance and banking which will be a must read for any investor, profes-sional or entrepreneur. There are many Islamic fi-nancial franchising opportunities which are exhib-ited globally around the world. We hope that GIF magazine will give you a comprehensive insight into the various franchising opportunities that the Islamic finance sector has across the globe.

We will also look closely at the principles of the Shariah in dealing with franchises in addition to presenting the best 10 franchising opportuni-ties in the Islamic Finance sector. So if you are an investor who is eager to know which industries hold the most lucrative opportunities in Islamic Finance and banking or you are a professional wanting to investigate ways to enter the industry through franchises, we are positive that GIF mag-azine will help in this regard.

Farhad ReyazatPhD in Risk Management Editor in Chief

Editorial Letter

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


2011 September - October Global Islamic Finance 9

Islamic finance newsIslamic finance news

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Takaful and Islamic Insurance Sector Growth to Reach $25 Billion by 2015

The size of the Global Takaful and Islamic Insurance sector is predicted to reach $12 billion dollars by the end of the current year compared to $9.14 billion last year and about $8 billion in 2009.

The bank plans to provide Rp 400 billion ($46.4 million) in financing for customers to buy gold, president director Ventje Rahardjo said.

Saudi Arabia comes in at the top in terms of Takaful market share with $3.9 billion dol-lars, followed by Malaysia with $1.2 billion dollars, the United Arab Emirates with $640 million dollars, Sudan with $340 million dol-lars, Indonesia with $252 million dollars, Qatar with $136 million dollars, and Kuwait with $127 million dollars.

A report issued by Ernst and Young suggests the sector’s growth will reach $25 billion dollars by the year 2015. Experts estimate the Gulf countries’ share could reach about 49% of the total global Takaful, as the sector witnessed a boom in the region during the last few years, in contrast to traditional in-surance which witnessed a notable decline during the same period.

Experts estimate the Takaful market value in the region to be $4 billion dollars and pre-dict a 20% growth this year, attributing the sector’s boom to technical revenues from investment profits.

Ashar Nazim, President of the Islamic Fi-nancial Services Group at Ernst and Young – Middle East and North Africa believes that Takaful will become the preferred insurance product in Islamic countries if it continues to grow at or exceed 2009 levels of 31%.The Takaful market currently represents 1% of the global insurance market, despite the fact that Muslims represent 20% of the total global population.

The Takaful sector’s activities are prima-rily concentrated in the Middle East region, North Africa and Malaysia. Indonesia, the Indian continent peninsula, the African con-

tinent peninsula, and the Commonwealth of Independent States, will become the market growth movers for the sector in the future. Saudi Arabia, Malaysia and the United Arab Emirates are considered the three largest markets for Takaful, while Egypt, Sudan, Bangladesh, and Pakistan are experiencing rapid growth.

Indonesia & Malaysia Collaborate To Boost Islamic Banking

The Indonesian and Malaysian central banks have agreed to improve coopera-tion to boost the development of Islamic finance in the two nations.

“Islamic finance like Shariah banking is no longer just complementary but has now become a genuine alternative financing op-tion,” said Darmin Nasution, the governor of Bank Indonesia. “So there is a strong need for Islamic banks in Malaysia and in Indone-sia to improve their cooperation and develop the Islamic finance market.”

Darmin was speaking at the opening of a two-day conference on Islamic finance, which was also attended by Vice President Boediono and the governor of Malaysia’s central bank, Zeti Akhtar Aziz.

Darmin said Indonesia’s Shariah banking sector should learn from Malaysia, which has become the center of Islamic finance in Asia. Total assets of Islamic banks in Ma-laysia stood at $116 billion as of the end of 2010, according to data from its central bank.

“Islamic finance in Malaysia has developed extremely quickly, while Indonesia has a huge potential market given that it has the largest Islamic population,” Darmin said.

Assets of Shariah banks in Indonesia totalled Rp 104 trillion ($12.2 billion) at the end of last year. Indonesia has 11 banks that of-fer Islamic finance options, including Bank Syariah Mandiri, Bank Muamalat Indonesia, Bank Mega Syariah, BRI Syariah and BCA Syariah. Separately, Zeti said that Malaysia and Indonesia should improve cooperation in Islamic finance and help to develop the

sector in the global market. “Islamic finance will continue to play an important role in the global economy,” he said. “So it’s important for us to grab this opportunity, not only for Malaysia and Indonesia but also for other Asian countries. Islamic finance will help im-prove welfare and boost economic growth.”

Halim Alamsyah, a Bank Indonesia deputy governor, said the bank wanted to discuss the technical aspects of Shariah banking with its Malaysian counterpart in greater de-tail. “This will help to create added value in the Shariah banking sector,” he said.

In the banking sector overall, Bank Indone-sia forecast lending by the country’s 120 commercial banks would rise 24 percent this year, slightly higher than the 23.8% gain in 2010. In the first half, loans climbed 24% to Rp 372.8 trillion from the same period last year.

Last year, banks’ combined net profit rose 26% to Rp 57.1 trillion from a year earlier, according to central bank data.

Gatehouse Bank acquires first US student accommodation property in Texas

Gatehouse Bank plc (Gatehouse), a whole-sale Shariah compliant investment bank based in the City of London, has complet-ed the acquisition of its first US based stu-dent accommodation property in College Station, Texas. Gatehouse has acquired a total of £93 million of student housing properties to-date with this recent acqui-sition. The transaction was conducted in partnership with GSH Kuwait and is part of a joint investment with The Scion Group, a specialised student-housing operator and one of the most active acquirers of student housing assets in the United States. Arch Street Capital Advisors, L.L.C a US-based real estate advisory firm structured and ar-ranged the transaction on behalf of Gate-house Bank and GSH. The College Station acquisition, at a current 98% occupancy rate, is forecast to deliver a stable and secure income flow with project-ed net cash yields of 7.0% per annum over 5 year holding period. Fahed Boodai, Chair-

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man of the Board of Directors at Gatehouse Bank stated, “This US acquisition earmarks Gatehouse Bank as a dominant force driv-ing the delivery of global real estate income- producing investment opportunities.” He added “Student accommodation is a sector of great importance that we believe will de-liver strong investment opportunities for the maximum benefit of our GCC clients. Gate-house’s expertise in this sector is proven by the delivery of core assets including two student accommodation transactions in the UK.” Robert Bronstein, President of The Scion Group which partnered in the transaction, added, “We’re pleased to have the opportu-nity to maximise the potential of The Lofts at Wolf Pen Creek, among the finest student housing assets anywhere in the world.

Scion is especially thrilled by the opportunity to join with GSH and Gatehouse Bank, which share our view that high-quality U.S. student housing is well suited to low leverage and a focus on current yields. We look forward to applying this philosophy to grow our partner-ship together.” Known as The Lofts at Wolf Pen Creek, the uniquely designed 310,422 sq ft property comprises 265 one, two, three and four bed-room loft-style flats and townhouses con-taining 683 beds, distributed among several buildings, most of them connected to one another to form an upscale resort-style com-munity.

Amenities include a 13,600 sq ft clubhouse, a theatre with stadium seating; an internet café and media centre; a business/study centre; two swimming pools; and a 24-hour fitness centre. The property is minutes away from Texas A&M University, which is one of the largest in the United States. The South-west and Southeast regions together ac-count for almost 32% of all U.S. student en-rolments and are one of the fastest growing regions nationwide.

As a result, there is a significant demand for living space. Last year in the U.S. transac-tion volume in the student housing sector in-creased 250% in comparison to 2009 levels and there is a very real opportunity for inves-tors looking to tap into this yield-generating growth sector. To meet continuing demand for high quality real estate prospects, Gatehouse provides leading advice and opportunities, as well as detailed research and sector analysis, to in-vestors across major international markets including the UK, Europe, Asia and the US. This latest transaction follows the acquisi-tion of two earlier student accommodation properties in the UK, and brings the total val-

ue of Gatehouse Bank’s global real estate portfolio to in excess of £230 million.

Tamweel Expands Launching Two New Is-lamic Finance Products

It has been reported that Tamweel, the UAE Islamic home finance provider, announced the expansion of its Home Finance product suite with the launch of two new products.

The Non-residents Programme will make home finance available to select overseas investors looking to purchase residential property in the UAE. Tamweel’s Home Re-finance Program for fully paid properties is designed to help owners unlock the value in their homes.

Through the Non-residents Programme, fi-nance is available for ready residential prop-erties in Abu Dhabi and Dubai up to a maxi-mum value of Dhs5m and with repayment tenure of up to 25 years. The product is open to salaried individuals from select countries. With this announcement, Tamweel becomes the only local finance company to cater to

non-residents. The launch of the Non-res-idents Programme follows the recent an-nouncement of the Federal Cabinet to ex-tend visas for non-resident property buyers to three years from the current six months.

Varun Sood, Acting Chief Executive Officer of Tamweel, said “The recent announcement by the Federal Cabinet will bring about in-creased certainty to foreign property inves-tors which will in turn provide a boost to the UAE real estate sector. In launching this product now, Tamweel is well positioned to meet the anticipated uplift in demand from overseas investors.”

Tamweel also launched its Home Refinance Programme which allows salaried and self-employed owners of fully paid properties to acquire finance for up to 50% of the value of their home.

“Home Refinance Programmes are common in many mature markets, such as the UK and US, but relatively new in the UAE. There is, however, a clear demand from owners of fully paid properties to unlock some of the value in their homes to fund home renova-tions, children’s educations and etc.

The launch of Tamweel’s Home Refinance Programme meets this demand and is in line with our commitment to provide innova-tive solutions that meet the evolving needs of customers,” added Sood.

Iraq to Enter Islamic Banking Sector

Iraq is the new player to emerge in intro-ducing the construction of a government Islamic bank with an estimated capital of $214 million. Iraq’s new Islamic bank will be under the supervision of the Central Bank of Iraq and will be administratively linked to the Finance Ministry.

An Iraqi official confirmed that the Islamic bank will work to attract significant capital and will contribute to the process of inte-grating governmental and private banks. The Iraqi government also decided to allow the operation of Windows in governmental banks.

The Economic Committee of the Iraqi Council previously announced that Islamic banks, of which there are nine, don’t contribute to rais-ing the economic development level, while experts found that the private banks in Iraq, of which there are 36, don’t have the tools to promote monetary and economic policies for several reasons, including a missing law organising operations and the failure to se-cure the required support from the country. For example, the Rafidain Bank, one of the most important governmental banks in Iraq, doesn’t accept transfers from private banks


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As a widely embraced alternative to conventional interest-based banking, Islamic finance has the potential to, among other things, spur a revival of the domestic real estate sector. This impending resurgence will not only help bolster investor confidence in the local market, but also accelerate national economic growth as well

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Mr. Mohamed Ayjaz, General manager, Hamptons International & Partners LCC Oman

It follows that it is better for Islamic banks to have a strategy that helps achieve a stronger position in a few selective markets than one which results in marginal positions in many competitive markets

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Christine Kuo, Vice President and Senior Analyst, Moody’s

With the increasing internalization of Islamic finance, industry leaders are looking to boost cross-border growth opportunities and Asia is rapidly strengthening its position as a leading hub for significant Islamic finance transactions,,

David Mclean,Managing Director, World Islamic Banking Conference

,, Islamic Finance is also in the process of strengthening its footing in the industry. It is faced with several regulatory and product de-velopment issues. Islamic financial expertise is limited in Halal food industry so employees need to be trained and be made aware of the potential benefits of Islamic Finance,,

Mahmood Hasan, CEO, Rasul Group of Companies’

,, Having spent the last few years obtain-ing the Islamic Finance Qualification, writing numerous articles and visiting the region to give conference speeches I thought the groundwork had been done for managing either institutional or private money. I have also visited Islamic banks looking for a joint venture to white label an ethical fund to protect investors from the inflationary effects of climate change,,

Tony Birch, Managing Director, Oppenheim & Co Limited and Guernsey Gold Limited

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(including Islamic banks) and the Finance Ministry refuses to deal with private banks (including Islamic ones).

The Executive Director of the Association of Iraqi Private Banks, Faiq Nasser Hussain, announced that Iraqi governmental banks shouldn’t operate pursuant to the Islamic banking system because Islamic bank budg-ets are different from the budgets of tradi-tional commercial banks. He noted that the Central Bank of Iraq (CBI) finally put it to a committee to draft a law for this sector.

The Central Bank of Iraq recently announced that it will grant a number of licenses to es-tablish private banks, confirming that their growth will enhance the economic situation in the country. The total capital of private banks is about $2.7 billion dollars and ex-pected to rise to 100 billion dinars by the end of June, reaching 250 billion by the

end of 2012. The two main purposes of the Central Bank of Iraq Central Bank CBI are to maintain price stability and implement monetary policy, including exchange rate policies, management of foreign reserves, currency issuance, management, and or-ganising internal and external payments.

Albaraka Turkish Unit Secures $150m Funding

Albaraka Banking Group said its Turkish subsidiary has mandated several major banks to arrange a $150 million dual-cur-rency syndicated finance facility to expand its activities in the country.

Albaraka Türk said the banks involved in the arrangement of Murabaha financing facility are ABC Islamic Bank, Emirates NBD Bank, Noor Islamic Bank and Standard Chartered Bank (together the initial mandated lead ar-rangers and the book runners). As a promi-nent participation bank in Turkey, Albaraka Türk enjoys a market share of 19.14 per cent in the participation banking segment by asset size in Q1’ March 2011.

The financing facility has a tenor of one year and carries a profit rate of 150 bppa over the relevant Libor/Euribor. The facility was launched into general syndication last month with banks from across the globe in-vited to participate in the facility.

Financing under this Facility will be used by Albaraka Türk to expand its financing activi-ties in Turkey. The Facility has a tenor of one year and carries a profit rate of 150 bp pa

over the relevant Libor/Euribor. The facility was launched into general syndication on the 29th June 2011, with banks from across the globe invited to participate. Albaraka Türk is amongst the first financial institu-tions and one of the pioneers in the field of interest-free banking in Turkey. It completed its establishment in 1984 and commenced operations in the beginning of 1985. Albara-ka Türk is currently rated “BB” with negative outlook by S&P.

Albaraka Türk continues its operations in compliance with the Law of Banking num-bered 5411. Albaraka Türk was founded by Albaraka Banking Group (ABG), one of the prominent groups of the Middle East, Is-

lamic Development Bank (IDB) and Alharthy Family, which served the Turkish economy for more than half a century. As of 31st May 2011, the foreign partners own 66.16%, the domestic partners 11.33% and 22.51% are publicly held. Albaraka Türk has a market share of 19.14% in the Turkish participation banking segment by asset size in Q1 2011.

IFS Approved for Islamic Finance Training and Exam Centre

IFS, the affiliate of Mawarid Finance which is actively involved in providing a wide range of services in the Islamic finance industry, has recently been approved as an authorised training and exam centre for IBTA (Certified Business Professional) which is a global organisation committed to training and certifying business profes-sionals to the international standards.

IFS shall provide the training through more than 15 programs in Arabic and English lan-guages, as well as organising online exams. Rehab Lootah, the Managing Director, IFS, said, “Approval of IFS as an authorised exam & training centre for IBTA shall enable us to take wide steps in developing our country and nation through keeping the profession-als equipped with the required knowledge and skills to international standards, which shall enhance and support the business sectors and achieve excellence in customer service, communication skills, crisis man-agement, leadership and decision making, project management, sales, tourism and hospitality.”


She added, “This initiative has been achieved through communication with Trak Learning Solutions, the education solution provider in the Middle East and North Africa. Being an authorised training and exam centre for IBTA shall qualify us to conduct and supervise the international exams for the professional cer-tification.”

Othman Al Othman, General Director, Trak learning solutions, said, “CBP program de-velops the important professional and life skills. The training programs in the sessions enhance the training and learning environ-ment to achieve the maximum benefit to the trainees and enable them to overcome the challenges in the job market.

This ensures that the candidate is exposed to functional business tasks and thus gains practical exposure to the work environment. The certification exam measures the skills

and knowledge earned by the program. He added, “CBP programs develops the busi-ness and life skills, the workshops and lec-tures of such programs help in enhancing the training and education environment to achieve the maximum benefit for the train-ees and qualify them to compete and over-come the market challenges as per local and international standards.”

Sanusi Islamic Banking Praised By Muslim Lawyers

It has been reported that The Muslim Law-yers Association of Nigeria (MULAN) has commended the Central Bank of Nigeria (CBN) governor Sanusi Lamido Sanusi for

continuing with the foundation laid by his predecessor Chukwuma Soludo on Islamic banking.

The group dismissed the allegation that the CBN governor is introducing the non-interest banking as part of the alleged northern agenda, as baseless and totally uncalled for, stating that Islamic banking will not Islamise the country but rather will be beneficial to all. In a statement signed by its national presi-dent, Tajudeen Olaseni Oladoja, the group encouraged Muslims and other people to invest their money and to become partners in order to share profits and risks in the busi-ness instead of becoming creditors.

While noting that Islamic finance is based on the belief that the provider of capital and the user of capital should equally share the risk of business ventures, such as industries, farms, service companies or simple trade

deals, it stated that Islamic banking is about removing the practice of interest which is not only unique to Islam.

“Islam is not the only religion that denies or prohibits usury; it is perhaps because the rules of prohibition are quite prescriptive and structured that it has achieved world prominence in a short space of time. Islamic financial institution is based on religious injunctions preached by all monotheist re-ligions including Hinduism, Christianity and Islam.

It prohibits usury, gambling, cheating, among others,” the statement said. According to the organisation, Islamic banking has entered a

sphere of finance and economics that has been unexplored for the last two centuries and has evidently become the fastest grow-ing sector in finance all over the world. The statement further pointed that the non-in-terest banking was approved by the former CBN governor Chukwuma Soludo before the emergence of Mr Sanusi in 2009 and there-fore condemned in strong terms the unwar-ranted condemnation of the CBN governor over the introduction of Islamic banking in Nigeria.

“A calm and thorough reading of the clear provisions of section 9, 23, and 52 of Banks and other Financial Institutions Act, Cap B3 LFN 2004 provided for the establishment of Islamic banking in Nigeria. It was in conse-quence of these provisions that, the former Habib Bank now Bank PHB was given an approval in 1992 to operate a window of Islamic banking, which is still operational,” it said.

Pakistan Islamic microfinance to Prosper

Pakistan key Chief Executive has praised the Islamic micro finance model and be-lieves it can be adaptable to all forms of microfinancing.

Microfinance is compatible to work with any model and it has the alternative to all the products of conventional system. Zubair Mughal, Chief Executive Officer, AlHuda Cen-tre of Islamic Banking and Economics Paki-stan said Islam has given the best system for poverty alleviation and both Muslims and non-Muslims could benefit from it.

He emphasised the people from Central Asia, the Caucasus and South Asia could equally benefit from Islamic principles of microfinance. At an International seminar on financial inclusion for Central Asia, the Cau-casus and South Asia organised by Asian Development Bank Institute-Japan, he said that out of the total population of 1.7 billion about 562 million are Muslims in these re-gions, which becomes important for finan-cial inclusion through this system.

He discussed the poverty issues of central Asia, the Caucasus and south Asia sepa-rately so that Islamic microfinance becomes an effective tool for poverty alleviation in these areas. He said in the wake of the cur-rent financial crisis all around the globe, the Islamic microfinance has gained even more importance due to its transparency and sustainability. The event in Urumqi, Peoples Republic of China was attended by delegate from China, Japan, Pakistan, Bangladesh, India, Malaysia, Singapore, Kazakhstan, Uz-bekistan, Tajikistan, Georgia, New Zeeland, Romania, Kyrgyz, UK and Afghanistan.

News gif

As a widely embraced alternative to conventional interest-based banking, Islamic finance has the potential to, among other things, spur a revival of the domestic real estate sector. This impending resurgence will not only help bolster investor confidence in the local market, but also accelerate national economic growth as well

,,

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Mr. Mohamed Ayjaz, General manager, Hamptons International & Partners LCC Oman

It follows that it is better for Islamic banks to have a strategy that helps achieve a stronger position in a few selective markets than one which results in marginal positions in many competitive markets

,,

,,

Christine Kuo, Vice President and Senior Analyst, Moody’s

With the increasing internalization of Islamic finance, industry leaders are looking to boost cross-border growth opportunities and Asia is rapidly strengthening its position as a leading hub for significant Islamic finance transactions,,

David Mclean,Managing Director, World Islamic Banking Conference

,, Islamic Finance is also in the process of strengthening its footing in the industry. It is faced with several regulatory and product de-velopment issues. Islamic financial expertise is limited in Halal food industry so employees need to be trained and be made aware of the potential benefits of Islamic Finance,,

Mahmood Hasan, CEO, Rasul Group of Companies’

,, Having spent the last few years obtain-ing the Islamic Finance Qualification, writing numerous articles and visiting the region to give conference speeches I thought the groundwork had been done for managing either institutional or private money. I have also visited Islamic banks looking for a joint venture to white label an ethical fund to protect investors from the inflationary effects of climate change,,

Tony Birch, Managing Director, Oppenheim & Co Limited and Guernsey Gold Limited

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Franchisinggif

THE TOP 10 BEST FRANCHISES IN ISLAMIC FINANCE AND BANKING

THE TOP 10 BEST FRANCHISES IN ISLAMIC FINANCE AND BANKING

Abstract: In this edition of Global Islamic Finance Magazine we will be looking at the best global franchising opportunities in Islamic finance and banking which are essential reading for any in-vestor, professional or entrepreneur. There are many Islamic financial franchising opportunities around the world. In this article GIF Magazine gives you a comprehensive insight into the various franchising opportunities that the Islamic finance sector provides. We will also look closely at the principles of Shariah in dealing with franchises, as well as presenting the best 10 franchising op-portunities in the Islamic finance sector. So if you are an investor who is eager to know which indus-tries hold the most lucrative opportunities in Islamic finance and banking, or you are a professional wanting to investigate the ways in which to enter the industry through franchises then look no further. GIF Magazine will provide you with a comprehensive insight leaving you fully equipped with all the answers you may need. Islamic finance is growing at an unprecedented rate, which means more opportunities will be coming up across the various sectors of Islamic finance and this article will put you in a position to invest your time and money in something really worthwhile.

Keywords: Franchises, Islamic Finance, Islamic Banking, Sukuk, Takaful, Shariah Principles, Sha-riah Law, Opportunities, Investments, Deals

Author: Tasnim Nazeer, Global Islamic Finance Magazine Editorial Team, United Kingdom


An Introduction to Franchises in Islamic Finance SectorsThe Islamic finance sector is growing at a phenomenal rate. Its diverse expansion is providing investors with lucrative opportuni-ties to tap into franchise businesses across the various sectors of Islamic finance. It is important first to establish the main purpose of a franchise, which is the practice of us-ing another firm’s successful model of busi-ness. The franchise works as an investment model whereby the owner of the franchise has a direct stake in the business.

The most profitable businesses exhibiting success under franchises are those that have an excellent record of profitability as

well as those that can easily replicate Islamic financial services and products successfully. Some of the key sectors for Islamic financial franchises are outlined in Figure 1.

It is important that any franchise adheres to Shariah principles, which are governed by the Shariah regulatory body of the country. There are many opportunities worldwide for franchise businesses in the areas of Taka-ful, Sukuk, infrastructural development, Islamic banking and the very popular Halal brand sector, which runs chains of Halal foods under Islamic finance instruments. Major Islamic financial hubs, such as those found in the Middle East, Asia and Europe, are tapping into Islamic franchising oppor-

tunities around the world and collaborating on a united front in order to drive the Islamic financial industry forward. Every investor or entrepreneur wishing to start up a franchise must adhere to the principles of Shariah.

Figure 2 explains the various principles that an individual has to follow when dealing with any Islamic financial institution, project or investment, which also applies to any franchise. Once you have acquainted your-self with the Shariah principles necessary in building up your franchise, then you can look into the various fully fledged Islamic fi-nancial opportunities for franchises around the world.

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The Takaful Sector Providing Key Franchis-ing OpportunitiesThe Takaful Islamic insurance sector is do-ing increasingly well all over the globe with companies opening up their services to cater for Shariah compli-ant insurance products and serv-ices. These Takaful products and services have provided the basis for all subsequent franchise establishments. Recently the Islamic finan-cial hub of Dubai exhibited a key investment in a lu-crative franchising deal.

The leading Dubai based company Dubai SME and Noor Takaful launched a partnership to attract more UAE national en-trepreneurs into the in-surance industry, offering them flexible business start-up options. Both Dubai SME and Noor Takaful signed a memorandum of understanding (MOU) in order to offer franchises to UAE nationals so that they could sell Noor Takaful branded products right across the United Arab Emirates.

Entrepreneurs were also encouraged to par-ticipate in the franchising scheme of Noor Takaful products and were allowed to work under three franchise arrangements pro-vided by the company. Outlined in Figure 3 are the three options open to entrepreneurs who wish to own a franchise selling Noor Takaful Products.

This lucrative franchising deal, with the col-laboration of Noor Takaful and Dubai SME, was announced in 2011 and can provide entrepreneurs, particularly first time inves-tors, with an excellent opportunity to join the franchise business.

Dubai SME has mar-keted Noor Takaful products in order to spur on the success of the franchises across the United Arab Emir-ates. HE Abdul Basit Al Janahi, CEO of Dubai SME said, “Dubai SME has an expanding part-nership network, which is a strong platform to create synergies and

source competitive services and solutions for business growth.

We are delighted to have Noor Takaful among our partners. The partner-

ship also marks the first strategic initiative of Dubai SME to promote

home-based businesses to gen-erate substantial income and

create opportunities for UAE nationals in new economic sectors.” In addition Noor Takaful will support all in-terested franchise entre-preneurs by providing the relevant business informa-tion, including the income potential and the key re-sponsibilities of each fran-chise.

This provides great scope for first time entrepreneurs

who want to invest in a lucra-tive and reliable Islamic finan-

cial franchise, especially as the Takaful business is a growing

sector and it is therefore a good time to invest.

Dr. Ahmed Al Janahi, Managing Director of Noor Takaful said, “Noor Takaful is pleased to be entering into this strategic partnership with Dubai SME. This will be the first time a franchising concept within the insurance industry will be available in the region.

We expect this relationship to raise aware-ness of Takaful, and to support entrepre-neurial Emirate men and women in making informed decisions regarding their business requirements.”

He further added that, “This partnership offers us the opportunity to continue to develop our presence in the small and me-dium business sector, and positions us as

a reliable and trusted insurance partner for thriving young entre-preneurs.”

Another key opportuni-ty for the Takaful fran-chise sector was pre-sented by UAE based Methaq Takaful, who signed an MOU with United National Bank in order to fund a mo-tor vehicle insurance

TAKAFUL

SUKUK

INFRASTRUCTURAL DEVELOPMENT

ISLAMIC BANKING

HALAL BRAND SECTOR

Figure 1: Key Franchising Sectors in Islamic Finance

Prohibition of Riba (interest) and uncertainty

Prohibition of forbidden assets

Existence of underlying assets

Profit sharing/Risk sharing

Figure 2: Principles of Shariah as a Guideline for Franchises


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scheme. Methaq Takaful insurance has ad-vanced remarkably in the Takaful business, and has built up a solid number of franchise customers in addition to key sponsorship and partners.

It is believed that around 60 per cent of the insurance business is generated from motor insurance, followed by medical insurance at 20 per cent and the remaining 20 per cent from other insurance businesses in the UAE.

Competition in the insurance industry has increased significantly in recent years and Methaq is well positioned, with its efficient system capitalising on the emerging fran-chise opportunities.

Methaq Takaful Insurance Company’s vision is to offer general insurance services to cor-porate and individual customers, which will be delivered through the multiple distribu-tion channels it has established. Methaq offers over 30 general insurance products as part of the phased roll-out of the product range and service offerings.

In future Methaq plans to introduce new and innovative products which will be part of the company’s commitment and drive to intro-duce operational excellence and best use of technology within the Takaful sector.

This company therefore has many potential opportunities, with sound connections for building up a franchise. UNB CEO Moham-mad Nasr Abdeen said that, “This MOU is within UNB’s strategy to provide a wide range of financial solutions to the customers and a reaffirmation of its core value of being the bank that cares. The introduction of this service complements the various products that the bank provides, benefiting a very large customer base.” Methaq Takaful Man-aging Director Abdullah Al Maamarri further added “We are proud to tie up with Union National Bank, giving added value to our customers.” (Methaq Takaful Insurance).

Sukuk Providing a Gateway of Opportunity for FranchisesSukuk Islamic bonds are doing unprecedent-ly well in the Islamic finance industry and are becoming a global commodity as many countries around the world tap into the vari-ous opportunities that Sukuk provides. One key opportunity is the franchising of Sukuk Islamic bond companies, products and serv-ices.

The most profit-able businesses exhibiting suc-cess under fran-chise are those

that have an excellent record of profitability and those that can replicate Islamic financial services and products successfully. What are your thoughts on the success of franchising in Islamic finance?

Franchising is a holistic culture of mutual coop-eration towards noble cause of progress & pros-perity in the spirit of corporate brotherhood for the socio-economic benefit of all, which is justi-fied by the Qur’anic principle “…..help each other in righteousness and piety, but do not cooperate among you in sin and rancour….” (5:2).

Considering the contemporary phenomena in the rapid growth with global appreciation of the Islamic financial system, it may be the right time to enrich the franchising culture within the Islamic financial system for a common greater achievement by sharing the acceptable Shariah standard in terms of policies, system, talent, technologies, products, operation & culture.

Hence, with the dynamic slogan of “progress & prosperity in Islamic financial system for the common benefit of all by waiving the issue of one’s religion, race, culture, status, gender or nationality”, unjustifiable & unacceptable com-pletion within the Islamic financial environment shall be avoided, which shall be replaced by jus-tifiable cooperation with utmost wisdom, mutual respect, care, share & concern. This noble para-digm may successfully be facilitated by a Shari-ah compliance of franchising culture among the Islamic financial industries across the world.

In your opinion what are the key franchising sectors in Islamic finance? And what are your thoughts on the future?

The key franchising sectors in Islamic finance may include the following:

Policies & Guidelines• System• Talent• Technology• Products• Operation• Corporate Culture•

By the enrichment of the Shariah compliance of the franchising culture within the Islamic finan-cial environment, may help the industrial growth of the Islamic financial system with greater sig-nificant results not only for the corporate play-ers, but also for the customers including the in-nocent beneficiaries.

What are your thoughts on the first step to franchising is acquainting yourself with the Shari’ah principles?

There are ten components of the first step to franchising of Islamic finance in acquainting every involved one (be one regulator, decision maker, operator, player or customer with equal requirement from the respective counter part of the franchisor & the franchisee) with the basic relevant principles of Shariah, not only in mind but also in action, namely:

Exclusive division (Shariah compliant/Is-• lamic Finance).Conceptual understanding of Shari’ah • (Maqasid al-Shariah) affecting franchising of Islamic finance.Regulatory frameworks (relevant Shariah • rulings) governing franchising of Islamic finance.Shariah approved Documentations (poli-• cies, guidelines, forms & procedures).Technical-know-how (with the Shariah • standard) facilitating the franchise objec-tive affecting Islamic finance.Operational mechanisms (with Shari’ah • compliance) for an effective management of franchise objective of Islamic finance.Customers’ rights, obligations & behav-• iours as per approved by the Shariah prin-ciples in participating in, contributing to, cooperating with & benefiting from fran-chised Islamic financial operation. Public awareness plan of franchising of Is-• lamic financial system.Shariah secretariat (Shari’ah compliance • division with R & D).Shariah council (for advising & decision • making).

Prof. Dr. Modh. Ma’sum Billah, Chairman, Middle Eastern Business World (MBW), Group Global Trade (Oil & Gas) and Investment

Franchising


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It is a lucrative market to investigate with huge potential and is a growing, diverse franchise sector, with more global investors from around the world getting involved daily. Barclays, the leading conventional bank, launched Barclays Capital or BarCap, as it is often known, and is doing increasingly well in Sukuk Islamic bonds franchising.

Barclays Capital is renowned as a lead-ing franchise for Sukuk and has already launched one of the three largest Sukuk ever issued to date. This positions them at the top of the league table in Sukuk fran-chising, setting a benchmark for others to surpass. The three lucrative Sukuk deals are outlined in Figure 4.

Dubai Islamic Bank is another key player who has provided great opportunities in the Su-kuk franchising sector. Dubai Islamic Bank was recently assigned an ‘A’ rating for its strong franchise and liquidity position within the sector. Fitch expects DIB’s focus on its retail operations to result in higher margins and further stability in earnings.

In issuing its rating, Fitch added that it con-siders DIB’s funding profile to be a rating strength, with customer deposits providing the bulk of its funding needs. Fitch said that given its franchise, DIB attracts a large pro-portion of its deposits from the retail seg-ment, ensuring a low-cost and stable depos-it base and therefore a satisfactory liquidity position.

Commenting on the Fitch rating, Abdulla Al Hamli, Chief Executive Officer, Du-bai Islamic Bank, said “Over the last few years DIB has focused on an agenda of di-versification and managed growth which has further strengthened its strong commercial Islamic bank-ing franchise, offering a full range of retail and corpo-rate banking products and services.

This has contributed in maintaining healthy liquid-ity largely funded by low cost stable retail customer deposits, strong capital ra-tio, growth in core revenue and significant increase in retail customer base.” (Al Sukuk).

Dubai Islamic Bank gives plenty of opportu-nities for investing in franchises to sell their products and services efficiently with global scope for profitability.

Along with Dubai Islamic Bank and BarCap’s reign of Sukuk franchise, many other fully fledged and Islamic windows offer the op-portunity to franchise in Sukuk as it has de-veloped into an increasingly popular area in great demand from customers and investors around the world.

Sukuk is a global commodity in which any investor can become involved through the country of their choice. However the most lu-crative Islamic financial hubs remain in the Middle East and Malaysia - the two predomi-nant countries providing Sukuk and other Islamic financial instruments.

Infrastructure Based Islamic Finance Fran-chise Development OpportunitiesInfrastructure growth remains a lucrative investment for project financing, especially through Islamic financial instruments. In countries such as the Middle East the infra-structure sector is a prime place for invest-ments from all around the world.

There are some specialised banks, particu-larly in Malaysia, that deal with infrastruc-ture based Islamic finance franchising. When dealing with this type of franchise it is beneficial to have prior experience of the infrastructure market and relevant knowl-edge of managing an infrastructure based franchise through Islamic financing. CIMB Bank Berhad Malaysia has its own partners for infrastructural based Islamic financial franchising called CAPASIA Islamic Infra-structure Fund.

Badlisyah Abdul Ghani, Executive Director and Chief Executive Office, works on the management and overseeing of the over-all Islamic banking and finance franchise of CIMB Group known as CIMB Islamic. His areas of responsibility cut across all legal entities within the Group since CIMB Islamic operates as a parallel franchise, leveraging on the Groups’ infrastructure and network both locally and globally.

CIMB have opportunities to invest in infra-structure and have been doing well in the

global Islamic financial are-na. The infrastructure sec-tor is a niche sector for the Islamic financial industry and therefore opportunities should be looked into with the collaboration of a bank or reliable Islamic financial institution.

Islamic Banking Spearhead-ing FranchisesThere are many fully fledged Islamic banks, in addition to Islamic windows through conventional banks, which have opened up worldwide. These banks often provide services which are lucrative-ly beneficial to starting up a franchise.

Often investors are keen to look into reliable forms of franchises and find that opportunities with Islamic

Become a home-based agent using the Intilaq license of the Department of Economic Devel-opment

Work as a business start-up in the Business Incubation Centre at Dubai SME

Work as a full-fledged business operating independently

Figure 3: Three Options for Noor Takaful Franchises

Source: CPI Financial

PCFC (Dubai Ports Customs and Free Zone Corporation) - US$3.5 billion January 2006AK. Here there was innovation together with our partner, Dubai Islamic Bank, to

come up with what was essentially an acquisition structure that was financed in Sukuk format. It was a pre-IPO (Initial Public Offering) Sukuk, which is the first of its kind. If an IPO occurred in the underlying company related to the borrower, sukuk holders would receive shares in that IPO on a mandatory basis, which had never been done before.

Nakheel Properties – US$3.52 billion December 2006AK. This is currently the largest sukuk ever. We refined the pre-IPO structure to allow investors to have an option of whether or not to receive the shares upon an IPO. In the PCFC structure, it was mandatory, i.e. if the IPO occurred, your sukuk would be partly redeemed in shares. But in the Nakheel sukuk, investors could choose whether to receive shares or have the sukuk redeemed at maturity.

Aldar Properties – US$2.53 billion February 2007AK. Aldar was a listed company, unlike Nakheel and PCFC which were unlisted. For this reason the Aldar Properties sukuk were fully convertible into shares of Aldar, subject to certain criteria being met.

Figure 4: The big three: BarCap’s world-beating sukuk

Source: Business Management


banks fulfil their criteria for a profitable opportunity. One such relia-ble franchising bank is HSBC Amanah, which has branches across the world, including the United Kingdom. HSBC Amanah offer prod-ucts and services for Takaful and Sukuk in addition to a range of Shariah compliant services which can easily be developed in the franchising sector.

Dubai Islamic Bank also has opportunities for Takaful and Sukuk franchising of their products, which are open to UAE nationals and can provide significant profitability as well as a stable environment for business. The Islamic Bank of Asia has global branches in the Middle East, Singapore and Asia and offers the opportunity of fran-chising their products and services in a totally Shariah compliant manner.

The Islamic Bank of Asia recently appointed a new Chief Executive Officer, Toby O’Connor, displaying its commitment to expand Islam-ic banking franchising with the expertise of key professionals.

CIMB Malaysia also has vast opportunities for the franchising of Sukuk, which is offered through the bank itself, and many inves-tors can tap into this lucrative sector. Another bank which has pro-gressed in developing and providing franchising opportunities for Shariah-compliant products and services is Jordan Islamic Bank.

It offers franchising options for products such as Sukuk and Taka-ful as well as investment funds to help with the financing of Sha-riah compliancy. The bank provides its banking, financing and investment services through 59 branches and 12 cash offices in different locations in the country, as well as through the bonded of-fice. The bank also offers services through 80 ATMs all over the country.

The Saudi Arabian banking sector has shown significant growth in op-portunities for franchising, partic-ularly Saudi based Al Rahji Bank. Al Rahji bank has developed a strong franchising network and the Saudi banking franchise cur-rently consists of 22 commercial banks, 12 local banks and 10 branches from foreign banks. These banks are outlined in Figure 5.

The Halal Brand Paving the Way for Islamic Finance FranchisingThe Halal brand of food chains and restaurants around the world has been increasingly establishing opportunities for franchis-ing through Islamic fi-nance. Many Halal restau-rant franchises have been set up with funding from Islamic banks around the world, paving the way for the use of Shariah com-

gif Franchising

Salama Evans, Managing Editor, HalalFocus, United Kingdom

What are your thoughts on the expansion of franchising opportunities within the Halal brand of food chains and restaurants?

Creating a branded Halal only international chain of restaurants is a business opportunity that has still not fully taken off. However, major fast food chains, like KFC, Nando’s and McDonald’s all over the world, are taking advantage of this business opportunity by convert-ing some of their outlets to Halal only and profiting nicely from it. Even with public outcries in the UK with KFC converting some of their outlets to Halal and taking bacon off their burgers, and some areas of France where Quick restaurants changed the pork and bacon to turkey and bacon on their burg-ers, these fast food giants are not deterred by customer complaints. At the end of the day it is the financial return from these Halal outlets that prove their sales are increasing, and it was a sound financial judgment to convert them to Halal in the areas chosen.

Nando’s has the advantage of being able to have Halal and non-Halal out-lets without any backlash from the public because none of the items on their menus are, or were ever, pork based. Distinguishing which ones are Halal is up to the individual however, it is not part of their branding. Smaller national Halal chains of restaurants have managed to grow in places such as Ma-laysia, UAE and even the UK as a small Halal only fried chicken chain easily identified by the Muslim consumer. However, none of these companies have managed to take the big step to creating an international chain of Halal only restaurants easily recognised by Muslims traveling the world.

One of the big stumbling blocks for international chains is the sourcing of Halal meat and poultry with trusted Halal certification, with high quality and consistent quantities available. KFC in the UK, also not only had the non Muslims complaining about not getting bacon on their burgers at the Halal outlets, but one of the UK Halal certifiers announced to the media because the poultry was stunned and not considered Halal by them. This is an ongoing conflict.

We have a long way to go before Halal certifiers agree on the stunning issue, so you can see with the delicacy of these issues in the West, also involving animal rights activists, why creating an inter-national chain of Halal res-taurants is something one has to think through thor-oughly, and take expert advice on, before proceeding.


National Commercial Bank

Samba Financial Group

Al Rajhi Bank

Riyad Bank

Banque Saudi Fransi

Saudi British Bank

Arab National Bank

Saudi Hollandi Bank

Saudi Investment Bank

Bank Al Jazira

Bank Al Bilad

Al Inma Bank

Figure 5: Saudi Franchising Banks

Source: Gulf Base

Emirates Bank

Gulf International Bank

National Bank of Kuwait

Bank Muscat

BNP Paribas

Deutsche Bank

Figure 6: Franchise banks around the world

Source: Gulf Base

Top 10 Franchises in Islamic Finance and Banking

BarCap Barclays Capital- Franchises in 1. SukukNoor Takaful- For products and services 2. franchising TakafulDubai SME- Company to distribute and 3. promote Takaful products to franchisesDubai Islamic Bank- Offering numerous 4. franchising opportunities in Sukuk, Takaful and banking productsHSBC Amanah- Franchise for global bank-5. ing products/servicesCIMB Islamic Bank- Banking division fran-6. chises and products/servicesMethaq Takaful- Takaful provider for fran-7. chising Takaful products and servicesIslamic Bank of Asia- Offering lucrative 8. franchising of products/servicesAl Rahji Bank- Saudi based franchising of 9. banking products Jordan Islamic Bank- Winner of many 10. awards for franchising in banking divisions

Dubai SME teams up with Noor Takaful • (2011). CPI Financial. Retrieved from: http://www.cpifinancial.net/v2/News.aspx?v=1&aid=8203&sec=Islamic%20FinanceUnion National Bank and Methaq Taka-• ful Insurance Company sign Bancassur-ance agreement to launch new motor insurance scheme (2010). Retrieved from: http://www.methaq.ae/media-lounge/news5.aspxFranchising (2011). The Free Encyclo-• paedia Wickipedia. Retrieved from: http://en.wikipedia.org/wiki/FranchisingBusiness Management (2010). Global • Sukuk Market. Retrieved from: http://www.busmanagementme.com/article/Sukuk-surge/Dubai Islamic Bank (2011). Al • Sukuk. Retrieved from Al Su-kuk.com: http://al-sukuk.com/Actualites/201102/20110221DIB.phpCIMB Islamic (2011). Board of • Directors, CIMB. Retrieved from: http://www.cimbislamic.com/index.php?ch=is_au&pg=is_au_leaderinfo&ac=12&cat=bodIslamic Bank of Asia (2011). Islamic • Bank of Asia Names Toby O’Connor. Re-trieved from: http://www.islamicbanka-sia.com/news/2011/Pages/pr110503.aspxJordan Islamic Bank (2011). Jordan Info • About the Bank. Retrieved from: http://jordan-info.com/jordan_islamic_bank.htmAudi Saudi Arabia (2011). Growth • Drivers. Retrieved from: http://www.gulf-base.com/site/interface/SpecialReport/RAJHIBANK.pdfJ Bladd (2010). Al Islamic Plans to • Franchise Halal Food Chain. Retrieved from: http://www.arabianbusiness.com/al-islami-plans-franchise-halal-fast-food-chain-348550.htmlJ. Roberts (2011). Young, Muslim Con-• nected, Marketing Week. Retrieved from: http://www.marketingweek.co.uk/analy-sis/cover-stories/young-connected-and-muslim/3014934.article

References and Further Reading:

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pliant instruments in dealing with the lucra-tive business opportunities developed by the Halal brand.

Al Islami has made significant progress in advancing the franchising of the Halal brand and has plans to expand to the UK and France.

Al Islami first entered the European market in 2007 through a deal with UK food distributor 3663 First for Foodservice. The joint venture supplies meat products to the food industry, predominantly in the UK and France. Saleh Abdullah Lootah said “We’ll be launching in the UK and France shortly; either the end of 2010, or early 2011.

We’ll be offering the chain as a franchise… I think the French deal will be closing very soon.” Mohamed El-Fatatry, founder of inte-grated marketing agency, Muxlim, says the Muslim consumer is predicted to account for 30% of the world’s population by 2025. “Halal food brands need to learn from Islamic banks,” says El Fatatry.

“These banks are taking Halal mainstream by highlighting that Islamic banking is no different from mainstream banking, apart from having new ethical values.” There will be further scope for many investors to tap into unique and innovative Halal branding for franchising through Islamic finance.

The Top 10 Best Franchises in Islamic Fi-nance and BankingSo, after our analysis of the best franchising opportunities in Islamic finance what are the top 10 best banks or firms for franchises in Islamic finance and banking?

Global Islamic Finance Magazine has provid-ed you with information on the top 10 fran-chising firms and banks for all your Shariah compliant franchising needs. In addition we have explained the Shariah compliant prin-ciples of Islamic finance which will form the foundation for the success of your franchise.

There are numerous opportunities with pres-tigious Islamic financial companies around the world. However, the sector which proves to have the majority of opportunities is the Takaful insurance sector, which is the most successful in franchising Islamic insurance products and services. gif


gif Market Review

A Belgian academic and econo-mist launched a global network last December which included Islamic Finance lawyers to give legal advice in all aspects of Is-lamic Finance.

The project called Islamic Fi-nance Lawyers (IsFin) is based on macro-economic observa-tions that money today is mainly in the hands of Islamic financing investors, said Laurent Marliere, a professor in marketing and general manager of IsFin. In a statement from the Kuwait news agency (KUNA) he explained that there are two reasons for this, high price of oil and secondly the ethical issue.

“The Islamic banks have not been shaken by the credit crunch because they had no toxic products so they are also very strong,” he said.

“Islamic finance is fast growing area of fi-nance. Islamic finance is new to the west-ern world. It is going to grow. This is an area moving fast,” said Marliere who has written a dozen books on economics and has 20 years experience working with international law firms. Coming to the idea of Islamic fi-nance the Belgian academic replied that he had specific interest in the subject and he did a one-year course on Islamic finance. “I felt the gap in the market. There are only about a dozen global law firms that help Is-lamic investors do their legal expertise,” he explained.

“The most difficult aspect is to find lawyers specialising in Islamic finance in the western world. It is easy to find a specialist in Kuala Lumpur or Dubai but not here,” said the Bel-gian economist.

“If you seek a lawyer for example in Sweden on Sukuk (Islamic bond) investment it will be very difficult. But we have a specialised local lawyer who understand the technicality and culture of Islamic finance,” he asserted.

He said Islamic investors today are seeking more secure and stable investments so they seek investments in European countries like Sweden, France and Germany. In Europe Is-Fin have 15 large and reputed law firms as members. He gave as an example that their member in Spain, Cuatrecasas, has as their

clients the Spanish government and also Kuwaiti banks. Marliere stressed that “this is not a Euro-pean project. It is a world-wide project. We are now opening up membership for law firms in the Middle East and Asia,” he said.

Asked why the project is based in the Belgian capital he replied that Brussels is home to many large international law firms. Ines Wouters, a Brussels-based law-yer specialising in taxes and a partner in IsFin, told KUNA that one of the main obstacles in the development of Islamic finance is the tax issue.

“Islamic finance is something new and each country has dif-

ferent landscape related to regulations and taxes so the idea is how to implement in a particular landscape Islamic finance in order to make it effective,” she said. Wouters said they have organised seminars for law firms on Islamic finance in Brussels with the par-ticipation of scholars from the Muslim world and the West.

“The legal environment in Belgium is actually quite friendly and there are real possibilities to develop projects which are Shariah-com-patible either for Muslims but also for non-Muslims,” she noted. There is a big demand here in Brussels of Shariah-compatible prod-ucts and also how to organise business in Shariah-compatible way, she added. gif

Islamic investors today are seeking more secure and sta-

ble investments so they seek invest-ments in European countries like Swe-den, France and Germany

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BELGIUM ECONOMIC EXPERT SAYSIslamic Finance to Grow in the West

Source: GlobalIslamicFinanceMagazine.com


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The industry experts gave GIF magazine an exclusive interview about the largest dual-tranche global sovereign US dollar Sukuk. The dual-tranche consisted of US$1.2 billion five year 2.991% Sukuk-al-wakala certifi-cates and US$800 million 10 year 4.646% Sukuk-al-wakala certificates. The Sukuk cer-tificates were issued through Wakala Global Sukuk Berhad and received a rating of A- by Standard and Poor’s and A3 by Moody’s. Qudeer Latif and Gregory Man share their views with GIF magazine.

Qudeer Latif is the partner and global head of Islamic finance for Clifford Chance. He has experience working in London, Dubai and Riyadh and also practices covering ar-eas such as structuring and implementing Islamic instruments. Qudeer was actively involved in deals such as the US$1.25 bil-lion Sukuk-al-ijara for the government of Malaysia and he is recognised as a leading global Islamic finance lawyer. Global Islamic finance magazine also interviewed Gregory Man the senior associate at Clifford Chance, Hong Kong. He is part of the Capital Markets and Structured Finance team and has ex-tensive experience in areas such as conven-tional and Islamic Capital Markets, Securiti-sation and Structured finance. Gregory Man also has experience advising a wide range of issuers and arrangers in regions such as the Middle East, Europe and Asia.

What advice did you give to CIMB, Citi, HSBC and Maybank regarding the Sukuk? We advised CIMB, Citi, HSBC and Maybank as joint lead managers and joint book run-ners as to English law, which was the gov-erning law of the majority of the transaction documents. We also worked with them in documenting the transaction, including the Shariah structure.

How did your supporting partners such as Qudeer Latif and Debashis Dey contribute to the successful Sukuk? The transaction was led by partner Stewart Dunlop and senior associate Gregory Man in our Hong Kong office, with support be-ing provided by partners Debashis Dey and Qudeer Latif and a further team of associ-ates including Shauaib Mirza, Lauren Djedid

and Alekhya Prakash in Dubai. US securities law advice was provided by partner Craw-ford Brickley and senior associate Thomas Kollar in Hong Kong. In addition, a separate Clifford Chance team comprising counsel Anthony Oakes and senior associate James Booth also in Hong Kong provided advice to the delegate. It was only by utilising the Clif-ford Chance network and providing a truly global team operating across time zones in this manner that we were able to execute the transaction so successfully and in such a short timeframe.

How did the innovative Shariah structure develop? The development of the Shariah structure was an iterative process. We helped the joint lead managers to develop a Shariah-compliant structure which was acceptable to their respective Shariah Advisory Boards, met the requirements of the Government of Malaysia, was very innovative but which was also attractive to investors.

What are your thoughts on the success and challenges of the Sukuk?The transaction involved an innovative Shariah structure which had never been at-tempted by a sovereign issuer previously. It appeared that the structure was success-fully received in the market, which is some-thing which could not have been known until the transaction had been launched. One of the key challenges was for the lawyers to complete the documentation and for the joint lead managers and the government to complete the marketing of the transaction in what was a challenging timeline and made even more challenging by a backdrop of ex-tremely volatile market conditions resulting from concerns over sovereign debt in Europe at the time.

What are your thoughts on Clifford Chance being part of the largest dual-tranche glo-bal sovereign US dollar Sukuk and first glo-bal sovereign USD Sukuk?We believe that our work on this ground-breaking transaction reflects our standing as one of the leading law firms in the global Islamic finance market, which is something which has often been acknowledged by our

AN EXCLUSIVE ON THE LARGEST DUAL-TRANCHE GLOBAL

SOVEREIGN SUKUK ISSURANCE

Qudeer Latif

Interview with Clifford Chance’s head of Islamic finance, Qudeer Latif and senior associate, Gregory Man


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peers, competitors and clients. We once again demonstrated our ability and reputa-tion to be able to deliver and execute innova-tive and complex transactions, which often involve a cross border element, and in rela-tively short timeframes.

In addition, with the recent secondment of Gregory Man to Clifford Chance’s Hong Kong office, we now have execution capability for Islamic finance transactions on the ground in Asia as well. Because of this capability, we believe that the execution of Islamic finance deals from Asia will be a growing trend. When viewed with our existing and traditional ca-pability in the Middle East, Europe and the US, we therefore believe that we truly have a strong international presence in the Islamic finance market.

What impact did the largest dual-tranche global sovereign US dollar Sukuk have on the rest of the Islamic financial industry? The transaction represented a number of first:

first global sovereign USD Sukuk for • 2011first global sovereign USD Sukuk struc-• tured under the Shariah principle of Wakalalargest dual-tranche global sovereign • USD Sukuk ever issuedfirst 10-year global sovereign USD Su-• kuklowest absolute yield achieved by an • Asian sovereign for a new USD issu-ance

Given the number of firsts represented, the transaction was clearly innovative and, in our view, innovation and development in Islamic finance is a positive. We may see other issu-ers also attempt to do similar transactions to this in the future.

What aspects of English law did you advise CIMB, Citi, HSBC and Maybank? There was a requirement to develop a Sha-riah structure which would be enforceable under English law. The majority of the docu-ments are therefore governed by English law and are designed to create a contractual

relationship with the Government of Malay-sia which would have the same commercial effect as a conventional fixed income instru-ment like a bond.

Being one of the world’s leading law firms. What advice would you give to experts, in-stitutions, companies with in the industry about Sukuk? Islamic finance is becoming an important segment of the finance industry and is grow-ing globally. There will therefore no doubt be many opportunities out there for all parties. As a firm, we are also glad to be part of this global development.

How would you best characterise the cur-rent and potential demand for Sukuk in your part of the world? We understand that there is still liquidity and thus demand for Sukuk in both the Middle East and in Asian markets such as Malaysia. But, we have recently seen Sukuk become a global product, with Middle Eastern issuers tapping into markets in Asia and Asian issu-ers marketing their Sukuk to investors in the Middle East. In addition, we have seen many issuers, such as the Government of Malaysia issue their Sukuk to investors in the United States pursuant to Rule 144A of the US Se-curities Act of 1933. So long as an issuer structures its Sukuk to accommodate differ-ent schools of Islamic jurisprudence, it can therefore market its Sukuk internationally.

The Sukuk certificates were issued through Wakala Global Sukuk Berhad under the Wakala structure. Could you tell us more about the Wakala Structure? Pursuant to the Declaration of Trust entered into between the Trustee and the Delegate, the Trustee agrees to hold the Trust Assets upon trust absolutely for the Certificate hold-ers as beneficiaries in accordance with the provisions of the Declaration of Trust. Pursu-ant to the Share Sale and Purchase Agree-ments, the Share Sellers will sell and trans-fer to the Trustee the Original Shares, and pursuant to the Asset Sale and Purchase Agreement, the Lease Asset Seller will sell, transfer and convey to the Trustee the As-sets. Pursuant to the Lease Agreement, the Trustee in its capacity as lessor of the

Gregory Man


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Lease Assets (in such capacity, the “Lessor”) will lease the lease assets comprised of the Assets, as such assets may be repaired, refurbished, upgraded or replaced from time to time as a result of any Major Maintenance and Structural Repair and/or any Ordinary Mainte-nance and Repair or any substitu-tion in accordance with the Substi-tution Undertaking, in which case the parties to the Lease Agreement shall amend Schedule 1 (Assets) to the Lease Agreement to reflect any such substitution (the “Lease As-sets” provided however that “Lease Assets” shall not include any asset the title to which has been sold, transferred or otherwise conveyed to the Government of Malaysia un-der the terms of the relevant Trans-action Documents) to the Govern-ment of Malaysia, in its capacity as lessee of the Lease Assets (in such capacity, the “Lessee”).

The Lessee will pay the Rental on each Rental Payment Date.Under the Wakala Agreement, the Trustee will appoint the Government of Malaysia as the Trustee’s agent (in such capacity, the “Wakeel”) to perform certain Wakala Services in respect of the Lease Assets and the Shares. In addition, the Trustee will also appoint the Wakeel to, and the Wakeel will undertake to, purchase, either itself or through the Transaction Agent, for and on behalf of the Trustee, Commodities from certain suppliers which the Trustee will subsequently sell to the Government of Malaysia (as purchaser) pursuant to the Murabaha Agreement.

The Government of Malaysia will execute the Purchase Undertaking in favour of the Trustee and the Delegate pursuant to which the Government of Malaysia undertakes, provided that there has been no Total Loss Event in relation to the Lease Assets and fol-lowing receipt of an Exercise Notice from the Trustee, to purchase all of the Trustee’s in-terests, rights, benefits and entitlements in and to the Wakala Sukuk Assets at the Su-kuk Exercise Price specified in the Exercise Notice.

Where a Total Loss Event has occurred in re-lation to the Lease Assets, the Government of Malaysia undertakes, following receipt of an Exercise Notice from the Trustee, to pur-chase all of the Trustee’s interests, rights, benefits and entitlements in and to the Shares at the Share Exercise.

Price specified in the Exercise Notice. If, following the receipt of an Exercise Notice pursuant to the Purchase Undertaking, the

Government of Malaysia fails to pay all or part of the Sukuk Exercise Price or any De-ferred Payment Price, Murabaha Indemnity Amount or Wakala Indemnity Amount (as applicable) payable in accordance with the Murabaha Agreement or, as the case may be, the Wakala Agreement on the due date for payment thereof,

the Government of Malaysia shall ir-• revocably, unconditionally and auto-matically (without the necessity for any

notice or any other action) continue to act as Wakeel in respect of the Wakala Sukuk Assets, and

the Lease Agreement • shall be deemed to be extended for a period from and including the date on which the Sukuk Exercise Price or any Deferred Payment Price, Mura-baha Indemnity Amount or Wakala Indemnity Amount (as applicable) was due to be paid, but excluding the date on which such amounts are paid in full in accordance with the terms of the Purchase Undertaking and the Murabaha Agreement or, as the case may be, the Wakala Agree-ment. In such circumstances, the Lessor shall be entitled to receive the Additional Rental Amount in re-spect of such period.

Upon the occurrence of a Total Loss Event,

the Lease shall auto-• matically terminate and the Lessor will be entitled (in addition to any amounts payable pursuant to the Wakala Agreement, without double-counting) to any due and unpaid Rental up to the date on which the Total Loss Event occurred, and

the Certificates will be re-• deemed and the Trust will be dissolved by the Trustee on the date specified in Condition 10(c) (Capital Distributions of the Trust — Dissolution following a Total Loss Event). The Certificates will be redeemed in • accordance with the order of priority set out in Condition 6(b) (Trust —Appli-cation of Proceeds from Trust Assets) using the Takaful/Insurance Proceeds payable in respect of the Total Loss Event which are required to be paid into the Transaction Account by no later than close of business in Malaysia on the 30th day after the occurrence of the Total Loss Event and any Total Loss Shortfall Amount.

If a Total Loss Event occurs and an amount (if any) less than the Takaful/Insurance Cov-erage Amount is credited to the Transaction Account (the difference between the Taka-ful/Insurance Coverage Amount and the amount credited to the relevant Transac-tion Account being the “Total Loss Shortfall Amount”), then the Wakeel will pay the Total Loss Shortfall Amount directly into the Trans-action Account as soon as practicable and in any event by no later than the close of busi-ness in Malaysia on the 31st day after the Total Loss Event has occurred. None of the Delegate or Agents is under a duty or obliga-tion to determine or calculate the Total Loss Shortfall Amount or the Takaful/Insurance

The transaction involved an in-novative Shariah

structure which had never been attempted by a sov-ereign issuer previously. It appeared that the structure was successfully received in the market, which is something which could not have been known until the transaction had been launched

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Coverage Amount. Under the Redemption Undertaking, provided that a Redemption and Cancellation Notice has been served on the Trustee in accordance with the terms of the Redemption Undertaking, the Trustee undertakes to purchase from the Govern-ment of Malaysia the Malaysia Certificates held by the Government of Malaysia in con-sideration for the cancellation of the Malay-sia Certificates and

selling, transferring and conveying its • interests, rights, benefits and entitle-ments in and to certain Redemption Lease Assets to the Government of Ma-laysia (through the Federal Lands Com-missioner); and/or selling and transferring its interests, • rights, benefits and entitlements in and to certain Redemption Shares to the Government of Malaysia (through the Minister of Finance and/or the Federal Lands Commissioner); and/or payment of the applicable Redemption • Amount in accordance with the terms of the Declaration of Trust, these Con-ditions and the Redemption Undertak-ing.

The Trustee will execute the Substitution Undertaking in favour of the Government of Malaysia pursuant to which the Govern-ment of Malaysia has the right to require the Trustee to sell, transfer and convey on any Substitution Date all of the Trustee’s inter-est, rights, benefits and entitlements in and to the Substituted Lease Assets in consid-eration for the transfer and conveyance by the Government of Malaysia to the Trustee of the New Lease Assets (pursuant to a sale agreement).

The Government of Malaysia will be obliged to certify that the New Lease Assets are capable of being leased and are of a value which is equal to or greater than the value of the Substituted Lease Assets on the rel-evant Substitution Date. In order to effect

the substitution, the Trustee and the Govern-ment of Malaysia will enter into a sale agree-ment to affect the sale of the Substituted Lease Assets to the Government of Malaysia and the sale of the New Lease Assets to the Trustee.

Under the Wakala Agreement, the Govern-ment of Malaysia shall be entitled to substi-tute at any time and at its own discretion any Shares with replacement shares, provided that the replacement shares are in compa-nies that comply with the Eligibility Criteria and the value of such replacement shares when aggregated with the value of the re-maining Shares is not less than the Share Value and subject generally to the applica-ble provisions of the Wakala Agreement.

The Trustee will establish a transaction ac-count in London or the city in which the specified office of the Principal Paying Agent is located (the “Transaction Account”) in the name of the Trustee which shall be operated by the Principal Paying Agent on behalf of the Trustee for the benefit of the Certificate holders into which:

the Government of Malaysia will de-• posit all amounts due to the Trustee un-der the Lease Agreement, the Wakala Agreement; the Murabaha Agreement or the Purchase Undertaking, as the case may be, and the Delegate will deposit all the pro-• ceeds of any action to enforce the Trust Assets taken in accordance with Condi-tion 15 (Enforcement and Exercise of Rights).Pursuant to the Declaration of Trust, • the Trustee will declare that it will hold certain assets (the “Trust Assets”), con-sisting of:all of the Trustee’s rights, interest and • benefit (present and future) in, to and under the Wakala Sukuk Assets;all monies standing to the credit of the • Transaction Account;

all of the Trustee’s rights, interest and • benefit (present and future) in, to and under the Transaction Documents (ex-cluding any representations given to the Trustee by the Government of Ma-laysia pursuant to any of the Transac-tion Documents); andall proceeds of the foregoing (which are • held by it), upon trust absolutely for the Certificate holders pro rata according to the face amount of Certificates held by each holder in accordance with the Declaration of Trust and these Condi-tions.

What is the advantage of Sukuk compared to conventional bond? One of the main advantages of Sukuk as compared to a conventional bond is that it can be marketed to a wider investor base. Islamic investors will only be able to invest in an instrument which is Shariah-compliant and therefore cannot invest in conventional bonds. However, conventional investors can invest in both conventional bonds as well as Sukuk.

This increased demand can sometimes translate into pricing advantages for issu-ers. In addition, we have seen an increased demand for highly rated Sukuk over the last year and a half as there have not been that many highly rated issuers who have at-tempted to tap into the market. Those who have come to the market have therefore had access to relatively large sources of liquidity amongst Islamic investors in particular.

What are your views on the future of Su-kuk? The Sukuk market appears to be an in-creasingly important and developing market which is being used by corporates and gov-ernments around the world to raise funding. We hope that this will be a trend which will continue to develop. gif

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TAKAFUL (ISLAMIC INSURANCE): CONCEPT, CHALLENGES, AND OPPORTUNITIESAuthor: Safder Jaffer, Head of Takaful Practice of Milliman, DubaiFarzana Ismail, Consulting Actuary, Milliman, United KingdomJabran Noor, Consulting Actuary, Milliman, DubaiLindsay Unwin, Senior Consulting Actuary, Milliman, United Kingdom


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TAKAFUL (ISLAMIC INSURANCE): CONCEPT, CHALLENGES, AND OPPORTUNITIES

Abstract: Through desktop research, one can get a plethora of materials and papers on Takaful, but most tend to focus either on the fundamentals of Takaful or on Takaful models. Takaful is structured on the principles of sharing and pooling mortality/mor-bidity risk with other participants, It is seen as the Islamic counterpart of conventional mutual Insurance. Part 1 of this article will explore the key issues and challenges facing the world of Takaful and suggested areas where work is required to find solutions. Therefore this article is intended to provide useful reference material for practioners by summarising key aspects such as an overview of Takaful and the intricacies of the models

Keywords: Takaful Industry, Conventional Insurance, Practices, Takaful Operating Models

Muslims account for around 25% of the world’s total popula-tion, but despite rapid growth in recent years, insurance sales within

the Muslim population remain a small fraction of the total insurance market. Historically, the incompatibility between conventional insurance and key tenets of the Islamic faith has acted as a significant barrier to sales. These differences have led to very low penetration rates and have left many Muslims with little external protec-tion for their dependents or possessions.

The development of Takaful, which origi-nates from the Arabic verb ‘kafalah,’ which means ‘to help one another’ or ‘mutual guarantee,’ has been driven by a need to overcome these obstacles and create an insurance proposition that is fully compli-ant with Shariah (Islamic law).

It offers Muslims a valuable risk manage-ment tool and the first true alternative to conventional insurance in both the life and non-life sectors that is acceptable to the Muslim faith.

For non-Muslims, Takaful products poten-tially offer an alternative source of insur-ance protection—with different investment objectives, an approach to surplus distri-bution, and an oversight system with an ethical dimension. Hence in Malaysia, for example, non-Muslims account for more than 60% of the total Takaful premiums.

Market Size and OutlookWhilst Takaful started in 1979 in Sudan, it only gained momentum in early 2000 when the Malaysian government promoted it and significant growth was witnessed thereafter. The growth of Takaful has var-ied significantly from country to country and its success, or otherwise, has been largely dependent on the awareness and affluence of the local population, as well as on the robustness of the local regulatory framework. Hence the highest growth has been observed in places such as Malaysia (with its considerable awareness of Takaful and robust regulatory framework), whereas growth in the Middle East has only recently begun to take off.

Depending on the definition of Takaful, the currently quoted volumes in terms of premiums range from USD$1 billion to USD$5.6 billion. Although the exact size of the Takaful market has often been dis-puted, there is general acknowledgment of the rapid growth of the industry. In 2007, Takaful premiums in emerging markets grew by roughly 26% and accounted for 5% of insurance premiums written in Mus-lim countries. According to Takaful Re, a Dubai-based Retakaful company, Takaful premiums crossed the USD$3 billion mark in 2007 as seen in the table in Figure 2.

The projected Takaful written premium es-timates have often been debated by practi-tioners because of the wide range of num-bers published by various sources. There is difficulty in determining firm estimates


gif Takaful

of the total industry potential as there is a wide variety of Takaful definitions and cat-egorisation, as well as a lack of consistent and credible data. Oliver Wyman suggested in a recent study that the Takaful premium potential is at least USD$20 billion whereas Swiss Re in its annual Sigma report sees a potential of USD$56 billion.

Takaful premiums by 2015 are estimated to be in the range of USD$7 billion to USD$8 billion. Hence it is necessary to exercise cau-tion when analysing projected figures.

Takaful provides access to a large, relatively untapped market, in which insurance pen-etration hovers somewhere well below 2% of GDP, and its growth in the global market is expected to continue in the long term. Glo-bal estimates for the growth of the worldwide Takaful industry come in at 20% per year, far outstripping the 2.5% annual growth for con-ventional insurance premiums.

It is interesting to note that many Takaful providers have emerged largely unscathed from the financial crisis, as investments are commonly held in highly liquid assets, which is due to limited Shariah-compliant invest-ments.

Insurers considering entry to the Takaful market are better off assessing the markets and opportunities sooner rather than later. Targeted marketing and consumer educa-tion are essential to develop market aware-ness and established insurers can leverage their existing marketing and distribution platforms. The lack of a clear market leader in Europe and the UK means that insurers can take advantage of the challenges and opportunities present in a developing global industry.

Principles and Practices Un-derlying Takaful

Principles Underlying the Taka-ful IndustryThe Islamic Financial Services Board (IFSB), a self-regulated organisation in Islamic finances, produced a paper on governance (in December 2009) and defines Takaful as follows:

Takaful is the Islamic counterpart of conventional insurance, and exists in both Family (or ‘Life’) and General forms. Takaful is derived from an Arabic word that means joint guarantee, whereby a group of participants agree among themselves to support one another jointly for the losses arising from specified risks.

In a Takaful arrangement the participants contribute a sum of money as a Tabarru’ commitment into a common fund that will be used mutually to assist the members against a specified type of loss or damage. The un-derwriting in a Takaful is thus undertaken

on a mutual basis, similar in some respects to conventional mutual insurance. A typical Takaful undertaking consists of a two-tier structure that is a hybrid of a mutual and a commercial form of company – which is the Takaful operator (TO) – although in principle it could be a pure mutual structure.

Hence there is a recognition that whilst the current ‘Takaful’ concept and practice is in fact a hybrid of a mutual and commercial insurer, in principle it needs to move more towards a pure mutual structure. This will be analysed later when discussing the op-portunities and challenges of the Takaful industry.

There is a common misunderstanding that insurance or risk mitigation is not allowed under Islam, as Muslims believe that only God knows one’s future and faith. The fol-lowing conversation taken from the sayings of the Prophet Muhammad depicts an inter-esting message as to why Muslims should indeed reduce the risk of loss:

Prophet Muhammad asked a Bedouin who had left his camel untied, ‘Why do you not tie your camel?’ The Bedouin answered, ‘I put my trust in God.’ The prophet then said, ‘Tie up your camel first and then put your trust in God.’

Every society has risk management needs and, with the evolution of time, the meth-odologies also evolve. Almost 10 centuries before the advent of conventional insurance companies, the Muslim societies in Arabia adopted concepts of risk mitigation such as ‘hilf’ to assist victims of natural disasters or hazards of trade journey.

Another common practice widely used in Islam was ‘al-aqilah.’ Under the custom of ‘al-aqilah,’ it is mutu-ally agreed that, if a person is killed unintentionally by another person, the paternal relatives will take the responsibility to make a mutual contribution for the pur-pose of paying the blood money to the victim’s relatives. This practice of having a fund that pools contributions from a group of people to assist others in need is akin to mutual insurance.

It is important to point out that the mutual assistance was not originally a commercial transac-tion and did not contain any profit or gain at the expense of others. Rather it evolved as a useful so-cial practice to mitigate the bur-den of an individual by dividing it among fellow members.

Safder Jaffer, head of Takaful Prac-tice of Milliman

Safder Jaffer is a British-qualified actuary and holds an MA degree in Islamic Economics with thesis on Islamic Banking. He specialises in

takaful (Islamic Insurance) and cur-rently heads the Takaful Practice of Milliman, based in Dubai. Previous to his role in Milliman, Safder Jaffer led Swiss Re’s Family Takaful Solu-tions based in Zurich he was instru-

mental in helping to set-up Swiss Re’s Takaful Branch in Malaysia.

Source: Takaful Re

(USD$ MILLIONS) 2004 2005 2006 2007

GCC 770 1,238 1,579 2,046

SAUDI ARABIA 645 1,065 1,340 1,695

KUWAIT 54 83 90 124

UAE 31 42 65 109

QATAR 25 34 50 76

BAHRAIN 15 15 34 59

SOUTH EAST ASIA 474 544 692 951

MALAYSIA 343 412 534 797

INDONESIA 77 75 80 94

THAILAND 30 30 32 35

BRUNEI 24 27 30 35

AFRICA 121 181 215 317

LEVANT 14 17 21 32

INDIAN SUB-CONTINENT 5 8 11 18

TOTAL 1,384 1,988 2,518 3,364

Figure: 2


gif Takaful

There are certain key issues within conven-tional insurance that Islam does not permit: There is a further focus in Takaful (and in Islam in general) around the importance of moral values and ethics as business is meant to be conducted openly in accord-ance with the utmost good faith, honesty, full disclosure, truthfulness, and fairness in all dealings.

It is not within the scope of this article to look into the Shariah matters in depth as there is a diversity of opinion on the exact princi-ples of Takaful. There are some schools of thought within Islam that allow conventional insurance so long as it does not involve Riba (or usury) whilst others have a range of toler-ance with some of the key issues mentioned above.

However, by and large, there is broad con-sensus on the solution to these issues. This emerged in the late 1970s in Sudan, but gained more prominence in the 1980s in Malaysia and the Persian Gulf countries in the form of Takaful.

Takaful can thus be seen as the Islamic counterpart of conventional mutual insur-ance (i.e., insurance that is compliant with the Shariah). Takaful is not a type of insur-ance but rather an alternative to insurance. It has to operate on cooperative principles and incorporate the concept of Tabarru’ (do-nation, gift).

Instead of paying an insurance premium, Takaful participants (policyholders) donate their Takaful contribution to a common pool to mutually assist the members against a defined loss or damage. It is a one-way transaction which does not expect a defi-nite return on the donation, unlike the more traditional bilateral conventional insurance contract where a premium is paid in return for an insurance benefit.

The pooling does eliminate Gharar, as the uncertainty about future claim events cer-tainly still exists but now is acceptable as the donation (Tabarru’) is meant for mutual assistance and not for profit-taking or gam-bling (contracts of charity are not affected by the prohibition of Gharar).

However, unlike conventional insurance where the risk is transferred to the insurer, all participants mutually share the risk in Takaful, which is an important fundamental difference.

The concept of Shariah (Islamic law) compli-ance is an evolving one and is overseen by the Islamic scholars that sit on the Shariah Supervisory Board, which provides the final certification of compliance. The scholars base their views primarily on the principles

of the Quran, supplemented by Sunnah (the teachings of the Prophet), Fatwas (judicial opinions of Shariah scholars), and Islamic jurisprudence on economic transactions.

While the words of the Quran and Sunnah are sacrosanct, the independent reasoning of Shariah scholars can be revoked or adapt-ed to suit changing circumstances, and new developments are dealt with by legal reason-ing and judgment of Shariah scholars.

This creates a moving goalpost, which is one of the challenges in the Takaful industry. Takaful provides Shariah-compliant solutions to the prohibited concepts with conventional insurance while still protecting against un-certain events in return for a commensurate fee. The mutual guarantee offered by Taka-ful is centered on a transparent, ethical, and Shariah-compliant agreement between the operator and participants.

Practices in the Takaful IndustryThis section provides an overview of the components and current practices in the Takaful industry, including:

Practices within Family Takaful (Life) • and General TakafulShariah-compliant assets• Retakaful• Retro-Takaful•

Family Takaful (Life) and General Takaful As introduced above, conventional insur-ance as sold in Western markets is funda-mentally irreconcilable with several tenets of the Islamic faith. In terms of life insurance, Shariah scholars view these contracts as a gamble on the insured’s life.

There is uncertainty surrounding when and if death will occur within the covered period, and in the event that no claim is made the policyholder is considered to have made a loss.

For Muslims, this incompatibility rules out traditional life insurance as a means of obtaining protection for their dependents. Family Takaful offerings provide access to life coverage in a manner which does not conflict with their religious beliefs.

Takaful is structured around the core princi-ple of sharing and pooling mortality/morbid-ity risk with fellow participants rather than transferring it to a profit-oriented corporate entity. The concept of mutual support allows many parallels to be drawn between Shari-ah-compliant Takaful operations and mutual insurers.

However, unlike mutual insurers and friendly societies, current Takaful operations involve shareholders who have a profit motive, who provide the capital and fund the administra-tion of the risk pool, and who are separate from the participants. Hence, Takaful opera-tions can be viewed as Shariah-compliant commercialised mutual insurance opera-tions. This structure of necessity is due to the need for capital and creates another set of challenges.

Similar to the concept of with-profits prod-ucts sold by mutual insurers, Family Takaful is designed to combine protection for the benefit of one’s dependents with a savings element and requires the distribution of sur-plus to participants. However, the require-ment of transparent disclosure of charges makes Family Takaful contracts akin to the clear charging structure underlying a unit-linked insurance contract.

Current practice is to develop Shariah-com-pliant variants of conventional insurance products. Family Takaful variants of most common life products, including level and decreasing term assurance, savings and re-tirement plans, and critical illness coverage, have been successfully launched in various markets.

Farzana Ismail, Consulting Actuary, Milliman

Farzana Ismail is a Consulting Actu-ary with Milliman based in London

since 2004. She has authored various articles and is a regular

speaker at industry conferences on the areas of longevity risk, Solvency

II and Takaful. Since 2009, she has led the development of family

Takaful offering in Milliman London, working closely with the Dubai of-

fice. She is a Fellow of the Institute and Faculty of Actuaries and has written a thesis on a comparative study between conventional insur-ance and takaful for her Masters

degree.


gifTakaful

For example, a direct contribution style of savings scheme offering equity exposure could be developed by limiting investment to stock issued by companies that meet the non-Haram or Halal (lawful) requirements. Even product designs, such as annuities and whole life plans, whose inherent features in-clude an uncertain duration, are currently being considered as Takaful offerings.

A consequence of mutuality, voluntary contri-butions, and absence of third parties (such as the insurer in conventional insurance) to share in the risks is that Family Takaful con-tracts cannot (or do not) offer guarantees to the participants. Guarantees on investment returns, bonuses, risk charges, or premiums, etc., are not offered under Takaful products.

While Takaful practice allows the spread of risk through reinsurance from Retakaful companies, or conventional reinsurers on a necessity basis, this practice is not to allow guarantees as the reinsurance pool is seen as an extension of the primary risk pool. Ac-cordingly, investment returns on contributed funds by the participants are based on ac-tual investment experience.

However, the Takaful operator is obligated to advance a loan (qard), on an interest-free basis, to support any shortfalls in the risk pool in meeting claims. This implicit guaran-tee of underwriting risk by shareholders of the Takaful operation creates some weak-ness in the current commercial model of a Takaful operation. Commonly, while there are no guarantees, there are expectations established at point of sale through product illustrations.

However, the concept of mutual assistance does not prohibit the use of underwriting and prospective pricing based on experi-ence studies. As with conventional insur-ance, if the health of a potential participant would result in significant additional strain being placed on the underwriting fund then an extra contribution would be required.

The prohibition of interest-bearing instru-ments does not impact on the use of interest functions in pricing or valuation of long-term liabilities in Takaful. The pricing interest as-sumption is based on expected returns from Shariah-compliant assets underlying the li-abilities.

In terms of surplus distribution, any distri-bution made to participants is based purely on actual surplus arising. As long as the underwriting fund is not in deficit, surplus arising from both investment and underwrit-ing activities can be used to make a cash payment to participants and/or contribute to any claim fluctuation reserve. The latter is set up to cover short-term volatility in the

size and incidence of payments out of the underwriting fund.

As with regular bonus declarations on con-ventional with-profits contracts in the UK, surplus distributions, if any, are most com-monly made on an annual basis. Partici-pants in a Takaful operation will need to be appropriately and comprehensively educat-ed on this feature of the product design so that reasonable expectations are built up as to the level of distribution.

Shariah-Compliant AssetsThe avoidance of Riba, Gharar, Haram, and Maisir in the design of Takaful products has a significant impact on the investment deci-sions of a Takaful operation. Contributions must be invested purely in Shariah-compli-ant assets, i.e., assets that are non-interest-bearing and whose returns are not derived from activities considered unethical.

Haram or forbidden investments in Islam include financial derivatives such as futures and options, interest-bearing bonds, and eq-uity issued by companies partaking in non-Halal business activities as described ear-

lier. The development of the Sukuk market and a robust Shariah-compliant stock selec-tion process together offer Takaful providers an increasingly viable solution to this invest-ment conundrum.

Shariah law forbids loan issues that are at a discount to their nominal value and, as already discussed, completely restricts the earning of interest (Riba). These two condi-tions effectively rule out conventional corpo-rate or government bonds.

The expanding Sukuk market offers access to an asset class which shares some prop-erties with conventional bonds and others with equity stock, whilst remaining Shariah-compliant.

Regular Income Assets: Sukuk are issued via the creation of a special purpose vehi-cle (SPV) by an issuing bank that has been approached by a company or government seeking funding for a particular project. Su-kuk certificates are then issued in return for an investor’s funding contribution, and rank alongside the bank’s other senior, unse-cured debt.

Sukuk instruments are structured to provide a direct link to the assets that underlie the particular project and through this link con-fer shared ownership of these assets to the investor. Investors then receive a regular in-come based on a target rate of return.

Neither this income nor the return of capi-tal on maturity is guaranteed and both will typically vary in line with the revenue of the company (or equivalently the return on or value of the underlying assets). This poten-tial variance is partially offset by the ability of the Sukuk manager to build up reserves when revenue exceeds the target rate, which can be subsequently used to make up short-falls.

Sukuk provides the Takaful market with a legitimate investment alternative to govern-ment and corporate bonds. Several issues surround these Sukuk, such as availability, control, and ownership. These issues impact their overall effectiveness in supporting long-term liabilities, especially income annuities.

Equities: A Takaful operator does not need to seek an alternative investment in order to gain exposure to equity-type risk and re-turn. Equity stock does not pay interest and offers direct participation in the profits of a listed business whether through dividends or growth in the price of the stock. However, restrictions do exist in relation to the type of company a Takaful operator may invest in to remain Shariah-compliant. To gain ex-posure to equity returns Takaful operators or their investment managers must apply

Lindsay Unwim, Senior Consulting Actuary, Milliman

Lindsay is a Senior Consulting Actu-ary with Milliman based in London. She joined Milliman in 1987. She has over twenty years experience working with mutuals and friendly

societies in the UK and holds a number of Actuarial Function

Holder, With-Profits Actuary and Ap-propriate Actuary roles. Since 2009

she has been an integral part of Milliman’s family Takaful offering, working closely with the Milliman

Dubai office. She is also a Fellow of the Institute and Faculty of Actuar-ies and holds a Practising Certifi-

cate (including with-profits).


gif

a screening process to eliminate stocks of companies that are exposed to forbidden industries or breach certain financial condi-tions. The industries deemed to be non-Sha-riah-compliant include banking, insurance, gambling, and those linked to pork, alcohol, or tobacco.

The financial screening looks at key financial ratios of a particular company, such as con-ventional debt ratio and the sum of the in-terest and non-compliant income compared to total revenue. Where these ratios exceed limits laid down by a company’s Shariah Supervisory Board, the equity issued by the company in question is excluded from per-missible investment.

This screening is a continual process, as the evolving nature of a firm’s business practic-es and capital structure mean that its status as either compliant or non-com-pliant is not static. Real Estate and Mortgages: Although there are Shariah-compliant forms of investments in real estate and mortgages, these are currently under-utilised but have signifi-cant potentials.

RetakafulBy entering into a reinsurance contract, conventional insurance companies are able to share risk, gain capital support, or ben-efit from a broader base of expe-rience in areas such as pricing, underwriting, and claim man-agement. Historically, Takaful operators have sometimes also had to make use of conventional reinsurance owing to the lack of a Shariah-compliant alternative—this exception was based on the ‘dharura’ or necessity principle.

The growth in the Retakaful mar-ket offers a solution to this prob-lem. Retakaful provides these same facilities to Takaful opera-tors but within a structure that remains Shariah-compliant and in a manner specifically tailored to the particulars of the Takaful market.

In the same way as Takaful pro-vides a vehicle for participants to provide support to and share their own risk with a pool of other members, Retakaful al-lows Takaful funds to share risk among multiple Takaful pools. In this regard, the operation of a Retakaful fund is very similar to that of a direct Takaful fund. A Retakaful fund must have a

Shariah Supervisory Board and the criteria it must satisfy to be considered a Shariah-compliant mirror those to which a Takaful fund must adhere.

The Retakaful fund receives contributions from each participating Takaful fund and distributes back surplus arising from invest-ment and underwriting activities using one of the models described later in this report.

Further, if the Retakaful fund goes into defi-cit then the Retakaful operator is required to make an interest-free loan or Qard Hasan to the fund to eliminate this shortfall. Re-Takaful operators may not pay commission to a Takaful fund with which it is engaged.In recent years there has been a significant growth in global Retakaful capacity, owing to major reinsurance companies such as Swiss Re, Hannover Re, and Munich Re entering

the market. Their entries will help facilitate further expansion of the Takaful market, and the capital support and depth of advice that these players can offer will be invaluable in setting up an operation, wherever the cho-sen market.

Retro-Takaful Some Retakaful operators retrocede con-ventionally on the ‘basis of necessity’ be-cause currently there is limited Retro-Takaful capacity available. There is talk of a Lloyd’s syndicate for Retakaful players that would imply retro ceding each other’s business to reduce volatility and provide the spread of risk, but this has yet to materialise.

Takaful Operating Models’The basic structure of a Takaful scheme involves the policyholders or participants enlisting a Takaful operator to perform the

necessary investment and under-writing roles.

Family Takaful, the Shariah-com-pliant equivalent of life insurance, is commonly structured so that a participant’s contributions are apportioned between two segre-gated funds: the investment fund and the underwriting fund. An in-dividual (investment) account is maintained for each participant with the contributions made, net of any upfront fees.

From this account, risk charges are deducted to be deposited into the pooled underwriting fund. Contributions paid into the under-writing fund are considered to be made on the Tabarru’ basis, to support all participants in their exposure to mortality/morbidity risk. Any covered claims suffered by the participants are paid from the underwriting fund to avoid the transfer of risk.

The sharing of risk with fellow participants is in contrast to full or partial transfer of the risk to a proprietary company. This also means that if the underwriting fund is insufficient to pay claims then no recourse can be made to shareholder assets.

However, in practical terms, to pre-vent closure of the fund, the defi-ciency is covered by a temporary interest-free loan (Qard Hasan) provided by the Takaful operator. This would be repaid from future surpluses arising within the un-derwriting fund. Nevertheless, this arrangement acts as a strong

Riba, or usury The first of these is the earning of interest, referred to in Islam as Riba. It is a concept expressly prohibited at several points in the Quran. Tradition-ally viewed from the perspective of a loan, Riba is considered unfair and inequitable to the borrowing party and therefore earning interest is forbidden under Shariah law and Muslims must avoid Riba in all of their financial transactions.

Gharar, or uncertainty

The second element is the presence of uncertainty embedded in the design of conventional insurance products. Uncertainty and the trading in risk are classed as Gharar, a concept forbidden in Shariah law to protect participants from hazardous or unjust transactions. Conventional insurance is designed around the transfer of risk in return for a premium, and the timing, severity, and/or frequency of insured events are each subject to varying degrees of uncertainty. The perception that insurance products commonly contain unclear contract terms furthers the view that a high level of uncertainty pervades all aspects of conventional insurance.

Maisir, or gambling

Related to Gharar is the concept of Maisir, also prohibited under Islam, which captures those transactions with an underlying gambling or specula-tive nature. In the context of life insurance, many contract designs can be viewed as gambles which ul-timately benefit one side of an insurance contract at the expense of the other. For example, by taking out a term assurance contract, the risk is transferred to the insurer for a fixed premium and the payment of a small sum could potentially yield a disproportion-ately large payout, benefiting the policyholder at the expense of the insurer. Alternatively, the payment of a stream of premiums for many years could result in no return at all, which benefits the insurer.

Haram, or forbidden

Conventional insurance designs may have invest-ments in a number of asset classes that partake in activities prohibited within the Muslim faith, such as investments in alcohol-related companies, pornography, or gambling-related enterprises such as casinos. Such activities are considered Haram or forbidden in Islam, and consequently, the proceeds of the conventional insurance are also deemed to be unacceptable in the Muslim faith.

There are certain key issues within conventional insurance that Islam does not permit:

Takaful


incentive for operators to properly manage the fund, thereby limiting the possibility of making future loans.

Takaful is most commonly structured using the following models:

The Mudarabah model: This is a ‘Propri-• etary’ or ‘Partnership’ model that con-siders the Takaful operator as a busi-ness partner with the participants. It is structured on classic profit-sharing prin-ciples, i.e., a partnership model where the participants provide the capital, while the Takaful operator provides ex-pertise and management of the Takaful fund. A contract details how underwrit-ing surplus and investment profits are shared between operator and partici-pants, similar to conventional insurance (with-profits or participating business). The Takaful operator shares in the in-vestment and underwriting surpluses via a predetermined ratio mutually agreed with the policyholders at outset. Neither the operator nor the participant can unilaterally alter this agreed shar-ing ratio, which is usually explicitly set out in the contract at outset. From the perspective of the participants, they do not contribute directly to the operator’s costs and all contributions are effec-tively available to meet claims. Corre-spondingly, the operator can generally only expect to make a profit by ensuring that the expenses of managing the op-eration are less than the total share of investment profit and/or underwriting surplus it may receive. If the underwrit-

ing fund runs into deficit then the op-erator is obliged to provide an interest-free loan or Qard Hasan, to be repaid once the fund is in surplus.

The Wakala model: This is an ‘Agency’ • model that treats the Takaful operator as an agent of the participants tasked with the administration of the Taka-ful fund, for which it is compensated through a fixed fee. The operator does not share in the risk nor in the surplus generated from the two funds (invest-ment and underwriting) but instead receives a fixed up-front fee (commonly a percentage of contributions paid) to cover management expenses, distribu-tion costs—including intermediaries’ remuneration—cost of capital, and a margin for operational profit. This fee must be pre-agreed and is commonly expressly stated in the contract. This fee can vary by product and some contracts can change over time. Competitive con-sideration predominates in the setting of the level and structure of this fee. On the whole, the operator will be profit-able if the fee it receives is greater than its incurred expenses. Theoretically, the Takaful operator bears no insurance risks itself. The risk-bearing is seen as a process of solidarity between partici-pants and takes place solely among the collective of insured persons (therefore the name ‘joint guarantee’). However, due to the obligation to make up for any deficits in the pooled underwriting fund, the insurer is indeed exposed to a non-negligible insurance risk: it might not

CONVENTIONAL INSURANCE TAKAFULA risk transfer mechanism whereby risk is transferred from the policyholder (the insured) to the insurance company (the insurer) in consideration of an ‘insurance premium’ paid by the insured.

Based on mutuality; hence the risk is not transferred but shared by the participants, who form a common pool. The company (takaful operator) acts only as the manager of the pool. In effect, the policy-holders are both the insurer and the insured.

Contains the element of uncertainty, i.e., Gharar, which is forbidden in Islam. The terms of the contract are unclear as to certainty of when any loss would occur and how much compensation would be payable.

The element of uncertainty, i.e., Gharar, is brought down to ac-ceptable levels under shariah by characterising contributions as donations (Tabarru’), not obligations, and for a good cause, i.e., To mitigate the loss suffered by any one of the participants, as opposed to payments linked to definite expectation of insured benefits to be received.

Contains an element of gambling, i.e., Maisir, in that the insured pays an amount (premium) in the expectation of gain (compensation/payment against claim). If the anticipated loss (claim) does not occur, the insured loses the amount paid as pre-mium. If the loss does occur, the insurer loses a far larger amount than collected as premium and the insured gains by the same.

The participant pays the contribution (Tabarru’) in the spirit of ne’ea (purity) and brotherhood to cover mutual losses of members of the pool. Losses and gains are mutually shared by the pool members who contribute to the pool. That is, third parties (insurers or reinsurers) are not affected by the outcome of risk events.

Funds are mostly invested in fixed interest-bearing instruments such as bonds, fixed interest securities, etc. Hence these contain the element of riba (usury), which is forbidden in Islam.

Funds are only invested in non-interest-bearing, i.e., Riba-free, in-struments. Note that regular income investments are still possible (such as under Sukuk, islamic bonds) as long as the income is not interest-based.

Surplus or profit belongs to both the shareholders and the with-profit policyholders. The insured is covered during the policy period but is not entitled to any return at the end of such period.

Surplus belongs to the participants and is accordingly returned to them.

Figure 3: Summary of the key differences between conventional insurance and Takaful

Jabran Noor, consulting Actuary, Milliman

Jabran is a consulting actuary in Milliman’s Dubai, UAE, office serv-

ing the Middle East, Africa, and South Asia. He joined Milliman in May 2009. Jabran has more than 13 years experience in the insur-ance industry with roles spanning life and non-life insurance compa-nies. His current areas of focus are life insurance and enterprise risk

management. Jabran is a Fellow of Society of Actuaries (USA), Fellow of the Institute and Faculty of Ac-

tuaries (UK) and Professional Risk Manager.

gifTakaful


be able to recuperate a Qard Hasan if insufficient surplus is generated over time. Furthermore, no interest can be charged on the outstanding loan, but this is one of the very intrinsic princi-ples of Islamic finance that has to be strictly followed. In reality, therefore, the Takaful operator under a Wakala model bears more risk than the design-ers of the model may have intended. In the extreme, the underwriting fund can be underfunded to create perpetual deficit in the fund thus making it the responsibility of the Takaful operator to be at risk perpetually.

In the 1980s, in a pioneering Takaful regu-latory development in Malaysia, scholars initially accepted the more commercial Mudarabah model. However, recently there have been concerns raised by scholars that Mudarabah may not be appropriate be-cause of the fact that Takaful is supposed to create a ‘surplus’ and not ‘profits,’ and underwriting surplus is prohibited as this arises from insurance risk.

Therefore the element of profit-sharing of underwriting surplus by the Takaful op-erator within the Mudarabah model is deemed to be not Shariah-compliant. The pure Mudarabah model seems more akin to a business venture rather than a mutu-ally based contract based on solidarity of its participants, which would imply that the Tabarru’ is working capital and is arguably not in the spirit of a donation. Furthermore, the relationship between policyholders and operators lacks transparency.

The development of Takaful in the Middle East took shape later in the 1990s, with the popular preference towards a Wakala model. The Wakala (agency) framework emerged as the dominant model, and Ma-laysian scholars have moved in favour of this model too.

However, in late 2004, some scholars—par-ticularly those in Pakistan, Bangladesh, and South Africa—began to highlight deficien-cies with the Wakala approach.

As a result of the recent findings in the Taka-ful industry, there have been many varia-tions of Mudarabah and Wakala developed by practitioners to address the limitations. The variant Takaful models considered in this section are:

Variant Mudarabah model: A variant of • the pure Mudarabah model would be to limit the profit-sharing element such that it is only applied to the investment portion, which would then be fully in line with Shariah. However, this model

might not be commercially viable as it is likely that the income generated from the investment portion will be insufficient for the Takaful operator. Another variant of this model would be to charge the operating expenses directly from the Takaful fund instead of funding it from the shareholders’ fund (i.e., the underwriting result is net of Tabarru’, claims, Retakaful, reserve adjustments, and operating expens-es). The type and amount of expenses charged to the fund should be laid out to the participants in a transparent manner, although there are concerns about the type of expenses that can be charged to the fund. With the Mudara-bah model, there is also the difficulty in managing fixed expenses alongside a variable and potentially volatile sur-plus, although this feature indirectly encourages the efficient management of the Takaful operation. However, given the many commercial challenges facing the pure and hybrid Mudarabah models, many Takaful operators have opted for the Wakala structure.

Wakala with incentive fee model: Crit-• ics of the pure Wakala model cite the lack of incentives for the operator to manage the Takaful fund efficiently as the operator does not share in any profits. The operator’s income is a fee, which is based on turnover (i.e., Taka-ful contributions). Therefore, the Taka-ful operator may be driven to write large amounts of new business without due regard to proper underwriting or claim management (although to some extent this action is deterred through the commitment of an interest-free loan or Qard). To encourage the opera-tors to apply appropriate underwriting and investment approaches, some op-erators have adopted a Wakala model with incentive compensation, where the Wakala fee is adjusted (upwards) in the instance of an underwriting and investment surplus. This performance-related fee would not be permitted un-der a pure Wakala model though the Accounting and Auditing Organisation for Islamic Financial Institutions (AAO-IFI, the self-regulatory body) recognise that an incentive fee is permissible.

Wakala Mudarabah model (hybrid): • This is the most popular model today for Family Takaful operators, where a Wakala is applied on the underwriting fund and a Mudarabah on the invest-ment profit. Specifically, the operator charges a Wakala fee from the Taka-ful contributions and all underwriting profits are distributed back to the par-

gif Takaful


gifTakaful

ticipants. However, investment profit is shared between the participants and the operator based on a predefined ra-tio. There is an appeal within this model as investment profits are usually the major source of income for Takaful op-erators, whereas underwriting results can easily be managed using quota share Retakaful arrangements.

Wakala with Waqf model: The main is-• sue in the pure Wakala model is that the element of Gharar (uncertainty) is not fully eliminated because the con-tribution (treated as a ‘donation’) re-mains in the participant’s ownership and is effectively a ‘conditional’ dona-tion. Hence the participant can expect to receive the surplus back, which therefore becomes a conditional gift. However, there is uncertainty about the level and timing of the surplus it will receive. Secondly, there is a rela-tionship between the participant and operator and another amongst partici-pants (exchange of gift for a gift). This creates doubts on the Wakala contract as a contract of compensation. The re-lationship of the Takaful operator with the participants is ambiguous because none of the participants are liable for the repayment of the outstanding loan. To overcome these concerns, Pakistani scholars developed the idea of a hybrid Wakala-Waqf model to remedy some of these inherent disadvantages.

This model requires the setting up of a Waqf (endowment-trust or independent pool) that becomes the nucleus for the relationship between the participant (donor) and the operator (i.e., both have obligations towards this trust). A Waqf is a well recognised Sha-riah entity which has the ability of accepting ownership or appointing ownership of asset. The objective of the Waqf is to provide relief to participants against defined losses as per

the rules of the Waqf fund. By setting up a Waqf, the following advantages are derived:

The relationship of participant and op-• erator is with the Waqf fund (i.e., ambi-guity removed)

Donation of participant to the Waqf is • unconditional (Gharar removed)

Operator can be a Mudharib (or manag-• er) of the investments of Waqf and can share in the investment profits

Contingency reserves within the fund • may be set up

Cross-subsidy of various generations of • policyholders is permissible

Surplus distribution can be predefined • on a variety of criteria with the primary condition that the operator does not get any share as a Wakeel (or representa-tive) to the Waqf fund

Currently this model is widely used in Paki-stan and South Africa, and has also been adopted by the Swiss Re Retakaful branch in Malaysia.

Which Model to ChooseAn operator can choose any of the above-stated models but the choice depends on many factors, such as the target population, regional acceptance, Shariah board views, regulatory framework, product design, mar-keting, and pricing. As outlined above, the most common models are the Wakala and Mudarabah model or a hybrid of both:

Mudarabah model is less acceptable glo-bally but perhaps more attractive as profit is shared with the policyholders. However, there is a strong opinion of scholars from especially the Middle East that underwrit-ing profit cannot be shared with the opera-

tor as it stems from donations. The Wakala model is by far the most recognised and has the positive effect of providing a fixed and steady income stream. However, in its pur-est form it has limited upside potential as the only source of income is the Wakala fee. This could harm competitiveness as a high up-front Wakala fee might look unattractive to participants and have adverse effects to new entrants because of the high initial costs.

There has been an increasing trend towards the hybrid model which is based on the ap-plication of the Wakala model for the under-writing portion and the application of the Mudarabah model for the investment part.

Considering that investment income usually makes up the bulk of the profits, this model is viewed by many Takaful operators to be commercially viable. This is widely practiced in the Middle East and Malaysia and accept-ed by virtually all scholars across the world. The AAOIFI has also endorsed hybrid ver-sions of Wakala models.

In all models, although not mandated by Shariah, the Takaful operator is commonly expected to provide an interest-free loan in case of a deficit in the underwriting pool. This expectation requires careful risk man-agement techniques as there is uncertainty in terms of the amount and timing of the loan to be repaid from future surplus arising. Part 2 of Takaful (Islamic Insurance): Con-cept, challenges and Opportunities will give an overview of the issues and challenges facing the Takaful industry such as the lack of consumer awareness, the lack of Shariah scholars with experience and the Issues In the choice of Takaful models. The article will also look into finding sustainable solutions to some of these challenges.

International Cooperative and Mutual Insurance Federation (2010). Takaful glossary. Retrieved Sept. 3, 2010, from: http://www.Takaful.coop/index.• php?option=com_definition&Itemid=20.Certificate in Islamic Finance and Banking. Glossary of terms and contracts. Book Two: pp. 2-13. Retrieved Sept. 3, 2010, from: http://www.cimaglo-• bal.com/PageFiles/360530223/Glossary.pdf.Islamic Finance Qualification – The Official Workbook Edition 3 (2009).• Swiss Re (2008). Insurance in emerging markets. Sigma, No. 5.• Ernst & Young (2008, 2009). World Takaful Report.• Presentations at the World Takaful Conference, Dubai, UAE (2008, 2009).• Presentations at the International Takaful Summit, London, UK (2008, 2009).• Financial Services Authority (2007). Islamic finance in the UK.• Usmani, Mohammed Taqi (2007). Introduction to Islamic Finance.• Wong, K. (2007). Risk-based capital framework for insurers in Malaysia.• Central Bank of Bahrain (2007). Insurance Rule Book.•


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The unparalleled growth of Islamic finance in non-Muslim countries has defied all the stereotypes which claim that its growth ex-ists only in Muslim countries. The Islamic financial system, which is cooperative and risk sharing, provides the impetus for the entrepreneurial activities in many coun-tries. India - the largest democratic country in the world, and a kaleidoscope of differ-ent cultures - has recently seen resurgence in Islamic financial activities. Last year during a visit to Malaysia, a country with a fully fledged Islamic banking system, Prime Minister Manmohan Singh announced that he would ask RBI to investigate demand for the establishment of Islamic banking in India. Pressure has been mounting on RBI to introduce Islamic banking, a unique interest-free banking system, in the country. The move could bring in billions of dollars in investment from countries in the Middle East.

Though, no fully fledged Islamic banks are operating in India yet, the recent spate of activities give rise to Shariah-compliant personal investment products, which re-frain from trading in stocks and risky com-modities or ventures. Leading asset man-agement companies such as Tata Mutual, Benchmark Asset Management, Taurus Mu-tual and Sundaram Mutual Fund already have ethics-based investment products. Kotak Mutual, ICICI Pru Asset Management, Reliance Mutual, HSBC, Ambit Capital and UTI Mutual Fund have a series of Shariah-compliant offshore funds which allow for-eign investors to invest in growing Indian stock markets. There are challenges in in-troducing the Islamic banking system within the political sphere, as well as the regula-tory framework. . When the whole world is in the depth of a recession, after the failure of the casino cult of Wall Street, the Indian government is seriously looking at Islamic finance as an alternative to hedge the speculative and risky conventional banking system. Now the ball is in the court of the Indian government, as they decide whether to stick with a system that makes the rich richer and the poor poorer, or to shift to a balanced financial system which includes empathy, sound investment and trust?

Nigeria is the most populous country in Af-rica, with a population of over 150 million; half of which are Muslims. In the past, many efforts have been made to establish Islamic banking in the country, but to no avail. This is due to several factors, including the coun-try’s ethnic and religious diversity, as well as a lack of commitment from Muslim in-vestors. However, thanks to the current governor of the Central Bank of Nigeria, Malam Sunusi Lamido Sunusi, a regulatory framework for Islamic banking was put in place early this year. Recently, the apex bank gave JAIZ In-ternational plc Approval in Principle (AIP) to operate as an Islamic bank, while Stanbic IBTC Bank was given permission to operate a window of Islamic Banking. These developments have been welcomed, especially within the Muslim-dominated north of the country. They are expected to pave the way Nigeria’s establishment as Af-rica’s Islamic financial hub, which in its turn will contribute to the reduction of the pov-erty which has blighted the northern part of the country, through asset financing, qard hasan, zakat etc.

Since 1980, two attempts have been made to kickstart Islamic banking in Pakistan. The first attempts, which was directive in nature, was made in 1980 when the government asked banks to include interest-free bank-ing in their portfolios. The second attempt was made in 2000, and was based on evo-lution and competition. Through this initia-tive, Islamic banks were given the chance to compete with conventional banks. Since 2000, Islamic banking has grown by leaps and bounds, and is rapidly capturing a sub-stantial market share. The Islamic mode of banking comprises about 6.7% of the bank-ing sector in Pakistan, and there are more than 750 Islamic banking branches based in different commercial banks across the country. This growth is expected to reach the level of 12% within the next two to three years.

Amjad Khan Suri

Assistant Professor, Preston International College, India

Khawaja Khalid Mushtaq

MBA Student, IBA Karachi, Pakistan

Auwalu Ado

Regional Executive North (Takaful), African Alliance Insurance Plc, Nigeria

Shining the spotlight on GIF’s Brand Ambassadors

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We believe that the World deserves a better future

Welcome to a sustainable and ethical banking

Era

Islamic Finance Services

We believe that the World deserves a better future

THE RISE OF RETAKAFUL SPURRING ISLAMIC FINANCEAuthor: Tasnim Nazeer, Global Islamic Finance Magazine Editorial Team, United Kingdom

Abstract: The Retakaful sector is becoming a popular Islamic commodity and in this article Global Islamic Finance Magazine will give you a comprehensive outlook into the rise of this lucrative emerging sector. The Retakaful sector has opportunities to grow if the challenges which it is currently facing are met sufficiently. These key challenges for the Retakaful sector and the ways to implement solutions will be discussed in more detail in this article. As the Islamic finance industry is growing at an unprecedented rate, various commodities such as Retakaful are also arousing interest from investors and business professionals around the world.

GIF will not only give you an overview of the Retakaful sector but we will also be looking at how insurance companies can benefit from this potential sector in addition to weighing out the risks which are currently associated with using conventional insurance companies in com-parison to Islamic insurance firms. GIF will give you an up to date insight into the issues surrounding the Retakaful sector which is a must read for anyone wishing to enter the industry or who simply wants to be kept well informed with the latest developments. Many investors, business professionals and entrepreneurs may find this article beneficial in outlining the highs and lows of the emerging Retakaful sector.

Keywords: Retakaful, Takaful, Insurance Companies, Islamic Finance, Challenges, Solutions, Insurer, Al Aqad

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A Comprehensive Overview of the Growing Retakaful SectorRetakaful is the reinsurance of Takaful busi-ness which adheres to the principles of Sha-riah financing. Retakaful or reinsurance is a method of insurance whereby an insurance company or syndicate can transfer all or part of its liabilities in respect of claims aris-ing under the contracts of insurance that it writes to another insurer (the reinsurer).

This will enable an insurance company (re-insured or direct insurer) to protect itself against any risks that may be incurred in its total claim costs or in any one year for exam-ple wipe out its profits, or even cause it to be insolvent.

The concept for Retakaful is that there will be a joint indemnification of the loss or dam-age that may occur, out of the fund that it is collectively contributed to. The current climate of the Retakaful sector is that it currently faces the challenge worldwide of having a lack of Retakaful companies that are built up efficiently to conform to the high levels which are required by conventional insurers.

In addition Retakaful companies need to work on there status as there is also a cur-rent lack of ‘A’ rated Retakaful companies. Due to the lack of efficient Retakaful com-panies around the world many worldwide Takaful companies had to resort to using conventional reinsurance firms.

It has been a cause of concern for many Shariah scholars who would prefer Takaful companies to use traditional Retakaful firms however they have currently allowed dispen-sation to Takaful companies to reinsure on a conventional basis as long as there are no Retakaful alternatives available in the coun-try of operation.

A conventional reinsurance contract would be based on the Islamic instrument of Al Aqad and this transaction is unique to other forms of commercial contracts which are typically found in conventional reinsurance companies. The Retakaful contract of Al Aqad is based upon the concept whereby there is a policy for both parties to share mutual responsibility to provide security. The Retakaful Al Aqad contract covers the following losses as outlined in Figure 1.

All Retakaful reinsur-ance contracts must conform to being based on financial

transactions that bind both the reinsurance company and the insurance company on the general principles of the contract of Al Aqad. It is of utmost importance that any Retakaful or Takaful company should conduct all its af-fairs in a manner that meets adheres to the Islamic principles of the Shariah such as at the time of investing its funds and carrying out business transactions.

This adherence to the Shariah should follow suit in all classes of insurance or in any other financial transaction. Currently the retroces-sion from Takaful companies ranges from 10 percent in the Far East where Takaful companies have exhibited small commercial risks, to the Middle East where up to 80 per-cent of risk is reinsured on a conventional basis so far.

Current Retakaful Operators Offering the Potential for ReinsuranceRetakaful operators are steadily emerging to cater for the needs and demands of Takaful companies wishing to adhere to their faith and restore business with Retakaful compa-nies rather than conventional ones.

Retakaful operators agree a premium with a Takaful operator which will pay the pre-mium from the Takaful fund to the Retakaful operator. In return, the Retakaful operator will provide security for the risks which have been reinsured. This can help to provide sta-bility in the case of unexpected losses and damage with a mutual agreement from both parties.

As Figure 2 outlines the Takaful holders are individuals or companies that purchase the Takaful products or services and pay an agreed upon premium to the Takaful opera-tor. These products may be general Takaful or Family Takaful with the aim to protect them from unforeseen risk and also unex-pected losses.

The Takaful operator will then take a per-centage of money from the Takaful fund and pay the premium to the Retakaful opera-tor to establish the reinsurance protection in addition to spreading its risks. Reinsur-ance contracts may cover a specific risk or a broad class of business which can often be beneficial for the company.

There are essentially two parties involved in Retakaful insurance and this type of insur-ance cannot work without traditional Takaful companies it simply would not be existent as one relies on another. The two parties that are involved in the operations of Retakaful are outlined in Figure 3.

The Retakaful industry is primarily an en-hancement of the Takaful sector which aims to mutually distribute the risks so that risks are distributed equally. Retakaful is mainly prominent when dealing with a large number of risks and which could be subjected to sig-nificant losses. Retakaful also ensures that Takaful funds are well maintained and gives an underlying capacity for ceding compa-nies. To summarise the main objectives of Retakaful Operations outlined in Figure 4.

There are a number of Retakaful operators or companies and many of them reside in the Middle East and Asian continents. If you are unaware about the potential lucra-tive Retakaful companies which could offer scope for business and opportunities or if you simply want to utilise the companies products and services Figure 5 outlines the successful companies.

The list of Retakaful companies is steadily increasing and you can use some of the con-tact names to further investigate opportuni-ties, products and services for Retakaful in

a number of different countries around the world.

The Numerous Ben-efits of Retakaful for Takaful CompaniesThere are numerous benefits for traditional Takaful companies when wanting to uti-lise Retakaful company services. One main benefit is the fact that using Retakaful com-

Unpredicted Loss

Unpredicted Damage

Unpredicted Risks on Life

Unpredicted Risks on Property

All cover will adhere to Shariah Principles

Figure 1: Retakaful Contract Concepts and Cover

Takaful Holders Pay Operator for Takaful Service

Takaful Coop

Premium is paid from Takaful Funds

Retakaful Firms receive Premium

Takaful Operators Pay Premium

Figure 2: Process of Retakaful Operators with Takaful Companies


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panies will ensure that the Takaful Company adheres to their faith and upholds Shariah compliancy.

Many Takaful operators have had to resort to using conventional insurance companies however this may not adhere to the princi-ples outlined in the Shariah and therefore these Takaful companies will be in the prob-lem of adhering to their faith and sticking to the principles of no interest.

With Retakaful many Takaful companies can be rest assured that all transactions and in-surance cover is Shariah-compliant and ad-here to the principles of Islam therefore all products and services will stick to the ethos of Islamic finance.

Another benefit for Takaful companies to use Retakaful is that without the significant growth of Retakaful the Takaful industry could merely fall short of not gaining oppor-tunities for distribution of risks. This could be potentially harmful in the current climate when the insurance financial industry is at a competitive edge.

Many conventional insurance companies are doing well in their dealings and Islamic financial insurers wish to pursue a more in-novative approach to attract customers and investors. Retakaful allows Takaful compa-nies to be protected from insolvency in a Shariah-compliant manner. It also provides Takaful companies with underwriting and in-vesting the accumulated fund in an Islamic manner which adheres to the principles of Islam.

Another key benefit for Takaful operators using Retakaful firms is that it creates un-derwriting flexibility which adds to the over-all stability of the company. Retakaful gives scope for Takaful companies to directly com-pete with their conventional counterparts especially in the form of accepting risks.

Some Retakaful firms will also enable the Takaful company to utilise benefits in the retained deposit reserves which is stored in the Retakaful fund in the interest of its cli-ents without the need to pay riba (interest) which will ensure that the process sticks to the Shariah principles of the prohibition of interest in Islamic finance.

One main and crucial benefit that many Takaful providers find is that Retakaful aims to further enhance the Takaful business and one cannot be sustained without the other. The success of Takaful companies can further be increased by the use of Retaka-ful firms and this is an imperative thought which Takaful companies need to consider carefully before undertaking risks with con-ventional counterparts. With Retakaful com-

panies as the risks are distributed mutually between the two primary parties there is a form of relief for the Takaful provider and this just adds to the numerous benefits that Retakaful possesses for the modern day Takaful provider.

Risks of Takaful Companies who use Con-ventional ReinsuranceThere are many risks involved if Takaful companies continue to stick with conven-tional reinsurance companies in managing reinsurance and risks. This is primarily due to Shariah compliancy as many conventional insurance companies deal with interest and as we know in any Islamic finance transac-tion or investment interest or riba is strictly prohibited.

Although some Shariah scholars have given the go ahead for Takaful companies to use conventional reinsurance this is a matter of debate and this only applies to Takaful com-panies who have no other means or no other Retakaful alternative.

It is understandable that the Retakaful sec-tor has not reached the level whereby there are not many star rated Retakaful firms which would make Takaful companies more reluctant to use them. However any Takaful firm has to run its business on the principles

of Shariah and this can only be done with Retakaful companies for a pure Shariah-compliant method of insurance. Takaful companies can be rest assured that the Re-takaful industry is progressing globally with the emergence of many international inves-tors worldwide setting up reliable star rated Retakaful companies the choice is expand-ing.

As the Islamic finance industry further ex-pands there will be more opportunities for the development and implementation of successful and reputable Retakaful com-panies which can cater for the demands of Takaful companies and also reach the level of their conventional counterparts.

Apart from the risk of Non Shariah complian-cy on using conventional reinsurance there are other risks involved. These risks include the fact that conventional insurance and conventional reinsurance works in a differ-ent system to the Takaful system.

Conventional insurance involves the trans-ferring of risks from the insured party to the insurance company and then on to the reinsurance. Takaful however works in a completely different way whereby it is more focused on the sharing of risks and equal distribution.

This involves the Takaful company manag-ing the Takaful fund on behalf of its party and there is a not any liability on the Taka-ful company to pay the primary participant. All payments under Takaful are given in a gift form however conventional insurance companies may deny this right and not un-derstand the concept in comparison to a Re-takaful company.

Therefore one of the other main risks in-volves the fact that the principles of Takaful and conventional insurance come into con-flict resulting in a conflict of interest when it comes to fitting in reinsurance.

Overcoming Challenges for the Retakaful IndustryAs with any financial sector there are un-doubtedly challenges that will crop up and the Retakaful sector has its fair share of challenges which need to be addressed and overcome in order for it to further progress in the highly competitive financial world. Al-though there is scope for Retakaful products one major challenge is convincing Taka-ful providers who are currently resorting to conventional insurers to use Retakaful com-panies instead. This matter needs to be ad-dressed with the Shariah supervisory board who has already given the option for Takaful companies to use conventional insurers if there are no Retakaful options available.

Provides protection for the Takaful Company covering insolvency, losses, damages, interest of participants.

It encourages cooperation between the two primary parties to mutually distribute the risks out evenly

It provides financial stability to the Takaful operator in order to compete with conventional insurance companies in accepting risks

Retakaful operations create a business inter-est in line with Takaful Operators

It promotes an interest free form of Reinsur-ance

Figure 4:

There are two primary parties involved in Retakaful operations:

1) The insured which is the company of the direct insurer, which desires to relieve itself from the part of the risks, insured. This party is best known as the Takaful Operator.

2) The insurer which is the company, which accepts that portion of risk, which is being reinsured. This primary party is called the Retakaful Operator.

Figure 3: Two Parties involved in Takaful Operations


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However more options for Retakaful serv-ices are opening up around the world and it should be of utmost importance that Sha-riah scholar’s emphasis the switching from conventional to Retakaful in order to adhere to the principles of Islamic finance and main-tain consistency in practice.

Another key challenge which the Retakaful sector currently faces is the lack of Retakaful companies that are efficiently capitalised to reach the levels required by insurers in par-ticularly the lack of ‘A’ rated Retakaful com-panies, as there needs to be more recogni-tion of such companies to further promote Retakaful.

The lack of Retakaful companies worldwide has therefore resulted in Takaful companies having to reinsure on a conventional basis, contrary to the preferred option of seeking cover in adherence to Islamic principles which poses a huge problem.

If Retakaful companies can capitalise them-selves efficiently then they can it can enable them to do the following as outlined in Figure 6.

Hussein Al Ajmi, Assistant Director and Head of Centre for Insurance at the Bahrain Insti-tute of Banking and Finance, said,

“There has been a long-awaited increase on the Retakaful side. However, because of the lack of capacity on the Retakaful side, Taka-ful companies were allowed to work with conventional reinsurance companies. Over the next few years, I think the pressure on Takaful companies to limit their relationships with conventional insurance companies will be even greater. Around the GCC and South-east Asia there has been an increase in the number of Retakaful operators.” (CPI Finan-cial).

However despite the challenges of a lack of star rated Islamic reinsurance companies there have been demand and implementa-tion to facilitate international players who are already starting to enter the Retakaful market. Many of these international and Middle Eastern players have already entered the Retakaful market with strong ratings which builds the scope for the trust in Taka-ful companies collaborating with Retakaful star rated companies.

It is up to the Shariah board to revisit this issue in providing the switch over for Taka-ful companies to move from conventional in-surers which are not Shariah-compliant and switch to a more Shariah-compliant Retaka-ful rated company which would be beneficial for the entire Islamic financial sector.

The key challenges that the Retakaful in-dustry faces are that they have to convince Takaful insurance companies to collaborate with them and build excellent working rela-tionships as highlighted by Clyde & Co. As the Islamic finance industry matures it will become more problematic if Takaful compa-nies are dealing with conventional insurers as this poses the main problem of Shariah compliancy, after all the main ethos and principles of Islamic finance is to adhere to the principles of Shariah financing.

There is also a need for more resources and expert staff in the Retakaful sector. Like any sector of the Islamic finance industry the need for experts is imperative and Retakaful providers would need to exhibit the best of the best to further expand and progress in the highly competitive financial world.

One solution to overcome the shortage of experts and staff is for Retakaful compa-nies to provide educational resources, con-ferences and events to further inform and educate their employees and give them the edge they need too be a direct competitor with conventional reinsurance companies. Another aspect which remains a challenge is the unauthorised policy wordings from Taka-ful companies.

Many Takaful companies have fallen short of adapting policy wordings to fit in with the reinsurance industry however this may mean non Shariah compliancy. This is a challenge that needs to be addressed and perhaps a standardised policy needs to be created. In order for the Retakaful industry to further progress it is vital that Takaful companies give the necessary support and encourage-ment as without Takaful companies the Re-takaful sector cannot work efficiently.

The Retakaful industry faces challenges however with the key support from Takaful providers it can further progress and with flexible Takaful providers switching back to Retakaful companies the sector can further prosper and grow.

Gatehouse London Enters into Takaful Sector

Gatehouse London is entering into the Takaful sector with the facilitation of the city’s first Takaful brokerage. Gatehouse London (GNL) said “We’re for the first time offering global corporations Takaful support from London, the world’s leading insurance market,” Richard Bishop, CEO of GNL Insurance.

He said: “Up until now large multination-als that have required global Shari>ah-compliant insurance solutions have been forced to use small brokers in Asian and Gulf countries, whereas they can now be serviced from London.”

GNL Insurance is a joint venture between British Islamic bank, Gatehouse and Paul Napier, a Lloyds insurance broker based in London.

The new firm will provide a global gate-way for corporate and institutional clients seeking commercial risk protection, with its initial mandate being the provision of insurance for real estate, trade finance and financial institutions.

The firm will only be focusing on large commercial clientele, not retail or gen-eral Takaful. Bishop said: “The retail in-surance market is not ready for Takaful, this is why [UK retail Takaful firm] Salaam Halal Insurance failed, as the market, es-pecially at the retail level is dominated by a handful of large, aggressive firms who will force any competition out of the game by all means necessary.”

GNL’s first client is Chartis UK a diversi-fied global risk solutions leader. For sev-eral years Chartis has recognised the importance of Takaful financial products and through Chartis Takaful in Bahrain has been offering Shari’ah-compliant commercial and consumer products since 2006

As there are more Retakaful companies around the world that are being established it furthers the scope for the sec-

tor to further progress. The Islamic finance industry is estimated to be worth over $1 trillion dollars by 2012 and this staggering growth can further progress if all the sectors work together to ensure Sha-riah compliancy and standardisation

„46 Global Islamic Finance September - October 2011

Protecting the financial stability of Taka-ful companies from adverse underwriting results

Stabilise claims ratios from one year to the next

Minimise claims accumulation from loss-es within and between different classes

Geographically spread risk

Increase capacity

Increase the profitability of insurers through permitting greater flexibility in the size and type of risks accepted

Technical support and help

Figure 6: Overcoming Challenges Can Lead to Benefits

Source: Re Orient

Figure 5:

Source: Takaful Coop

List of Current Global Retakaful Com-panies

Islamic Takaful & Retakaful Co. (IRTCo.) (Bahamas)

ACR Retakaful (Bahrain)

Hannover ReTakaful B.S.C. (Bahrain)

Solidarity Islamic Takaful & Retakaful Co. (Bahrain)

PT Reassuransi Internasional Indonesia (Indonesia)

Amin Reinsurance Company (Iran)

Al Fajer Retakaful Insurance Co. (Kuwait)

ACR Retakaful (Malaysia)

Asean Re-Takaful International (Malaysia)

MNRB Retakaful Berhad (Malaysia)

Munich Re ReTakaful (Malaysia)

Swiss Re ReTakaful (Malaysia)

Al Khaleej Takaful Ins & Reins Co. (Qatar)

Islamic Takaful & Re-takaful Co. (Saudi Arabia)

Malath Cooperative Insurance & Reinsurance Co. (Saudi Arabia)

Sanad Cooperative insurance & Reinsurance (Saudi Arabia)

Saudi Reinsurance (Saudi Arabia)

Weqaya Takaful Insurance & Reinsurance (Saudi Arabia)

Tokio Marine Nichido Retakaful Pte Ltd (Sin-gapore)

National Re-insurance Co. (NRICo.) (Sudan)

Sheikhan Insurance & Reinsurance (Sudan)

Sudanese Insurance & Reinsurance Co (Sudan)

BEIT Iaadat Ettamine Tounsi Saoudi Re-insur-ance (B.E.S.T. Re) (Tunisia)

Tunis Retakaful (Tunisia)

ACR ReTakaful Holdings Limited (UAE)

Dubai Islamic Insurance & reinsurance Co. (UAE)

Takaful Re Limited (UAE)

The Future of the Growing Retakaful Sec-torThe future looks promising for the growing Retakaful sector especially if more effort is made to overcome the challenges which are currently being addressed by Retakaful and Takaful companies.

With the correct support and backing from Takaful companies and the Shariah regula-tory board the Retakaful sector can further prosper and develop.

Retakaful can further enhance the Takaful sector and expand the Islamic insurance in-dustry further. If however Takaful companies continue to stick to conventional reinsur-ance companies they could fall short of fac-ing Non Shariah compliancy and undergoing the many risks and challenges of doing so.

As there are more Retakaful companies around the world that are being established it furthers the scope for the sector to further progress. The Islamic finance industry is es-timated to be worth over $1 trillion dollars by 2012 and this staggering growth can further progress if all the sectors work together to ensure Shariah compliancy and standardi-sation.

There are numerous benefits as outlined in this article for Takaful companies wishing to utilise Retakaful companies as it provides a stable framework for insurance which remains Shariah-compliant at all times in comparison to conventional reinsurance companies.

In this article we have comprehensively addressed the key issues surrounding the Takaful sector including a detailed overview of the sector and a list of Retakaful compa-nies around the world that can further ben-efit you if you are a business professional or entrepreneur wishing to start your own Re-takaful company.

The Retakaful sector overall has full poten-tial to fully emerge as a leading sector which can enhance the growth and maintain the success of the unprecedented Takaful insur-ance around the world.

Clyde & Co (2011) Retakaful Revisited, Ar-• ticle Retrieved from: http://www.clydeco.com/knowledge/articles/retakaful-revis-ited.cfmTakaful and Retakaful (2010) Re Orient, • Article Retrieved from: https://www.reori-ent.co.uk/pdfs/takaful_retakaful.pdfRetakaful Paradigm Islamic Reinsurance • (2010) Takaful Coop, Retrieved from: www.takaful.coop/doc_store/takaful/Re-takaful%20Paradigm.docRetakaful Companies (2011) IC-• MIF Takaful, Retrieved from Takaful Coop: http://www.takaful.coop/index.php?option=com_content&view=article&id=47&Itemid=41Revisiting Retakaful (2011) CPI Financial • Issue 64, Article Retrieved from: http://www.cpifinancial.net/v2/Magazine.aspx?v=1&aid=2740&cat=IBF&in=64Demographic Changes in Islamic Coun-• tries Retakaful (2011) Swiss Re: Retrieved from: http://www.swissre.com/clients/insurers/retakaful/Demographic_chang-es_in_Islamic_countries_create_growth_potential_for_retakaful_operators.htmlRetakaful Reinsurance (2011) Institute • of Islamic Banking and Finance Retrieved from: http://www.islamic-banking.com/retakaful_or_reinsurance.aspx


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gif Market Review

At the 36th Annual Meeting of the Board of Governors of the Islamic Development Bank (IDB) which concluded on the 30th of June in Jeddah there had been no pro-gressive resolutions as many of its member countries are experienc-ing crucial challenges to their polit-ical and economic governance and in real need of economic reforms.Saudi Finance Minister Ibrahim Al-Assaf’s speech was a reiteration of what the IDB achieved in 2010. There was nothing about Saudi Arabia ever issuing a debut sover-eign sukuk that was mentioned in the meeting.

The key demands made by IDB gov-ernors were highlighted by Ahmad Mohamed Ali, president of the IDB Group, in his closing address. One demand was for a bigger role for Islamic banking, and Ali stressed that the IDB will be giving priority so as to promote Islamic develop-ment finance.

“The IDB needs to conduct more dialogue on the role Islamic bank-ing can play in promoting econom-ic and social development in mem-ber countries and the incentives that may be provided to encourage Islamic banks to have long term investments in development projects that generate new jobs,” stressed Ali. But is this not the mandate which the IDB has had for the last 36 years of its existence? And yet many of its member countries do not have any Islamic banking, while some have a mere peripheral few token products or the odd institution or window.

The governors supported the member countries partnership strategies (MCPS) launched a year or two ago. But this is still in its nascent stage and has been piloted only on Turkey and more recently Indonesia. To do this on the required scale and urgency would require huge technical resources which the IDB does not currently have. Pre-dictably down the line at future annual meet-ings, the complaints will resurface that the IDB is not implementing MCPS fast enough. This may help through greater and more

meaningful decentralisation, which the IDB has promised, but this Ali conceded will be gradual.The issue of making the terms and conditions of IDB financing provided to mem-ber countries more competitive is an annual sore point. Even some IDB managers agree that these have to be improved because if they remain uncompetitive say to the con-ventional trade and other financing, then it becomes a disincentive for corporates and entities in member countries to use these IDB financing facilities. This in turn under-mines two of the very core objectives of the IDB of promoting intra-Islamic trade and Is-lamic banking and finance per se.

One IDB Group entity, the Islamic Corpo-ration for the Development of the Private Sector (ICD), has already pledged to mak-ing its mark-up and repayment schedules more flexible as well as lowering its financ-

ing costs. The ICD, according to Ali, is also seeking to introduce new financial tools that respond to the requirements such as the creation of employment opportunities partic-ularly among the youth. Sayyad gave no insight into the problems faced by a post-Mubarak Egypt; the policy of the government on Islamic finance and the latest on Egypt’s plans to introduce legislation to facilitate Su-kuk issuance, which many believe could play a vital role in mobilising funds to finance development in those economies undergoing politi-cal transformation.

Abdel-Hamid Al-Triki, minister of planning and international coopera-tion of Tunisia, however should be commended for his frank assess-ment of Tunisia’s political, economic and social challenges following the ousting of President Zine El Abidine Ben Ali. He was the only governor to link democratisation with economic and political progress.

“Successful democratisation re-quires the full commitment of all segments of Tunisian society; i.e. the government, the people and political parties, in this ambitious futuristic project and concerting all efforts to meet this great challenge.

We are confident that successful transition will inevitably help us lay the foundations of democracy that will turn Tunisia into a better country and secure welfare and prosperity for its people,” he maintained.

Malaysian Finance Minister Mohd Najib Ra-zak, who is also the prime minister, in his statement as governor, stressed that “we are aware that there are a number of in-stances where Islamic Development Bank, institutionally, was unable to make appre-ciable differences. If we are to hold Islamic Development Bank as a catalyst of change, we must also recognise that Islamic Devel-opment Bank needs to implement its inter-nal reforms, not least in the building of its capacity to a level that allows the bank to be an effective catalyst of change.” gif

Islamic Development Bank GovernorsSeek More Action in Promoting Islamic Finance


„The policy of the government on Islamic finance and the latest on

Egypt’s plans to introduce legislation to fa-cilitate Sukuk issuance, which many believe could play a vital role in mobilising funds to finance development in those economies un-dergoing political transformation


World Islamic Finance Review gif

ISLAMIC FINANCEGAINS MOMENTUM

IN EUROPE, PART IIAuthor: Professor Rodney Wilson, Durham University, United Kingdom

Abstract: Part 2 of Islamic Finance gains momentum in Europe gives an overview of areas such as Islamic mortgages and the develop-ment of investment banking within Europe and Islamic fund management. The challenge for Islamic finance was to create a satisfactory

Shariah-compliant alternative to the conventional mortgages based on interest. The article will cover topics such as the first Islamic mort-gages offered in the Europe and explore the reasons why investment banking has become the attraction from the Shariah viewpoint.

Keywords: Investment Banking, Islamic Mortgages, Shariah-Compliant Finance, Wealth Management, Europe, Turkey


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Islamic retail banking in Europe In addition to offering mudaraba accounts which entitle the depositor to a share in the bank’s profits, a number of Islamic banks provide specified mudaraba accounts where the funds deposited are allocated to a single company with the agreement of the deposi-tor. The Islamic bank in these cases acts as an agent, charging an arrangement and an-nual management fee, with the depositor sharing in the profits of the specified com-pany.

The returns will normally be more volatile than those in general investment accounts, as bank profits will partly depend on its com-petency in risk and debt portfolio manage-ment. The depositor expectation would how-ever be for a higher return with a specified investment account. So far such accounts are not offered in Europe, but they have proved popular elsewhere, notably with Jor-dan Islamic Bank depositors.

Islamic banks cannot provide overdraft fa-cilities or personal loans on which interest is payable, but rather structured financing facilities for specific purposes usually in-volving the acquisition of physical assets. In markets such as Europe however many retail clients want cash loans, so that they can shop around for the best price, rather than relying on murabaha facilities, where an Islamic bank purchases a commodity on behalf of a client, who then purchases the commodity from the bank for a larger pay-ment including a mark-up, with settlement being on a deferred payments basis.

To avoid tying financing to particular trad-ing transactions, and provide greater flex-ibility, a number of Islamic banks, including the Islamic Bank of Britain, offer a tawarruq facility. This involves an initial murabaha transaction, and a simultaneous reverse transaction, where the client sells the com-modity received to a third party nominated by the Islamic bank, in return for a cash sum being deposited in his or her current ac-count.

The effect is identical to an overdraft or personal loan with the client repaying on a deferred payments basis, but the legitimacy under Shariah is that the financing is asset backed and involves trading rather than a straight loan. The legal rights and obliga-tions under English law, as well as under Shariah, are distinctive, but because tawar-ruq mirrors conventional financing, it has many critics.

In most European countries, especially in the United Kingdom and France, most people, including Muslims, want to own the home they live in, and are prepared to take out substantial mortgages for this purpose, with

this becoming their largest single financial commitment. As conventional mortgages are based on interest on the amounts bor-rowed, the challenge in Islamic finance was to develop satisfactory Shariah-compliant alternatives. The first Islamic mortgages in Europe were offered in 1988 by Al Baraka Bank to Gulf Arabs for properties in London, with the mortgages structured through an ijara rental contract, whereby the bank pur-chased the property, and the client repaid by monthly instalments and in addition pay-ing rent to the bank, which was based on

the implicit rental value of the property as agreed through an independent valuation. After the Al Baraka Bank reverted to becom-ing an investment company it ceased to pro-vide housing finance and the United Bank of Kuwait, which already provided conven-tional mortgages, started to offer mortgages based on murabaha from 1997, and the fol-lowing year housing finance based on ijara contracts, the latter being the equivalent to a variable rate mortgage, while repayments and the mark-up for the murabaha mort-gage was fixed.

Both were perceived as expensive, not least because stamp duty had to be paid twice, initially when the bank purchased the prop-erty and subsequently when the client pur-chased from the bank. It was only after the 2004 budget in the United Kingdom, when the Chancellor of the Exchequer announced the abolition of the double stamp duties on these mortgages, that Shariah-compliant housing finance became more competitive.

Following the stamp duty relief, Al Buraq, the Islamic retail finance subsidiary of the Arab Banking Corporation, devoted more energy and resources to marketing Shariah-compli-ant home finance. As a result it has become the leading player in the United Kingdom market. Al Buraq does not have a branch network, but it markets its Islamic home finance through Bristol and West, a former building society purchased by the Bank of Ireland, with a substantial branch network, including in areas with significant Muslim populations.

In addition the Islamic Bank of Britain of-fers Al Buraq Shariah-compliant home fi-nance through a white labelling agreement under which they receive a fee for every cli-ent signed up. The Arab Banking Corpora-tion has a large base of Shariah-compliant deposits which can be used to finance the Islamic mortgages, unlike Islamic Bank of Britain, whose deposit base is small. Lloyds TSB also offers Al Buraq mortgages, as al-though it is one of the largest banks in the United Kingdom, with enormous deposits, these are conventional and pay interest, and hence cannot be used to fund Shariah-compliant housing finance.

Al Buraq’s Islamic mortgages are based on a combined ijara and musharaka structure with the bank and the client entering a part-nership, and the bank paying up to 90 per-cent of the capital and the client at least 10 percent. Repayments are scheduled up to 25 years, with the client paying rent to the bank for its share of the property, this being the main element in the bank’s profit. Most young clients are more concerned with their initial monthly payments rather than pay-ments after 10 or 20 years, as by then their

Professor Rodney Wilson is Director of the Islamic Finance Programme

in Durham University. He has researched on Islamic finance

since the 1970s and has written numerous books on the subject for

leading international publishers including Edinburgh and Columbia University Presses and Brill. He has extensive consultancy experience, including with the Islamic Financial Services Board with respect to its Shariah Governance Guidelines.

He is currently working on a project on Islamic finance in North Africa for the African Development Bank. From January until June 2009 Rod-ney Wilson was a Visiting Professor at the Qatar Foundation’s Faculty of Islamic Studies in Doha, and he returned there in 2010 for a four

month period.

Professor Wilson’s teaches masters level courses on Islamic econom-ics and finance and supervises

PhD students working on Islamic finance. He has acted as Course Di-rector for Euromoney Legal Training in various regions such as London, Bahrain, Kuwait, Riyadh and Abu

Dhabi.

World Islamic Finance Review


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financial circumstances should have im-proved as their careers progress. Therefore to ensure the initial payments are competi-tive, only very small repayments are made at first, the major servicing element being the rent. After several years repayments in-crease as rent diminishes, but the aim is to backload rather than frontload total monthly payments so that they increase rather than decrease over time. Actual repayments can be tailored to the needs of individual clients and their future income prospects.

Most types of property are acceptable for Shariah-compliant mortgages including leaseholds with more than 70 years of life. Self certification of income is permitted, and Islamic mortgages are also available on a buy to let basis. The major competitor to Al Buraq in Shariah-compliant housing finance is HSBC Amanah which offers a similar fi-nancing structure. Their mortgages were seen by some as more expensive, but the terms have become more favourable as they have sought to increase market share.

Islamic wealth management in GenevaEurope has been an important destina-tion for capital flows from the Middle East for over sixty years, with increasing funds originating from the Gulf since the first oil price boom of the 1970s. A sig-nificant proportion of these flows came through government owned national investment funds, such as the Kuwait Investment Authority and the Abu Dhabi Investment Fund.

The aim was to re-cycle so called petro-leum-dollars into financial assets that could provide future income and capital appreciation, so that future generations in the oil rich states in the Gulf could continue to enjoy prosperity once oil supplies became depleted. All of this invest-ment was conventional, with returns and risk the major concerns, not Shariah com-pliance, indeed much was channelled into treasury instruments which paid interest.

It was mostly private investors from the Gulf who were concerned with Shariah compli-ance, but in the 1970s and 1980s there were limited possibilities for ensuring that investment in Europe was compliant. The Euro-Arab joint venture banks had clients wanting to invest in a Shariah-compliant manner, but they did not have any instru-ments to offer, limited expertise on the subject and no Shariah boards to provide guidance. Some informal Shariah-compliant advice was offered by London based institu-tions such as the Saudi International Bank and United Bank of Kuwait, but in the 1980s their expertise was limited in this area.

The major early development was the estab-lishment in 1981 of the Dar al Maal al Islami Trust in Geneva, largely due to an initiative by Prince Mohamed Al Faisal, the member of the House of Saud and one of the leading long term supporters of Islamic finance who was responsible for the founding of the Fais-al Islamic Banks of Egypt and the Sudan.

Dar al Maal al Islami is perhaps best de-scribed as an investment company rather than a bank, although it continues to own 37 percent of the capital of the Faisal Islam-ic Bank of Egypt as well as a 41.7 percent shareholding in Ithmaar Bank, a Bahrain based investment bank with extensive links to Kuwait and Saudi Arabia and the Faisal Bank of Pakistan. Its most significant con-nection is with its wholly owned subsidiary, the Islamic Investment Company of the Gulf, a Bahamas based company that is a signifi-cant force in Shariah-compliant wealth man-agement.

Dar al Maal al Islami has had a varying record for profitability, but following a restructuring in 2005 its business seems to be on a much sounder footing, with a net profit of over $52 million recorded. Funds worth almost $2 bil-lion are managed by Dar al Maal al Islami, largely raised by from high net worth indi-vidually by the Islamic Investment Company of the Gulf.

The funds are deployed in Shariah-compliant investments internationally, but with a focus on Europe and emerging markets through the Geneva operation. The Shariah Board of Dar al Maal al Islami meets annually in Cairo under the chairmanship of Dr Nasr Farid Mo-hamed Wasel to reviews all investments. The major potential for Dar al Maal al Islamic for raising funds is in the Saudi Arabian market where in 2007 it launched Ethraa Capital in co-operation with the Kingdom based com-pany, Atheeb Trading and the Kuwait Invest-

ment Company. At the time of writing Ethraa is waiting to see if its license application has been approved by the Saudi Arabia Capital Markets Authority.

Having an operational presence in Geneva, the world’s largest wealth management cen-tre, undoubtedly gives Dar al Maal al Islami an advantage over some of its Gulf rivals who do not have a European presence. The attraction of Switzerland is not so much its banking laws ensuring client confidentiality in these days of “know your customer” re-quirements, but rather the local skill pool in asset management, low staff turnover and management continuity compared to other financial centres, and the emphasis on building long term relationships with clients of high net worth.

Wealth management has become a highly specialised activity, involving the cultivation of long term client relationships, and the pro-

vision of specialist advisory and execu-tion services, activities in which Swiss banks excel. Comparable institutions such as Investment Dar and the Inter-national Investor of Kuwait or Arcapita of Bahrain, which have a mandate to ensure all their investments are Shari-ah-compliant, have arguably a stronger marketing presence in the Gulf, but they lack the capacity and skill set to invest in Europe in a sustained manner, apart from one off transactions such as the acquisition of Aston Martin, the Brit-ish luxury car manufacturer by Invest-ment Dar.

Such direct investments are not a sub-stitute for building up a wider portfolio to ensure risk diversification. Arcapita has a wider portfolio of direct invest-ments in Europe, including Paroc, a pharmaceutical company, Roxar, a firm

that provides technical solutions to the oil and gas industry and Vogica, a French kitch-en and bathroom supplier. However exactly what the investment strategy is for such di-verse businesses remains far from clear.

Many Shariah-compliant investors of high net worth deal directly with European banks, notably with UBS of Switzerland the leading provider of Shariah-compliant wealth man-agement services. UBS had a fully owned Shariah-compliant subsidiary in Bahrain, Noriba Bank, which until 2005 had a high profile at Islamic finance conferences, but UBS felt it would be more attractive to Gulf clients to market its own brand rather than have a separate identity for Islamic finance operations. Hence it re-launched its Gulf op-eration, and in 2006 opened a branch in the Dubai International Financial Centre with thirty experienced banking professionals as


„T h e challenge for Islamic eq-

uity funds in Europe was to attract sufficient investment to

achieve viability, which proved dif-ficult for stand alone offering. The funds currently available are mostly offered by those large multination-

al banks that have a portfolio of Shariah-compliant services

for their clients


signed to the office. A totally integrated serv-ice can be provided between the Dubai office and the Geneva headquarters, drawing on all the expertise in the latter while providing the Shariah compliance locally in the Gulf.

UBS provides Shariah-compliant deposits for individuals of high net worth through a commodity murabaha facility similar to that offered by the Islamic Bank of Britain. This is a fixed term investment of up to a year, with UBS in Jersey acting as the buyer and UBS Zurich as the agent. The purchase of the base metals is settled through a spot trans-action but the sale price is through deferred payments at a mark-up with the depositor sharing in the profit from the mark-up.

The minimum deposit is $250,000 with a va-riety of currencies accepted including Swiss Francs, Euros, Sterling and US Dollars. Early withdrawals are not possible as the funds are tied up in the underlying trading transac-tion, and as there is no secondary market in the deposit certificates, the deposits are il-liquid until maturity. Investors however enjoy returns in line with market rates on conven-tional time deposits. Structured Islamic in-vestments are offered by UBS using foreign exchange BLOC (buy low or cash) certificates which are well established in the Swiss mar-ket.

This provides investors with exposure to currency movements, usually Euro/Dollar transactions, and the possibility of making gains. A minimum investment of $50,000 is required with the investor who believes the Euro will appreciate receiving a pre-de-termined return in Dollars if the Euro rises over the cap limit quoted. If the Euro depre-ciates, the investor receives Euros rather than Dollars, and will make a Dollar loss, but the price will still be better than the forward price of Euros for the maturity period.

Most S h a -

riah schol-ars consider

options and futures trading to be haram, but

the Shariah board of UBS has ap-proved BLOC certificates, which are held to maturity and not traded. The certificates pro-vide a useful hedging instrument for import-ers in the Gulf with significant Euro exposure reflecting the importance of European sup-pliers for these economies. Euro/Dollar ex-change rate changes have become more of a problem for importers in the Gulf in recent years given that most Gulf currencies remain pegged to the US Dollar with oil exports and payments also US Dollar denominated.

Private banking and wealth management services usually include succession plan-ning as funds get passed from generation to generation. Under Shariah there is a fixed formula for the division of estates on death, with specific provisions for spouses and chil-dren and the will of the deceased only apply-ing to one third of the inheritance.

Complicated legal issues arise when there are conflicts between Shariah and national laws and in all European jurisdictions Mus-lims who want their estate to be divided in accordance with Shariah must make a will as the default position under both English common law and civil codes is not Shariah-compliant.

Many law firms have standard templates that can be adapted to the particular cir-cumstances of individual clients to ensure that their European assets are divided in ac-cordance with Shariah when they die. UBS has provision for a personal Shariah trust as a succession planning solution for Muslim families of high net worth.

The aim is to consolidate assets within a legal structure which is Shariah-compliant, including assets held in multiple jurisdic-tions, which does not necessarily have to include Switzerland. Other European banks offer similar private banking services, no-table BNP Parisbas which has dedicated

private banking teams in its Middle Eastern branches in Bahrain, Abu Dhabi, Dubai, Kuwait, Riyadh, Doha and Beirut as well as at its “solutions centre” in Geneva. Its private banking business, including that for Muslims seeking Shariah compliance, is located in Geneva rather than its Paris head office.

Islamic investment bankingIt is only during the last decade that invest-ment banking has become significant in the Muslim world, and all of the largest Islamic banks, such as Al Rajhi Bank or the Kuwait Finance House, are retail rather than invest-ment institutions. Investment banks are focused on financing mergers and acquisi-tions; the arranging of initial public offer-ings (IPOs) of shares when companies are floated; the securitisation of assets, as well as bond and note issuance and the devel-opment of structured products and financial derivatives.

Most, but not all, of these activities are Sha-riah-compliant, but what makes investment banking potentially attractive from a Shariah perspective is that most of their income is fee based, rather than being dependent on interest, as with conventional retail banks.

There is only one exclusively Shariah-com-pliant investment bank in Europe, the Euro-pean Islamic Investment Bank, (EIIB) which was established on 11th January 2005. The EIIB obtained its license from the United Kingdom’s Financial Services Authority on 8th March 2006 and has its headquarters in the City of London, Europe’s major invest-ment banking centre. Its initial financial backing was from Gulf investors, but like Is-lamic Bank of Britain, it was admitted to the London Stock Exchange Alternative Invest-ment Market (AIM) where its shares were listed for its IPO.

This raised capital worth £73 million, giv-ing the bank a capital base of £184 million, which is of course very small in relation to most major investment banks. The EIIB is fo-cused on three business areas with special-ised divisions: treasury and capital markets, asset management and corporate finance and advisory.

The treasury and capital market division provides spot foreign exchange rate quotes and the Islamic equivalent of forward quotes for transactions which must be undertaken as futures trading is not permissible under Shariah. It also quotes sukuk prices in Lon-don, and is involved in inter-bank commodity murabaha and wakala money market trans-actions mostly through the London Metal Exchange. The capital markets remit covers sukuk securitization and structured trade fi-nance and the bank is hoping it can play a


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leading role in Sterling and Euro corporate sukuk issuance. Asset management serv-ices include the provision of property invest-ment, structured product and private equity funds although all of these products is at an early stage of development within EIIB. The corporate finance services involve advising on capital raising opportunities, mergers and acquisitions and cross border private equity placements, with the focus on busi-nesses based in the Gulf but with financial interests, including subsidiaries, in Europe.

The market for investment banking serv-ices is highly competitive and the leading European investment banks have of course much more expertise and resources than niche operators such as EIIB. In contrast to wealth management and private banking where the stress is on building long term client relationships, in investment banking clients are more likely to shop around for the best deal when awarding their mandates.

Several leading European investment banks have secured the services of Shariah advi-sors or appointed Shariah boards so that they can compete for investment banking business in the Gulf and South East Asia which involves Muslim clients or institutions concerned with Shariah compliance.

Deutsche Bank has been particularly active through its specialist Islamic banking opera-tion based in Dubai. It has provided invest-ment structures that facilitate the issuance of Shariah-compliant securities that offer investors access to alternative asset class-es. Together with Merrill Lynch and Morgan Stanley, Deutsche Bank launched 14 struc-tured products in August 2007 which are traded on the Dubai International Financial Exchange (DIFX).

Returns are linked through DIFX TraX that gives investors exposure to shares listed on the Dubai Financial Market and the Abu Dhabi Securities Market, as well as commod-ities including oil. Earlier in June 2007 Deut-sche Bank joined forces with Dubai Islamic Bank to issue five year capital protected notes with the returns linked to the Deutsche Bank – Goldman Sachs Asset Management ALPS Index. Deutsche Bank also pioneered a Shariah-compliant profit rate swap with Dubai Islamic Bank, the equivalent to a vari-able and fixed interest rate swap through a transaction worth $500 million.

French investment banks have also been actively involved in Islamic finance, notably Société Générale and Calyon, the invest-ment banking subsidiary of Credit Agricole. Société Générale arranged refinanced the Taweelah desalination plant in Abu Dhabi through its Islamic banking unit in Dubai with a $150 million share being Shariah-

compliant and the remaining $390 million share including conventional bonds and cor-porate lending. Calyon has been active with its affiliated bank, Banque Saudi Fransi, in syndicated Islamic financing. Its largest deal to date in June 2007 was the arrangement of a $2.9 billion Shariah-compliant financing facility for Mobily, the Saudi Arabian mobile phone subsidiary of Etisalat, the UAE tel-ephone company.

This was based on a murabaha fixed mark-up pricing arrangement, as was an earlier $150 syndicated facility for the Alliance Bank, one of the leading financial institutions in Kaza-khstan, Central Asia. The Shariah board of Abu Dhabi Islamic Bank provided the com-pliance advice, as Calyon does not have its own Shariah board.

Shariah-compliant fund managementFunds represent an ideal vehicle for Muslim investors as the fund manager can assume responsibility for Shariah compliance where-as an individual investing directly in assets cannot easily know if they are compliant. In many respects the principles of Islamic fund management are similar to ethical fund management, as both types of investment rely on pre-determined screening criteria to determine what it is legitimate to fund. There are two types of screens used for Shariah-compliant investment, sector screens and financial screens.

Unacceptable sectors to invest in include brewing and distilling and the production and distribution of other alcoholic bever-ages, pork production and distribution, gambling and casino operations and media companies whose output includes material seen as offensive, including pornography. In practice this rules out a wide range of companies, as for example hotels chains with gaming operations are excluded, as are supermarket companies selling alcohol, al-though some more liberal Shariah scholars may not object to the latter if it is a second-ary segment of the business.

Conventional banks are the most significant sector screened out because of their deal-ings in interest and it is this exclusion that has the greatest significance for returns on Shariah-compliant equity investment. Empirical studies have shown that Shari-ah-compliant investments out-perform the market when bank shares fare badly but under-perform when conventional bank profits are healthy.

The financial screens are designed to avoid exposure to heavily leveraged companies or those having excessive interest earnings. Hence, using the criteria developed by the Dow Jones Islamic Market Index, companies that have borrowing in excess of one third of their market capitalisation are excluded, as are companies that derive more than one third of their income from interest, as is the case with most conventional banks.

Companies whose ratio of conventional re-ceivables exceeds 45 percent of their mar-ket capitalisation are also excluded, the argument being that such companies are in practice offering conventional lending, as the revenue from the receivables will include a premium reflecting market rates of inter-est.

Islamic funds have been offered in Europe for over two decades, the pioneering fund being offered by Kleinwort Benson in 1986 and the most publicised being Flemings Oa-sis Fund launched in 1996 which was closed after the take-over by Chase of Flemings. The challenge for Islamic equity funds in Europe was to attract sufficient investment to achieve viability, which proved difficult for stand alone offer-ings. The funds cur-rently available are mostly offered by those large multina-tional banks that have a portfolio of Shariah-compliant services for their clients.




HSBC Amanah for example offers three funds from Dublin and one from Luxem-bourg, European centres that have attracted offshore fund business.

Those offered from Dublin include an Ameri-can equity fund, managed by Wellington, an Asia-Pacific Fund managed by Aberdeen As-set Management and a Pan-European Fund managed by Pictet Asset Management. The fund management outsourcing to specialist managers enhances performance, the aim of HSBC Amanah being to provide its exist-ing Muslim clients with more choice.

For each of the funds the initial charge is 3.25 percent, the annual management fee 1.85 percent and there is in addition a switching charge of 1 percent for those wish-ing to move to other HSBC funds. The mini-mum investment is only $10,000 with daily dealing, the leading holdings of the pan-Eu-ropean fund being BP, Royal Dutch Shell, GlaxoSmithKlein, Total and Novartis. Expo-sure to European oil companies is thought to appeal to Gulf investors.

The only independent Shariah-compliant fund offered in Europe is by Oasis, a South African based financial services group with extensive ties with the Gulf. Their Cresent Global Equity Fund, which was launched from Dublin, is valued at almost $37 million. Nearly half of the fund’s exposure is to Eu-ropean equities, with the United States ac-counting for less than one third.

The major sectors for investment are re-tailing, healthcare, manufacturing industry and information technology. The fund has performed well since inception, with an an-nualised return of 14.5 percent in dollar terms, well above the 2.6 percent annual-ised returns from the Dow Jones Islamic Market Index. The appreciation of the Euro has undoubtedly helped performance given the higher exposure to European stock than is the case for most global equity funds, whether conventional or Islamic.

The major Shariah-compliant funds man-aged from London are offered by Deutsche Bank and Scottish Widows, the fund man-agement and subsidiary of Lloyds TSB. The Deutsche Islamic Equity Builder Certificates have been offered since January 2003 and are marketed in the UAE by Emirates Islamic Bank, and white labelled in Saudi Arabia by the National Commercial Bank, the largest provider of Shariah-compliant funds world-wide, as Alahli Islamic Equity Builder Certifi-cates. Shariah compliance is provided by the Shariah board of the National Commercial Bank in Jeddah.

Although managed from London the certifi-cates are listed in Frankfurt. There are four certificates available based on the United States, the Asia-Pacific region, Europe and a Global fund combining the other three.

The Asia Pacific Certificates have given a return of 139.6 percent since inception, the European Certificates a return of 83.9 percent and the United States Certificates a return of 57.6 percent. The appreciation of the Euro undoubtedly accounts for the su-perior performance of the Euro Certificates in dollar terms relative to the United States Certificates.

The Scottish Widows Islamic Global Equity Fund was launched in October 2005 the aim being to provide a fund that could be offered to Lloyds TSB Muslim clients both in the United Kingdom and in the Gulf from their Dubai branch. Scottish Widows Investment Partnership is one of Europe’s leading asset managers with funds worth £97.8 billion be-ing managed.

The Islamic Global Equity Fund was val-ued at $19.3 million, with its major share-holdings including Intel, Pfizer, Bayer, Rolls Royce, OCC Petrol, China Mobile and Merck. The annual management charge is 1.5 per-cent, which is very competitive for an Islamic fund given the additional costs incurred with Shariah compliance.

Scottish Widows and Lloyds TSB also mar-ket the Children’s Mutual Shariah

Baby Bond which qualifies for a tax free lump sum for children

and young people once they become 18. The United

Kingdom government also contributes to

this saving scheme by providing vouch-ers worth £500 all parents in receipt of Child Benefits. Up to £100 per month can be paid into the fund which

can generate a con-

siderable sum which the young person can use on maturity after their 18th birthday to cover further education costs, a deposit on an apartment or other expenses. The Sha-riah Baby Bond is also marketed by the West Bromwich Building Society, which has a sub-stantial branch network in the Midlands, where many British Muslim families reside.

London is also a centre for Shariah-compli-ant property and leasing funds, although these are all closed ended, with only a few institutions and individuals of high net worth subscribing, rather than the general public as with the open ended equity funds. The property and leasing funds are usually less liquid, with the investment typically locked in for periods of 3 to 5 years and only limited facilities for redemptions, usually with exit penalties.

ABC Islamic Asset Management is the lead-ing player in the market through funds that invest in the student, healthcare and resi-dential property markets as well as club transactions and private portfolio manage-ment where the bank forms partnerships with small groups of investors and provides leverage through murabaha and ijara struc-tures, with the largest residential property project being in Leeds where almost £60 million was invested.

The total value of the United Kingdom Shari-ah-compliant commercial property portfolio exceeds £329 million, with the property re-stricted to halal use which excludes tenants such as betting shops or alcohol vendors. Although the leasing funds are offered and managed from London the assets are world-wide, examples being G.E. Quartz Japan whose operating equipment leases were fi-nanced and the Burlington Northern Santa Fe Railroad in the United States where the leases covered railway equipment and roll-ing stock.

Future prospects for Islamic finance in Eu-ropeAlthough Islamic banking and financial services have been offered from Europe for almost three decades in many respects the industry is still in its infancy. Much of the business activity has been focused on Shariah-compliant institutions from the Gulf and Muslim investors of high net worth, but this has resulted in activity being somewhat cyclical and linked to oil market develop-ments.

The impact on Europe’s resident Muslim population has been marginal, and mostly confined to the United Kingdom, even though France and Germany have much larger Mus-lim populations, with that of France exceed-ing five million. The Gulf and wider Muslim world is likely to continue to generate sub-

stantial Islamic finance business for London as an international financial centre and Eu-rope’s leading investment banks and asset managers, but the longer term prospects are more likely to be shaped by develop-ments within Europe and further European Union enlargements.

There are two major issues, the first being whether retail Islamic banking services can be provided for continental Europe’s Mus-lim population and if this is desirable. Sec-ondly there is the issue of European Union enlargement to encompass countries and regions with long established Muslim popu-lations in the Balkans, and Turkey, the most populous state in Europe, with over 72 mil-lion Muslims.

Although the European Union functions as a single market, banking and financial regulation is devolved to member states. In the United Kingdom the Financial Serv-ices Authority has played a pro-active role with respect to Islamic banking and finance and been broadly supportive, but that has not been the position elsewhere in Europe, where central banks and other regulatory authorities have shown little interest.

There is also a negative perception of Sha-riah, especially amongst right wing and na-tionalist politicians, which potentially inhibits the spread of Islamic banking and finance. What is not always appreciated is that Sha-riah compliance in finance is a choice, and not about the imposition of Shariah on those, including Muslims, who want to lead secular lives and manage their financial af-fairs in a conventional manner.

Some critics assert that Islamic finance is simply another facet of segregation and places Muslim banking in a ghetto, but those who rebut this argument point out, as shown earlier, that many leading European banks are now heavily involved in Islamic finance. There is certainly potential to develop more

Shariah-compliant savings and financ-ing products for Europe’s Muslim community, as well as distribute Islamic takaful insurance which remains in its infancy in Europe, de-spite the involvement of firms such as Allianz and Prudential in the taka-ful industry in the Gulf. At present the worldwide value of takaful premiums amounts to $1.7 billion, but less than one percent of this is spent in Europe.

The greatest potential for Islamic finance in Europe is undoubtedly in Turkey where Is-lamic banking has been established since the 1980s although it remains on the fring-es of the financial system, accounting for less than five percent of deposits, and opin-ions on its merits are politicised as already indicated. Turkey currently has six special fi-nance houses, as Islamic banks in the coun-try are designated, most being under joint Gulf and Turkish ownership.

The largest Shariah-compliant bank, Ihlas Fi-nance House, collapsed during the financial crisis of 2001-2002, but depositors were compensated through Central Bank and the Ministry of Finance which helped maintain public confidence in the special finance houses.

The leading institutions are Kuveyt Turk Par-ticipation Bank, which was established in 1989, and is majority owned by Kuwait Fi-nance House and the Kuwait Social Security Fund, and Bank Asya, which is under major-ity Turkish ownership, and dates from 1996. Kuveyt Turk has a network of 79 branches while Bank Asya has 111 branches spread throughout the country, but with the largest number in Istanbul and Ankara.

Both banks receive most of their deposits through profit sharing mudaraba accounts, and Kuveryt Turk, like its Kuwait parent, is heavily involved in leasing finance using an ijara structure.

Turkey has the greatest potential for expan-sion of banking in Europe, including Islamic banking, as the fastest growing economy, with GDP growth averaging 7.5 percent over the period from 2004 to 2006; and although this slowed to 5.7 percent in 2007, growth is expected to accelerate to 6.2 percent for 2008.

Turkey of course starts from a low base given its per capita GDP of under $8,000, but it has attracted foreign direct investment of almost $10 billion annually since 2005 and remittances, mainly from Turks work-ing in the European Union, average almost $ 1 billion annually. Turkey can serve as a bridge between the European Union and the wider Muslim World and in the longer term it is likely to be Istanbul, not London, which becomes Europe’s leading centre for Islamic banking and finance.

Iqbal, Munawar and Molyneux, Philip, Thirty Years of Islamic Banking: History, Performance and Practice, Palgrave Macmillan, 2004.• Kuran, Timur, Islam and Mammon: The Economic Predicaments of Islamism, Princeton University Press, 2006.• Lewis, Mervyn and Algaoud, Latifa, Islamic Banking, Edward Elgar, 2001.• Nomani, Farhad and Rahnema, Ali, Islamic Economic Systems, Zed Books, 1994.• Tripp, Charles, Islam and the Moral Economy: The Challenge of Capitalism, Cambridge University Press, 2006.• Vogel, Frank and Hayes, Samuel, Islamic Law and Finance, Kluwer Law International, 1998.• Warde, Ibrahim, Islamic Finance in the Global Economy, Edinburgh University Press, 2000.• Iqbal, Munawar and Llewellyn, David, Islamic Banking and Finance: New Perspectives on Profit Sharing and Risk, Edward Elgar, 2002.• Iqbal, Munawar and Wilson, Rodney, Islamic Perspectives on Wealth Creation, Edinburgh University Press and Columbia University Press, New York, • 2005.Jaffer, Sohail, (ed.) Islamic Asset Management: Forming the Future for Sharia Compliant Investment Strategies, Euromoney Books, London, 2004.• Jaffar, Sohail, (ed.) Islamic Insurance: Trends, Opportunities and the Future of Takaful, Euromoney Books, London, 2007.• Jaffer, Sohail, (ed.) Islamic Retail Banking and Finance: Global Challenges and Opportunities, Euromoney Books, London, 2005.• Islamic Development Bank, Jeddah from: www.isdb.org• Islamic Finance News, Kuala Lumpur from: www.islamicfinancenews.com•

References and Further Reading

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Islamic equity-based financing is an Islamic investment engaging at least two parties to do business together under Shariah princi-ples. Examples of this are Mudarabah (trus-tee partnership), Musharakah (joint venture), Muzara’ah (Harvest Yield Profit Sharing) and Musaqot (Plantation Management Fee Based on Certain Portion of Yield).

Meanwhile, debt based financing is a trade based financing engaging related parties with buying and selling of good under Sha-riah principles. This financing consists of Murabahah (cost-plus sale), Ijarah (leasing),

Bay Salam (deferred delivery sale), and Bay Istishna (manufacture-sale). Lastly like its counterpart, Islamic banks also provide a range of banking services such as Wakalah, (opening of letter of credit), Kafalah (letter of guarantee) and Hiwala (debt transfer).

Islamic banking theory recognises financing allocation into three types which are:

a) Equity based financing;b) Debt based financing and; c) Benevolent loan and fee based and fund based services.

Amongst all kinds of financing, debt based financing is the most favorite one in particu-lar Murabahah financing. Islamic banks use it is because

a) Murabahah rate of return is predeter-mined, fixed and continues b) Trade financing does not require much ef-forts to monitor, cooperate or evaluate like investment based financing and c) Risk of default is relatively low. Whilst for the clients, Murabahah is preferable due to its fixed rate of return along payment period, no charge for late payment/default, treating

Islamic Finance Instruments gif

IDENTIFYING AND MITIGATING MORAL HAZARD PROBLEM IN MURABAHAH FINANCING: THEORETICAL APPROACH

Author: Rifki Ismal, PhD Student, School of Government and International Affairs, Durham University, United Kingdom

Abstract: Murabahah is a dominant financing instrument occupied by MME in Indonesian Islamic banking industry. However, price volatility of the good being financed opens a chance for MME to gain profit by pretending to be default (moral hazard). Assessment on conditions triggering such moral hazard and probability of client to take risk of pretending to be default are being analysed. Finally, Islamic banks can mitigate it through appropri-ate bank’s investigation and charging some cost as well as penalty. Keywords: Murabahah, Moral Hazard, Price Risk, Penalty


Islamic Finance Instruments gif

IDENTIFYING AND MITIGATING MORAL HAZARD PROBLEM IN MURABAHAH FINANCING: THEORETICAL APPROACH

Author: Rifki Ismal, PhD Student, School of Government and International Affairs, Durham University, United Kingdom

Abstract: Murabahah is a dominant financing instrument occupied by MME in Indonesian Islamic banking industry. However, price volatility of the good being financed opens a chance for MME to gain profit by pretending to be default (moral hazard). Assessment on conditions triggering such moral hazard and probability of client to take risk of pretending to be default are being analysed. Finally, Islamic banks can mitigate it through appropri-ate bank’s investigation and charging some cost as well as penalty. Keywords: Murabahah, Moral Hazard, Price Risk, Penalty

an asset being purchased as collateral, etc.Nevertheless, Murabahah financing in a Shariah point of view contains several risks to be anticipated by the banks. Such risks are price risk, default risk, commodity risk and market risk. Focus of this article is to price risk, which is the volatility of a com-modity price along its financing period.

Bank’s client in this case might potentially earn monetary benefit when the price of a good being financed through Murabahah is going up more than its beginning price when Murabahah contract was signed. Hence,

there comes up three options, first is to con-tinue Murabahah contract until end of the period and realise the gain from the price margin assuming future price of the good is still high. Or, the second option is to im-mediately terminate Murabahah contract by pretending to be default and earn monetary benefit when the price of the goods has reached its highest level.

Lastly is to fully pay the total Murabahah contract on the spot with/without a hope for price rebate as some scholar prohibits it.

The article will focus on the second option because it can be classified as a moral haz-ard problem in Murabahah contract. In the Shariah point of view, if the client is really in a default situation, there are only limited ac-tions that can be pursued by bank;

a) Extending Murabahah payment period un-til the client has financial ability to continue it b) Ending the contract with an obligation to the client to fulfill all of his payments c) Selling the asset in the market as it func-tions as a collateral in the contract and us-ing the income to settle the rest of the pay-ment.

Nonetheless, those actions only apply to an honest default. If the client pretends to be default it is intolerable and Islamic banks might suffer some problems because of it, such as:

Interrupting bank’s predetermined • cash flow in asset side, which has been planned and adjusted with its liability side.Disrupting bank’s predetermined profit •

calculated along Murabahah contract (from the beginning until ending of the contract period). Selling an asset in the market causes • extra cost.It requires sudden investigation (I) by • bank to check the real condition of the client with the cost borne by bank itself if client is honestly defaulting.

Considering those problems, it is important to prevent clients from doing such a moral hazard by finding the condition that can trig-ger it to happen, how big the probability is and how Islamic banks can discourage it. In-spired by Dr. Habib Ahmed’s article (2000), this paper explores moral hazard in Mura-bahah contract by modifying and extending Dr. Ahmed’s works combined with applied finance/mathematics theory.

Although case of this article is in micro and medium enterprises in Indonesia, the as-sessment can also be implemented to other cases as long as still under Murabahah con-tract.

Murabahah Financing and Indonesian Mi-cro and Medium Enterprise Referring to some advantages of employing Murabahah contract described earlier, un-doubtedly, this financing instrument domi-nates asset side of Islamic banks operated all over the world unexceptionally Indone-sian Islamic banks.

From the year 2001-2007, Murabahah ac-counts for 61% of the total industry financ-ing, the highest among others followed by Istisna 6%; Ijarah and other debt based fi-nancing as seen in figure 1.

It is important to prevent cli-ents from doing such a mor-

al hazard by finding the condition that can trigger it to happen, how big the probability is and how Is-lamic banks can discourage it

„2011 September - October Global Islamic Finance 57

gif

Interestingly, tracing from type of enterprise being financed, it is found that around 73.6% of the total financing goes to Micro and Me-dium Enterprise (MME) as listed in figure 1. Like reasons in other overseas Islamic banks, Indonesian Islamic banks love to advance fi-nancing to MME because it has less risk of business loss and operates in a large scale of consumer business transactions and re-turnable projects with a continuous payment of return. Of all MME, Individual MMEs lead the industry with around 90.3% and the rest of them are companies MME which cope only 9.68% of it. Knowing that most of the Islamic banking industry’s financ-ing is to MME, it is absolutely essential to anticipate Murabahah’s moral hazard coming from price volatility as discussed above. Successful plan to prevent it and develop MME’s Murabahah financing may support and determine the prospect of Indonesian Islamic banking industry ahead. Selection Criteria of Murabahah Fi-nancing This part elaborates Islamic banking se-lection criteria in advancing Murabahah financing to its clients. It is going to be a starting point to know what kind of con-dition can trigger moral hazard. But be-fore that, several assumptions below are used as the basis of the analysis.

Client proposes Murabahah financ-• ing to Islamic bank for an asset val-ued as V in time period t = 0. It also functions as collateral in Muraba-hah contract.To acquire such asset, client pro-• poses the bank to finance major part of asset value or L at time t = 0. L is the residual value of the asset after down payment (Dp) made by the client to the vendor. Down payment is counted as Dp = DpV. Hence L = (V – DpV) and L<V.Bank is risk neutral.• Mark up (rm) is set by bank after pur-• chasing an asset and signed bilateral Murabahah contract with the client. rm is assumed to be composed of rate of profit (πm) and administrative cost (Ca). Thus, rm = πm + Ca. Therefore, L(1 + rm) is the total Murabahah contract to be paid from t1 until tn (end of Muraba-hah contract).

Bank conducts Murabahah investiga-• tion regularly or upon demanded. Dur-ing Murabahah contract, investigation is done to monitor the client’s financial ability while in case of default, investi-gation is placed to ensure the real con-dition of the client. Cost of such investi-gation is borne by bank but if the client is proven to do moral hazard, he has to cover this cost alone.

Following all assumptions, regular Muraba-hah payment from client to Islamic bank is formulised as and role as a regular cash inflow for the bank. Finally, Islamic bank for the sake of this research judges three variables as criteria to select Murabahah financing proposal. Firstly is information about client (λ), normalised to unity (0< λ <1), leading to adverse selection (AS) or AS = ƒ(1/λ). If bank only knows less information about the client, λ ≈ 0 meaning there will be adverse selection, whilst if bank has a lot of positive information about client, λ ≈ 1 meaning there will be no adverse selec-

tion. The second variable to be evaluated is whether client has saving account (T) in the bank. Assuming the same normalised unity as information variable above (0< T <1), Murabahah financing will be given if client is the bank’s own depositor (T ≈ 1) meaning he has account in the bank and no financing will be given if client is not bank’s depositor or T ≈ 0. Finally is price and expected price [E(Pv)] of the good planned to be purchased in the market.

According to the standard economic theory, price of the good in the market is determined by market demand (D) and Supply (S) or E(Pv) = ƒ(D,S). Thus, if E(Pv)>V0 Murabahah financing will be extended but if E(Pv)<V0 it will not be realised thereof. This third variable is notably the source of moral hazard in Murabahah and when the existing price of goods is in higher position than the first price when it was bought. Based on those three set of variables, Islamic bank evaluates various Murabahah proposals with parameter θ = ƒ(λ, T, Pv). Note that the higher the risk, the closer θ to unity (0< θ <1) and Islamic bank will tend to release funding for Murabahah proposal. Later on, this indicator underlies a condi-tion that opens a chance to the client to do moral hazard upon receiving Muraba-hah financing.

Murabahah Financial DecisionAs Murabahah is remarkably a trade-based contract with a deferred payment, total payment of Murabahah contract will be treated as opportunity cost concept related to the present and future value of the total payment. However, unlike con-ventional way of using interest rate to cal-culate present and future value, Shariah

adopts rate of return (rm) as a controllable tool to direct the present of future value of payments being made. With respected to Murabahah financing, Islamic banks will de-cide to release financing if the present value of the total Murabahah payment is higher than (or at least the same as) total proposed Murabahah financing (L0), or simply said PV ≥ L0.

By adjusting conventional present value for-mula to Islamic perspective, total present value of Murabahah financing is derived as follows:

Islamic Finance Instruments

∑ ∑= =

+−=+n

t

n

t

tmp

tm rVDVrL

1 1

)1)(()1(

Type of Business

Average Annual Financing (billion Rp)

2004 2005 2006 2007

Mirco Medium Enterprise (MME) Non MME

7,6611,303

10,8303,204

12,4475,612

16,7576,768

Total Financing 8,964 14,034 18,059 23,525

Figure 2: Financing Allocation for MME

Source: Bank Indonesia

30%

61%

6% 1% 2%

MusyarakahMudharabahMurabahahIstishnaLainnya

Figure 1: Islamic Banking Financing Breakdown

Source: Bank Indonesia, data from 2001-2007


and because so PV of Murabahah financing is formulated as .

Recalling Murabahah financing decision prerequisite of PV ≥ L0, Murabahah pro-posal from a client will be approved if

while PV = L0 represents inter-nal rate of return (IRR) which is a breakeven point between financing being given and payments received alongside period of Mu-rabahah contract. In order to gain profit, Murabahah’s mark up rate rm should be determined in a higher rate than IRR or r*m ≥ rm. Then, the final Murabahah financing decision will be noting that r*m is the profitable Murabahah mark up rate for the bank.

Conditions Potentially Cause Moral Haz-ardAs briefly explained above, Murabahah client can be tempted to do moral hazard when-ever there is a possibility for that. Logic be-hind it is monetary benefit possibly gained by pretending to be default to terminate the contract rather than continuing it until end of Murabahah contract.

Continuing the indication of moral hazard appeared inherently with fluctuation of the price, there are three scenarios of price risk with respected to the probability of doing moral hazard as explained in the following:

Higher Current Market Price than the First Price Agreed in Murabahah ContractThe current market price of a Murabahah good is higher than the first price when it was agreed to finance or Vk > V0. Intuitively, client might think of possibility to gain some benefit by squaring the contract, releasing the good but receiving some money from it especially if he also has enough saving (T) in the bank to cover the cost upon needed.

He pretends to be default although “pretend-ing” itself is a kind of dishonesty and not al-lowable in Islamic financing principles. For micro and medium enterprises (MME), set-tling Murabahah contract of working capital good (machinery, operational car, etc) when they have a better alternative is not impos-sible, especially if they can benefit by doing it and when a higher current market price facilitates them to do such purpose.

What are benefits of pretending to be de-fault to end the contract unilaterally? Follow-ing some unwanted output faced by Islamic banks as an impact of this unplanned ter-mination of Murabahah contract, client will get:

Profit margin from a higher current mar-• ket price of the good than the starting price in the contract (assuming cost of selling, etc is not significant). A release from an obligation to continue • Murabahah contract and can utilise his money (allocated previously for pay-ment) for other purposes.Another alternative to replace the good • especially if the Murabahah good is not needed again or there is a better alter-native other than acquiring the good at the end of Murabahah contract.

Nevertheless, as the client declares himself default, Islamic banks will instantaneously arrange an investigation to find out the real situation. For this client declaration, prob-ability of arranging investigation (I) is almost one (assuming unity index 0< T <1) and the consequences of this sudden investigation are definitely two.

If banks find and believe that client’s default is real then the cost of investigation will be under their responsibility as it should be, but if banks find that it is fraud (pretended to be default), the client should bear investigation cost and other penalties explained later.

No Changes in Market Price of the GoodIf the price of a good is relatively the same as the first price agreed in the contract (Vt = V0), client will less consider of pretend-ing to be default unless he is really default consciously. The probability of doing inves-

tigation for this case would only be 0< I <1 as Islamic banks also realise that client will not try to deceit due to zero benefit of doing it. Even, if the client is really in default and investigation finds it true, cost of investiga-tion and penalties will not charge him (still responsibility of the bank). The result of end-ing the Murabahah contract in this case is under bilateral decision and consciousness meaning that any benefit or loss appears to client at the end contains no dishonesty.

gifIslamic Finance Instruments

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Lower Current Price Than The First Price Agreed in Murabahah ContractUndoubtedly, this condition (Vt < V0) brings no incentive for client to conduct moral haz-ard like in the first scenario and probability of bank’s investigation is nearly zero (I ≈ 0). When a client pretends to default and is proven as cheating (moral hazard) in the bank’s investigation, he has to pay for the investigation cost and penalties.

Even if, bank’s investigation fails to prove it as less probability of doing it, ending Mu-rabahah contract by selling the good to the market might cause him to add more money to cover the rest of the total L(1 + rm) as the current market price of the good is lower than the first price agreed in the contract.

However, as MME often engages in Mura-bahah contract for a real and marketable capital good, so this scenario of lower cur-rent market price than firstly agreed price rarely happens. Whilst like the same case in the unchanged price above, if the client re-ally goes bankrupt and cannot fulfill his pay-ment obligation, any benefit or loss appears to client at the end of Murabahah contract contains no dishonesty.

Moral Hazard as A Consequence of Price RiskNow, focus of the analysis is to scenario of the higher current market price of the good as it opens the opportunity of moral hazard. When client dares to pretend default, what is the bank’s total receipt if Murabahah con-tract has to be ended unscheduled? Assum-ing that bank’s investigation fails to detect client’s moral hazard, Islamic bank will get total accumulated payment of: TRb = with k = termination of Murabahah contract and s = portion of asset value (after being sold) located for bank. To see the present value of TRb, it has to be adjusted with rate of return as explained earlier. The total cost termination date is: TCb = I + Cs with Cs = cost of selling such asset to the market. Thus, total profit (πb) for banks of this moral hazard practice is:

As the equation above has been in form of net present value, the value of L0 is negative representing initial financing value followed by positive revenue received from payment of Murabahah from t = 1 into t = k.

Meanwhile, if bank’s investigation success-fully detects this client’s moral hazard prac-tice, total cost will be zero assuming no other related cost except investigation cost (I) and cost of selling the good to market (Cs). Total

profit of Islamic bank becomes:

For the client, this scenario produces total revenue of:

because he does not have any asset left but he potentially gains income from price margin of selling asset in the higher current market price. TRc has already counted total client’s payment of Murabahah from t = 1 until t = k. Then, if bank’s investigation fails to detect his practice, total cost (TCc) is zero ending up with total profit (πc) = TRc.. But, if his practice is caught by banks, unfor-tunately he has to bear I and Cs so that his total profit is:

For a comparison, let’s examine a normal condition when client continues Muraba-hah contract until end of the period without

any willingness to take moral hazard conse-quences. In this situation, total revenue for the bank is: TRb = Total cost (TC) is only investigation cost (I), so total profit counts to be:

On the other hand, client receives TR as the last market price of the asset (Vn), but his total cost is:

without any obligation to pay both investi-gation cost and selling cost. Then, his total profit in this case becomes:

Formulating the Chance of Doing Moral Hazard Using set of formula calculated above, cli-ent will happily do moral hazard if profit of doing it is bigger than not doing or (πmh > πco). Fewer than two consequences of being found or not found by bank’s investigation, every scenario is shown in the following:

Moral hazard is not found by bank’s inves-tigation: Profit resulting from moral hazard is ,

whilst normal profit of continuing the contract is so moral hazard happens if :

Moral hazard is found by bank’s investiga-tion:Profit resulting from moral hazard is, whilst normal profit of con-tinuing the contract is so moral hazard happens if:

Minimizing the Client’s Moral Hazard Prof-it through Penalty Because of some negative impacts of this moral hazard practice mentioned previously and to create trusted relationship between bank and client, Islamic banks may impose penalties besides assigning client to pay for investigation cost and cost of selling. How-ever, such penalty should fulfill at least two prerequisites:

a) It is charged during Murabahah period and not at the end of the contract periodb) It is charged because client deceives the bank while in fact he is in a good financial capability to continue Murabahah contract until the end of the period.

In principle, this penalty is set to minimise client’s total profit resulted from price mar-gin into the level that causes him to just con-tinue the contract until end of the period.

Dr. Rifki Ismal is a bank researcher at Directorate of Islamic Bank-

ing, Bank Indonesia. He is also a lecturer at Faculty of Economics, University of Indonesia where he got his BA in economics in 1997. Upon obtaining a BA and working at Bank Indonesia for 3 years, Dr.

Ismal received his master degree in applied economics from the Depart-

ment of Economics, University of Michigan, Ann Arbor, USA in 2003.

He also got a PhD degree in Islamic Banking and Finance from Durham University, England. Currently, he

is a member of IFSB working group on stress testing. Dr. Ismal has

published many papers in various international journals and he is

an active writer in the Indonesian newspapers on issues surrounding

Islamic banking and finance.

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Total amount of penalty borne by client of his moral hazard is counted as β{(1-s)Vk} which is percentage of client net profit after selling Murabahah’s asset. As a result the chance of doing moral hazard become more diffi-cult as the profit from moral hazard is now

or simply,

Whilst normal profit of continuing the con-tract is still so the chance of conducting hazard happens might appear if:

Mitigating Moral Hazard through Effective Investigation After charging penalty, effective investiga-tion plays an important role to detect and minimise the probability of doing moral haz-ard.

The client on the other hand considers the probability of bank’s investigation (to avoid sanction), as crucial factor to calculate cost and benefit of doing moral hazard. Thus, if probability of bank’s investigation can be written as PI, the probability of moral hazard and the policy of bank to stop it can be deter-mined. Summarising all profit alternatives of cli-ent in figure 3:

The probability of con-tinuing Murabahah contract until the end of the period totaling profit gained if investigation occurs and if investiga-tion does not occur is found as:

and the probability of terminating it (pretend-ing to be default) is counted as:

As client will try to do moral hazard if πmh > πco therefore cut-off probability of bank’s investigation (PI*) that will lead to moral hazard practice is:

Several important points revealed by equa-tion 17 above regarding bank’s policy to miti-gate moral hazard are:

If probability of bank’s investigation (PI) • is less than (PI*) or (PI<PI*), client will most likely pretend to be default (moral hazard) knowing that the profit of do-ing it is higher than just continuing the contract. Moral hazard problem will likely to • take place not only when probability of bank’s investigation is low but also due to a very high current market price of the Murabahah good leading to a prom-

ising profit to square the contract prior to its end period.

Hence, to mitigate such moral hazard, • Islamic banks have to

a) Determine probability of bank’s investiga-tion (PI) so that PI = PI* andb) Set an appropriate percentage of client’s net profit after selling Murabahah’s asset (β) to reduce client’s profit of terminating the contract prior to its end period (1-s)Vk besides charging client to pay investigation cost (I) and cost of selling the good (Cs).

ConclusionIslamic banking and financing recognises three forms, equity based financing, debt based financing and benevolent loan. In practice, debt based financing particularly Murabahah is dominantly occupied by Is-lamic banks around the globe unexception-ally in Indonesia.

Indonesian Islamic banking industry records a lot of financing given under Murabahah contract specifically released to Micro and Medium Enterprise (MME).

However, price risk of the goods being financed opens a chance for MME to gain profit by pretend-ing to be default. To mitigate such problem, Islamic bank conducts bank’s investigation and charging some cost as well as penalty. Hence, client will hope-fully keep continuing the Murabahah con-tract until the end of the agreed period.

Allah SWT (2005). Al Qur’an. Ministry of Religion, Republic of Indonesia, Diponegoro, CV, 10th printed, Bandung, 2005.• Antonio, Syaefi (1999). “Shariah Bank for Bankers and Practitioners”. Bank Indonesia and Tazkia Institute, 1st Edition, Jakarta, December 1999.• Obaidullah, Mohammed (2005). “Islamic Financial Services”. Islamic Economic and Research Center, King Abdul Aziz, University Jeddah, Saudi • Arabia, May 2005.Rosly, Saiful Azhar (2005). “Critical Issues of Islamic Banking and Financial Market: Islamic Economics, Banking and Finance, Investment, Takaful • and Financial Planning”. Authorhouse, United States, 2005.Bank Indonesia (2000-2007). Islamic Banking Monthly Statistics Report, Jakarta, 2000-2007. • Iqbal, Zamir and Mirakhor, Abbas (2007). ”An Introduction to Islamic Finance: Theory and Practices”. John Wiley & Son Pte, Ltd, Singapore, 2007.• Ahmed, Habib (2000). Incentive Compatible Profit-Sharing Contracts: A Theoretical Treatment. Proceedings of the Fourth International Conference • on Islamic Economics and Banking, Loughborough University, Loughborough, 2000.Benninga, Simon (2000), Financial Modeling, The MIT Press Cambridge, Massachusetts London, England, Second Edition, 2000.•

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In this edition of Global Islamic Finance Magazine we will be looking at the financial and economical poverty which Somalia is currently facing and the beneficial option of Islamic Microfinance in combating poverty in Somalia. Somalia is a country located in East Africa which has suffered a severe famine of drought since July 2011 which has resulted in the worst food crisis that Africa has faced in 20 years. The United Nations had con-firmed that famine does exist in two regions of southern Somalia which were in the regions of Southern Bak-ool and Lower Shabelle.

Across the country, nearly half of the Somali population cur-rently 3.7 million people are now experiencing a crisis of food, poverty, shelter and mal-nutrition. Islamic Microfinance has been an unprecedented way to combat poverty which may provide the affected poor people of Somalia with a form of economical relief. This article will provide you with a compre-hensive update on Somalia’s poverty crisis and the benefits of using Islamic Microfinance to combat the devastated regions.

Islamic Microfinance a Model for Alleviat-ing PovertyIslamic Microfinance is becoming an in-creasingly popular mechanism for alleviat-ing poverty especially in developing coun-tries around the world. Islamic Microfinance relies upon adherence to the principles of Islam and the Shariah as it is socially re-sponsible form of investing and only involves itself in projects such as Zakat which are charity based projects or economic projects to develop an individual country’s economy. Islamic Microfinance gives the investor a chance to get involved in worthwhile projects which could essentially play a significant role in targeting poverty and alleviating it in many countries around the world. Islamic Microfi-

nance primarily relies upon the provision of financial services to the poor or developing regions which are subject to certain condi-tions laid down by Islamic jurisprudence or “Shariah”. Islamic Microfinance represents the mergence of two growing sectors which is the microfinance and Islamic finance in-dustry. It has the potential to not only be the solution for an increased demand to help the poor but also to combine the Islamic socially responsible principles of caring for the less

fortunate with microfinance’s ability to pro-vide financial access to the poor. Unleash-ing this potential could be the key to provid-ing financial access to millions of Muslims who currently reject microfinance products that do not comply with Islamic law. Figure 1 shows the potential model of an Islamic Microfinance scheme. Most Islamic Microfi-nance arrangements fall under the scheme of Mudaraba which is a contract whereby one participant provides capital and the

other participant utilises it for business purposes such as the ‘worker’. However there are many other Islamic financial instruments that can be used under the Islamic Microfinance scheme shown in figure 2.

Figure 2 shows the various Is-lamic instruments that can be used for Islamic Microfinance schemes so that Islamic mi-cro institutions can use them to help the poverty in coun-tries such as Somalia. Islamic Finance is unique because it gives the opportunity for so-cially responsible investments through Islamic Microfinance

options in order to help poorer nations tack-le economical problems and provide them with a means of sources to obtain capital. Under the Ijarah leasing schemes the poor can take a leasing Islamic instrument and be given the capital they need to combat poverty and aid in creating a more substan-tial life for themselves.

This is particularly beneficial in countries such as Somalia when they are afflicted with famine and poverty stricken regions. The Microfinance derived profits acquired are shared equally between the two par-ties involved. A Shariah advisor is normally consulted in a Microfinance projects and the proportion of profits are agreed at a term. There have been more and more opportu-nities and Islamic Microfinance funds that

Qardhul Hasan, •

Murabahah, •

Ijarah schemes are relatively easy to • manage and will ensure the capital needs (qardhul hasan), equipments (murabahah) and leased equipments (ijarah) for potential micro-entrepre-neurs and the poor.

Participatory schemes such as • mudarabah and musharakah, on the other hand, have great potentials for microfinance purposes as these schemes can satisfy the risk sharing needs of the micro-entrepreneurs.

Figure 2: Islamic Instruments for Islamic Microfinance

ISLAMIC MICROFINANCE the Key to Help Somalia in the Famine Crisis


Keywords: Islamic Micro Finance, Somalia, East Africa, Famine, Poverty, Islamic Finance, Islamic Banking, Shariah Compliancy

Seller

Micro EntrepreneurSell at mark up price Repayment

by installment

CashPayment

Figure 1: Mechanism of Islamic Microfinance

Source: Emerald Insight

Microfinance Institution

ISLAMIC MICROFINANCE the Key to Help Somalia in the Famine Crisis



have been established around the world to cater for opportunities for Islamic invest-ments in alleviating poverty within the grow-ing sector. The Islamic banking institution can also help facilitate Islamic Microfinance options for Somalia. The mechanism of Is-lamic banks in facilitating Islamic Microfi-nance options are outlined in Figure 3.

Islamic Finance a Valid Financial Solution to SomaliaWhile poverty in the Muslim world is widespread, Somalia is having its fair share of the pov-erty stricken crisis. However if the population of Somalia had more access to financial serv-ices then they would be able to develop their economy and get back on track. However the options of financial services for alleviating the poverty in East Africa are either inadequate or exclusive.

Therefore Islamic micro finance provides the ethical Shariah-compliant mechanism to cater for the population of Somalia and give them a financially sound way of drawing profits for their livelihoods and helping the poor. It also gives room for Islamic micro entrepre-neurs who want to invest in a good cause and make a socially responsible difference to someone’s life through Islamic Microfi-nance. Many regions around the world have

already created tailor made Islamic Micro-finance programs either through Islamic banks or Islamic Microfinance institutions to cater for dealing with poverty. Zubair Mughal, Chief Executive Officer of AlHuda Centre of Islamic Banking said in a statement that, “In the wake of the current financial crisis all around the globe, the Islamic Microfinance has gained even more importance due to its transparency and sustainability. Islamic Microfinance becomes an effective tool for

poverty alleviation” (Micro Finance Africa). Mr. Zubair Mughal offered his services from AlHuda-Centre of Islamic Banking and Eco-nomics who have also set up a Help Desk for Advisory, Trainings and Capacity Building for Microfinance Institutions. We provide com-

plete solutions in Islamic Microfinance for poverty alleviation are practiced effectively. If the country of Somalia can be supported through this financial and economical crisis of poverty by utilising the options of Microfi-nance in a Shariah-compliant manner then they may be able to be alleviated from pov-erty. It also allows investors to partake in a worthy cause in giving a socially responsible and charitable donation of funds to Somalia in order to facilitate Islamic microfinancing

options and further see Soma-lia get back on its feet.

Utilising Islamic financial in-struments such as Murabahah and Musharaka to help in fa-cilitating Islamic Microfinance can not only spur the Islamic micro financial sector but can also increase the options of Is-lamic finance and make it more accessible to poverty stricken countries such as Somalia. In this comprehensive update Global Islamic Finance Maga-zine has taken you through the mechanisms of Islamic Microfi-nance as a model for both Is-lamic banking institutions and a way to alleviate poverty. It is

a socially responsible form of financing that is very appealing to the developing coun-tries in aiding with financial crisis, famines, drought and other tragic causes which has resulted in many economical crises around the world.

Chillymanjaro (2011) Severe drought causes famine in East Africa, Islamic Micro Finance, Retrieved from: http://thewatchers.adorraeli.• com/2011/07/25/severe-drought-causes-famine-in-east-africa/Islamic microfinance: an ethical alternative to poverty alleviation (2011) Emerald Insight, Retrieved from: http://www.emeraldinsight.com/jour-• nals.htm?articleid=1891578&show=htmlMicrofinance can work with all models (2011) Islamic Micro finance Africa, Retrieved from: http://microfinanceafrica.net/tag/islamic-microfi-• nance/Why has Islamic Micro finance Not Reached Sale Yet (2011) Retrieved from: http://microfinance.cgap.org/2011/03/09/why-has-islamic-microfi-• nance-not-reached-scale-yet/

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Figure 3: Islamic Banking Institutions Mechanism for Islamic Microfinance

Source: Emerald Insight


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TURNING TO TRADITIONAL METHODS OF MARKETING YOUR

ISLAMIC FINANCIAL INSTITUTION


Abstract: Global Islamic Finance Magazine will look closely at utilising traditional methods of marketing to promote your Islamic financial institution. This article is ideal for any professional, business entrepreneur or investor wishing to make the best use of traditional methods of marketing which can further spur your

company forward. As the Islamic finance and banking industry is rapidly advancing and showing significant growth there is no better time to market your products and services to the global audience. The global

current climate has seen a surge in demand for Shariah-compliant products, services and many Islamic banks and windows have opened up institutions around the world to cater for the growing demand. Both

Non Muslims and Muslims alike want to tap into the various services offered by Islamic financial institutions and banks and therefore careful marketing in adherence to the principles of Shariah can certainly make

Islamic banking and finance more appealing. What are the best ways to market your product using the back to basics methods? GIF magazine will show you the various ways including how to optimise your chances of

promoting your financial institution.

Keywords: Traditional Marketing Techniques, Islamic Finance, Islamic Banking, Shariah Compliancy, Networking, Islamic Media, Advertising, Promotion, Financial Institutions


An Introduction to Traditional Marketing Strategies in Islamic FinanceThe Islamic finance industry is expanding rapidly and the nature of marketing strate-gies has also given light to many companies seeking new innovative ways to target the growing market. However not every company wants to folk out on highly expensive digital modern technological techniques and many successful Islamic financial institutions rely on traditional ways of marketing to grab their target audience. Islamic financial institu-tions, banks and companies may choose to go down the traditional route of marketing by using literature, posters, personal net-working at conferences, events, seminars and advertising to further expand their cus-tomer base. These traditional methods are more cost effective and can further get your company noticed especially if it is facilitated correctly and you gather a good team of sup-port to help you along the way.

First and foremost any form of marketing in Islamic finance has to follow the guidelines and principles set out by the Shariah which is highlighted in Figure 1.

The principles of the Shariah have to be ad-hered to when considering marketing plat-forms of any type as highlighted in Figure 1. Many Islamic financial institutions including leading entrepreneurs and investors wishing to tap into the industry have to ensure that they strictly avoid interest (riba) and en-sure that all their dealings are done in a manner which adheres to the principles of Islam. This can gather cus-tomer trust and can also cre-ate a better reputation for the companies as when custom-ers trust the products and services then they can fully indulge further into what the company has to offer.

Back to Basics: Essential Techniques for Traditional Marketing PracticesWhen investigating the various types of traditional marketing strategies that could be used to effectively promote Islamic financial in-stitutions, banks or compa-nies we have to consider the traditional ways of marketing that we can utilise today as discussed in Figure 2.

Advertising your company forms the basis of traditional marketing techniques. You can choose to advertise through financial publica-

tions, posters and the online platform which is key in engaging your target market and also offers scope for global consumers to tap into your products and services. It is important to ensure that your company and products should be endorsed in a Shariah-compliant manner so advertising has to ad-here to the principles of the Shariah. Adver-tising can be done through various different Islamic financial publishers or news agency websites or financial news websites. You can even advertise on your own corporate website. The more advertising you include for your marketing strategy will ensure that more people know about your company and products and will help further spur the suc-cess of your company. Advertising can be utilised through marketing consultants who can help you to build your company logo and brand and further spur the overall appeal for your financial institution.

You may decide that advertising in collabo-ration with brand names such as mobile phones that will sponsor your products and services can be an effective way of target-ing the market. There are many posters, bill boards and magazine advertisements that capture the eye of the reader especially if they are endorsed by a popular brand. It is inevitable that not all industries will be suit-able to endorse your Islamic financial prod-uct and therefore you would have to look into

Shariah-compliant companies and products to do so. In or-der for traditional methods to work in the fast paced indus-try advertising is a must for any investor, company CEO or entrepreneur.

Literature, Press Releases and Financial PublishersMany companies tradition-ally used to create pamphlets, leaflets of literature to adver-tise and give more informa-tion about their company and services. This can provide a person with the information you want them to know and take home. However be aware that nowadays most people will read a leaflet and then it becomes second nature to dispose of it without taking it in. This is mainly due to the digital revolution where ev-erything can be found online and information is easily ac-cessible from the internet at a touch of a button. Most peo-ple prefer to use internet plat-forms for information there-fore some forms of literature marketing may not be sub-stantial enough in attracting

Islamic Financegif

Prohibition of uncertainty

Profit sharing and risk sharing

Existence of an underlying asset

Prohibition of forbidden assets

(e.g. alcohol, gambling)

Prohibition of riba

Islamic Finance

Figure 1: Shariah Principles in Traditional Mar-keting Practices

Source: Apec Melbourne

Advertising

Figure 2: Traditional Marketing Techniques

Diagram by Tasnim Nazeer

Literature

Press Releases

Financial Publishers

Websites

Sponsorship

Marketing at conferences and seminars

Figure 3: Shariah Compliant Platforms for Traditional Marketing

Islamic Financial SeminarsIntroduce and promote your Islamic Financial Product in arecognised seminar such as Euromoney or IIFA Seminars

\

Organise Meetings with leading Islamic Scholars & Community Leaders Set up a day in your finacial institution to discuss and promote Islamic Finance from first hand experience with leading scholars and com-munity leaders \

1

2

Advertisements from Islamic Media Groups/Publications/TV Utilise the range of Islamic Media to target your Muslim Market and futher educate them on what products are Shariah compliant.

\

3

Global islamic Finance International FotumsThere are many Islamic Finance International Forums which you can get sponsorship from as well as promote your Islamic Financial product at the event \

Gain sponsorship from Islamic Certified Accreditors such as CIMAIf your Islamic Financial product is at a bank you could gain sponsors from accredicted financial institutions such as CIMA

\

6

4

5

Network your way to successful Islamic Financial Product Promotion Networking is key in establishing good contact who can help to suc-cessfully promote your Islamic your Islamic Financial product

\


Islamic Financegif

your target audience. Press releases which can be done through financial publishers are also a good way of keeping your target mar-ket in the know about your company and the latest updates.

However again due to the traditional form of marketing press releases become less effec-tive if they are not done in a digital platform. Press releases in newspapers or financial magazines can keep customers up to date and further promote your company on its achievements and improvements within the Islamic financial world. However there are tangible methods of creating press releases with substantial scope to target the market in a traditional manner.

Corporate WebsiteAlthough corporate websites may be consid-ered to be part of the modern form of mar-keting, websites have been around for years and many people have tapped into the tra-ditional method of marketing through com-pany websites. Your corporate website will say a lot about your brand and the products and services you have to offer.

It provides the basis for the ethos of your company and you would need to ensure that it is maintained and constructed to the highest quality in order to utilise successful branding techniques.

Through your corporate website you can give the opportunity for global clients across the world to tap into your company and learn more about it. A good marketing dialogue for your website and relevant information can help further spur the success of your com-pany in addition to providing relevant ad-dresses and company contact numbers.

SponsorshipAnother traditional marketing technique has been through the form of sponsorship. Many finan-cial institutions have gathered key sponsors collaborating with big named brands and financial banks which have come together to help spur the success of their company. Sponsorship can pro-vide a mechanism of support to a financial institution or compa-ny and really spur your company forward. There are many ways to engage sponsors through meet-ing social financial gatherings, networking, forums and various conferences and seminars. This will give you the relevant scope to meet important contacts who may be of help in sponsoring your brand or product to its full potential.

Marketing at Conferences/SeminarsMarketing your company, brand, product and services at conferences and seminars is another traditional way of grabbing your consumer base and any other eager inves-tors or sponsors wishing to collaborate in your business. Traditionally many entrepre-neurs would exhibit their ideas during world-wide financial conferences and seminars in order to attract the target audience and grab customers from around the world. This is a successful tool in networking the traditional way and can be a good way of meeting key people in the financial world in addition to gaining sponsorship although you need to be confident and have good flair when you are selling your ideas, products or services.

Traditional Marketing Platforms for Your Company, Product or ServiceThere are many different platforms to pro-mote your company, product or service in a Shariah compliant manner as discussed in Figure 3. As you can see from Figure 3 there are various ways to promote your company through traditional forms of marketing and we are going to comprehensively run through the methods available.

Networking at Islamic Financial Seminars, Forums and MeetingsIntroducing your Islamic financial product, institution or service through advertising or speaking at Islamic financial seminars and forums such as the prestigious Euro money and IIFA can really help spur the success of your company. There are various global organisations that can help you to achieve your advertising goals and can aim to pro-vide time for your company to exhibit them-selves in a relevant seminar.

It may be worth looking into the various pos-sibilities available to really achieve your goals of promoting your company the traditional way. Islamic financial forums and meetings also provide the opportunity for your com-pany to gain sponsorship which is crucial if you are considering traditional marketing strategies as your sole strategic marketing plan. You may also be able to gain sponsor-ship from Islamic Certified Accreditors such as CIMA or other relevant companies which cater for your individual company needs and requirements.

Promotion through Islamic Financial Me-diaThere are numerous Islamic financial media corporations around the world from news-papers, magazines and television channels which can further help to spur your company forward. You could utilise a platform for Is-lamic financial media to further promote and market your company and the products and services it has to offer in a Shariah compli-ant manner. All Islamic media platforms will have to ensure that the products and ser-vices you market are endorsed in a Shariah-compliant manner adhering to the principles of Islam. What traditional marketing indus-tries can I use to endorse my institution, brand or service?

There are various traditional industries which can be used in a Shariah-complaint manner to endorse your brand, product or institution successfully as outlined in Figure 4.

As highlighted in Figure 4 there are many ways to endorse your product in Shariah-complaint industries such as the motor vehicle, electrical, food and Islamic media

sectors. These sectors provide a good scope for advertising the traditional way and you can con-tact Islamic media outlets and Islamic financial institutions to further help with your advertis-ing campaign for your product, service or brand. Marketing in a traditional framework can work more effectively if you utilise the avenues which are open to you by taking control of the op-portunities you have at hand and really focus on establishing a sound marketing strategy for your product, brand or company. Many Islamic Financial banks have collaborated with leading mobile phone manufacturers such as Blackberry, Nokia and many more in order to make Is-lamic financial services more ac-cessible and appealing. One ex-ample is Dubai Islamic Bank who launched the Mobile Islamic

Food Industry - Halal Foods and Drinks to Sponsor

Motor vehicle Industry - Cars

Figure 4: Shariah Compliant Industries to Endorse my Institu-tion, Brand or Service

Electronic Industry such as Mobiles & Laptops

Islamic Institutions/Companies

Islamic Media such as islamic Finance Publications and TV advertising on Islamic Channels


Banking in collaboration with leading smart phone providers which would be appealing to both Muslims and Non Muslims alike. Pro-moting Islamic Financial products through the use of state of the art technology can aim to effectively market the product and be an equal competitor to conventional banks marketing strategies. Another example of effective marketing in Shariah-compliant industries is Emirates Islamic Bank sponsor-ing the bank’s launch of new products with a ceremony which showcased the latest Nis-san cars. Director of Sales and Marketing at Arabian Automobiles, Felix Welch said in a

statement that, “We are delighted to put this highly attractive fleet financing and vehicle maintenance package together with our partners at Emirates Islamic Bank. We be-lieve this combination of incentives and the highly competitive profit rate on offer will ap-peal to fleet managers looking for the best turn-key corporate fleet financing and main-tenance deal on the market today.” Emirates Islamic Bank is promoting its services and is an exclusive bank in this partnership which is a unique business initiative between two leading players in the market. The Islamic financial sector is thriving and business

partnerships such as the Arabian automobiles partnership with Emir-ates Islamic Bank can further help to promote Islamic financial institu-tions and highlight them into the forefront to further diversify Shariah-compliant investments, products and services (GIF Online).

Challenges of Traditional Market-ing Strategies Vs the Digital AgeWith the revolution of the new digi-tal era whereby most marketing and promotion is done through an online platform, traditional forms of mar-keting may face many challenges. Although traditional methods of marketing and promotion form the basis of any company’s mechanism for attracting customers with the ad-vancement of technology it has been increasingly difficult to capture the target market relying on traditional strategies alone. An example of this is the emergence of social network-ing which has enabled people to correspond quickly and efficiently through various social networks and promote their websites and compa-nies through various websites such as Facebook.

However traditional forms of market-ing strategies whereby a representa-tive from a company has to physi-cally attend conferences, events and seminars may take more time and more effort. Many investors, entre-preneurs and business associates are worried about time manage-ment and may find digital market-ing an easy and effective option as opposed to traditional marketing forms. However traditional market-ing strategies can work effectively and may even gain sponsorship for your company in terms of network-ing. If you were to make an impres-sion on an investor that you have met personally through a confer-ence or seminar than you may be on the right track for key sponsorship for your company. It also enables you to meet like minded individuals

with a variety of talents at first hand to fur-ther promote your company and expand your customer base.

This is where traditional marketing never falls short of first hand experiences with network-ing clients. Another challenge for companies wishing to solely use traditional marketing methods is the costs. It can be relatively costly to create company literature, leaflets and posters in print then it is to have them featured on a digital platform whereby you can promote your company for a less price

gifIslamic Finance

Dubai Islamic Bank became the first full ser-vice Islamic bank in 1975. It is now seen as the fair alternative to conventional banking.

The customer focused institution provides a close personal service and ensuring that cus-tomers are offered solutions.

The bank also offers a range of services such as online banking, phone banking, investor re-lations, SMS banking and e-statement.

Dubai Islamic Bank

Absa Group Limited provides different types of banking, assurance, wealth management prod-ucts and services.

The brand changed in 1998, the decision was made because the idea of multiple brands with overlapping target markets did not make sense.

The Absa Group was created from the idea of having one single brand offering a range of ser-vices.

The logo was developed from the letter ‘A’ sym-bolising the beginning.

The colour red was used to create the feeling of excitement and energy.

Absa Group Limited

The ADIB slogan is ‘Banking as it should be’ they aim to create a brand that is simple sen-sible and transparent.

The logo was produced with the idea of a 3D element symbolising the new dimension to ADIB.

The circular shape in their logo shows the global expansion of the company and the con-nections around the world. It also symbolises simplicity.

The crescents in the logo symbolise the Sha-riah compliance, transparency and mutual benefit.

Abu Dhabi bank offers a range of services such as Mobile banking, SMS banking, Phone bank-ing and e-ADIB.

Abu Dhabi Islamic Bank


gif

and reach a more global audience. However there are advantages to creating literature and leaflets which can be used to be sent out to interested potential customers for your Shariah-compliant financial business. One of the key challenges that the whole Islamic finance industry faces today is the need for standardisation in Shariah compliancy in order to avoid disputes between scholars as to what is deemed Shariah-compliant. This can often leave any marketing strategy with a doubt as to whether there brand is genuinely Shariah-compliant. Therefore it is always best to consult scholars from a posi-tive consensus who the majority agrees with rather than deviate from the norm of what is Shariah-compliant as it could become an innovation. Targeting a global audience may be harder when traditionally marketing your Islamic financial institution in comparison to reaching millions of people on the digital marketing platform.

Overall there are ways to make traditional marketing work for your individual company or brand and with time and effort it can be done to create a successful target market for your financial institution.

Traditional Marketing: Making it WorkAlthough it seems that traditional forms of marketing are being overtaken by the technological advancing world of the digital platform there are ways to make traditional marketing methods work. So how can you make it work? This is the question many have asked.

The Future of Traditional Marketing Strate-giesAlthough traditional forms of marketing form the basis for the digital platform and highly advanced technological marketing its future may be hindered by the take over of these platforms. As technology unfolds many com-panies, investors and entrepreneurs have recognised the key potential of marketing their products and services online and very rarely make such an effort with making tra-ditional marketing strategies work. However there are methods whereby a company can solely use traditional marketing strategies as discussed in this article to further grab

and expand their customer base. It may be that the traditional marketing strategies you choose to use may be sufficient for your indi-vidual company, brand or product. However bigger firms prefer to use digital marketing to promote their product in order to save time and effort. There are advantages to tra-ditional marketing strategies such as meet-ing key sponsors and establishing important contacts to support your business. An inves-tor may be more likely to respond to your ideas or business products and services if they have met you in person and built a rap-port with you and this is why traditional mar-keting techniques still can work effectively in comparison to digital.

Some companies cannot afford to spend on creating literature and leaflets for a global customer base as it may find that the post-age alone can affect the overall company costs. There is also no guarantee of a re-

sponse from customers or potential custom-ers when posting promotional material and if they do respond it may take more time in comparison to social networking sites or cor-porate websites whereby people can send you a message at the click of a button and you are more likely to respond quicker and get things done in a cost effective manner. Making use of the marketing resources you have such as creating a brand and logo which can be promoted through Islamic financial media institutions or financial publishers can help get your company recognised.

Advertising is key to any traditional market-ing strategy and this has to be utilised ef-fectively in order to make your strategy work and stand out from the crowd. There are hundreds of advertisements on the market for various financial products from around the world so it is important to ensure that the design, layout and promotional offers are of the highest quality when using tradi-tional marketing techniques to promote your business, brand or product.

Perhaps it may be worth looking into tradi-tional methods of marketing coupled with digital branding which can give you the best of both forms and can ensure that you mar-ket your product or company in the most fulfilling way. It is always important to in-vestigate the various avenues available in marketing your product so that you can keep your options open and combining digital and traditional methods of marketing may pro-vide you with the perfect balance you are looking for.

Any form of marketing has to adhere to the principles of the Shariah and this should be considered as the first and foremost point of action for your strategy. There are chal-lenges to marketing your product, brand or business solely in a traditional framework however collaborating with digital branding platforms can further help you to spur your company forward. If you do want to use sole-ly traditional marketing platforms GIF maga-zine has discussed the various ways you can do so in this article which would hope to give you the insight you need to kick start your marketing strategy.

You can utilise networking skills by attend-ing conferences, seminars and events to further promote your brand, product or service.

Creating unique literature and leaflets to distribute to a global customer base can add to your profile and provide an intellec-tual form of marketing.

You can gain more sponsors through tra-ditional forms of marketing harnessing employees selling skills and the ability to promote your company to investors and Islamic financial institutions.

You can use the traditional method of con-tacting Islamic financial media outlets, fi-nancial publications and create press releases to further capture your target market.

Social Networking sites may be the new age revolution but what about profession-al marketing through meeting associates, investors and entrepreneurs which can provide even more creditability to expand your customer base.

Figure 5: Make Traditional Marketing Work for You

Islamic Finance

Al Shawi, Irani & Baldwin: (2003) Benchmarking Information Technology, An International Journal of Benchmarking- • Iqbal M, Islamic and Conventional Banking in the 90’s (2000): A comparative study: Loughborough University Press• Warde I, Islamic Finance in The Global Economy (2000): Edinburgh University Press• Extracts from: Wilson, J.A.J and Liu, J. (2010), “Shaping the Halal into a brand?”, Journal of Islamic Marketing• EIB and Arabian Automobiles Launches Promotion (2010) Retrieved from http://www.globalislamicfinancemagazine.com/index.php?com=news_• list&nid=838Ogilvy Noor Spearheads Islamic Branding Drive (2010) The Drum, Retrieved from http://www.thedrum.co.uk/news/2010/07/05/14589-ogilvy-• noor-spearheads-islamic-branding-drive/Z. Akhtar Aziz, (2006) Focus on Human Capital Development in Malaysia, BIS Review, Retrieved from: http://docs.google.com/• viewer?a=v&q=cache:QNpjzL5F-68J:www.bis.org/review/r061220b.pdf+strategic+leadership+islamic+finance


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gif Market Review

Malaysia’s success in attracting US$9bil of orders for a US$2bil sale of sukuk reflects a one-year drought in global issuance by sovereign borrowers.

The nation’s record dollar-denominated offering of US$1.2bil of five-year notes and US$800mil of 10-year debt was snapped up by more than 320 investors in Europe, Asia, the Middle East and the United States, the Government said in a statement.

The yield on the existing 3.928% Sukuk due in June 2015, the last international issue in May 2010, dropped eight basis points to 2.66%, prices from Royal Bank of Scotland Group show.

The offer drew interest from both the US$1 trillion Islamic banking indus-try and non-Syariah-compliant investors who are favouring higher-rated Asian debt due to Europe’s turmoil, according to CIMB-Princi-pal Islamic Asset Management Bhd.

Companies in India, China, the United States and Pakistan have postponed debt sales this month as the odds of a Greek default pushed up their cost of borrowing.

“Malaysia’s good credit standing, the rarity of sovereign sukuk and the need for funds to diversify risk probably helped to shore up interest,” Zeid Ayer, who helps oversee US$1.6bil at Kuala Lumpur-based CIMB-Principal Islamic and bought the five-year notes, said in an interview on the 29th June. “Demand was stronger than the two-to-three

times I expected,” he added. Malaysia now has four global sovereign bonds, three of which are Islamic of different maturities. The nation’s only non-Syariah compliant dol-lar note of US$1.75bil matures on the 15th July. There’s currently US$29.9bil of global sukuk, which pay returns on assets to com-ply with Islam’s ban on interest, outstanding including Malaysia’s latest sale, according to Bloomberg calculations.

Malaysia’s issuance of the world’s first 10-year Islamic bonds may encourage other governments and local companies to sell longer-maturity notes, according to RAM Rating Services Bhd. “More longer-dated Islamic paper are needed to help insurance companies and banks meet asset liabili-ties,” Zakariya Othman, the head of Islamic ratings at RAM said.

Pakistan’s government deferred its plan to sell bonds in Oil & Gas Development Co, the nation’s biggest energy explorer, because of the European debt crisis, Asad Amin, a spokesman for the fi-nance ministry, said.

NTPC Ltd, India’s largest power company, put off a US$500mil is-sue of dollar notes in Singapore, the Daily News and Analysis re-ported on its website. Bank of America Corp postponed a sale of debt in Japan, citing the “mar-ket environment,” Takayuki In-oue, a Tokyo-based spokesman, said on the 21st June.

Malaysia’s 2.991% notes matur-ing in July 2016 were issued to yield 145 basis points, or 1.45 percentage points, more than US Treasuries. The difference for the 4.646% debt due in July

2021 was 165 basis points. Malaysia sold US$1.25bil of five-year dollar Sukuk in May last year at a premium of 180 basis points. The yield on the five-year bond dropped 10 basis points to 2.99%, RBS prices show. The rate on the 10-year security declined 12 ba-sis points to 4.61%.

Indonesia delayed a sale of at least US$500mil of Syariah-compliant dollar bonds to October, Rahmat Waluyanto, direc-tor-general at the Finance Ministry’s debt management office, told reporters in Jakarta on the 20th June. The yield on the country’s Sukuk sold in April 2009 dropped five basis points yesterday to 2.77% and is down 36 basis points this year, according to RBS. gif

Malaysia’s issuance of the world’s first 10-year Islamic

bonds may encourage other govern-ments and local companies to sell longer-maturity notes

„


MALAYSIA Fluctuating Sukuk Sales


Business News

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Pakistan is progressing, its Islamic Banking sector with the implementation of new banking products to cater for the demand for Shariah-complaint services. One such example is Meezan Bank as it appears to be doing increas-ingly well in facilitating and implementing Islamic bank-ing products and services in comparison to competitor Islamic banking branches. “We have never had to turn a client down for liquidity concerns,” says Sheikh, the head of corporate banking at Meezan Bank. His is a luxury most bankers would be en-vious of in the current mon-etary climate.

Liquidity is the lifeblood of the financial services sys-tem. Simply put, a financial institution needs to be able to ensure that it is able to move the right amounts of money at the right time to the right places in order to keep its lending clients, as well as its depositors, happy. Failure to do so for even a single second can result in a cata-strophic drop in confidence levels that can lead to an unravelling of even the most storied financial behemoth, like the American investment bank Lehman Brothers in 2008. Meezan, apparently, seems to be swimming in liquidi-ty these days, largely due to an extraordinary build-up in deposits which have increased at an average annualised rate of 50% per year between 2002 and 2010, compared to the banking industry average of 16.3% during that same period. (Inflation during that pe-riod averaged just over 9.3%)

Profits have kept pace, rising every year except 2008. For 2010, the bank earned Rs1.6 billion, a whopping 61% higher than

the previous year. Profits in the first quarter of 2011, meanwhile, suggest a better year still, higher by another 61%. The bank has long been the dominant player in Islamic banking, with more deposits and assets than all other Islamic banks combined.

Yet its success has also meant that the bank has grown beyond what is still seen as the ‘Islamic niche’ in the banking market. “Ef-fectively, our competition is the middle-tier banks: Standard Chartered, Bank AL Ha-bib, Habib Metropolitan, etc,” says Sheikh, though he was quick to point out that the

bank is not dismissive of its fellow Islamic banking rivals. Meezan Bank executives say that they market their serv-ices to prospective clients based on pricing and having a full suite of products. The bank does not downplay its Islamic nature, but is keen to be seen as a viable financial partner for companies that are agnostic about Shariah compliance.

In essence, Meezan is the most mature of Pakistani Is-lamic banks: one that sees it-self as a full-service financial institution that also happens to be 100% Shariah-compli-ant. Yet the bank is also not trying to go down the road taken by Faysal Bank, which started off as an Islamic bank but then slowly shed its reli-gious credentials and became a conventional bank. “While being Islamic is not our only unique selling point, it is cer-tainly important to us and too many of our customers,” says the corporate banking head, adding that they do not plan on abandoning their Shariah-compliance any time soon.

Indeed, Meezan executives seem to view Shariah-compli-ance as a highly useful tool

in risk management for the bank. Unlike a conventional bank, Meezan must keep track of how its clients utilise the funds that are released to them.

While the bank does not do this for every sin-gle loan, it does so for enough to ensure that its risk management is better than most of its conventional counterparts. Non-perform-ing assets from less than 3.7% of total lend-ing, far less than the industry average.

PAKISTAN PROGRESSES IN ISLAMIC BANKINGwith Meezan BankSource: GlobalIslamicFinanceMagazine.com

gif

„T h e

bank has long been the dominant player in Is-

lamic banking, with more de-posits and assets than all other Islamic banks combined. Yet its success has also meant that the bank has grown beyond what

is still seen as the ‘Islamic niche’ in the banking

market

gif Market Review


Thailand has an increased potential to tap into the in-vestment and trade sector of Islamic finance and fur-ther expand their economy through the facilitation of Islamic financial institutions, products and services. “If the governing rules and regula-tions for Islamic financing like Sukuk are put in place [in Thailand], then investors from the Middle East or Ma-laysia who want to invest ac-cording to Islamic principles may come and look at Thai-land as a potential invest-ment opportunity,” Ahsan Ali, Dubai-based global head of Islamic origination, said.

The Securities and Exchange Commission agreed to amend a law allowing for the sale of and trade in Islamic bonds. The draft bill is be-ing prepared by the Council of State for forwarding to the incoming Cabinet for approv-al. Investors mainly from the Middle East have expressed greater interest in Asia, which has witnessed growing trade and investment with the Arab world. “This opens up an opportunity for Thai-land and creates flows from other countries and investors searching for Shariah-compliant products,” Ali said. Islamic financing is growing even in non-Muslim countries, ensuring that they do not lose out on this opportunity to get access to the credit, prices and yields of Sukuk.

Global sales of Sukuk, which pay asset re-turns to comply with Islam’s ban on interest, totalled US$13.2 billion this year compared with $6.6 billion a year earlier, according to data compiled by Bloomberg as of 5th July. Worldwide Islamic assets are projected to reach almost $1.6 trillion with revenue of $120 billion by next year, according to Oliver

Wyman’s report on “The Next Chapter in Is-lamic Finance - Higher Rewards but Higher Risks”. The Islamic Bank of Thailand may sell $150 million of Shariah-compliant bonds overseas by the end of this year. The bank also plans to raise Bt5 billion from the sale of the country’s first Sukuk in the domestic market this quarter. Three real-estate firms plan to sell as much as $500 million of the notes. The Islamic securities returned 3.6 per cent in the second quarter, the HSBC/Nasdaq Dubai GCC US Dollar Sukuk Index shows. Emerging market debt gained 3.4 per cent, the JPMorgan Chase EMBI Global Diversified Index shows. However, Islamic fi-

nancing does face challenges. Taxation and the regulatory and legal framework remain disadvantages in many coun-tries. Shariah-compliant prod-ucts are not allowed for sale by banks in many countries while these products may be taxed at different rates than conventional financial prod-ucts. “The first step in the market’s development is for the regulators to ensure there is a level playing field, which means orthodox and Islamic products are equivalent coun-terparts. Then, they should leave it to the marketplace to develop [by itself],” Ali said.

This year, market conditions are better than last year for Sukuk on the back of continu-ing liquidity. Sukuk issuers are looking for signs to enter the market and what will hap-pen in the financial markets in the next six months. “If the markets continue with proper financial and economic condi-tions, then people will come to the markets because li-quidity is there to absorb these issues. If there is bad news including negative po-litical or economic matters, investors will wait before mak-ing an investment decision,”

Ali said. While the market remains volatile, issuers may not like to go experimenting in the market because that may affect pricing. Greece’s story has caused risk aversion in general.

“It’s exactly like conventional issues,” Ali said. Sukuk complies with Islamic princi-ples but behaves like conventional bonds in terms of pricing, rating, listing and yields. If there is no regulated system or legal system developed for Islamic financial products, this country may lose out on that opportunity, he said.

THAILAND TO PROSPERin Islamic FinanceSource: GlobalIslamicFinanceMagazine.com

gif

„T h e fi r s t

step in the market’s de-velopment is for the regula-

tors to ensure there is a level playing field, which means or-thodox and Islamic products are equivalent counterparts.

Then, they should leave it to the marketplace

to develop

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 18/05/2010 09:41:42

More than 400 key players, regulators and thought leaders in the global Islamic funds and investments industry are set to gather in the Kingdom of Bahrain on the 26th and 27th of September 2011 for the 7th Annual World Islamic Funds and Financial Markets Confer-ence (WIFFMC 2011).

Held in strategic partnership with the Cen-tral Bank of Bahrain, the 7th Annual WIFFMC 2011 will set the stage for critical discussions that will focus on “achieving international scale and creating a vibrant Islamic financial market and re-invigorating the Islamic invest-ments industry.”

Announcing the launch of the event, David McLean, Managing Director of the World Is-lamic Funds and Financial Markets Confer-ence noted that “following the return of inves-tor confidence to global markets, the Islamic funds and investments industry has gained substantial momentum at an international level. The recent acceleration seen in the Is-lamic funds and investments industry is set to grow further as governments and institutions

in the high-growth Asian and Middle Eastern markets continue to seek Shari’ah-compliant instruments as an attractive alternative for raising capital for infrastructure development and investment projects and also for diversi-fying their investment portfolio.”

He also said that “with global Sukuk issues this year projected to surpass even the record high level of issuances achieved in 2007, it is critical for the industry to undergo structural transformations and respond to an investor-driven world to tap into the next wave of op-portunities.”

“WIFFCM 2011 will focus on developing for-ward-thinking strategies that will get the in-dustry back on the high-growth track, achieve critical mass, and tap into the highly positive global fundamentals which promise signifi-cant potential for Islamic investments”, he added. The 7th Annual World Islamic Funds and Financial Markets Conference (WIFFMC 2011) is set to begin on the 26th of Septem-ber 2011 with an opening keynote address by Abdul Rahman Mohammed Al Baker, Execu-

tive Director – Financial Institutions Supervi-sion at the Central Bank of Bahrain which will be followed by keynote addresses by Germain Birgen, Chairman - LFF Islamic Finance Task Force, Chairman - ALFI Islamic Finance & ME Working Group, Managing Director - Global Head HSBC Amanah Securities Services - HSBC Securities Services (Luxembourg) S.A. and Gary Palmer, Chief Executive, Irish Funds Industry Association (IFIA).

The session will discuss key regulatory initia-tives to strengthen the Islamic investments industry and will also assess the growth op-portunities for Islamic funds in dynamic new jurisdictions.

Commenting on his participation at the event, Abdul Rahman Mohammed Al Baker, Execu-tive Director - Financial Institutions Supervi-sion at the Central Bank of Bahrain said that “with the Islamic investments market having grown to become an increasingly substan-tial segment within the global financial sys-tem and having gained substantial interest and momentum in the post-crisis economic

Event Review gif

Islamic Funds and Investments Market Expands its Global Footprint

The World Islamic Funds and Financial Markets Conference to Discuss Strategies for Achieving International Scale and Creating a Dynamic

Islamic Financial Market

landscape, it is essential that the strong foundations laid out for the industry is now tapped into growing the industry to its next phase of development to achieve the international scale and critical mass. With the strong and robust regulatory frameworks adopted by the Central Bank of Bahrain, Bahrain will continue to be one the leading financial centres in the region and a global leader in Islamic finance.”

“We are once again delighted to host the annual World Islamic Funds and Finan-cial Markets Conference and we believe that events like these are essential to enrich the ongoing dialogue and debate on the Islamic investments industry”, he added.

WIFFMC 2011 will also feature the exclu-sive on-site launch of the Ernst & Young Islamic Funds & Investments Discussion Paper 2011. Now in its fifth year, the Ernst & Young Islamic Funds & Invest-ments Report has rapidly established it-

self as an invaluable reference resource for leading players in the Islamic funds and financial markets. This year’s dis-cussion paper will provide the impetus for an interactive review of the market, the players, and the challenges, and will offer fresh perspectives on renewed strategies as leading players seek to further align their business models with the expanding internationalization of the industry.

The Islamic Investments Institution of the Year Award will also be announced at WIFFMC 2011. The award recogniz-es an institution that has significantly contributed to the development of the Shari’ah-compliant investments industry either through the development of inno-vative products and services that have substantially advanced the regional and global Shari’ah-compliant investments industry and/or outstanding financial performance resulting from excellence in its operations.

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 18/05/2010 09:41:42

Event Review gif

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gif Business News

BookReview

Islamic Capital MarketsProducts and Strategiesby Kabir Hassan & Michael Mahlknecht

Islamic finance has experienced rapid growth in recent years, showing significant innovation and sophistication, and producing a broad range of investment products which are not limited to the complete replication of conventional fixed-income instruments, derivatives and fund structures.

Islamic finance represents an elemental departure from traditional interest-based and speculative practices, relying instead on real economic trans-actions, such as trade, investment based on profit sharing, and other solidary ways of doing business, and aims to incorporate Islamic principles, such as social justice, ecology and kindness, to create investment products and financial markets which are both ethical and sustainable. Products cre-ated according to Islamic principles have shown a low correlation to other market segments and are relatively independent even from market tur-bulences like the subprime crisis. Therefore, they have become increasingly popular with secular Muslims and non-Muslim investors, as highly use-ful alternative investments for the diversification of portfolios. In Islamic Capital Markets: Products and Strategies, international experts on Islamic Finance and Sharia’a Law focus on the most im-minent issues surrounding the evolution of Islamic capital markets and the development of Sharia’a-compliant products. The book is separated into four parts, covering:

General concepts and legal issues, including • Rahn concepts in Saudi Arabia, the Sharia’a process in product development and the in-tegration of social responsibility in financial communities;Global Islamic capital market trends, such as • the evolution of Takaful products and the past, present and future of Islamic derivatives;National and regional experiences, from the • world’s largest Islamic financial market, Ma-laysia, to Islamic finance in other countries, including Germany, France and the US;Learning from Islamic finance after the glo-• bal financial crisis; analysis of the risks and strengths of Islamic capital markets com-pared to the conventional system, financial engineering from an Islamic perspective, Sharia’a-compliant equity investments and Islamic microfinance.

Islamic Capital Markets: Products and Strategies is the complete investors’ guide to Islamic finance.

978-0-470-68957-8 • Hardback • March 2011 • £45.00 / €54.00

Attracting the World of Small and Medium Enterprises for Islamic Banking Part of Article Collection, individual article £4.99/

Attracting the world of enterprises for Islamic banking services dis-cusses the various options available for Small and Medium sized enterprises (SMEs). It also ensures that all business professionals and those SMEs wishing to tap into the market are familiarised with the Shariah compliant principles and various methods of Is-

lamic financing contracts. These contracts range from the successful and popular Ijarah contract through to Istisna, Mudaraba, Musharaka, Salam and many others which will be discussed comprehensively in this article.

Global Islamic Finance Magazine aims to establish the various ways SMEs can success-fully attract the numerous benefits of Islamic financial options and contracts which pro-vide an ethical alternative to conventional methods of financing.

Order Number: 2011g069

Financial industry might be viewed as one of the most global sectors yet the reality is otherwise. Irrespective of the globally accepted finan-cial product base the industry is highly dependent on a key success factor: Customer relationship management. This intangible success

factor is a key differentiating factor for both mainstream and Islamic financial institutions and is highly subject to regional dynamics. The article sheds light on the Islamic Financial Institutions’ (IFI) service offerings and IFI customer expectations.

Order Number: 2010g068

Global Islamic Finance on Increasing Customer LoyaltyPart of Article Collection, individual article £4.99 / $7.99

Islamic Finance 3 Volume Set by Brian KettellJohn Wiley & Sons Ltd. /£90.00

Islamic finance is the fastest growing sector within the financial mar-ket place, a growth rate which has not been matched by the vast need for educational and training publications. This set is an all in-one

learning package for anyone interested in Islamic banking and finance, bringing together the core textbook Introduction to Islamic Banking and Finance, The Islamic Banking and Finance Workbook and Case Studies in Islamic Banking and Finance.

The set combines coverage of a wide range of products and issues in Islamic finance with a series of real life case studies which follow the themes in the introductory text, illustrating Islamic concepts and transactions in the real world. The workbook contains questions and answers, chapter summaries and key learning outcomes, enabling readers to test their un-derstanding of the main principles of Islamic banking and finance.


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

2nd Fraud & Compliance Forum19th-20th September 2011, Doha QatarOrganised by Fleming Gulf

Islamic Finance news Roadshow20th September 2011, JapanOrganised by RedMoney Group

2nd Abu Dhabi Investments Forum26th – 27th September 2011Abu-Dhabi, United Arab EmiratesOrganised by Fleming Gulf

2nd Oman Capital Markets Forum 201126th – 27th September 2011, OmanOrganised by OITE

Annual Middle East & Africa Airfinance Conference28th – 29th September 2011Dubai, United Arab EmiratesOrganised by Euromoney seminars

September

2nd Annual Retail Banking Asia Pacific2nd – 5th October 2011Kuala-Lampur, MalaysiaOrganised by Fleming Gulf

SME Conference3rd – 4th October 2011-07-18, Abu DhabiOrganised by Fleming Gulf

1st Annual International Summit on Is-lamic Corporate Finance (ICFS 2011) 10th – 11th October 2011Abu-Dhabi, United Arab Emirates, Organised by Mega Events

3rd Operational Risk Forum10th – 11th October 2011DubaiOrganised by Fleming Gulf

Islamic Finance news Roadshow: Issuers and Investors Asia forum17th October 2011, MalaysiaOrganised by RedMoney Group

3rd Annual World Islamic Retail Banking18th – 20th October 2011, DubaiOrganised by Fleming Europe

1st Business Transformation Conference Led Expo19th – 20th October 2011, London, UKOrganised by Business Transformation

Islamic Investment and finance forum24th – 27th October 2011, Istanbul, TurkeyOrganised by IIRM

Solar Investment Summit - Middle East 201126th – 27th October 2011Abu-Dhabi, United Arab EmiratesOrganised by Solarpraxis

Islamic Finance news roadshow31st October 2011EgyptOrganised by RedMoney Group

October

Islamic Finance news Roadshow3rd November 2011, TurkeyOrganised by RedMoney Group

Islamic Finance news roadshow8th November 2011, CanadaOrganised by RedMoney Group

Islamic Finance news roadshow10th November 2011, USOrganised by RedMoney Group

The 9th Middle East Forex & Investment Summit 2011 15th – 16th November 2011Abu Dhabi, United Arab Emirates Organised by Arabcomgroup

18th Annual World Islamic Banking Con-ference (WIBC 2011)20th & 22nd November 2011Republic of BahrainOrganised by MegaEvents

The Kingdom Investors Summit21st – 22nd November 2011Riyadh , Saudi ArabiaOrganised by Naseba

7th Operational Excellence in Banking - OPEX 201121st- 22nd November 2011Dubai, United Arab EmiratesOrganised by Fleming Gulf

Russian Power: Finance and Investment22nd – 24th November 2011Moscow, RussiaOrganised by Adam Smith Conference

Russian Banking Forum22nd November- 1st Dec 2011Moscow RussiaOrganised by Adam Smith Conference

Risk Management in Oil & Gas22nd – 23rd November 2011, Doha, QatarOrganised by Fleming Gulf

November December

Event Calendar

Commodities Week Middle East5th – 7th December 2011Dubai, United Arab Emirates Organised by Terrainn

Global Islamic Finance Awards & Confer-ence10th December, United Arab Emirates Organised by Global Islamic Finance Magazine

1st Annual Islamic Project Finance & Trade Finance Conference10th – 11th December 2011United Arab Emirates Organised by Global Islamic Finance Magazine

International Conference on Islamization in Modern Science and Scientification of Islamic Studies19th – 21st December 2011Selangor, MalaysiaOrganised by Association of Malaysian Muslim Intellectual (PIMM)

gif Event

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

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Bai Stands for “sale” or contract of sale. It is often used as a prefix in referring to different sales-based modes of Islamic finance, such as Murabaha, Istisna’a, and Salam.

Bai al Inhah

Buying an object for cash then selling it to the same party for a higher price whose payment is deferred so that the purchase and sale of the object serves as a ruse for lending on interest. It equates to a double sale by which the borrower and the lender sell and then resell an object between them, once for cash and once for a higher price on credit, with the net result of a loan with interest. Used by some Islamic banks, it refers to selling of an asset to the customer through deferred payments. At a later date, the bank will repurchase the asset and pay the client in cash terms. Thus, Bai al Inah comprises two agreements; in the first agreement, the bank sells an identified asset to the customer at an agreed price and the customer can complete the purchase of bank’s asset by payment in instalments over an agreed period; in the second agreement, the bank re-purchases the same asset from the customer at a lower price and on completion of the second transaction, the bank will pay the lump sum amount in immediate cash at the price agreed between them. The difference in the price is the bank’s profit, which is determined in advance. This arrangement is prohibited by the majority of Shari’ah scholars as it also equates to a sale and buy-back arrange-ment. Also known as Bay-al Inah or Inah. Similar to tawarruq however, intawwaruq a third party is involved as an intermediary.

Bai’ al Mutlaq Conclude a sale without any option to rescind.

Bai’ al Muqayaza Exchange of goods with goods is called barter.

Bai Bithaman Ajil (BBA)

This contract refers to the sale of goods on a deferred payment basis; a deferred payment sale. Islamic banks use it as a mode of financing for purchase and sale or deferred payment of consumer goods. Technically, this financing facility is based on the activities of buying and selling. There is no interest charged. Equipment or goods required by the cus-tomer are purchased by the bank which subsequently sells the goods to the customer at an agreed higher price; payment is deferred and the customer is allowed to settle payment either by installments or in a lump sum within a pre-agreed period. The deferred payment price which is the bank’s sale price includes a profit mark-up for the bank agreed by both parties. Similar to a Murabaha contract, but with payment on a deferred basis known as Murabaha Muajjal.

Bai Mu’ajjalLit.: a credit sale or deferred payment contract. Technically, a financing technique adopted by Islamic banks, It is a contract in which the seller allows the buyer to pay the price of a commodity at a future date in a lump sum or in installments. The price fixed for the commodity in such a transaction can be the same as the spot price or higher or lower than the spot price. The concept is the same as Bai Bithaman Ajil (BBA).

Bai wafa Buy-back, sale and repurchase, a contract with the condition that when the seller pays back the price of goods sold, the buyer returns the goods to the seller.

Bay’al ayan Sale of tangible objects such as goods (as opposed to sale of services or rights).

Bay al-dayn Sale of debt. According to a large majority offuqaha’, debt cannot be sold for money, except at its face value, but can be sold for goods and services.

Bayu al-Gharar Trading in risk, where the Arabic word ghararis taken to mean “risk”. See Gharar.

Bay-al InahAlso termed as Bai ah Inah. Buying an object for cash then selling it to the same party for a higher price whose payment is deferred so that the purchase and sale of the object serves as a ruse for lending on interest. At a later date, the bank will repurchase the asset and pay the client in cash terms. Similar to tawarruq however intawarruq a third party is involved as an intermediary.

Bay al-kali bil kali A sale in which both the delivery of the object of sale and the payment of its price are delayed. It is similar to a modern forward sale contract.

Bay al-mudaf A sales contract in which delivery of both the commodity and the payment is deferred - for example forward sales in modern times. Such contracts are not permitted by the Shari’ah.

Bay muzayadah Sales by auction.

Bayt-al-Mal Public Treasury in the Islamic State.

Batil Null and void. Invalid sale or contract. One that does not fulfil the conditions relating to offer and acceptance, subject matter or the consideration and possession or delivery of the subject matter or involves some contravention of the Shari’ah, such as the involvements of riba, gharar or qimar. Also termed as Aqd Batil and Bai Baatel. Opp.Sahih.

Islamic Finance GlossaryB


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