201108 Global Islamic Finance

Ethica

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Bankin

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UK: £6.00

PUTTING CORPORATE STRATEGY IN PLACE

ISLAMIC BANKHOW TO RUN

AN ISLAMIC BANK

Islamic Finance gains momentum in Europe

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Islamic Project Financing Setting the Agenda for Innovative Opportunities

P. 28

State of QatarEnd of Islamic Banking Windows

August 2011

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Contents;QWERTYUIIOPDFHJUIIOPDFHJJIslamic Banking

14

14 How to run an Islamic bankPart I: Putting corporate strategy in place, values, regulations The term ‘Islamic banking’ means the carrying out of banking operations in compliance with Shariah principles. Islamic banking and finance have been growing rapidly over the years. Its successes not only include countries with large Muslim populations but also those countries where the Muslim population is a minority. Banking practices with the concept of receipt and payment of interest are not in accordance with Shariah principles. In the past Muslim communities could not avoid conventional ways of banking but Islamic banking practices have been flourishing over the past years so that Islamic finance is now recognised throughout the financial world...

News

9 Islamic Finance News

Interview

25 Islamic Finance is one of the key functional areas for the Halal IndustryInterview with Mahmood Hasan, CEO of Rasul Group of CompaniesMahmood Hasan is the CEO of Rasul Group of Companies, Pakistan. With a Masters in Business Adminis-tration he established this entrepreneurial venture in 1983. His transformational leadership and visionary approach led to the establishment of the brand Bake Parlor. The Halal industry and Islamic finance share an economic and ideological interdependence and also have a high growth potential when looking at the retail and commercial forefront...

World Islamic Finance Review

28 State of Qatar: End of Islamic Banking WindowsAt the beginning of February, 2011, Qatar Central Bank (QCB) notified all conventional banks in Qatar that they were required to stop operating Islamic windows (IWs) by the 31st of December 2011.On the 10th of February 2011, QCB issued a public press release detailing the requirements and explain-ing the reasons for its decision to stop the operation of the IWs...

32 Part 1: Islamic Finance gains momentum in EuropeIslam all too often resonates negatively in Europe, with much non-Muslim public opinion uncomfortable with Islamic culture and values. Secular and Christian opinion is at best suspicious of Shariah, Islamic law, and indeed often antagonistic. The notion of wanting to apply Shariah principles to banking and finance is treated with scepticism if not outright hostility, especially as there is no concept of Christian or Jewish banking, even if there are some parallels between Shariah financial principles and the teaching of the Old Testament...

32

25

Islamic Finance

42 Part 1: Islamic Project Financing Setting the Agenda for Innova-tion Opportunities The global demand for Islamic project financing is growing at an unprecedented rate where many investors around the world are looking into major financial hubs to aid in funding lucrative projects. As the Islamic financial market adheres to the principles set out by Shariah law all investments and projects have to be constructed in a Shariah compliant manner and authorised by an Islamic financial governing or regulatory body of the country. There are many lucrative sectors which provide scope for profitable projects across the spectrum of Islamic finance. Traditionally projects in the infrastructure sector proved more rewarding as there were many opportunities especially in the Islamic financial hub of the United Arab Emirates...

48 Do Conventional and Islamic Finance Share Common Episte-mology?An overall socio-political-economic system gives rise to an economic system out of which grows a system of financing to facilitate production, trade and exchange. The idea of the contemporary conventional eco-nomic system is usually traced to Adam Smith’s conception of an economy as envisioned in his book, the Wealth of Nations. What has been ignored until recently, however, the fact that, from an epistemological point of view, Smith’s vision of the economy is embedded in his vision of a moral-ethical system that gives rise to the economy envisioned in the Wealth of Nations...

4 Global Islamic Finance August 2011

Marketing and Branding

55 Unleash the Power of Internal Marketing in your Islamic Finan-cial Institution There are various forms of marketing techniques and strategies that can help to spur the Islamic finance industry forward. However one such technique which cannot be understated is the effectiveness of using internal marketing strategies. So what exactly is the concept of internal marketing? Internal marketing is the application of processes and principles within the marketing framework of financial institutions. Internal marketing therefore involves a business or company using various different methods and dividing marketing roles within their departments transforming them into business units...

Market Review

54 Russia needs Changes to Law to Facilitate SukukAs the Islamic finance industry is growing at an unprecedented speed, Russia still remains to have changed laws in order to facilitate sukuk. Russian borrowers are pitching plans to sell the nation’s first Islamic bonds even as regulators lag behind in customising laws for the industry...

72 Oman to Add a Staggering $6 Billion Worth of Islamic Financial AssetsIt has been reported that Oman is to add a staggering $6 Billion worth of assets for the development over the next few years, according to estimates by Ernst & Young’s Islamic Financial Services Group...

74 Islamic Countries Urged To Adopt Economic Financial ReformsSaudi Arabia’s finance minister has reportedly urged Muslim countries to adopt suitable economic reform programs and adapt to the changing global financial economic changes to confront the challenges of fac-ing them and building solutions...

75 Islamic Finance Trade Sector Expands in Asia and Middle EastIslamic trade finance has grown progressively towards Shariah-compliant banking and could serve as one of the key growth drivers to aid the $1 trillion Islamic finance industry in its growing global expansion...

80 Gulf Banks Tackle Challenges to Boost Shariah InvestmentsGulf Banks are making significant efforts to boost Arabian Gulf banks saying that they are more ready to accept Asian Islamic debt as Shariah-compliant, allowing them to invest in a market that has issued twice as much sukuk as the Middle East this year...

76 Event Review

79 Events Calendar

82 Business Directory

84 Glossary

86 In the Next Issue

62

55

48

Sukuk

62 Analysis of Sale/Debt based Sukuk: The Malaysian Saga, part 2 The absence of bonds instruments in most al-murabaha project finance particularly in the ever liquid Middle-East countries may be explained by the controversy on the validity of using bai al-‘inah in the securitisation process and the application of bai al-dayn at a discount in bonds in secondary trading. The question now is; what are the underlying issues behind this controversy about the legitimacy of bai al-‘inah and bai al-dayn in Islamic law? What could explain its rejection in the Middle-East countries while gaining acceptance in Malaysia?...

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Islamic bank-ing is at the peak of its

success with many branches opening up worldwide. It is there-fore crucial that both business professionals and entrepreneurs understand the best ways to establish an Islamic financial insti-tution which adheres to the principles of the Shariah

„Islamic Banking is fast developing in the global financial world with many establishments being set up worldwide to cater for the demands of both Muslims and Non Muslims around the world. It is therefore imperative that the development of Islamic banks is well defined and the system of running a Shariah compliant bank is well under-stood by all industry professionals.

The last decade has seen an increasing demand for Shariah compliant banking with well estab-lished conventional banks opening up Islamic windows to cater for the rising demand. The UK alone has an estimated US$300 million of com-bined assets and overall the Islamic finance in-dustry is expected to rise to over US$1 trillion. This provides adequate scope for the develop-ment of Islamic banks and a real opportunity for companies and interested business professionals to learn more about running an Islamic banking institution.

If you are considering opening up an Islamic bank there are a number of issues which need to be addressed. It is first and foremost crucial that you have a good support team and reliable regulatory body who understand the concepts of Shariah finance to the core. With efficient Shariah super-visory backing your financial institution you can then implement the facilitation of Shariah compli-ant products and services which are currently in global demand around the world.

Islamic banking institutions cannot divert from the ethics of Shariah as all transactions should remain Shariah compliant and this should be the primary ethos when establishing and running your bank. Malaysia, the Middle East and the GCC have played a significant role in supporting the facilitation of the running of Islamic banks around the world. The Islamic Development Bank (IDB) in particular has contributed significantly to the implementation of Islamic banks and funding throughout the world and is a forerunner in estab-lishing Islamic banking institutions worldwide.

It is important to remember that developing strat-egies is key in achieving profitable asset growth for any potential development of an Islamic bank. Improving the position of risks is a crucial aspect that contributes significantly to the Islamic bank-ing strategy, although Islamic banks have man-aged well in overcoming negative asset of invest-

ment depositors. Islamic banks have more than 300 institutions spread over 51 countries, includ-ing the United States, as well as an additional 250 mutual funds that comply with Islamic principles. It is estimated that over US$822 billion worldwide Shariah-compliant assets are managed according to The Economist.

Although the implementation of Islamic banks may face some challenges such as liquidity and the lack of Islamic liquid instruments it still has potential for any avid investor wishing to tap into the lucrative current market. Islamic banking is continuing to grow which is why many internation-al banks such as HSBC, Deutsche Bank and many others have developed their own Islamic windows or services.

The main challenge that the heads of Islamic banks face is the core problem of regulatory con-formity to the Shariah. Therefore standardisation is key in Islamic finance to ensure that all trans-actions and services have set guidelines which can be applied to Islamic banking institutions worldwide. Islamic banking institutions need to address these challenges and work effectively alongside Islamic regulatory bodies to ensure Shariah compliancy at all times which will help to build up the prestige of Islamic banks around the world.

Promoting transparency and product breadth can further help Islamic banks to be successful in promoting Shariah-compliant funds. With almost 2 billion Muslims worldwide and a vast number of Non Muslims who prefer to use the ethical meth-ods of Shariah-compliant financing there is much scope for the development and success of Islamic banks worldwide.

Farhad ReyazatPhD in Risk Management Editor in Chief

Editorial Letter

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

2011 August Global Islamic Finance 9

Islamic finance newsIslamic finance news

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Bank Rakyat Indonesia’s Shariah Branch Debuts Scheme to Tap Gold in Islamic Fi-nance

It has been reported that BRI Shariah, a subsidiary of state-owned Bank Rakyat In-donesia, has launched a new product that allows its customer to buy gold in instal-ments, in a bid to draw broader segments of the population to Islamic banking.

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

The first scheme of its kind in Indonesia, Precious Metal Ownership (KLM) is intended to appeal to the young, middle-class popu-lation because of its long-term investment appeal, with customers able to pay in instal-ments from six months to 15 years, Ventje said.

“Imagine that in 1998 gold was around Rp 78,000 per gram, and now it’s already over Rp 400,000 per gram,” he said. “How many have regretted not buying it at that time? With this facility, customers can buy gold at the current price and pay that in monthly in-stalments.”

The product utilises two Shariah contracts, qardh and ijara. Under qardh, the bank loans money to the customer to buy the gold, and the debtor is only required to repay the amount borrowed. The customer must keep the physical gold in the bank’s vault which, under ijara, is rented out by the bank.

Islamic finance must match the level of serv-ice and innovation of conventional banking, Ventje said, and that means taking unique approaches.

“I think the ‘hardcore’ Shariah market is fin-ished,” he said, “For Islamic banking to ex-pand, it has to see itself as part of overall banking, not as an alternative.”

Total Islamic lending in Indonesia reached Rp 75.7 trillion by the end of April, compared with Rp 1,843.5 trillion in conventional bank-ing, according to Bank Indonesia data.

At the end of May, BRI Syariah’s total financ-ing was almost Rp 6 trillion, about a third of which came from consumer financing. Ventje said the bank wants to reach Rp 9 trillion in financing by the end of 2011. The high target will erode the lender’s capital ad-equacy ratio to 15 percent by the end of this year, he said.

As of May, its capital adequacy ratio was at 20 percent. Although the bank has the full support from its parent company, it did not rule out selling sub-ordinate sukuk to bolster its capital.

Tenaga to Sell $1.7 Billion 20-Year Islamic Bond, CEO Says

Tenaga Nasional Bhd., Malaysia’s biggest power producer, plans to raise as much as 5 billion ringgit ($1.7 billion) from a 20-year ringgit-denominated Islamic bond of-fering.

Its chief executive officer said, “We plan to sell the bonds in August or September,” Che Khalib Mohamad Noh said. Proceeds from the offering, the company’s first debt sale since 2004, will be used to finance a coal-fired Manjung power plant in the northern state of Perak, Che Khalib said.

The utility is raising power generation capac-ity to meet rising demand on the Malaysian peninsula after shelving plans to buy elec-tricity generated by the Bakun hydroelectric dam on Borneo Island earlier this year. The 20-year paper will help alleviate a shortage of longer-dated securities that insurers need to match assets and liabilities.

“There will be demand for Tenaga’s sukuk as long-dated corporate Islamic paper is scarce,” said Michael Chang, who oversees $1 billion as head of fixed-income at MCIS Zurich Insurance Bhd. in Kuala Lumpur. “Ul-timately, demand will depend on the inter-est-rate outlook and pricing.”

The Islamic insurance, or takaful, industry grew at an annual pace of 16 percent over the last five years, double that of non-Islam-ic insurers, RAM Rating Bhd., the bigger of Malaysia’s two rating companies said last

week. Sarawak Energy Bhd., a Malaysian state-owned electricity company based on Borneo Island, sold 3 billion ringgit of 5-, 10- and 15 year Islamic bonds last month at the lower end of its yield guidance.

“It’s the right time to sell bonds in the do-mestic market as there’s a lot of liquidity,” Che Khalib said, adding that three invest-ment banks have been short-listed as un-derwriters. “The attractive price for the gov-ernment’s sukuk sold last week is a good benchmark.”

Sri Lanka Commercial Bank Launches Is-lamic Finance Unit

Sri Lanka’s Commercial Bank said it is starting alternative banking services com-pliant with Islamic Shariah principles with a three member committee of scholars to ensure that all products and services under the Islamic unit are Shariah compliant.

“As one of Sri Lanka’s largest private banks it is our obligation to ensure that the servic-es the unit provides are fully compliant with the tenets of the Shariah,” managing direc-tor Amitha Gooneratne said in a statement. M M A Mubarak, Fazil Farook and M M Mur-shid, from Sri Lanka’s All Ceylon Jamiyyathul Ulama will be on the Shariah board.

Commercial Bank will offer deposit products such as ‘Mudaraba’ savings accounts and ‘Mudaraba’ investment accounts’ and asset products such as ‘Murabaha,’ ‘Musharaka,’ ‘Diminishing Musharaka,’ and ‘Ijara’ leasing and import financing.

The bank said the products operate on the Islamic principle of both the bank and the customer sharing returns as well as risks. Mudaraba, which is a form of profit sharing investment, is a partnership where one part-ner provides full capital while the other man-ages the business.

Any profit made using the funds is divis-ible between the customer and the Bank at a predetermined ratio agreed to by both parties. Murabaha is the sale of goods by the Bank to customers at a cost plus profit where the selling price is decided at the time

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of the sale. Murabaha can be used for local purchases or import of trading commodities and the customer is given a fixed tenor to settle the sales proceeds, the bank said.

Musharaka is a method of financing based on partnership, used for asset financing and export financing. Partners are entitled to a share in the profits that result from the project at a predetermined ratio which is mutually agreed upon at the time of enter-ing into the contract.

Diminishing Musharaka is a partnership in which one partner (the customer) will pur-chase the Bank’s share in a fixed asset over a predetermined period and become the owner of the asset.

The ownership of it will be passed to the client upon successful completion of the agreed terms. This can be used for property purchase, housing purposes and project fi-nance. Available for unregistered vehicles and equipment and machinery, Ijara is a contract where the lessor (Bank) who owns the asset transfers its usufruct to another person for an agreed period at an agreed rental.

The asset will be gifted to the customer when all lease rentals are met on time. Im-port financing involves providing letters of credit with financing on Islamic terms, this includes import Murabahas.

Bahrain’s Elaf Bank Licence Granted By Malaysia

Bahrain-based Elaf Bank, licensed by the Central Bank of Bahrain to operate as a wholesale Islamic bank with a paid-up cap-ital of $200 million, has been granted a li-cense by the Ministry of Finance Malaysia to open a branch office under the Malaysia International Islamic Finance initiative in Malaysia.

Elaf Bank was presented with the license during a formal ceremony held at Bank Ne-gara Malaysia in the presence of key officials and representatives from both sides.

Elaf Bank plans to start its branch office op-erations in Kuala Lumpur immediately now that it has fulfilled the formalities required for obtaining the license.

Jamil El Jaroudi, CEO of Elaf Bank, highlight-ed the importance of opening a branch of-fice in Malaysia, which falls in line with the bank’s long-term business strategy.

He said “Elaf Bank is developing its busi-ness through two hubs covering the GCC and MENA region and the South East Asia region, as a two-way business corridor. Be-

ing a wholesale Islamic bank headquartered in the capital of Islamic finance in the Middle East (Bahrain), the logical next step would be to open our first international branch of-fice in the capital of Islamic finance in South East Asia (Malaysia). This will help us oper-ate more efficiently and closely to meet the needs of our cross-regional clients, and be able to execute deals that will contribute to the sustainable growth of the Islamic fi-nance industry in both strategic markets,” he added.

“We firmly believe the bank is poised to not only widen its scope and reach through the opening of the branch office in Malaysia, but also to consolidate its excellent client rela-tions and business activities as a result of this step, which will no doubt generate ben-efits for both regions and create value for the Bank,” Jaroudi said.

Elaf Bank is a closed shareholding company incorporated in Bahrain. The bank encom-passes the full spectrum of wholesale Islam-ic banking with an additional differentiating dimension geared toward developing the

sukuk secondary market to act as a market maker. Elaf Bank currently provides a wide range of financial services to clients involv-ing investment banking including fund-rais-ing advisory, mergers and acquisitions and asset management and treasury and capital markets such as liquidity management, for-eign exchange, investment, structured prod-ucts and derivatives.

UAE Central Bank To Launch Islamic Cer-tificates of Deposit For Repo Facility

The UAE Central Bank is doing unprece-dently well and is about to launch a facility for repurchase for Islamic certificates of deposits in order to provide a new liquidity tool for the OPEC member’s banks.

It has been quite a challenge for the UAE with the lack of liquidity management tools in the Islamic finance industry, which has close to $1 trillion worth of assets globally. The Shariah compliant principle of the ban on interest rules out the possibility of most interbank tools therefore liquidity tools need to be further developed.

“The Shariah-compliant facility, which ac-cepts the Central Bank’s Islamic certificates of deposits as collateral, is introduced to provide a source of liquidity to banks,” the central bank said in its circular to banks, which was seen by Reuters.

The new facility is based on a murabaha concept; the circular also showed Murabaha is a sales contract, usually employed in com-modity transactions, that involves the pur-chase from an independent supplier which is then sold at an agreed price that includes the institution’s costs plus additional profit.

In November, the UAE central bank launched auctions of Islamic certificates of deposit, which saw volumes increasing steadily. Banks held 12 billion dirhams ($3.3 billion) worth of the certificates in April, some 10 percent of the overall volume, central bank’s data show.

“It is a repo with Islamic certificates of de-posits as collateral against cash and allows them to free up liquidity when needed,” said an executive at an Abu Dhabi-based bank.“There is a shortage of liquidity instruments and it is more pronounced on the Islamic side,” he said, asking not to be named. Is-lamic finance accounts for around 17 per-cent of banking assets in the UAE.

The UAE central bank’s monetary policy is limited by its dirham peg to the US dollar. It uses CDs auctions and repurchases facili-ties among other tools to regulate liquidity in the banking system. Late last month, the central bank said it planned to tighten regu-

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lations on how banks in the second largest Arab economy manage liquidity so they can better cope with future crises. UAE lenders remain hesitant to lend following Dubai’s $25 billion debt restructuring last year and weakness in the property sector, although deposits stand at their highest level in more than two years as the country enjoys safe-haven status amid unrest in the region.

Malaysian Islamic Banks See A Brighter Future

Islamic banks in Malaysia enjoy a bright fu-ture as they are able to compete and have the resilience to survive in the country’s open and competitive economy said Dr Awan Adek. Malaysia is an unprecedented Islamic financial hub with a significant scope to provide a benchmark to other Is-lamic financial hubs around the world.

Deputy Minister of Finance Datuk Dr Awang Adek Hussin said 21 Islamic banks are op-erating in Malaysia, with RM351 billion in combined total assets.

“There are 11 domestic Islamic banks; six foreign Islamic banks; and four international Islamic banks, reflecting bright prospects to plans to transform Malaysia into a premier international Islamic financial centre,” he said.

Siti Zailah sought explanation on the impli-cations to Islamic banks in the country fol-lowing impending restructuring of the banks. Awang Adek said the government had still no definite plans to carry out a restructuring ex-

ercise for banks, including for Islamic banks, except if the banks themselves conducted such an exercise. He alluded to the govern-ment’s merger of commercial banks under which 23 local banks were merged into nine. “Any merger exercise in future will hinge on the business decision by the banks’ board of directors and shareholders.

“Given the increasingly competitive econom-ic scenario today, banks will find ways and means that will favour them,” he said.

Awang Adek said completed merger exer-cises thus far had yielded good impact for banks as they have emerged stronger with higher working capital, have opened more branches and enjoyed higher national profile in the banking sector.

“The mergers have also enhanced banks’ financial standing; improved their internal

risk management; quality of their assets, efficient management; and are able to ven-ture into regional and global markets,” he added.

Bahrain Takaful Industry Prospering in 2011

The takaful industry in Bahrain is said to be prospering in 2011 as people are fa-vouring Shariah-compliant methods of Is-lamic insurance.

Takaful total contributions grew by 16.5 per-cent to reach BD13.4 million ($35.6m) in the first quarter of the year compared with BD11.5m for the same period last year,

according to the Central Bank of Bahrain (CBB). But traditional insurance still took the largest share of the market, down slightly at BD43.3m in the first quarter compared to BD44.1m last time. The insurance market in Bahrain consists of 27 domestic insur-ance companies and 11 branches of foreign insurance companies covering both direct insurance and reinsurance.

The recorded data for the insurance market during the first quarter of the year shows a slight increase of 1.8 percent in gross written premiums in the quarter up from BD55.7m last time to BD56.7m.

This growth was mainly due to the surge in the premiums of life insurance and the re-markable growth of the takaful. The com-bined capital of both conventional and taka-ful insurance companies grew by 4 percent to reach BD163.6m in the first quarter

compared to BD157.2m in the first quarter of 2010. The total assets of insurance com-panies increased by 6 percent to BD1.29 billion compared to BD1.22bn last time. Conventional insurance reported the high-est contribution in total assets at the rate of 79 percent.

Reinsurance companies that operate from Bahrain showed a rise in both reinsurance premiums and net profit during the first quarter, increasing reinsurance premiums by 5.6 percent to BD151m compared with BD143m. The net profit of reinsurance companies increased by 3.8 percent to reach BD8.1m compared to BD7m reached previously. “The key indicators show that

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Islamic finance is one of the fastest grow-ing industries in the world. However, authentic education on the subject is not widely and easily available. We are delighted to work with Durham University and Hawkamah to fill this vacuum and create what will be the bench-mark in Islamic finance teaching. For the first time in the UAE, practitioners as well as stu-dents can benefit from a curriculum designed to teach both the academic and practical skills needed to succeed in Islamic finance

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,,Dr. Hussain Hamed Hassan, Managing Director, Dar Al Sharia

Institutional and corporate banking will always be more volatile than the retail side. However, the retail side has the most untapped potential in terms of offering investment products, Takaful and other forms of financing. Financial institutions that focus on the retail side will win over those focused on the institutional side

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Tariq Al-Rifai,Director, Dow Jones Islamic Market Index

To prosper and grow, the Islamic financial industry needs to be served by firms that can deliver well-researched and designed tools that are Shariah-compliant and commer-cially viable; [it must] also comprehensively consider taxation, audit and accounting perspectives,,

Neil D Miller,Global head of Islamic finance, KPMG

,, Islamic finance is becoming much more prominent throughout the financial institu-tions of the world, rapidly growing from a niche industry to a mainstay of finance,,

John Willsdon, CIMA, the Chartered Institute of Management Accountants

,, We want to make that capacity available to regional Takaful, both in the GCC and Asia, in order to assist them in their reliance upon conventional facultative reinsurance for those risks that either exceed their own underwriting capacity or are for exposures that are not core to their underwriting capabilities. We hope that in time, all Takaful operators will realise that there is abundant Retakaful capacity available, and that they will seek to utilise only Retakaful when looking to mitigate their risk exposures and volatility of profits,,

Richard Bishop, CEO of GNL Insurance

,,

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there has been minimal negative effect on the growth of insurance companies due to recent events in Bahrain, where indicators clearly show a rise in total insurance pre-miums, capital and assets of the insurance market in Bahrain, in addition to the remark-able growth of the takaful insurance industry keeping up with the growth of both the direct insurance market or the reinsurance market in previous years,” the CBB said.

Islamic Finance The ‘Greener’ Ethical Op-tion

Islamic Banking is the right platform to boost ‘green financing’ as it is based on the concept of promoting good practices and values,” said R Seetharaman, Chief Executive Officer of Doha Bank.

The Chief Executive delivered the inaugural address at a seminar on Islamic economics,

organised by the Indian Islamic Association – Qatar (IIAQ), under the title “Towards an Alternative Economy” at Omar Bin Al Khat-tab Preparatory School for Boys in Doha. Seetharaman said Islamic banking is not just a financial system but it is part of a to-tal value-based social system that seeks to enhance the general welfare of society as a whole.

“Sustainable environment development, developing water resources, facing global warming, ensuring women’s participation and promotion of small-scale enterprises are all part of green financing. This is clearly an area where Islamic Banking can play a pivotal role,” he said.

Seetharaman, however, noted that Islamic banking is currently in its infancy and faces several challenges. Young people should be encouraged to take up these challenges to ensure that this significant economic system carries through and plays a leading role in the current global financial stage. He added that Islamic banking is growing in popularity as Japan has just issued five Sukuk Ijara (Is-lamic leasing bonds) and many other coun-tries including Italy, Canada and Spain are showing great interest in such products and services of Islamic banking.

In the UK, there is a full-fledged Islamic bank, called the Islamic Bank of Britain, and there are 22 counters at conventional banks that offer Islamic banking services and prod-ucts. Seetharaman noted that infrastructure development projects in India can attract foreign investment if the country opens up its banking sector to Islamic banking. India’s

11th Planning Commission has earmarked $542bn for this sector, but hardly any mon-ey comes from the Gulf-based financiers as they are reluctant to deposit in an interest-based system.

P P Abdur Rasheed, former Head of Eco-nomics Dept at Government College, Malap-puram, India, and K Abdullah Hassan, Head of Research at Islamic University, Santa-puram, India, also delivered speeches on ‘Fundamentals of Islamic Economics’ and ‘Basic Principles of the Zakah System in Islam’. Nizar Kocheri, lawyer and noted hu-manitarian activist, delivered a felicitation speech and Abdul Wahid Nadvi, Acting Pres-ident of Indian Islamic Association, Qatar,

presided over the ceremony. V T Faisal, Gen-eral Secretary of IIAQ, welcomed the guests and Taj Aluva proposed a vote of thanks.

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 prominent participation bank in Tur-key, 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 syn-dication last month with banks from across the globe invited 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 bppa over the relevant LIBOR/EURIBOR.

The facility was launched into general syn-dication on the 29th June 2011, with banks from across the globe invited to participate. Albaraka Türk is amongst the first financial institutions 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. Albaraka 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 the 31st May 2011, the foreign part-ners own 66.16 per cent, the domestic part-ners 11.33 per cent and 22.51 per cent are publicly held. Albaraka Türk has a market share of 19.14 per cent in the Turkish par-ticipation banking segment by asset size in Q1 2011.

Islamic finance is one of the fastest grow-ing industries in the world. However, authentic education on the subject is not widely and easily available. We are delighted to work with Durham University and Hawkamah to fill this vacuum and create what will be the bench-mark in Islamic finance teaching. For the first time in the UAE, practitioners as well as stu-dents can benefit from a curriculum designed to teach both the academic and practical skills needed to succeed in Islamic finance

,,

,,Dr. Hussain Hamed Hassan, Managing Director, Dar Al Sharia

Institutional and corporate banking will always be more volatile than the retail side. However, the retail side has the most untapped potential in terms of offering investment products, Takaful and other forms of financing. Financial institutions that focus on the retail side will win over those focused on the institutional side

,,

,,

Tariq Al-Rifai,Director, Dow Jones Islamic Market Index

To prosper and grow, the Islamic financial industry needs to be served by firms that can deliver well-researched and designed tools that are Shariah-compliant and commer-cially viable; [it must] also comprehensively consider taxation, audit and accounting perspectives,,

Neil D Miller,Global head of Islamic finance, KPMG

,, Islamic finance is becoming much more prominent throughout the financial institu-tions of the world, rapidly growing from a niche industry to a mainstay of finance,,

John Willsdon, CIMA, the Chartered Institute of Management Accountants

,, We want to make that capacity available to regional Takaful, both in the GCC and Asia, in order to assist them in their reliance upon conventional facultative reinsurance for those risks that either exceed their own underwriting capacity or are for exposures that are not core to their underwriting capabilities. We hope that in time, all Takaful operators will realise that there is abundant Retakaful capacity available, and that they will seek to utilise only Retakaful when looking to mitigate their risk exposures and volatility of profits,,

Richard Bishop, CEO of GNL Insurance

,,

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Islamic Banking gif


HOW TO RUN AN ISLAMIC BANKPUTTING CORPORATE STRATEGY IN PLACE, VALUES, REGULATIONS, PART I

Author: Imran Pasha, Head of Retail, Islamic Bank of Britain, United Kingdom Richard Williams, Finance Director, Bank of London and Middle East, United Kingdom Tajah Brown, Global Islamic Finance Magazine Editorial Team, United Kingdom

Abstract: When considering the aspects involved in running an Islamic bank it is vital to channel resources such as knowledge and relationships in the right direction in order to strike a balance be-tween innovation and control. Strategy is the art of creating value and providing frameworks, models and governing ideas. It could be compared to software, which needs to be updated as people expand their knowledge and gain experience. How to run an Islamic bank will explore the different strategies involved in the running of an Islamic bank such as risk positioning and financial fundamentals.

Islamic banking is a rapidly growing industry with the establishment of many new institutions em-bracing Shariah compliant banking. The UK has combined assets of US$300 million and overall the Islamic finance industry is worth an estimated one trillion US dollars globally. This article explores the key factors in running an Islamic bank, covering topics such as regulations and risk management. Im-ran Pasha and Richard Williams will give their views and advice on subjects such as the tailoring and overseeing of Islamic products and the attraction of non-Muslims to Islamic finance. The article also looks at the comparison of Islamic and conventional banks and the steps required when establishing an Islamic institution.

Keywords: Strategies, Shariah Principles, Basel III, Risk Management, Islamic Financial Products


Exploring the structure of Islamic bankingThe term ‘Islamic banking’ means the carry-ing out of banking operations in compliance with Shariah principles. Islamic banking and finance have been growing rapidly over the years. Its successes not only include coun-tries with large Muslim populations but also those countries where the Muslim popula-tion is a minority. Banking practices with the concept of receipt and payment of interest are not in accordance with Shariah princi-ples.

In the past Muslim communities could not avoid conventional ways of banking but Is-lamic banking practices have been flour-ishing over the past years so that Islamic finance is now recognised throughout the financial world. One of the first tasks that should be implemented when establishing an Islamic bank is the establishment of a reli-able body to provide Shariah supervision.

With the advice and approv-al of a Shariah supervisory body the bank can then start development of Shariah com-pliant products. The Shariah supervisory board enables the Islamic bank to conduct financial transactions which follow Shariah principles. The board should be a group of scholars who are expert in Islamic jurisprudence.

When focusing on the theo-retical aspect of Islamic fi-nance, the dominant issue is that of interest, which is prohibited in Islam and is not wanted or needed within Islamic banking operations. Islam teachings provide a strong foundation for organ-ising banking operations. This attitude towards interest in Islamic finance faced chal-

lenges when introduced to a world where interest plays an important role in most fi-nancial operations. The key principles of Islamic finance are the prohibition of riba, uncertainty and forbidden assets such as alcohol and the existence of underlying as-sets and finally, profit and risk sharing. The Shariah principles explain in detail the ethi-cal aspects of money and capital within Is-lamic finance and the relations between risk and profit as well as the social duty of the financial institutions.

The definition of ethics could be described as a set of moral values that distinguish right from wrong. There are various nega-tive effects of interest based finance such as instability, under-financing the economy,

which may lead to employ-ment losses, and not enough attention given to economic development. When consid-ering the ethical and moral principles within Islamic fi-nance and banking there is a responsibility to ensure that Shariah principles are met, such as full transparency and a focus on the Shariah board membership ensuring that the Shariah quality of finan-cial products is met.

Islamic banks cannot sepa-rate themselves from moral and ethical decisions. Their surroundings and staff, in-cluding experts, should abide by the moral and ethi-cal standards of the Islamic religion, which therefore determines the values and standards within Islamic fi-nance. Conventional banking uses the interest rate to con-duct financial actions. On the other hand Muslim scholars within Islamic banking have developed a different model of banking that does not use

Richard Williams, Finance Director, Bank of London and Middle East

Having qualified as a Chartered Accountant with KPMG in 1980, Richard’s early career in Invest-ment Banking was spent with

Chase Manhattan, Credit Agricole and Bankers Trust. He then spent 10 years at Robert Fleming & Co setting up their Global Equities Derivatives business which took

him to Tokyo and 3 years in Hong Kong with Jardine Fleming. Richard

joined BLME in January 2007 as Finance Director.

Characteristics Paradigm Version of Islamic Banking Conventional Banking

Nominal value guarantee of: Demand depositsInvestment deposits

YesNo

YesYes

Equity-based system where capital is at risk Yes No

Rate of return on deposits Uncertain, no guar-anteed

Certain and guaran-teed

Mechanism to regulate final returns on deposits

Depending on Banks performance/profits from investment

Irrespective of Banks performance/profits from investment

PLS principle is applied Yes No

Use of Islamic modes of financ-ing: PLZ and non-PLS modes Yes N/A

Use of discretion by banks with regard to collateral

Possible for reducing moral hazard in PLS modesYes in non-PLS modes

Yes always

Banks pooling of depositors funds to provide depositors with professional investment management

Yes No

Figure 1: Comparison of Islamic and conventional banking frameworks

Source: IMF working paper: Islamic Banking Issues in Prudential regulations and supervision

Islamic Banking gif

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interest. Islamic banks in comparison with conventional banks both have similar types of deposits. Conventional banks offer cur-rent accounts, savings accounts and fixed deposit account and Islamic banks have cur-rent and savings account. The Islamic banks also have investment accounts.

The big difference between conventional and Islamic banks is that the conventional banks pay a guaranteed interest rate on the sav-ings and fixed accounts while Islamic banks pay the depositor a profit depending on the deposit amount. Figures 1 and 2 show the comparison of conventional and Islamic banks and their banking frameworks.

The first standalone Shariah compliant retail bank in the UK authorised by the Financial Services Authority is the Islamic Bank of Britain (IBB) established in 2004. The IBB is also a member of the Financial Services Compensation Scheme. The bank aims to provide its customers with an individual and welcoming service.

Head of Retail, Imran Pasha, shares his ex-pert knowledge of how to run an Islamic bank. He is currently responsible for the bank’s distribution network, marketing func-tion and deposits. With over 10 years of experience in the financial services sector and various positions in the IBB such as Area Manager and Branch Manager, Imran Pasha talks us through the establishment of the IBB and the effect it had on the financial industry.

He says that the IBB has impacted the UK and Eu-ropean financial industry, “The bank has continued to maintain this position and still remains the only Islamic retail bank in the UK and Europe. It is con-sidered a pioneer of retail Islamic banking and cur-rently offers the largest range of Shariah-compliant retail financial products to the UK consumer.” Almost seven years on and IBB has grown at a steady rate and carved itself a niche in the UK retail banking sector.

The bank, based on its Shariah principles, is often viewed as an ethical and stable al-ternative to conventional banks. Certainly, its achievements are well recognised both in the UK and internationally. As a result it has earned a well deserved reputation as the UK leader in British Islamic banking. The strate-gies behind the success of Islamic banking.

There are a range of strategies to consider when running an Islamic bank, such as risk positioning and the financial fundamentals. The purpose of having a strategy is to help the banks improve and establish a strong place in a selection of markets rather than a place in a range of competitive markets. Is-lamic banks have ways to manage commer-cial risk, such as profit equalisation, invest-ment risk reserves, Mudarib fees and share holders. In addition, Islamic banks pay more attention to assets and liabilities compared to their conventional counterparts.

Islamic banks have problems in manag-ing liquidity and risk because of the limited amount of financial instruments on offer. Islamic products are not as commoditised and tend to need more altering and at-

tention, which can result in operation risk. The latest in-strument to complement the operating systems of Islamic transactions internationally is the wakalah structure. The exclusion of limitations within the Islamic finance industry should encourage the devel-opment and growth of the industry. The rapidly growing Islamic finance industry is al-ready worth an estimated one trillion US dollars globally.

Liquidity management struc-ture can be challenging for Islamic banks because of the lack of liquid instruments within Islamic finance. After attaining extra revenue the GCC Islamic banks kept a large amount of core liquid-ity in the form of short-term Murabaha and deposits from central banks. The result of these actions proved that it was the right choice for that particular area, which is known for numerous cycles and recurring shocks.

Imran Pasha, Head of Retail, Is-lamic Bank of Britain

Having over 10 year’s experience within the financial services sector, Imran held management positions with Merrill Lynch and HSBC. At IBB

Imran has held various positions progressing from Branch Manager

to Area Manager. He currently holds the position of Head of Retail. In

this role Imran holds responsibility for Bank’s the distribution net-

work, the marketing function and deposits.

The first steps to establishing an Islamic bank – Establishment of the IBB

Imran Pasha, Head of Retail at the Islamic Bank of Britain talks us through the steps:

Licensing. Establishing a bank is a long and painstaking task consisting of several elements. The first is regulatory and financial. IBB therefore came into existence in August 2004 when the UK government’s regulatory body, the Financial Services Authority (FSA), granted the bank its license. In September 2004 IBB became a UK publicly listed company on the Alternative Investment Market (AIM).

Retail financial services. Once the capital was raised by investors in the UK and the Middle East, the bank set about implementing the vision of offering Shariah complaint retail financial services. This included designing and setting up the infra-structure, processes and products as well as bringing together the team.

Branch network. This was followed by the setting up of a branch network. IBB now has a national branch network in key locations including London, the Midlands and North West.

Smart banking facilities. To complement this, and to enable Shariah compliant banking to be accessible to consumers across the UK, IBB also developed its Smart banking facilities. These allow customers to carry out their banking over the internet or telephone by liaising with one of the bank’s customer services representatives.

Marketing and awareness. Marketing and community relations have also played an important role in the bank’s activities. In order to establish a presence IBB has played a strong role in the British Muslim community, providing services to local mosques and charities. It has also undertaken extensive marketing, advertising and PR activities to ensure its target audience are aware of the bank and its prod-ucts and services.

Product development. Finally, the bank has undertaken extensive product devel-opment so that its customers can genuinely manage their finance according to the principles of their faith, i.e. without the use of interest. As a result of its ongoing work, the bank now offers the largest range of Shariah compliant retail financial products and services in the UK.

Islamic Banking

TOP ISLAMIC FINANCE INSTITUTION

RANKING?

WILL YOUR INSTITUTION BE IN

2011

Global Islamic Finance Awards of the Decade »Top 300 Islamic Finance Institutions across the Globe »

Top 50 Most Influential People in Islamic Finance »50 Best Companies to Work for in Islamic Finance Industry »

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These prestigious rankings provide a comprehensive outlook into the Global Islamic finan-cial industry and are the first of their kind. GIF is working hard to ensure that both individu-als and institutions are included in the list of high ranking categories. If you are interested in

taking part please register your interest at the earliest opportunity.

We are only able to include Institutions for which we have updated results in each category, so ensure that your Institution will provide us with updated data.

No financial payment is made as the cost of the research is funded by Global Islamic Finance magazine, with no third party financial sponsorship or support.

www.globalislamicfinancerankings.com

Deadline Extended Until 1st of September

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Warren Edwardes, CEO, Del-phi Risk Management, United Kingdom

Islamic products require more tailor-ing which could create operational risk. In what way can Islamic banks reduce the operational risk?

Shariah risk and reputational risk are prime sources of operational risk for Islamic banks.

The Holy Qur’an states: [3:130] ‘O you who have believed, do not consume usury, doubled and multiplied …’ [2:275] ‘Allah hath per-mitted trade and forbidden interest.’

Hadith I in al-Nawawi’s Forty Hadith, states that ‘actions are accord-ing to intent’ or ‘actions are what they are by virtue of intent’. Niyyah is intention: an inner act of the heart whereby one performs an outer act as the fulfilment of a particular duty, rather than merely a series of motions without religious value. The point of Shariah finance is to fulfil religious compliance and not just to appear to do so.

An issue for Islamic banks is the tendency to replicate conventional products with an Islamic veneer rather than create Islamic products based on Islamic principles of profit and loss sharing and genuine, rather than fabricated, trade transactions.

Cleverly engineered products, perhaps not fully explained to Shariah scholars, may initially be deemed Shariah compliant. However, when the undisclosed side trades affected by the SPVs become apparent, the products are uncovered as repackaged conventional products thus damaging the reputation of the Islamic bank.

Niyya, the intention which underlies all transactions, is the respon-sibility of the end-user investor or finance-seeker. It is important to have full transparency and disclosure about all of the transactions making up the structured product, so that stakeholders can evaluate the true intention behind it and see if it is compliant with their own Niyya, which may be genuine Shariah compliance or just the appear-ance of Shariah compliance. It is for the Muslim end-user to enter into contracts, directly or via financial institutions, with which he is happy to be judged on the day of judgement and not just on earth. For that transparency is key.

Products may be structured as a package of trades, which are indi-vidually Hallal, while the Niyya of the package as a whole is to repli-cate Riba, which is Haram. Each person involved must ask himself what his own Niyya is. If the transactions involve trades in certain markets, do the investors really understand these markets or are they entering into a synthetic Riba transaction that does not depend on the performance of these markets?

Transparency will help to mitigate operational risk represented by Shariah and reputational risk.

The risks within banking strategiesA selection of people in Islamic banking, such as regulators, share-holders, customers and company employees and management, determine its business strategy and performance All these people affect the financial strength of Islamic banks, but regulators in par-ticular have an affect on the bank’s strategy and ratings through their influence on the regulatory environment and overall support. The main aims of the bank regulator are to ensure that the deposi-tors are protected and to spread awareness of a strong banking sys-tem.

Shariah compliant products and investments are very important within Islamic Banking and may determine the bank’s reputation. If an investment did not follow Shariah principles it would have nega-tive consequences on the bank and create a risk of dissolution of the investment entity. It is vital that all investments are checked by the bank and by a Shariah authority or regulator. The product structure, contracts, asset securities and other aspects should be assessed before deciding whether the product or project is Shariah compli-ant.

After the approval of the Shariah board the product or project can be released on to the financial market. If the legitimacy is uncertain then the issue should be taken on by a Shariah auditor or supervisor, who can quickly deal with and solve any problems.

The purpose of most of Islamic banking strategies is to achieve prof-itable asset growth. Certain factors can affect the use of strategies, such as the progression of Islamic banking and finance, the position of the banks in their home markets, the resources available and me-dium and long term goals.

Improving risk position is another aspect that is part of Islamic bank-ing strategy, although Islamic banks are able to overcome negative shocks to the assets aspect of the investment depositors. Commer-cial risk is also something to be considered and, according to CPI Financial, Islamic banks have put in place buffers against loss in order to manage commercial risk. These are:

Profit equalisation (consistent earning across the cycle)• Investment risk reserves (attract negative shocks on asset • value)Mudarib fees (can decrease in order to avoid having a negative • affect on the depositing Rab al Maal)Shareholders (always supplying Qardh Hasan to profit-sharing • depositors)

The Finance Director at the Bank of London and the Middle East, Richard Williams gives his views on Islamic banks in the financial crisis. “When the credit crisis hit in 2008 many commentators and industry leaders appeared to believe that Islamic banks were ‘im-mune’ from the financial crisis. Now, however, we can see that some Islamic banks were exposed due to over-zealous expansion and ex-cessive risk concentrations, particularly in the property sector.” He continues “One of BLME’s priorities has been to offer a diversified range of products and services, ranging from asset management to trade finance and leasing.”

The legal and regulatory changes in Islamic finance and banking An important aspect of Islamic banking regulations is the ‘mainte-nance of a level playing field between banking institutions’, this re-

Islamic Banking

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sults in the regulators within Islamic finance applying the same prin-ciples of handling risks to all banks. Regulators apply the national supervisory principles to all banks, no matter what services they offer, Islamic or conventional. However the generic principles may not apply to every Islamic banking framework and the regulatory requirements should be tailored to cater to any relevant characteristics when run-ning an Islamic bank.

The Islamic financial industry is challenged by the development of consistent regulatory standards that apply to the specific features of Islamic banking. It is necessary for the regulatory standard to apply within the industry and to meet the requirements of the basic regula-tory standards worldwide. Capital adequacy is a very important part of assessing whether a bank will succeed or fail. It is an important as-pect when looking at a bank’s risk exposure and may reveal a bank’s risk relationships.

The Basel III system is the most recent of global regulatory standards which has developed from the previous Basel I and Basel II agree-ments. The Basel committee agree on the Basel II standards for banks’ capital adequacy and liquidity. The goal of the Basel III system is to strengthen bank capital requirements and encourage new poli-cies on bank leverage and liquidity.

Imran Pasha explores the legal and regulatory changes to ensure the aims of Islamic banks are met. He says that within the UK the govern-ment and the Financial Services Authority (FSA) have worked with and encouraged those aiming to establish Islamic financial institu-tions. The overall goal is to make the UK the capital Islamic financial hub in Europe. Imran Pasha says “To illustrate, the UK was the first member of the EU to authorise Islamic banks. The government also introduced changes so that Islamic mortgages would not be subject to double taxation. There have been at least five Financial Acts since 2003, where legislative changes have been introduced to put Islamic finance on a level playing field with conventional finance.” He adds that there have also been numerous changes made by the HMRC and the FSA covering the aspects of profits, taxation and regulation of Home Purchase Plans.

He refers to the CityUK Islamic Finance 2011 report and gives ex-amples of the UK within Islamic finance. “There are 22 banks in the UK offering Islamic products. This figure exceeds that of any other western country. There were five Sukuk listings at the London Stock Exchange (LSE) in 2010 and one in early 2011. This brings the aggre-gate total at the LSE to 31 listings worth US$19 billion. Islamic funds in the UK have combined assets of US$300 million.”

The Bank of London and the Middle East (BLME) is an independent wholesale Shariah compliant bank based in London and provides Is-lamic investment and products to businesses and individuals. The financial director, Richard Williams, discusses the changes in regula-tion and how it affects Islamic banks. Joining the BLME in 2007 the financial director spent his early career working in investment bank-ing.

He spent the next ten years at Robert Fleming & Co setting up the global equities derivatives business and travelled to Tokyo and Hong Kong. Richard also has experience with start up companies and in the areas of private equity with legal and general ventures. He shares his views saying “Basel III was introduced over the coming years with full accord, scheduled to be fully implemented by 2019.” Richard Wil-

Shah Fahad Yousufzai, Vice President, Products Develop-ment Department, Islamic bank of Thailand

How are values and regulations tai-lored to apply to Islamic finance and banking?

Any muamilat (financial transaction) without Akhlaq (ethics) is considered irregular and inappropriate.

Muamilat (financial transaction) and Akhlaq (ethics) work side by side within Islamic finance. Business transactions under the um-brella of Shariah must be according to the ethos of Islam. One can ask what the logic is behind not earning funds through interest. Is-lam prohibits it because it greatly restricts the physical activity and circulation of capital. As Islamic business transactions are based on real trade such as Murabaha sales, Musharakah venture capital and Istisna for construction purposes etc.

Islam is against the concentration of wealth in the hands of one individual and also encourages the distribution of wealth from rich to poor, as in the Zakath and Ushar system.

Islamic prohibits unlawful practices within Islamic finance and pro-hibits activities that could harm society, such as uncertainty and gambling.

The role of the Shariah supervisory board and Shariah audit and compliance team is crucial. One sees many examples of the Mu-rabaha role in developed Islamic banking market economies. All concerned authorities, for example Shariah compliance and audit teams and finance assigning executives, are responsible together with Shariah advisors for supervising financial practices. Each IFI needs a team of experts to eradicate non-Shariah compliant trans-actions and strictly monitor each and every transaction.

The main objective of Islamic banks is to carry out precise and ac-curate transactions according to Shariah principles. The executives of IFIs all over the world always associate profitability with their suc-cess, but profit is a secondary aspect of Islamic finance; the primary aspect is Shariah compliancy while practicing any mode of Islamic finance.

My suggestion to all central banks of countries practising Islamic banking is that a Shariah advisor should be an employee of the cen-tral bank and not of the commercial banks involved in practising Islamic banking. Islamic banks must add spiritual satisfaction to the job description, since it is an essential professional and social re-sponsibility. It would be helpful for true Islamic banking to function according to the real Islamic spirit.

Islamic Banking

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Conventional Banks Islamic Banks

The functions and operating modes of conventional banks are based on fully manmade principles.

The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah.

The investor is assured of a predetermined rate of interest. In contrast, it promotes risk sharing between the provider of capital (investor) and the user of funds (entrepreneur).

It aims at maximising profit without any restriction. It also aims at maximising profit but subject to Shariah restrictions.

It does not deal with Zakat.In the modern Islamic banking system, it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat.

Lending money and getting it back with compounding interest is the fundamental function of the conventional banks.

Participation in partnership business is the fundamental function of the Islamic banks. So we have to have thorough understanding of our customer’s business.

It can charge additional money (penalty and compounded interest) in case of defaulters.

The Islamic banks have no provision to charge any extra money from the default-ers. Only a small amount of compensation and these proceeds are given to charity. Rebates are given for early settlement at the Bank’s discretion.

Very often it results in the bank’s own interest becoming prominent. It makes no effort to ensure growth with equity.

It gives due importance to the public interest. Its ultimate aim is to ensure growth with equity.

For interest-based commercial banks, borrowing from the money mar-ket is relatively easier. For Islamic banks, it must be based on a Shariah approved underlying transaction.

Since income from the advances is fixed, it gives little importance to developing expertise in project appraisal and evaluations.

Since they share profit and loss, Islamic banks pay greater attention to developing project appraisal and evaluations.

Conventional banks place greater emphasis on credit-worthiness of clients. Islamic banks place greater emphasis on the viability of the projects.

The status of a conventional bank, in relation to its clients, is that of creditor and debtors.

The status of Islamic bank in relation to its clients is that of partners, investors and trader, buyer and seller.

A conventional bank has to guarantee all its deposits.

Islamic banks can only guarantee deposits for a deposit account, which is based on the principle of al-wadiah, thus the depositors are guaranteed repayment of their funds. However if the account is based on the mudarabah concept, clients have to share in a loss position.

Figure 2: Comparison of conventional and Islamic banks

Shareholders

Source: Gatehouse Bank Organisation Chart 2011

Figure 3: The structure of an Islamic bank

Board of Directors

CEO & COO Executive

Management

Shariah Supervisory

Board

Distribution

Infrastructure-Board

Products & Expertise

Communications

Office Manage-ment and

Support Board

Capital

Real Estate

Shariah Advisory

Treasury

Asset Finance

Placement

Finance & Operations Dept

Compliance Dept

Credit and Market Risk

Legal Dept

IT Dept

Shariah Advisory

Human Resources Dept

Line of Reporting

Advisory

Islamic Banking

Source: Mohdhafez.wordpress.com

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Dr Osama Alsulaiman, Legal Consultant in Islamic finance, Saudi Arabia

How are values and regulations tailored to apply to Islamic finance and bank-ing?

It is of the utmost importance for the prop-er functioning of Islamic finance (IF) that there is an appropriate legal framework to accommodate its applications. Traditional

finance has enabled legislation, contract enforcement measures and effective settlement dispute mechanisms. In addition to that IF re-quires a framework which takes into consideration its own distinctive characteristics. This necessitates the establishment of a competent legal framework to achieve the following:

Enabling legislation for the creation and authorisation of financial 1. instruments, establishing Shariah governance, and addressing conflicts between common or civil law and Shariah principles. Ensuring that contracts can be enforced by assuring that the le-2. gal documentation of any transactions or instruments complies with both Shariah and local law. Forming an appropriate mechanism for dispute settlement.3.

These legal considerations are crucial not only for proper implemen-tation but also to maintain the growth of the industry. After examin-ing the second and third points above, it can be seen that in practice contracts should comply simultaneously with two sets of laws: Islamic law and secular law. Compliance in this situation can be looked at in the same way as compliance between the laws of two or more jurisdic-tions when structuring any cross-border transactions. However IF, as part of the corpus of Islamic law, does not pertain to any particular country, territory or sovereign legal system. This raises concerns about the extent to which the norms and principles of IF are recognised by western countries. For example, in some cases the UK courts have ignored the reference to Shariah as a governing law; for instance in the case of Shamil Bank of Bahrain EC v Beximco Pharmaceuticals Ltd and others.

In Islamic countries such as Malaysia, conflicts also arose in the civil courts over Islamic finance contracts since judges have not been able to reach an agreement when dealing with Islamic finance cases. This can be seen for example, in the cases of Bank Islam Malaysia Berhad v Adnan bin Omar and Dato’ Hj Nik Mahmud Daud v Bank Islam Malay-sia Bhd. However, the Central Bank of Malaysia Act 1958 was replaced in 2009 by a new Act. Section 56 of the new Act makes it mandatory for the court or arbitrator to take into consideration any published rul-ing by the Shariah Advisory Council (SAC) relating to any Islamic finan-cial business. Sec 57 from the same Act provides that the SAC’s ruling is binding on the court and the arbitrator. The financial regulator also put the SAC under the Securities Commission so that it must be con-sulted by judges and its rulings must be considered binding. Malaysia has sought to give authority to the SAC to rule on any cases involving Islamic finance issues, rather than them being challenged in the court. It is therefore apparent that a prerequisite to the sustainable devel-opment of any financial industry is a suitable regulatory framework, which includes an effective dispute resolution mechanism. In contrast, the lack of enforceability of contractual agreements ultimately increas-es the possibility of default and delinquency.

liams continues by saying that the reason for the mixture of complexi-ties and Shariah prohibitions when increasing alternative and lower quality forms of capital, is that most Islamic banks have capital struc-tures that are led by Tier 1 capital in the common equity form. This re-sults in a lack of debt in Shariah compliant form, as well as meaningful levels of significant preference shares and hybrid capital structures.

He lists the factors that put Islamic financial institutions in a beneficial position compared to their conventional counterparts. The capital ad-equacy positions of Shariah compliant banks will benefit in a range of ways, which are:

The limited role of Trading Book businesses, where Shariah princi-• ples prohibit short selling and impose strict limitations on the use of derivatives. Consequently, Shariah financial institutions will be negligibly affected by the higher capital charges for such opera-tions. The modest and very limited use of derivatives and securitised • structures by Shariah compliant banks will result in such institu-tions not being adversely impacted by the additional capital charg-es that are being applied to address the inherent risks in such products (e.g. wrong way risk). The lack of leverage and contingent risks within Islamic banks • will result in the new leverage ratio only having a very modest im-pact.

He ends by saying “However, it is vital that Islamic financial institutions continue to develop liquidity instruments and for central banks to offer Shariah compliant facilities.”

Risk management in Islamic bankingAccording to the Financial Services Authority’s Financial Risk Outlook 2010, the financial crisis created asset losses, uncertainty about the amount of loss and the breakdown in funding liquidity. This resulted in the authorities creating a new capital regime that considers recapital-ising the banking sector and of a large amount of liquidity support.

However, with this regime came challenges such as capital adequacy and problems with funding as the new regime is introduced and low interest rates produced by margin challenges.

A risk may develop when not all the developers of a project attend the presentation of a project or investment to the Shariah board. This can result in a disagreement when deciding if the project or investment is Shariah compliant or not.

To resolve this risk the Shariah auditor needs to check the project or in-vestment before and after its launch. If the product is launched without being checked for legitimacy by the Shariah board, then there may be a demand for the investor to return the profits or cancel the product.

Islamic banks need to bring attention to risk management in Islamic banking and finance. The profit-and-loss-sharing modes of financ-ing could change the credit risk of investment depositors for Islamic banks and increase the risk for the asset section of the banks’ balance sheets. Profit-and-loss-sharing can make Islamic banks vulnerable to risks produced by equity investors.

Operation risk is an important aspect in Islamic banking and can devel-op from a number of sources, such as the internal activities conducted by Islamic banks, the non-standardised aspect of some Islamic prod-

Islamic Banking


ucts and the lack of a dependable system to implement financial contracts. There are a number of factors that make the operation of Islamic banks a higher risk and therefore could make them less prof-itable than conventional banks. The factors are fewer risk-hedging instruments and techniques, less developed or no interbank and money markets and government securities, and less availability of facilities operated by central banks such as lender-of-last-resort.

Shariah scholars encourage that all transactions be linked to a tan-gible and underlying asset. This results in a gap between cash and long-term bonds. Asset-based financing and lending products, which may well be found on an Islamic bank balance sheet, operate to lengthen the liquidity gaps because exits from the transactions are not always decided beforehand. Until Islamic banks are able to use

the short-term funding markets they will remain vulnerable and will appear less resilient than their conventional counterparts. Imran Pasha talks about the tailoring and overseeing of Islamic products. He says “Islamic products require more tailoring and as a result are subject to a dual set of rigorous controls and monitoring. This en-sures that as much risk as possible is mitigated and oversights are avoided”.

He continues, saying that the first sets of controls are put in place when the product is conceptualised and launched. The controls are there to ensure the products are Shariah compliant and are man-aged by the bank’s Shariah Compliance Officer. The bank’s Shariah Supervisory Committee provides any additional support, monitoring and controls. The second sets of controls are to ensure the opera-tional and business risk is mitigated. The IBB has distinct processes put in place to manage the opera-tional and Shariah compliance risk. He ends by saying “in fact, Sha-riah compliance adds another layer of rigour to IBB’s overall risk management procedures. Shariah compliance control is therefore the safety net that conventional banks do not have.”

What does the future hold for risk management in Islamic bank-ing?As the Islamic financial industry grows rapidly there is a need for the risk management sector of Islamic investments to improve. Is-lamic assets are estimated to be worth US$126 billion in the next ten years. The risk management sector needs to focus on strong management, vigorous governance and the ability to address Islam-ic banking issues.

The complicated Islamic banking products and relations, together with Shariah compliant substance and form, create issues such as displaced commercial risk. Islamic banks must have a consistent Shariah interpretation and standardisation to enable the banks to take advantage of opportunities quickly.

Establishing Islamic banks around the worldToday’s modern commercial banking system in the majority of coun-tries is developed from the financial practices in Europe. The bank-ing system revolves around the principles of capital certainty for de-positors and the assurance of the rate of return on deposits. In order to ensure the successful running of the banking system the Central Banks have the power of regulation and influence.

This means that all other banks have to abide by the rules of the Central Bank. However, Islamic banks face challenges when comply-ing with the rules when operating in non-Muslim countries.

The challenges that Islamic banks face when operating in non-Muslim countries are the tax procedures, the fact that the Islamic banking system cannot ensure any fixed rate of return on deposits and some Islamic banks cannot ensure the capital because if there is a loss it is taken from the capital. Another challenge that Islamic banks face is the Central Bank regulation and influence, which re-lates to liquidity and capital adequacy. These aspects depend on the assessment of the worth of assets from Islamic banks.

Non-Muslims within Islamic financeImran Pasha discusses the attraction of non-Muslims within Islamic finance. Shariah compliant products and investments are based

gif Islamic Banking

Capital adequacy

There must be more capital and more high quality capital in the banking system. Fundamentally, all Tier 1 capital must be fully effective at absorbing losses and Tier 2 capital must be far more loss ab-sorbent in order to protect capital.

LiquidityStrengthened liquidity disciplines that stress test the robustness of a bank’s funding profile and the adequacy of liquid asset reserves.

Leverage ratio

A back-stop measure to control banks unduly in-creasing their absolute leverage and level of model risk while retaining a high capital ratio. This is of particular importance when considering that some of the institutions that suffered the largest losses were among the best capitalised banks in the world.

Counterparty credit risk

Implementation of a capital charge based on a stress test volatility assessment of counterparty pre-settlement risks.

Figure 4: The four key areas in Basel III

Product risks This requires identifying and managing the risks in-volved in operating the investments for the product.

Payment risks

This risk has the same profile in a conventional bank. It can occur because of an error or mistake in process-ing payments. As with conventional banks, IBB has processes and controls in place to manage this risk.

Fraud risksThis again has the same profile in any conventional bank. Again, IBB has robust processes and controls to mitigate any such risk.

Operation risks

This would include any risk associated with processing queries related to products, services, counterparties and third parties. The risk is again mitigated through the controls IBB has in place.

Figure 5: The sets of risks

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Islamic Banking

TYPE DESCRIPTION COMMENTS

PLS modes Profit and loss sharing modes At the core of Islamic banking

Mudaraba Trustee finance contractThe bank provides the entire capital needed for financing a project, while the entrepreneur offers his labour and expertise. The profits (or losses) from the project are shared between the bank and the entrepreneur at a certain fixed ratio. Financial losses are borne exclusively by the bank. The liability of the en-trepreneur is limited only to his time and efforts. However, if negligence can be proved he may be held responsible for the financial losses incurred. It is usu-ally employed in investment projects with short gestation periods and in trade and commerce. It affects both the assets and liabilities sides of banks’ balance sheets. On the liabilities side, the contract between the bank and depositors is known as unrestricted Mudaraba because depositors agree that their funds be used by the bank, at its discretion, to finance an open-ended list of profitable investment and expect to share with the bank the overall profits accruing to the bank’s business. On the asset side, the contract between the bank and the agent-entrepreneur is known as restricted Mudaraba because the bank agrees to finance a specific project carried out by a specific agent-entrepreneur and to share the relative profits according to a certain percentage

Three conditions need to be met:1. The banks should not reduce credit risk by requesting collateral for this purpose. It bears the financial risk entirely and exclusively. However, collateral may be requested to help reduce moral hazard, e.g., to prevent the entrepreneur from running away.2. The rate of profit has to be determined strictly as a per-centage and not as a lump sum.3. The entrepreneur has the absolute freedom to manage the business.

The bank is entitled to receive from the entrepreneur the principle of the loan at the end of the period stipulated in the contract if, and only if, a surplus exists. If the enterprise’s books show a loss, this will not constitute default on the part of the entrepreneur, except for negligence or mismanage-ment.

Musharaka Equity participation contractThe bank is not the sole provider of funds to finance a project. Two or more partners contribute to the joint capital of an investment. Profits (and losses) are shared strictly in relation to the respective capital contributions. It is usually employed to finance long-term investment projects.

Banks can exercise the voting rights corresponding to their share of the firm’s equity capital. Their representatives can sit on the firm’s board of directors.All parties invest in varying proportions, and have the right to participate in the management of the enterprise.

Muzar’ah Traditional counterpart of the Mudaraba contract in farming.The harvest is shared between the bank and the entrepreneur. The bank may provide funds or land.

Musaqat Traditional counterpart of Musharaka contract in orchard keeping.The harvest is shared among the partners based on their respective contribu-tions.

Direct investment

The same concept as in conventional banking. The bank cannot invest in the production of goods and services which contradict the value pattern of Islam, such as gambling.

Banks can exercise the voting rights corresponding to their share of the firm’s equity capital. Their representatives can sit on the firm’s board of directors.

Non-PLS Modes

Non Profit and loss Sharing modes They are used in places where PLS modes cannot be imple-mented. For example, in cases of small scale borrowers or for consumption loans

Qard Al-Hasanah

Beneficence loans, These are zero-return loans that the Quran exhorts Muslims to make to “those who need them.” Banks are allowed to charge the borrowers a service fee to cover the administrative expenses of handling the loan, provided that the fee is not related to the amount or maturity of the loan.

Bal’ Mua ‘ jja Deferred payment sales, The seller can sell a product on the basis of a deferred payment in instalments or in a lump sum payment. The price of the product is agreed upon between the buyer and the seller at the time of the sale and cannot include any charge for deferring payments.

Contrary to contracts based on the PLS principle, modes such as markup, leasing and lease purchase have a prede-termined and fixed rate of return and are associated with collateral.

In fact, banks add a certain percentage to the purchase price and/or additional costs associated with these transactions as a profit margin, and the purchased assets serve as a guar-antee. Additionally, banks may require the client to offer a collateral.

These instruments can be considered to be more closely as-sociated with risk aversion and they do not substantially dif-fer from those used in a conventional banking system, other than in their terminology and in some legal technicalities.They are considered to conform to Islamic principles because the rate of return is meant to be tied to each transaction, rather than to the time dimension. However, some Muslim scholars advocate a stricter utilisation of such modes.

Bai’ Salam or Bai’ Salif

Purchase with deferred delivery, The buyer pays the seller the full negotiated price of a product that the seller promises to deliver at a future date. This mode only applies to products whose quality and quantity can be fully specified at the time the contract is made. Usually, it applies to agricultural or manufactured products.

IjaraIjara waiqtina’

LeasingLease purchase, A party leases a particular product for a specific sum and a specific period of time. In the case of a leas-purchase, each payment includes a portion that goes toward the final purchase and transfer of ownership of the product.

Murabaha Mark-up, The seller informs the buyer of his cost of acquiring or producing a specified product; then profit margin (or mark-up) is negotiated between the buyer and the seller. The total cost is usually paid in instalments.

Jo’ alah Service charge, A party undertakes to pay another party a specified amount of money as a fee for rendering a specified service in accordance to the terms of the contract stipulated between the two parties. This mode usually applies to transactions such as consultations and professional services, fund placements, and trust services.

Figure 6: Islamic modes of financing

Source: Kazarian, 1993; Iqbal and Mirakhor, 1987


on ethical and equitable principles, taken from Islamic law and are compared with the values of socially responsible investing. He says “Many of Islamic Bank of Britain’s prod-ucts have a wide appeal to consumers of all faiths who are seeking an ethical, competi-tive alternative. IBB is certainly very welcom-ing of customers who practise faiths other than Islam”.

He continues saying “When judged on its products, the bank strives to ensure its products are competitive as well as Shariah compliant. As a result, several of its prod-ucts have been taken up by customers of different faiths because they have proved to be very competitive when compared with competitor products.”

Imran also says that the recent financial tur-moil proved that the Islamic finance system is more resilient, transparent, asset-based and asset-backed compared to the conven-tional system. The Islamic finance system is a good base for people of other faiths to dis-cover more about Islamic banking.

He ends by saying “With ethical banking and socially responsible investing on the increase, Islamic banking has the potential to appeal to an even wider customer base, irrespective of their religious belief.”

Richard Williams also shares his views on the attraction of non-Muslims to Islamic finance. He begins by saying “For Islamic banks to continue to expand their market share, raise awareness and diversify their investor base they must attract more Muslims but also ap-peal to conventional investors.”

He continues by saying that the investors are now looking for alternative investment options or a change to their current holdings which is different from the ‘conventional high street banks.’

The reason for this is the last three years of economic turmoil, which some agreed is because of the high risk strategies of some conventional financial institutions. He says that “Shariah finance is one of the alterna-tives available to investors, both non-Muslim and Muslim.”

He concludes by saying that there are a number of reasons why Islamic banking is attractive to non-Muslims. The reasons include a personal service, competitive of-ferings and the similarities with ethical fi-nancing. “From BLME’s perspective, being a relatively small, nimble, flexible bank with competitive products and rates resulted in many of our clients being non-Muslims.”

Conclusion The Islamic financial industry will continue to develop and become more established in Muslim and non-Muslim countries. The par-ticipatory financing is an exclusive feature of Islamic banking and can provide funding for social and economic development projects. This is an example of an alternative service that Islamic banks offer compared to the tra-ditional services of conventional banks. This alternative way of banking gives the custom-er much more choice.

With increasing information about Islamic finance becoming available to Muslims and non-Muslims there is no reason why Islamic banking and finance will not continue to ex-pand. Richard Williams says “With each new product or service launch IBB engages in an education programme to help the consumer understand how it will benefit them. Explain-ing how products are Shariah compliant is also critical”.

BLME’s financial director gives his thoughts on the future of Islamic banks. He says “Growth and consolidation, with Reuters predicting an increase in Sukuk issuance, the IMF forecasting growth of 10-15% in the Islamic market and Moody’s anticipating the worth of the Islamic finance industry reach-ing US$5 trillion by 2015.”

Islamic Banking from: http://www.islamicbanking.nl/chap4.html#_Toc3149130• Prudential Regulation of Islamic banks: An analysis of Capital Adequacy Standards from: PDF 8-1-M.A.Noibi_3• Islamic Banking: Issues in Prudential Regulations and Supervision from: http://www.nzibo.com/IB2/IMFprs.pdf• Islamic Finance Explained (briefly) from: http://www.blakewatersolicitors.com/content.php?id=islamicfinance• Commercial risk from: http://cbb.complinet.com/cbb/display/display.html?rbid=1821&record_id=8374&element_id=7257&highlight=commercia• l+risk#r8374Islamic banking: state of the art from: http://www.irti.org/irj/go/km/docs/documents/IDBDevelopments/Internet/English/IRTI/CM/downloads/• IES_Articles/Vol%202-1..Ziauddin..ISLAMIC%20BANKING.pdfCAMEL rating system from: http://pdf.usaid.gov/pdf_docs/PNADQ079.pdf• Islamic Banks – Their strategies and ratings from: http://www.cpifinancial.net/v2/FA.aspx?v=0&aid=247&sec=Islamic%20Finance• Growing pains: Managing Islamic banking risks – PricewaterhouseCoopers from: http://www.pwc.com/en_GX/gx/financial-services/pdf/growing_• pains.pdfFinancial Services Authority – Financial Risk Outlook 2010 from: http://www.fsa.gov.uk/pubs/plan/financial_risk_outlook_2010.pdf• Islamic Financial Institutions and Products in the Global Financial System: Key Issues in Risk Management and Challenges Ahead by V. Sundararajan • and Luca Errico from: http://books.google.co.uk/books?hl=en&lr=&id=9FtK7n6r_dwC&oi=fnd&pg=PA3&dq=islamic+banking+risk+management&ots=Dte1LB7gy3&sig=eTTUlU-zheeu-fJkXJHM-OazvUQ#v=onepage&q&f=falseThe Basic Principles of Islamic Financial Institutions: Compared to Conventional Ones from: http://www.nzibo.com/IB2/basic.pdf• Differences between Islamic bank and conventional from: http://mohdhafez.wordpress.com/2007/03/03/differences-between-islamic-bank-and-• conventional/Regulation and Supervision of Islamic Banks from: http://www.sbp.org.pk/departments/ibd/Regulation_Supervision.pdf• Regaining the ethical standards of Islamic finance from: http://eng.assaif.org/Temi-generali/Finanza-islamica-e-finanza-etica• Gatehouse Bank organisation chart from: http://www.gatehousebank.com/about-us/corporate-governance/organisation-chart/•

References and Further Reading

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gifInterview

Please tell us a little bit about yourself and how you became involved in the Halal food industry? As an entrepreneur and industry representa-tive in a Muslim country like Pakistan I have observed that food manufacturers primarily deal in or rather choose to believe that they deal in Halal food products by default. Over the years ‘Halal’ has turned out to be more than just a religious concept. Total global ha-lal food market size is estimated to be about USD 635 billion. The domestic and interna-tional markets are gradually becoming more aware of the concept of ‘Halal’ and market demand for halal products is on the rise.

How would you best define the term ‘Halal’ and what type of food products is it appli-cable for? Awareness of the real meaning and implica-tion of the term Halal is limited and subjec-tive. Infact, there exists an inherent issue in

Muslim majority regions that Muslim manu-facturers at times believe that whatever they produce is by default Halal.

Halal food manufacturing implies integrity in supply chain by adherence to Shariah Law, maintaining high quality products, assuring consumer safety, fair trade and animal wel-fare.

Halal food should be manufactured under hygienic Shariah compliant guidelines. The primary prohibitions include items contain-ing alcohol or intoxicants, animals where the name of Allah has not been invoked during slaughter and animals which have not been slaughtered or dead before slaughtering.

There are several prominent halal-certifi-cation agencies. How is your organisation abiding by these certifications? Do you see the possibility of a natural collaborative ef-fort amongst them in any areas?Prominent Halal certifications include South African Halal Certification and Malaysian Halal Certification bodies. There are certi-fication agencies in Canada, Europe and United States as well. Infact, I would like to share that the importance of these certifica-tions has been recently realised in Pakistan.

ISLAMIC FINANCE IS ONE OF THE KEY FUNCTIONAL AREAS

FOR THE HALAL INDUSTRYInterview with Mahmood Hasan,

CEO of Rasul Group of Companies

Mahmood Hasan is the CEO of Rasul Group of Companies, Pakistan. With a Masters in Business Administration he established this entrepreneurial venture in 1983. His transformational leadership and visionary approach led to the establishment of the brand Bake Parlor. The Halal industry and Islamic finance share an economic and ideological interdependence and also have a high growth potential when looking at the retail and commercial forefront. Both sectors have common grounds such as sharing the aim to attain sustain-able growth and innovation under the Shariah principles. Only 5 to 10 percent of Halal businesses opt for Islamic finance the problem could be the Islamic banks limited understanding of the Halal industry. Islamic banks are focussing on Shariah-compliant index and Halal industry focus on Halal index. To bridge the gap both sectors need to identify the upcoming challenges and proactively implementing a solution. Mahmood Hasan shares with GIF the connection between the Halal industry and Islamic banking.

Islamic Finance is also in the process of strength-ening its footing in the industry. It is faced with

several regulatory and product development issues. Islamic financial expertise is limited in Halal food industry so em-ployees need to be trained and be made aware of the poten-tial benefits of Islamic Finance

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Food companies are now realising that to enter interna-tional markets and to attain credibility in the local market halal certifications are a must. Rasul Group has recently attained Halal certification from Bureau Veritas which is Halal certification agency registered in France.

Bureau Veritas together with the approval of Pakistan standard quality control authority (PSQCA) has lead to at-tainment of Halal certification by Rasul Group. The certi-fication attaining process is highly rigorous and involves amendment measures to be incorporated in supply chain and specialised training of key employees.

Surely, the issue of having a range of different certifica-tion agencies leads to be a major pitfall. The Halal food industry is in the process of establishing a strong footing and to attain long-term sustainable growth these certifica-tion bodies will have to find a collaborative mid way.

What is the potential demand of Halal food products?Well, I would say that more important than the current demand figure is the potential increase in demand for Halal food products. Currently the demand is about USD 635 billion out of which about 63% demand lies in Asian markets. However, to cater to this demand, food manufac-turers and Halal certification bodies need to find a plausi-ble solution to cater to this fragmented market. As it is a highly fragmented market in terms of awareness level and understanding of the term halal.

What are the major challenges faced by the Halal food industry?There are several regional challenges faced by the Halal food industry. Three major challenges that the industry is facing are:

Need for Certification: Halal food manufactures need • to realise and understand that they need to attain certifications. A huge majority of market players es-pecially in Pakistan do not realise the importance of these certifications. They need to realise that halal certification label on the packaging has a value in do-mestic and international market and has a high ac-ceptance level in not only religious terms but also in terms of hygiene.

Promoting Halal Brand: Halal is a brand in itself. Al-• though Halal food associations and bodies exist yet the brand equity is yet to be strengthened. For starters there exists a need for collaborative effort amongst industry players and halal food associations.

Halal food markets are highly diverse and fragment-• ed. They are basically fragmented markets by ethnic-ity, location, income level, awareness level, religious factors and a few other determinants. Hence, a one-size-fits-all strategy simply cannot work. It is a chal-lenge for Halal food manufacturers to deal with prod-uct adaptability and to cater to target market needs.

Should it be compulsory for Halal food manufactures to adopt Islamic Finance? In the extremely rigid sense one may argue that Halal food manufacturers should adopt and abide by Islamic means of financing. At Rasul Group we use a mix of conventional and Islamic finance. However the ratio of use of Islamic finance is increasing day by day.

Why don’t Halal food manufactures strictly adopt Is-lamic Finance? What are the hurdles? How can they be removed?As for any other business, finance is one of the key func-tional areas for Halal food industry. Halal food industry is in the process of strengthening its brand equity and im-proving its supply chain. In the process it is faced by range of challenges with respect to market demand, product ac-ceptability and certification issues.

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

These issues can best be resolved through mutual effort of Islamic Finance and Halal food industry. Islamic finance industrial players need to recognise the Halal food indus-try as a key niche market and provide tailored solutions to suit their needs.

What is the future potential for Halal food exports to international markets?The major players in Halal food export market include Halal food manufacturers in Malaysia and Indonesia. These markets are better regulated and understand the importance of Halal certifications. Infact, majority of Halal products exported to European and American markets are from these regions.

As for Pakistan the demographic trend is such that we are a thickly populated country with a large proportion of young generation. The domestic demand is immense and production capacity of local Halal food manufacturers is usually targeted to fulfilling this ever-increasing demand. As in our case we do export Halal products to Middle East, Europe, America Canada and Australia but most of the production is catered to fulfil the local demand.

What is the future potential for Halal food investment in Asian markets?There exists an immense potential for Halal food invest-ment in Asian market. Since 63% of the global halal food market demand is currently derived from Asian markets the market can be tapped by European and American in-vestors. However, international investors need to under-stand the concept of Halal and the need for Halal certi-fication.

What advice would you like to give to potential Halal food investors in Asian markets?Asian markets have high demand potential and capacity for further investment. However, international investors need to identify the market dynamics of selected Asian market, awareness level of consumers and requirements of Halal food industry supply chain methodology.

Infact total integrity in the Halal supply chain needs to be well preserved. If consumers lose credibility in the status of Halal, as in the case of Ajinomoto MSG product in Indo-nesia, it is extremely hard to earn back the required trust and credibility. Therefore, it is important for investors to get the Halal certificate from the most reputable certifica-tion body.

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At the beginning of February, 2011, Qatar Central Bank (QCB) notified all conventional banks in Qatar that they were required to stop operating Islamic Windows (IWs) by the 31st of December 2011. On the 10th of February 2011, QCB issued a public press release detailing the requirements and ex-plaining the reasons for its decision to stop the operation of the IWs.

What are conventional banks required to do?

New OperationsThe press release indicated that conven-tional banks are required to stop the follow-ing actions:

Opening Islamic branches;• Accepting Islamic deposits; and• Entering into Islamic financial opera-• tions.

Existing OperationsFor existing assets and liabilities, including deposits and finance operations, conven-tional banks are obligated to do the follow-ing up to and including 31 December 2011:

Collect the relevant assets and liabili-• ties and dispose of their obligations within any earlier agreed upon dates; andPay back all Islamic deposits upon any • earlier agreed maturity date.Following 31 December 2011, to the • extent that neither of the above options could be exercised, banks may do the following:Manage the remaining Islamic assets • in a special portfolio;Transfer some of the remaining Islamic • assets to the existing Islamic banks; andConvert the existing Islamic window • branches to conventional branches.

Although it is not stated, there appears to be no reason why such conventional banks could not open independent Islamic banks and then transfer the existing assets to the newly established Islamic banks. This op-tion, however, appears not to have been clearly provided for and has created a situ-

STATE OF QATAR:END OF ISLAMIC BANKING WINDOWSAuthor: Siraj Al Islam, Associate, Dewey & LeBoeuf LLP



ation where customers of such IWs have been left without a clear understanding of their rights and obligations. It is argued that QCB should now categorically provide a mechanism whereby IWs should be allowed to convert to full Islamic banks and that the process should be simplified and made clear to ensure that this is affected in a smooth and transparent manner.

In the publicly available information from QCB, it is not clear whether it would be possible for existing Islamic banks to ac-quire the IWs portfolios and thus allow the conventional banks to dispose of their IWs portfolios. To the extent that the QCB agrees with and allows such disposal, it may be that the customers of such IWs may not wish to deal with the existing Islamic banks and this may have been a reason as to why such cus-tomers did not choose the existing Islamic banks in the first place.

Another possible, voluntary scenario on the part of all the IWs, their customers and exist-ing Islamic banks may provide for a program whereby the IWs agree with their customers to bring to maturity their existing relation-ship. At the same time the IWs agree with existing Islamic banks to provide the same facilities so that the customers of the IWs are not commercially affected. Subject to Qatari law, this may even be achieved by the parties entering into a novation agreement. It is argued, however, that this may not be a workable solution from a commercial per-spective as the existing Islamic banks may not be willing to provide the same terms to the IWs customers as they currently have, on the basis that existing customers of the Islamic banks may be under different terms which may not be on par with the IWs’ terms.

Why is QCB stopping the operations of Is-lamic windows by conventional banks?

QCB has provided two categories of reasons for its decision:

Supervisory issues and• monetary policy issues, both of which • are dealt with in full detail below.

Supervisory IssuesQCB believes that, under Article (1) of the Qatar Central Bank Law No.33, enacted in 2006, a bank may either conduct its affairs following conventional banking practices or it may conduct its affairs according to Islam-ic banking and financing principles. There is no option for the same entity to provide both conventional and Islamic banking, and, as such, Islamic windows are incompatible with the law.

QCB further believes that there is no need to provide Islamic window operations, on the basis that there exist well-established Islam-ic banks which are capable of meeting the needs of investors and depositors who wish to conduct their affairs according to Islamic banking and finance principles.

QCB contends that conventional banks are effectively commingling the non-Islamic banking practices and Islamic banking prac-tices, and, as a result, are having difficulty in managing the following specific risks.

1. Bank RisksThe principle of Islamic banking is based on trade and a return on a specific trade, which always has an element of ownership, as opposed to conventional banking, which does not look at trade or base its return on trade or a value of a product of a trade, but rather on a direct increment of an amount borrowed or lent. Thus, the general risk pro-files of Islamic and conventional banking are completely different.

As more large and complex transactions are entered into, both Islamic and conventional deposits are being utilised for the same transactions. Clearly, the rates of return for conventional interest-bearing deposits are wholly different from deposits based on Is-lamic banking practices. QCB appears to contend that both Islamic and conventional risks are getting recorded in the same man-ner, and therefore that reliability, application of oversight, calculating ratios and indexes, and preserving the rights of conventional and Islamic depositors are becoming increasing-ly complex. The risk related to commingling has been widely debated by leading schol-ars in the past. The end result of the debate

appears to be that insofar as strict controls are adhered to, then effectively there are no particular issues that cannot be overcome. The controls discussed by the leading con-temporary scholars such as Taqi Usmani are as follows:

2. Segregation of FundsThe conventional funds and the Islamic funds should be completely segregated. This means that Islamic funds should be held in separate accounts and that books and records should be maintained which ev-idence the segregation so as to ensure that there is no commingling of conventional and Islamic funds.

3. Shariah SupervisionThe bank should have a group of Shariah scholars who are fully independent of the bank, whose decisions should be fully bind-ing on the bank, and who provide effective supervision of how the bank conducts itself. The Shariah scholars would effectively con-trol each and every aspect of the operation of the bank so as to ensure that each and every product that is stated as being Islamic does indeed comply with the Shariah.

4. Managerial Commitment It is argued that the management of the bank should be fully committed to Islamic banking and should not be there simply for the purpose of “exploiting practicing Muslim investors and in so doing unfairly compete with Islamic financial institutions”.

5. Providing Security for Investors FundsTo the extent that Muslims only deposit their funds with the bank, this amount should be fully guaranteed, and even where the bank is only acting as an investment manager, there should be proper screening and security in place to protect Muslim investors from such matters as fraud and deception.

6. Adhering to Islamic StandardsIt is paramount for a bank to adopt either the AAOIFI Standards or the Islamic Finan-cial Services Board (“IFSB”) standards and clearly demonstrate this. It is argued by many whether a conventional bank operates a window or incorporates a wholly owned subsidiary the net effect is the same and

In addition to specialising in Islamic banking and finance, Siraj has a long history of advising sponsors, bank-ing institutions and quasi-governmental entities with the structuring, implementation and delivery of major

projects, including PPP and PFI.At the age of 28, Siraj was appointed and served as the United Kingdom General Counsel for ISS, a global

organisation listed by Forbes as the world’s 5th largest private employer and as the 6th best outsourcing com-pany in the world by American Fortune Magazine.

Prior to joining Dewey & LeBoeuf, Siraj worked at international law firms including Clifford Chance LLP


gif World Islamic Finance Review

At the beginning of February, 2011, Qatar Central Bank (QCB) notified all conventional banks in Qatar that they were required to stop operating Islamic windows (IWs) by the 31st of December 2011. On the 10th of February 2011, QCB issued a public press release detailing the requirements and ex-plaining the reasons for its decision to stop the operation of the IWs.

What are conventional banks required to do?

New OperationsThe press release indicated that convention-al banks are required to stop the following actions:

Opening Islamic branches;• Accepting Islamic deposits; and• Entering into Islamic financial opera-• tions.

Existing OperationsFor existing assets and liabilities, including deposits and finance operations, conven-tional banks are obligated to do the following up to and including 31st December 2011:

Collect the relevant assets and liabili-• ties and dispose of their obligations within any earlier agreed upon dates; andPay back all Islamic deposits upon any • earlier agreed maturity date.

Following 31st December 2011, to the ex-tent that neither of the above options could be exercised, banks may do the following:

Manage the remaining Islamic assets • in a special portfolio;Transfer some of the remaining Islamic • assets to the existing Islamic banks; andConvert the existing Islamic window • branches to conventional branches.

Although it is not stated, there appears to be no reason why such conventional banks could not open independent Islamic banks and then transfer the existing assets to the newly established Islamic banks. This op-tion, however, appears not to have been clearly provided for and has created a situa-tion where customers of such IWs have been left without a clear understanding of their rights and obligations.

It is argued that QCB should now categori-cally provide a mechanism whereby IWs should be allowed to convert to full Islamic banks and that the process should be sim-plified and made clear to ensure that this is affected in a smooth and transparent man-ner. In the publicly available information from QCB, it is not clear whether it would

be possible for existing Islamic banks to ac-quire the IWs portfolios and thus allow the conventional banks to dispose of their IWs portfolios. To the extent that the QCB agrees with and allows such disposal, it may be that the customers of such IWs may not wish to deal with the existing Islamic banks and this may have been a reason as to why such cus-tomers did not choose the existing Islamic banks in the first place.

Another possible, voluntary scenario on the part of all the IWs, their customers and exist-ing Islamic banks may provide for a program whereby the IWs agree with their customers to bring to maturity their existing relation-ship. At the same time the IWs agree with existing Islamic banks to provide the same facilities so that the customers of the IWs are not commercially affected. Subject to Qatari law, this may even be achieved by the parties entering into a novation agreement. It is argued, however, that this may not be a workable solution from a commercial per-spective as the existing Islamic banks may not be willing to provide the same terms to the IWs customers as they currently have, on the basis that existing customers of the Islamic banks may be under different terms which may not be on par with the IWs’ terms.

Why is QCB stopping the operations of Is-lamic windows by conventional banks?

QCB has provided two categories of reasons for its decision:

Supervisory issues and• monetary policy issues, both of which • are dealt with in full detail below.

Supervisory IssuesQCB believes that, under Article (1) of the Qatar Central Bank Law No.33, enacted in 2006, a bank may either conduct its affairs following conventional banking practices or it may conduct its affairs according to Islam-ic banking and financing principles. There is no option for the same entity to provide both conventional and Islamic banking, and, as such, Islamic windows are incompatible with the law.

QCB further believes that there is no need to provide Islamic window operations, on the basis that there exist well-established Islam-ic banks which are capable of meeting the needs of investors and depositors who wish to conduct their affairs according to Islamic banking and finance principles.

QCB contends that conventional banks are effectively commingling the non-Islamic banking practices and Islamic banking prac-tices, and, as a result, are having difficulty in managing the following specific risks.

Islamic Finance Lawyers Clifford Chance Launches Offices in Qatar

Source: GlobalIslamicFinanceMagazine.com

Clifford Chance has further expanded its business in the Middle East with the open-ing of a QFC regulated office in Tornado Tower. The new QFC office is headed by Ri-chard Parris, a projects specialist, together with Greg Englefield, who previously spent two years on secondment to a local Qatar law firm.

They have also been joined by Islamic finance lawyer and Arabic speaker Hus-sain Shalchi. They anticipate that the headcount will increase over the coming months.

Parris comments, “Clients have respond-ed very positively to our presence in Qa-tar. While we have long-standing and well-entrenched relationships in Qatar, there is an understandable desire to have advi-sors near at hand when working on strate-gically critical mandates.”

Clifford Chance has been active in Qatar since the 1980s and already regularly works with leading Qatari entities, inter-national banks, financial institutions and corporate entities based in Qatar.

The team in Doha are working closely with Clifford Chance lawyers across the Firm’s Middle East and international network to provide clients with access to the full range of the Firm’s expertise.

Graham Lovett, Middle East Managing Partner, comments, “We are delighted with the headway the Qatar team is mak-ing, both with existing and new Qatari cli-ents.”

David Childs, Clifford Chance Managing Partner adds, “We are very pleased to be joining our clients in Qatar and offering them access to the entire Clifford Chance network through our dedicated presence in Doha.”

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ISLAMIC FINANCEGAINS MOMENTUM IN EUROPE, PART IAuthor: Professor Rodney Wilson, Durham University, UK

Islam all too often resonates nega-tively in Europe, with much non-Muslim public opinion uncomfort-able with Islamic culture and values. Secular and Christian opinion is at best suspicious of Shariah, Islamic law, and indeed often antagonistic.

The notion of wanting to apply Shariah prin-ciples to banking and finance is treated with scepticism if not outright hostility, especially as there is no concept of Christian or Jew-ish banking, even if there are some parallels between Shariah financial principles and the teaching of the Old Testament.

Yet Islamic finance is thriving in Europe, and many major European banks perceive it as a profitable opportunity to generate new busi-ness rather than as a threat to existing busi-ness. Although Islam is sometimes viewed as prescriptive and concerned with restrict-ing choice, Islamic finance is about widen-

ing choice, and in particular about providing alternatives to interest based finance. The aim is to develop financial products that are seen as ethical and within the realm of so-cially responsible investment.

The approach in this paper is largely themat-ic and institutional rather than geographical, with the subject viewed from a European rather than an Islamic world perspective. It is perhaps appropriate to start by examin-ing the role of Islamic finance in Euro-Arab banking relations. Much of the focus is on Shariah compliant asset management, with a section on liquidity management without the use of conventional instruments such as treasury bills, and an extensive discussion of the structuring of Islamic sukuk securi-ties. In the banking field the development of Islamic retail banking in Europe is reviewed, with a further section devoted to Shariah compliant wealth management and private

Abstract: Part 1 of Islamic Finance gains momentum in Europe will take you through the years of Islamic finance with in Europe covering the various financial sectors such as Sukuk issuance, liquidity management, investment banking and wealth management. Professor Rodney Wilson will also discuss the development of Sukuk issuance in Europe covering fac-tors such as the political desire to ensure that British Muslims feel welcomed rather than outsiders.

Keywords: Sukuk Issuance, Muslims, Investment Products, Shariah-compliant Finance



banking. Prospects for Islamic investment banking are also considered as well as the European experience of Shariah compliant fund management. Finally future prospects for Islamic banking and finance in Europe are assessed, notably the provision of Sha-riah compliant services for continental Eu-ropean Muslims, and the possible implica-tions of Turkey’s accession to the European Union will be examined, although there the fortunes of Islamic finance have been rather mixed.

The Islamic financial activities of major Eu-ropean banks will become apparent from the discussion, as will the Islamic finance operations of some of the Arab banks with subsidiaries and branches in Europe. The achievements of the European based exclu-sively Islamic banks will also be reviewed, notably those of Islamic Bank of Britain and the European Islamic Investment Bank.

The role of Islamic finance in Euro-Arab banking relationsIslamic finance has become a key dimen-sion of the relationship between Arab banks and their European counterparties. While the Arab banks imported most of their con-ventional financial products from Europe in the past, now European banks are importing Shariah compliant products from the Arab World, not only for their overseas Arab cli-ents, but more significantly for the growing Muslim population of Europe. Thanks to the emergence of Islamic banking, knowledge transfers in finance have become a two way process rather than simply a one sided af-fair. European banks have as much to learn from the Arab World as the latter have from Europe as interdependence replaces de-pendence.

The increasing spread of Shariah compliant finance, and the dynamism of the econo-mies where it is important, is making the Euro-Arab financial relationship more a part-nership of equals in the twenty first century. In contrast for much of the nineteenth and twentieth centuries the Arab economies underperformed those of Europe, and one explanation for this underperformance was the development of a financial system in the region based on riba that was never fully accepted given its inherent conflict with Is-lamic values.

Fortunately now pious Muslims have a real choice, as Shariah compliant products have been developed over the last three decades to serve most of their financial needs, and these products are at least as efficient as their conventional counterparts. The United Kingdom has been the gateway for Islamic finance to enter Europe, partly reflecting the role of London as the leading international financial centre, but also as a consequence

of the exposure of leading British banks to the Arab and wider Islamic World and their knowledge of these mar-kets. It was the Arab joint venture banks that first brought Islamic finance to London in the early 1980s as Islamic banks in the Gulf found that re-depositing on a murabahah basis could be an effective tool for liquidity management, with the marks-ups generat-ed from trading activity on the London Metal Exchange.

The United Kingdom has also hosted the first Islamic retail bank in Europe, the Is-lamic Bank of Britain which started opera-tions in September 2004, and the European Islamic Investment Bank, which opened for business in 2006. The leading conventional banks have also become involved in serving the local retail market for Islamic financial services, notably HSBC and Lloyds TSB, both of which provide Islamic deposit facilities and housing finance using Shariah compli-ant structures.

It is of course internationally that European banks have made the greatest contribu-tion to Islamic finance with Barclay Capi-tal partnering Dubai Islamic Bank for the world’s largest sukuk issuances, Standard

Chartered making a notable contribution to Islamic finance through its networks in the Gulf, Pakistan and Malaysia, Deutsche Bank in pioneering capital protected funds in the Gulf and UBS in developing Shariah compli-ant wealth management services to name just some examples. It is the operations of these major European banks that will be also reviewed here.

Early Islamic trade finance operations of major European banksIt was the involvement of European banks in the Gulf that first resulted in them encoun-tering demands for Islamic finance. These date back over eighty years, as it was in the 1920s that the Eastern Bank, the predeces-sor of Standard Chartered, was asked by the ruler of Bahrain that the bank’s proposed branch on the island would only be allowed if it avoided all interest based transactions. At the same time the National Handelsbank of the Netherlands, the predecessor of ABN-Amro, was allowed to establish itself in Jed-

dah to pro-vide money changing services for pilgrims from Dutch Indonesia, the condition being that it avoided all inter-

est based transactions. For the next fifty

years most of the European banks in-volved in the Muslim world carried out their business us-ing interest, as indeed did their local coun-terparts, within financial systems where governments believed religion had no role to play. By the late 1970s however the percep-tions of European bankers was starting to change, largely as a result of the emergence of Islamic banks in the Gulf, with the Dubai Islamic Bank the first to be established in 1974, followed by the Kuwait Finance House in 1977 and the Bahrain Islamic Banks in 1978.

All these banks were extensively involved in Shariah compliant trade finance, especially of imports from Europe, using a structure known as murabaha, whereby an Islamic bank would pur-

chase an imported good on behalf of a cli-ent, and then resell the good to the importer for deferred payments covering the costs of the purchase plus a mark-up representing the bank’s profit. As the bank was involved in a real trading transaction which involved ownership risks this justified its profit, unlike interest on a conventional loan where there was only the credit risk of default.

As the payments by the Islamic banks would be made to the European exporter’s bank those bankers involved started to learn about Islamic finance. In a conventional trading transaction usually the exporter’s bank would demand a letter of credit from an importer’s bank that would guarantee the payment. With murabaha however, as it is an Islamic bank, and not the import distributor or agent who is making the payment, letters of credit are arguably unnecessary, as well regulated banks are less likely to default than individual corporate clients. This poten-tially lowered the costs of trade financing,

In the banking field the development of Is-lamic retail banking in Europe is reviewed, with a further section devoted to Shariah

compliant wealth management and private banking. Prospects for Islamic investment banking are also con-sidered as well as the European experience of Shariah compliant fund management

„



but European banks acting on behalf of their exporting clients were only prepared to wave the requirement for their Shariah compliant counterparties to provide letters of credit if they were satisfied that these Islamic banks could meet their payments obligations. To be confident in the timely payment of receiv-ables European banks needed to find out more about Islamic banking and understand how Islamic financing techniques worked.

Shariah compliant liquidity management in EuropeAll banks need to maintain liquid assets to meet depositor withdrawals and financial obligations to other institutions including banks. Rather than merely holding cash, which yields no return, usually liquid as-sets are held as treasury bills or repos, re-purchase obligations on which a financial institution which holds these monetary instruments earns interest. Islamic banks cannot hold such instruments, as interest is regarded as riba, which is explicitly prohib-ited in the Holy Koran.

This presented a challenge for Islamic banks, as they were required by regulators to hold liquid assets as part of prudential risk man-agement requirements, but there were no Shariah compliant liquid instruments avail-able which they could hold.

From 1980 onward a number of banks in London offered Shariah compliant liquid-ity management services to Islamic banks from the Gulf and the Jeddah based Islamic Development Bank. This involved inter-bank wholesale operations, with banks in London providing overnight deposit facilities for the newly established Islamic banks in the Gulf. The major institutions involved were the joint venture Arab banks in London, such as Saudi International Bank and the United Bank of Kuwait. They accepted deposits on a murabaha mark-up basis, with the associ-ated short term trading transaction

being conducted on the London Metal Exchange.

The margins were very small on these buying and selling transactions,

but they were sufficient for the banks in London to offer the Islamic financial institutions in the Gulf and Jeddah a return which

was comparable to that on conventional treasury bills. The at-traction of London

was the financial expertise avail-able and the low risk transactions facilitated by the London Metal Ex-

change because of the depth of the market. The joint venture counterparties were not directly involved in the trading, but rather engaged specialist brokers, notably Dawnay Day, which soon acquired the knowledge of the Shariah issues that concerned their Gulf clients.

Although the provision of murabaha facilities as an instrument for liquidity management remains significant, the real transactions involved result in it being a relatively costly means of ensuring Shariah compliance. A

preferable and less costly solution is for Islamic banks to hold modified treasury bills that satisfy Shariah requirements. Progress has been slow i n developing such instruments, and the trad-ing of securities based on bai’ dayn debt contracts, which is allowed by Shafii scholars in Malaysia, is not permitted by more con-servative schools of Islamic jurisprudence, including those whose opinions prevail in the Gulf. European Shariah scholars tend to follow the more conservative interpretations in the Gulf and South Asia associated with the Hanafi and Malaki schools of Islamic jurisprudence rather than the Shafii School which prevails in Malaysia and Indonesia.

How to manage liquid assets remains a major matter of controversy in Islamic finance, not least because many Islamic banks continue to have liquidity well in excess of regulatory requirements. Although the Islamic Finan-cial Services Board has provided guidelines for regulators on liquidity management, it does not specify what instruments should be used. In Bahrain salam sukuk securities have been developed which serve the same function as treasury bills, but as these are asset backed, the issuance and redemption involves buying or selling a claim to the un-derlying real asset rather than simply acquir-ing or disposing of debt.

This has been approved by the more con-servative Shariah scholars in the Gulf as a preferable alternative to bai’ dayn debt contracts and the bai’ bithaman ajil sukuk traded in Malaysia which are backed by fi-nancial rather than real assets. A salam con-tract involves a payment for a real asset to be delivered in the future, with the timing of delivery and the precise details of the asset specified in the contract. In the case of Bah-rain the issuer is the government, the assets are commodities such as aluminum used by the country’s smelter and the time to matu-rity is ninety days.

Islamic financial institutions purchase the salam sukuk and on maturity are reim-bursed after ninety days with a mark-up representing their return on the asset. On receipt of these funds they relinquish their rights to the underlying asset which reverts to the government as the issuer. At present salam sukuk are not traded on a secondary market, even though Bahrain has a Liquidity Management Centre established for sukuk trading, as the Shariah scholars view them as financial instruments and are concerned about the link with the underlying asset. This is a major limitation for salam sukuk, as treasury bills and repos are usually wide-ly traded in secondary markets, resulting in greater liquidity.

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.

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

www.iiconline.co.uk

International Investment Co (IIC)

International Investment Co (IIC)

Sukuk issuance and trading in Europe

At present there are no salam sukuk available in Europe although most countries have

active treasury bill and repo money markets. This

presents a problem for Islamic banks in Europe that have to

continue to rely on mu-rabaha inter-bank de-posits for their treasury

management. There is an opportunity to develop markets in Islamic securities in Europe which would attract institutional Shariah compliant investment from the Middle East as well as serving Is-lamic banks in Europe. London is an obvious location given the depth and breadth of its financial markets, especially as the Islamic Bank of Britain and the European Islamic In-vestment Bank are listed on the Alternative Investments Market (AIM). Developing a mar-ket in salam sukuk is problematic however unless tradability is allowed by the Shariah scholars, as merely having issuance is not a substitute for an Islamic money market.

The pioneering sukuk in Europe was by the German Federal State of Saxony-Anhalt which raised €100 million through an issu-ance on 31st July 2004. The sukuk is for five years using an ijara leasing structure with a floating return based on the six month Euri-bor rate plus one percent. In other words in financial terms it is identical to a floating rate note but because of the ijara structure the payments to the investors represent rent rather than interest or riba which is prohib-ited under Shariah. This is not merely the renaming of the return, but rather having a structure that is recognized as distinctive under national law, and in the case of the Saxony-Anhalt sukuk, German law.

Like other German state debt instruments the sukuk was listed in Luxembourg, with an additional listing in Bahrain to attract Gulf investors. Citigroup Global Markets was the arranger for the sukuk, and the Shariah ad-visory board of Citi Islamic Investment Bank in Bahrain vetted the legal documentation for Shariah compliance. The sukuk was rat-ed –AA by S&P and –AAA by Fitch with the state of Saxony-Anhalt acting as guarantor. The Kuwait Finance House, the second larg-est Islamic bank in the Gulf, acted as lead manager for the issue, with its visibility and reputation helping ensure that other Islamic financial institutions would invest in the su-kuk. As sukuk have to be asset backed, the solution under German law was to establish a “Dutch” foundation, which corresponded to the classical Islamic concept of a waqf.

The Ministry of Finance then transferred usufruct rights to its building to the founda-tion, which served as the underlying asset. When the sukuk is traded investors are buy-ing and selling rights to the real underlying asset which is permissible under Shariah, rather than simply paper debt instruments which cannot be traded in the view of Gulf Shariah scholars as already indicated.

Effectively the structure is a sale and lease back arrangement, with the foundation serving as a special purpose vehicle, (SPV), which is wound up on termination of the su-kuk, when the usufruct rights revert back to the Ministry of Finance which no longer pays rent to service the investors. In this respect it is different from a waqf religious endow-ment trust which exists in perpetuity rather than for a definitive period.

The idea for the sukuk followed an earlier road show during 2001 when German states tried to ascertain if there was a market for near sovereign issuers in the Gulf countries, with institutions there suggesting that any offering would attract more attention if it was Shariah compliant rather than being structured as a conventional bond or float-ing rate note. Most of the sukuk issued in the Gulf and South East Asia are for corpo-rate clients rather than sovereign sukuk, but corporate issuances have been slow to start in Europe. The Swiss company, EnergyMixx AG announced on 15th August 2007 that it had appointed Faisal Private Bank and the law firm Vinson Elkins to advise it on a suit-able sukuk structure to fund a power plant project in the Gulf, but the structure and the terms have still to be decided.

A relatively small corporate sukuk worth $26 million was arranged in April 2005 by ABC Islamic Asset Management in London and the Abu Dhabi Commercial Bank on behalf of Al Safeena Ltd of London. The English Law firm Norton Rose advised on the structure together with Voisin and Co. of Jersey, as the trust structure governing the sukuk was registered under Jersey’s offshore laws. This was the first Islamic security to be used to finance shipping, as the asset used was a Very Large Crude Carrier (VLCC), Venus Glo-ry, which was chartered to a Saudi Arabian shipping company.

An ijara structure was used for the sukuk, with the tenor being five years and the return a fixed six percent payable quarterly with the return of the principle on maturity. A fixed return is unusual on an ijara sukuk, which in this case means in financial terms it is equivalent to a bond rather than a floating rate note. Normally a murabaha structure with a mark-up would be used for a fixed re-turn sukuk, but as murabaha is a short term instrument, arguably an ijara structure is

preferable for a period of five years. A larger corporate sukuk worth $261 million was used to finance the purchase of the Sanc-tuary Building in London in 2005. Taylor Wessing, the international law firm, advised on the structuring, the clients being Bah-rain based Taib Bank and Hong Kong based Dominion Asset Management, represented in the United Kingdom by Pelham Associ-ates. This sukuk was also based on an ijara structure, but with a variable return linked to LIBOR, the London Inter-Bank Offer Rate, rather than a fixed return.

Turkey, an aspiring European Union member, has more Islamic bank branches than any other European country, although the role of Shariah compliant finance in its banking sys-tem remains marginal. It is an active mem-ber of the Jeddah based Organisation of the Islamic Conference (OIC) and subscribes to and has received Shariah compliant funding from the Islamic Development Bank, the aid agency of the OIC. At present all of Turkey’s government debt is funded through conven-tional bill, bond and note issuance involving interest based payments, but since Septem-ber 2005 consideration has been given as to whether some debt should be funded through sukuk securities.

As always in Turkey the issue has been com-plicated by political considerations, given the tensions between the AK, the moderate Islamist governing party, which supports Is-lamic finance, and the former president, and upholder of Turkey’s secularist constitution, who was at best skeptical towards the notion of finance being Shariah compliant. The ten-sions between Islamists and secularists in Turkey are long standing, and Islamic bank-ing and finance is viewed from the perspec-tive of political symbolism, rather than being simply about financial choices. The change in Turkish law necessary for the issuance of sukuk has been made more likely since the decisive election win by AK in 2007 under the Prime Minister, Recep Tayyip Erdogan, and the appointment of his political ally, Ab-dullah Gül, as President.

It is inevitably London that has the most potential as a centre for sukuk issuance in Europe given its established reputa-tion in Islamic banking, the depth and breadth of its financial markets and a regulatory framework that encourages rather than in-hibits financial innovation. There has been over three decades of official support, initially by the Bank of Eng-land, and from 1997 onwards by the Financial Services Authority as it took over regulatory responsibility for bank-ing, including Islamic banking. However the Treasury has only been marginally involved,





largely through granting tax concessions to ensure a level playing field for Shariah com-pliant housing finance, rather than viewing Islamic finance as a vehicle for raising rev-enue. During 2006 the idea of London serv-ing as a centre for sukuk issuance was first raised at an Islamic finance conference in June, which was attended by the then Chan-cellor of the Exchequer, Gordon Brown, and his deputy Ed Balls. As they became involved this gave the cause of sukuk issuance politi-cal momentum which has propelled subse-quent developments. Three factors appear to be positively influencing developments.

The first is to ensure that British Muslims see that their government is open and re-sponsive to the opportunities that Islamic finance offers. There is a political desire to ensure that British Muslims feel included rather than excluded, not least because Muslims who are United Kingdom nationals may vote, and their support is crucial to en-sure that the Labour Party maintains control of key marginal constituencies.

A second factor is to ensure that the City of London continues to play a major inter-national role in Islamic finance and attracts business for investment banks and law firms, which results in well paid jobs. The govern-ment has established a Working Group on City Competitiveness to ensure that Lon-don’s leading role in international finance is consolidated and enhanced, and the en-couragement of Islamic finance is viewed as part of this strategy.

Third although government debt is relatively modest in relation to gross domestic product (GDP) in the United Kingdom and funding can be secured easily, there is a desire to diversify funding sources to keep costs low and attract attention to Sterling as a stable and attractive currency for international in-vestors, including Muslim institutions and individuals concerned with Shariah compli-

ance.On 23rd April 2007 the Treasury announced that it would be under-taking a feasibility study of the po-

tential for sovereign sukuk issuance by the British government, the aim being to include a statement of progress in the pre-budget report for 2007. On 16th August 2007 the first meeting of the Islamic Finance Experts Group was convened in London, an official body established to advise the Treasury and the Financial Services Authority on issues relating to Islamic finance, including sukuk issuance. Issues being considered include who and how Shariah compliance will be ensured, the structure and size of the issu-ance, the period to maturity and the pricing.

Shariah assurance could imply the Treasury either appointing its own Shariah board or outsourcing compliance, both options having advantages and disadvantages. The struc-ture is most likely to be based on an ijara leasing contract, with the payments to the sukuk hold-ers being rents. As with other ijara based sukuk the government would establish an SPV which would hold the asset, a piece of state owned land, for the dura-tion of the sukuk that is anticipated to be five years. The gov-ernment rental payments for the use of the asset would be paid through the SPV to the investors with the tax treatment the same as for conventional securities. Rents would be benchmarked to either the London Inter-Bank Offer Rate (LIBOR) or Bank of England Minimum Lending Rates (MLR), the expecta-tion being that the actual rents paid would be at a discount to LIBOR or MLR reflecting the high quality of the government paper is-sued and its implicit AAA rating as the United Kingdom government always meets its finan-cial obligations.

The pricing would be in line with conven-tional government debt instruments, and it is anticipated that the same financial institu-tions will take up the offer as hold the con-ventional equivalent. The prime aim is not to attract Gulf capital inflows, but rather to establish a benchmark for high quality Islamic debt that can be used as a base for the higher pricing of future more risky

corporate sukuk issuance in London.

There was some disappointment that no sukuk announcement was made

in the Chancellor of the Exchequer’s pre-budget statement of October 2007, but given the complexity of the legal and technical issues to be resolved, the omission at this early stage was not sur-prising. The Chancellor Alistair Darling

indicated that further announcements

would be made in 2008, and that a report identifying key issues in the sukuk issu-ance would be announced, including the tax treatment of assets transferred into and from the SPV. It was also proposed that National Savings and Investment (NS&I), the British government sav-ings scheme, would offer Shariah compliant products to retail investors through the na-tional post office branch network.

Islamic retail banking in EuropeAs the main source of support for Islamic banking has always come from ordinary Muslims, and the development of Islamic

finance can be regarded as a populist move-ment rather than an initiative from govern-ments, it is not surprising that retail Islamic banking has been the dominant activity. The world’s largest Islamic financial institutions, the Al Rajhi Bank of Saudi Arabia and the Ku-wait Finance House, primarily provide retail, personal and private banking products, as do the Dubai Islamic Bank and Bank Islam Malaysia. In Europe Islamic finance has also been a bottom up rather than a top down movement, although it is only in the United Kingdom that the regulator, the Financial Services Authority, has actively facilitated the development of the industry.

Yet France and Germany have much larger Muslim populations than the United King-dom, where the total was only 1.8 million when Islamic retail banking started in the 1990s and still remains below two million today.

As Muslims are no different to non-Muslims in their needs and demands for financial services, not surprisingly Islamic banks and conventional banks offer Shariah compliant retail products that mirror those provided to ordinary clients. Current account or transac-tions deposits are always offered, as these facilitate payments through cheques, stand-ing orders, direct debits and most impor-tantly debit cards for use at point of sale or through automated teller machines. Of course as conventional current accounts

The United Kingdom has been the gateway for Islamic finance to enter Europe, partly reflecting the role of London as the lead-

ing international financial centre, but also as a conse-quence of the exposure of leading British banks to the Arab and wider Islamic World and their knowledge of these markets

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pay little or no interest, some observers may question the need for special Shariah compliant current accounts. Such accounts however are provided using wakala trust structures, where the financial institutions guarantees that the amounts deposited will not be used for interest based financing, or under the qard hassan principle, where the depositor provides the bank with in interest free loan on the understanding that no riba will be charged when the finance is utilised. In the United Kingdom both Lloyds TSB and HSBC Amanah offer Shariah compliant cur-rent accounts.

Banks providing Shariah compliant retail fi-nancial services in Europe all offer a range of savings and investment products. The Islamic Bank of Britain offers a treasury account, where those who have £100,000 or more to invest can place their funds for fixed periods ranging from 1-24 months, with higher returns offered for longer time deposits. The deposits are structured on a murabaha basis, with the funds used to buy and sell commodities on the London Metal Exchange, with the client being paid a mark-up reflecting the trading profit.

The profit rate is pre-determined, eliminating risk for the client, and the bank covers its po-sition in the commodity exchange by agree-ing the sale price at the time of purchase. Such transactions are permissible under Shariah, as the hedging does not involve the use of derivatives such as futures and options, but rather real trading transactions involving physical commodities.

Savings accounts are also offered where no minimum balance is required but returns are significantly lower than with the treas-ury placements. The Islamic Bank of Britain offers three instant access accounts, an in-ternet direct access account paying 3 per-cent in September 2007, a young persons account paying 2.5 percent and a undeter-mined savings account using a passbook with branch deposits and withdrawals pay-ing 2.0 percent.

It also offers term savings deposits with minimum notice periods for

withdrawals, the 30 day ac-

count

paying 3.25 percent, the 90 day account 3.50 percent and the 180 day account 3.75 percent. These accounts are based on a mudaraba structure, with the depositor sharing in the profits of the bank rather than earning interest. It should be noted that the percentage returns indicated are target rates, which are not guaranteed, as under a mudaraba structure returns cannot be pre-determined.

With mudaraba the profit rate declared on which returns on deposits are based should be related to the profitability of the financial institution. However most Islamic banks, including the Islamic Bank of Britain, main-tain a profit equalisation reserve into which a proportion of bank revenue is paid rather than being distributed to depositors.

The aim is to maintain a reserve fund, from which a profit share can be paid, even in years when the bank generates less profit. The cost to depositors is that they receive less in the more profitable years.

This profit smoothing, which is encouraged by regulators, including the Financial Serv-ices Authority, enables Islamic banks to stay competitive with conventional banks, with the option of increasing profit rates when interest is rising and other financial institu-tions pay more to depositors.

Islamic banks are often criticized by strict Muslims for benchmarking profit rates to interest indices, but legally the returns they pay are profits, not interest, and as Islamic banks only account for a minute share of bank deposits in most markets, they are price takers, not price makers.

There is a potential conflict between mudara-ba depositors and shareholders in an Is-lamic bank, as higher dividend payments to the latter may be at the expense of profit share payments to the former. However if the mudaraba depositors are not sufficiently rewarded, not many will be attracted to the bank, which will adversely affect the bank’s growth and its long run profitability.

In other words the market can provide a so-lution, without the need for regulatory inter-vention. Mudaraba is regarded as an equity type arrangement, but it is not the same as equity investment, as it is the shareholders

who own the bank and enjoy voting rights, not the mudaraba depositors.

However while the shareholders may re-ceive very variable dividends, and suffer capital losses as well as gains, returns to the mudaraba depositors fluctuate less, but they do not benefit from capital gains. Under Shariah the nominal capital value of mudaraba deposits cannot be guaranteed,

but in practice it is never written down as it is the shareholders dividend that is cut or eliminat-ed when losses occur, with mudaraba deposi-tors also higher in the pecking order with regard to claims in the case of insol-vency. In part 2 of Islamic Finance in Europe Professor Rodney Wilson will give his insight of the fu-ture of Europe’s Islamic finance industry looking at Turkey and the Financial Services Authority, their roles in the success of Is-lamic finance. The arti-cle will focus on sectors such as Islamic wealth, retail banking and Islamic investment banking.

Chapra, M. Umer, The Future of Econom-• ics: An Islamic Perspective, Islamic Foun-dation, 2000.El-Ashker, Ahmed and Wilson, Rodney, • Islamic Economics: A Short History, Brill Academic Publishers, 2006.El-Gamal, Mahmoud A, Islamic Finance: • Law, Economics and Practice, Cambridge University Press, 2006.Iqbal, Zamir and Mirakhor, Abbas, An In-• troduction to Islamic Finance: Theory and Practice, Wiley, 2007.Hassan, M. Kabir and Lewis, Mervyn K., • Handbook of Islamic Banking, Edward El-gar, Cheltenham, England and Northamp-ton, Massachusetts, 2007.Henry, Clement and Wilson, Rodney, The • Politics of Islamic Finance, Edinburgh University Press and Columbia University Press, New York, 2004. (reprinted by Ox-ford University Press, Karachi, 2005)Adam, Nathif J. and Thomas, Abdulkader, • (eds.) Islamic Bonds: Your Guide to Issu-ing, Structuring and Investing in Sukuk, Euromoney Books, London, 2004.Archer, Simon and Karim, Rifaat Abdel • (eds.) Islamic Finance: Innovation and Growth, Euromoney Books, London, 2002.Islamic Finance Information Service: • http://sitesecurities.com/ifisInstitute of Islamic Banking and Insur-• ance, London: www.islamic-banking.com



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Global Islamic Finance magazine was proud to support UCI’s annual conference at the London Stock Exchange for investors from the Middle East region. Conference organizer, Mr. Tahar Benourrad, and his team from UCI put together an exciting Dragons’ Den type format, with James Caan of BBC Dragons’ Den fame as the keynote speaker. The format gave the panellists an opportunity to see presentations from entrepreneurs requiring investments of between £5m and £150m in sectors ranging from real estate to renewable energy. The UCI event was heavily over subscribed and attracted some leading figures from both the UK and the Middle East, including sovereign wealth funds, private investors, and govern-ment representatives.

The conference panellists, who included Mr. Michael Clark, CEO of Qatar Islamic Bank, Mr. Hadi Damirji, Managing Director of Trin-ity Group, Dr. Hatem Abou Said of Al Baraka Banking Group, and Mr. James Caan, shared their views on the cultural and commercial nu-ances of raising finance from the Middle East and investing into the region. Mr. Caan kicked off the event with en exhilarating keynote speech highlighting his signature approach on private equity and real estate investing. Mr. Caan introduced his real estate investment firm Hamilton Bradshaw Real Estate (HBRE), which was represented at the conference by himself and his colleague and fellow investor Mr. Faisal Butt. One of Britain’s most suc-cessful and high profile entrepreneurs and in-

vestors, James Caan was in familiar territory, having seen over 1,000 presentations during his time at the BBC’s hit series Dragons’ Den. In Mr Caan’s opening remarks he shared his ideas with the audience, advising them on how to raise investment from the Middle East. He focused on the importance of understand-ing the Middle Eastern investor, who values relationships and trust above other factors. Mr. Caan stressed that investors from this region are highly sophisticated and profes-sional, and their investment analysis is led by top talent recruited from leading global invest-ment houses.

“Investors from this region generally expect entrepreneurs to have more direct contact, demonstrate their understanding of the lo-cal/regional market, and structure deals in accordance with cultural norms”, said Caan to an audience of private investors and entre-preneurs. Mr Caan went on to explain that the Middle East attracts literally thousands of en-trepreneurs/investors looking to raise capital; investors from this region see presentations almost on a daily basis. “They understand risk, they understand returns and they can discern the difference between an attractive, well thought out opportunity and hype”. He highlighted the importance of co-investment, i.e. “skin in the game”, from those seeking investment as an essential ingredient to es-tablishing any investment relationship in the Middle East.

JAMES CAAN OF BBC’S DRAGOS DENIS SUPPORTING THE GLOBAL INVESTOR WINDOW

Investors from this region [Mid-dle East] general-

ly expect entrepreneurs to have more direct contact, demonstrate their un-derstanding of the local/regional market, and struc-ture deals in accordance with cultural norms

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ISLAMIC PROJECT FINANCING SETTING the Agenda for Innovative OpportunitiesAuthor: Tasnim Nazeer, Global Islamic Finance Magazine Editorial Team, United Kingdom

Abstract: Global Islamic Finance Magazine will present part 1 of the Islamic Project Finance Series which will be dis-cussing the key components of project financing in adherence to the Shariah. This article aims to raise awareness of the functions and Islamic financial instruments used in Islamic Project financing along with an overview of the various opportunities presented in the sector primarily focusing on the UAE in Part 1 and then looking at various other countries around the world throughout the series. Islamic Project Financing is a growing sector and provides the avid investor with an excellent alternative to indulge in profitable projects through Islamic financial transactions which have the advantage of dealing with a prohibition of interest and many other benefits. Part 1 of the Global Islamic Finance Project Finance series outlines the various different types of Islamic financial instruments such as Mudaraba, Musharaka, Ijarah, Salam and most popularly Istisna and the implementation of the instruments in Islamic financial transactions. We will also look at the Insurance aspects of financing projects such as Takaful Islamic Insurance. All these components are vital to know when making that lucrative financial deal.

Keywords: Islamic Project Financing, Islamic financial Instruments, Mudaraba, UAE, Musharaka, Istisna, Salam, Takaful, Quard Hasan, Tranches, Saudi Arabia, Infrastructure, Energy

Islamic Finance

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Global Islamic Project Financing taking the Nation by StormThe global demand for Islamic project financing is growing at an unprecedented rate where many investors around the world are looking into major financial hubs to aid in funding lucrative projects. As the Islamic financial market adheres to the principles set out by Shariah law all investments and projects have to be constructed in a Shariah compliant manner and authorised by an Islamic financial governing or regulatory body of the country. There are many lucrative sectors which provide scope for profit-able projects across the spectrum of Islamic finance. Tradition-ally projects in the infrastructure sector proved more rewarding as there were many opportunities especially in the Islamic financial hub of the United Arab Emirates. Presently there are other sectors for Islamic project financing deals which are currently spearheading the market such as the energy, education, health and the Takaful market amongst many others which will be further discussed in this article. In this Is-lamic Project Finance Series Global Islamic Finance Magazine will take you through a comprehensive look at the role of Islamic Project Finance and its use in many countries around the world such as the Middle East, Asia, Europe and America. In the first part of Islamic Project Financing we will be focusing on opportuni-ties and the role of Islamic financing in particularly in the United Arab Emirates. GIF will also be giving you the vital information you need so that you acquire the knowledge of utilising Shariah com-pliant transactions when making project financing deals.

Ian Cogswell, director of natural reserves, corporate finance divi-sion, Mizuho Corporate Bank, said: “Increased liquidity in the region means that financial institutions will have to diversify their income streams on projects and be more innovative in their prod-uct offering.” Current projects in the oil and gas sector in Qatar alone amount to more than $60b, including Ras Laffan’s RasGas Onshore Expansion Project Trains, expected to produce 15.6m tonnes of LNG” (Khaleej).

Knowing the Vital Financing Principles of Islamic Project Fi-nancingIslamic project financing should be undertaken with adherence to Shariah principles which include the following:

Prohibition of Interest (Riba)

Figure 1:

By Tasnim Nazeer

Profit and loss Sharing (PLS)

Specific Islamic Finance Instruments

Islamic Finance

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It is important for any prospective investor or business professional to know the three main Shariah compliant rulings in Islamic fi-nance as outlined in Figure 1 and discussed in more detail.

• Prohibition of Interest (Riba)The prohibition of Interest in Islamic finan-cial transactions cannot be understated as it plays a significant role in distinguishing between a conventional transaction and an Islamic Shariah compliant one. In Islam it is prohibited when lending money in an unjus-tified manner. In the context of Shariah it re-fers to the premium that must be paid by the borrower to the lender along with the prin-cipal amount, as a condition for the loan or for an extension in its maturity, which today is commonly referred to as interest. The UAE Federal Law No. 5 of 1985 Concerning Civil Transactions (the ‘Civil Code’), which was issued with the aim of achieving maximum compliance with the Shariah, outlines this principle, and states in Article 714:

“If the contract of loan provides for a benefit in excess of the es-sence of the contract otherwise than a guarantee of the rights of the lender, such provision shall be void but the contract shall be valid.” (Tamimi.com)

• Profit and Loss Sharing (PLS)One vital concept in Islamic fi-nancing which you should be ac-customed to is the role of profit and loss sharing. This means that two partners in an investment must share their profits and loss-es on the basis of their capital share and the effort that they put into the project. PLS comprises of equity based financing as the justification for the PLS financiers profits rely upon his effort and the risk which he holds. If the invest-ment or project makes a loss than the PLS financier would also incur loss.

• Specific Islamic Financial In-struments There are specific Islamic finan-cial instruments when financing Shariah compliant projects which will be discussed further in this article. The variety of Shariah compliant instruments help to aid with investments and comply with the rulings laid out by the Shariah. It is always important to ensure you are utilising spe-cific Islamic financial instruments when carrying out an Islamic fi-nancing project.

• Prohibition of Uncertainty or Suspicion ‘Gharar’ in ProjectsAny transaction or investment project that a person wishes to indulge in that involves Gharar which is suspicion or uncertainty about the project should be avoided and is prohibited under Shariah Islamic law. For example it would be prohibited to sell goods for a project if those goods had been lost and you are not able to supply it.

The Role of Islamic Financial Instruments in Project FinancingIt is vitally important to have thorough knowl-edge of the Islamic financial instruments which you may wish to utilise when carrying out project investments. Figure 2 outlines all the major financial instruments that you should refer to before carrying out an Islamic financial project.

In addition to the main forms of Islamic project financing there are various Islamic loans which can be utilised such as the fol-lowing:

• Quard Hassan (Interest Free Loan)The Quard-Hasan instrument is equivalent to an interest-free loan either to corporate custom-ers in financial distress, (which later might be converted into an equity stake in the enterprise), or to individual clients for welfare purposes. In making the loan available, the bank may take se-curity for the loan (e.g. mortgage over the customer’s premises) and some may charge a nomi-nal fee. The service charges are not for profit; they are the actual costs recovered less than one im-portant condition, (to prevent the charges from becoming equiva-lent to interest), that the charge cannot be made proportional to the amount or to the term of the loan.

• Takaful (Insurance)When financing any Islamic project or investment it is worth noting the Islamic financial con-cepts of insurance which is pri-marily Takaful Insurance. There are many Takaful companies around the world and particularly successful ones in the United Arab Emirates such as Takaful Re. Takaful Islamic insurance differs from conventional coun-terparts as the concept of Taka-ful relies upon providing security to its customers in a way that is seen to be socially responsible

1) A price should be agreed mutually and not under duress

2) The project should be between parties that are sane and have the legal capacity to under-stand the implications of their actions;

3) At the time of contracting, the subject mat-ter of the contract should be in existence and able to be delivered without uncertainty or de-ception;

4) The contract should not be based upon a consideration (for the purposes of this bro-chure, this is translated as counter-value) that is itself prohibited under the Shariah (e.g. alco-hol, pork products, etc.)

Four Conditions of Validity in Islamic Financial Projects/Investments

Table by Tasnim Nazeer Information from Tamimi.com

• Istisna ( To Manufacture)

Istisna means commissioned manufacture which is to ask someone to manufacture. It is a relatively modern form of Islamic finance used globally by Islamic financial institutions and banks. Istisna involves one party purchasing goods and the other undertakes the manufacturing of the goods as agreed by both parties. Many Islamic financial institutions use Istisna to finance construction projects.

• Musharaka (Partnership Financing)

Musharaka is a traditional form of Islamic financing which is more wide-ly used in small scale projects and investments. Profits are shared out between two parties and both parties provide capital to the investment project. In a typical Musharaka contract between a bank and a customer the customer or partner will pay the bank its share in the profits and also a pre-determined portion of his own profits, which then reduces the bank’s shareholding in the investment. Eventually, the customer be-comes the complete and sole owner of the investment.

• Mudaraba (Cost Plus Financing)

In Mudaraba contracts it involves the financial institution such as bank who will agree to fund the purchase of assets from a third party as re-quested by their client. The bank will then go on to resell the goods to its client with a market profit. The client can then choose to purchase the goods immediately or as a deferred payment which is particularly popular Islamic financial instrument to use.

• Ijarah (Leasing)

In the Ijarah contract it contains similarities to that of its conventional counterparts as it is defined as a sale of leasing. The financial institution or bank purchases an asset which is required by its client for a rental fee. The ownership of the asset remains in the hands of the lesser who is responsible for its maintenance so that it continues to give the service for which it was rented. The lesser assumes the risk of ownership and in practice seeks to mitigate such risk by insuring the asset in its own name. Under an Ijarah contract, the lesser has the right to re-negotiate the quantum of the lease payment at every agreed interval. This is to ensure that the rental remains in line with prevailing market leasing rates and the residual value of the leased asset.

• Salam (Advanced Purchase)

If you did want to purchase a property or building for the means of project financing then there is the Islamic financial instrument of Salam which means advanced purchase. The Salam contract is defined as forward purchase of specified goods for full forward payment. This contract is regularly used for financing agricultural production and projects.

By Tasnim Nazeer with information from Tamimi.com

Figure 2:

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and fair. It refers to the pool of payments by a group of participants of an agreed sum into a common fund that will be managed in accordance with the Shariah, particularly the Mudaraba contract. In the case of the in-sured event, the participant benefits through Takaful by claiming compensation from the fund. In the absence of the claim, the par-ticipants share the surplus of the invested funds. Conventional insurance companies manage the funds of its clients on their be-half. Similarly in takaful, the Islamic Bank is a trustee (not to be confused with the legal concept of trustee under English law) man-aging the funds of the participants for a fee. Thus, each participant retains title over its share of the funds, and under certain condi-tions may withdraw its share.

However, in practice, it is seen that the pure Islamic Shariah compliant nature is detract-ed from the actual concept of takaful. The reason behind this is because the takaful funds are currently reinsured on a conven-tional basis due to the lack of a developed Islamic reinsurance market and the need to build up the reinsurance Takaful market.

To shed more light on the implementation of specific Shariah compliant instruments when dealing with Islamic financial projects GIF has displayed figure 3 which shows the process of Istisna from the construction stage up until the operations stage whereby Ijarah leasing can also be implemented.

A Wealth of Islamic Project Finance Oppor-tunities in the UAEThe United Arab Emirates hold a world of Islamic project financial opportunities for investors from all over the globe. Some of the main sectors for Islamic financial invest-ments are:

What do experts say about UAE Islamic Project Finance?There is much scope in the UAE primarily for infrastructure but the latest of deals from top Islamic financial Abu Dhabi Islamic Bank (ADIB) had undertaken the largest UAE project financing deal for Emirates Steel In-dustries. It had been reported on ADIB that, “Emirates Steel Industries sought the facil-ity to expand its steel production capacity and diversify its product offering as part of its strategic plan to become one of the larg-est integrated steel manufacturers in the region, in line with Abu Dhabi’s vision 2030” (ADIB).

Tirad Mahmoud, CEO of ADIB had report-edly said, “There are various reasons this is a very important deal for the UAE, the key one being that it is for the expansion of a strategic project of national importance. It will create additional employment opportu-nities and revenue sources for the UAE. In addition, this deal signals that the financing environment in Abu Dhabi is improving and could grow this year. This also shows ADIB’s unique capabilities to structure and ar-range large and complex financing for major projects such as Emirates Steel Industries’ expansion, with co-participation of Islamic and conventional financiers to achieve an optimal outcome for the client”(ADIB).

Stephen Pope, CFO of Emirates Steel In-dustries, said, “ADIB impressed us with their innovation and flexibility in structuring this large financing agreement. They were initially chosen due to their robust financial strength, commitment and experience in customising financing for many UAE compa-nies. We are pleased to note that their ef-forts and capabilities, that involved structur-ing this complex agreement with eight other banks in a dual-tranche Islamic and Conven-tional Facility, have justified our confidence in them.” (ADIB).

Saudi Arabia had also made unprecedented achievements in contributing to the Islamic project finance sector such as the project with Saudi Aramco in 2006 which was named the Ragibh Project. The Rabigh com-plex was one of the world’s largest integrat-ed export-oriented refinery and petrochemi-cal complexes to be built in the United Arab Emirates. The Rabigh complex has produced 18.4 million tons per annum of high value pe-troleum products which gives it much scope for the industrial sector to further advance and create more opportunities for Shariah compliant project financing. In Saudi Arabia they have successfully utilised the concept of tranches which primarily uses the Istisna instrument for the sale to be constructed and the Ijarah instrument which has worked as a successful partnership promoting profitable successes in Islamic financial projects.

The Rabigh Project had established a cred-ible framework within the Saudi legal sys-tem for the inclusion of Islamic tranches in multi-sourced transactions. Islamic financ-ing products are most attractive to project fi-nance sponsorship organisations especially in large capital projects when they can de-liver additional capital participation. Another benefit is the inclusion of multiple financing sources from export credit agencies, bond or Sukuk which adds structural complexity (and with complexity comes a time cost and execution risk).

The Islamic financing therefore needs to bring that “additional benefit” to overcome the perceived process and structural burden associated with the inclusion of an Islamic fi-nancing tranche. However in Islamic tranch-es there poses challenges of tenor and price. Pricing which runs over a long period of time in Islamic projects can often be unattractive for domestic and Islamic banks. However de-spite challenges that Islamic Project finance faces there has been unprecedented growth especially in the United Arab Emirates.

“The growth in Islamic project financing has been phenomenal. It exemplifies the suc-cess of both the burgeoning Islamic finance sector and the booming construction indus-try in the region,” said MEED, organiser of the upcoming Islamic Project Finance con-ference (Khaleej Times).

“Ensuring that tranches of Islamic funding work effectively with conventional finance, that clients understand where the liability lies in Islamic arrangements, and the impli-cations this has for relationships between conventional and Islamic investors is at the heart of our current work in the sector. It is an approach that is appreciated both by our clients and by their stakeholders.” said Ol-iver Agha, Global Head of Islamic Finance at DLA Piper (Khaleej Times).

Not only do non conventional project sectors such as steel incur lucrative deals in the UAE but there is also scope for infrastructural opportunities in the UAE. The energy sec-tor saw a vast opportunity in the UAE from Dolphin Energy whereby the government of Abu Dhabi secured a project financing deal for the construction of the Taweelah Fujairah pipeline, as well as the expansion of storage facilities at Ras Laffan, is progressing well, with the final stage of the pipeline due to be completed in the first quarter of 2011, and storage substantially complete.

Tony Boon, director of project finance for Dol-phin Energy, said that despite the increased liquidity available in the market, project fi-nance will continue to play a major part in fi-nancing options. “It is prudent to spread the risk across the types of finance available;

1. Construction phases (Istisna) — the borrower procures construction of project assets and then transfer’s title to assets to Islamic finan-ciers. As consideration, Islamic financiers make phased payments to the borrower (equivalent to loan advances).

2. Operations phase (Ijarah) — Islamic finan-ciers lease project assets to the borrower. Bor-rower makes lease payments (equivalent to debt service).

Source: Chadbourne.com

Infrastructure Projects• Agricultural• Construction and Energy• Educational • Charity Projects• Real Estate•

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in addition, banks providing finance can also validate the investment decision.” Dol-phin Energy has one of the largest financ-ing deals in the UAE, with the $3.5 billion deal to fund the construction of its Bridge 1 (Khaleej).

The UAE Steel industry has seen unprece-dented demand following the largest project financing deal as discussed above and therefore any potential investor or business professional may want to investigate the options in the steel industry further in the United Arab Emirates. There had also been opportunities in the UAE to get involved in Islamic law project such as the UAE Federal Supreme Court Justice Project.

“A plan has been chalked out to implement the e-justice project in Ajman, Umm Al Qai-wain and Fujairah, the minister said during a tour of the progress of the project in Shar-jah courts. The e-management and archiv-ing project, he added, aims at raising the

efficiency and competence of the federal justice system under the ministry’s strat-egy which primarily seeks to deliver best judicial services” (Global Arab Network).As you can see there are many opportuni-ties across the various sectors and some opportunities in the UAE expand out into many sectors of expertise. If you do have an expertise or knowledge in the field of infrastructure, energy or feel you can bring your knowledge and expertise to the project than the UAE may be the perfect place for you to start your Islamic project financing deal. In the next part of the Islamic Project Finance Series Part 2 will be looking at the Middle East and Africa and the various op-portunities it holds for the potential inves-tor.

The Future of Islamic Project Financing in the UAEThere is much scope for an unprecedented growth in Islamic Project financing in the UAE especially since Islamic finance as

an industry is attracting investors from all over the world. Islamic Finance as an in-stitution has become a globally renowned sector which caters for the demand of both Muslims and Non Muslims. In a predomi-nant Muslim population of the UAE it holds the advantage for many numerous Islamic projects to be undertaken through the vari-ous Islamic financial instruments discussed in this article.

If you are considering participating in an Islamic Project in the UAE then this article will give you the comprehensive informa-tion you need to know the vital compo-nents of instruments you can use including the type of insurance that you may want for your project such as Takaful insurance. The future of Islamic Project financing looks bright for the UAE seeing lucrative deals especially from the largest project finance deal in the Emirates Steel sector which is expected to see profitable returns for years to come.

Islamic finance providers

Conventional lenders

Project company

Construction contractor

Intercreditor agreement

Intercreditor agreement

Construction contract

Islamic facility agent

Investment agency

agreement

Sale undertaking

Purchase undertaking

Investment agency agreement

Istisna’aIjara

Service agency agree-ment

Source: Chadbourne.com

Figure 3:

Islamic Finance a UAE Legal Perspective (2010) Al Tamimi & Company, Article Retrieved from: http://www.tamimi.com/files/Legal%20Brochures/• IslamicFinance.pdfADIB leads the Islamic Tranche of the AED 4 Billion (2010) Abu Dhabi Islamic Bank, Article Retrieved from: http://www.adib.ae/adib-leads-islamic-• tranche-aed-40-billion-project-finance-facility-prestigious-emirates-steel-industIslamic Project Finance Structure and Challenges (2010) Chadbourne, Article Retrieved from: http://www.chadbourne.com/files/Publication/• c4ae820b-24ba-4e5b-9f7d-186814289e7e/Presentation/PublicationAttachment/20d7847a-8644-4b0f-b3e7-19a496eebf22/pfn_Intl_0210.pdfUAE Federal Supreme Court Justice Project (2010) Global Arab Network, Retrieved from: http://www.english.globalarabnetwork.• com/201009047135/Related-news-from-UAE/uae-federal-supreme-court-completes-first-phase-of-e-justice-project.htmlIslamic Finance Project in Saudi Arabia (2006) White & Case, Article Retrieved from: http://www.whitecase.com/files/Publication/5f53893a-• c38a-4d3b-873d-c7da9f181b27/Presentation/PublicationAttachment/536c71d1-05f5-4c04-a230-c8e647ca455e/article_Islamic_Project_Fi-nance.pdf$1 trillion project financing market spurs Islamic lending sector growth (2007) Khaleej Times, Article Retrieved from: http://www.khaleejtimes.• com/DisplayArticle.asp?xfile=/data/business/2007/June/business_June447.xml&section=business

References and Further Reading:

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Abstract: Simply stated, epistemology deals with the question of what we know about a phenomenon and how do we know it. The practi-tioners use the term Islamic finance industry (IFI) to refer to their activities in designing and trading “Shari’ah-compliant” ways and means of financing. Taxonomically, industries in an economy belong to a sector and sectors belong to subsystems which in turn belong to a larger system. For example, a bank belongs to a banking industry which belongs to the financial sector which belongs to the financial subsystem which belongs to the larger economic system which, finally, belongs to an overall socio-political-economic system. Before the current incep-tion of IFI, there was what could be called a “market failure” in the conventional financial system. There was substantial unmet demand for Shari’ah-compliant financial products. IFI grew out of the conventional finance to meet this demand. Muslim scholars writing mostly since the 1970s about Islamic finance focused on development of an Islamic finance system; they not only emphasised elimination of riba contracts but urged their replacement with risk-sharing contracts. The practitioners, most of whom had been operating in the conventional finance, were however interested in developing ways and means of finance that, while Shari’ah-compatible, would be familiar to and ac-cepted by market players in the conventional finance. The former emphasised Profit-Loss Sharing (PLS), the latter focused on traditional methods of conventional finance centred on risk transfer and risk shifting. This article argues that there are two ideal financial systems based on risk sharing, conventional and Islamic, and one actual conventional system focused on risk transfer. There are two industries within the actual system; conventional and Islamic finance industry. The paper then proceeds to discuss the epistemology and the main characteristics of each of the two ideal systems.

Keywords: Conventional Economy, Arrow-Debreu, Financial Instruments, Islamic Finance Industry, Risk

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DO CONVENTIONAL AND ISLAMIC FINANCE SHARE COMMON EPISTEMOLOGY?Author: Abbas Mirakhor, PhD in Economics, Iran Edib Smolo, Researcher and Coordinator of Islamic Capital Market Unit, ISRA, Malaysia

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Epistemology of Conventional and Islamic Finance

An Ideal Conventional Financial SystemAn overall socio-political-economic system gives rise to an economic system out of which grows a system of financing to fa-cilitate production, trade and exchange. The idea of the contemporary conventional economic system is usually traced to Adam Smith’s conception of an economy as envi-sioned in his book, the Wealth of Nations. What has been ignored until recently, how-ever, the fact that, from an epistemological point of view, Smith’s vision of the economy is embedded in his vision of a moral-ethical system that gives rise to the economy envi-

sioned in the Wealth of Nations. That moral-ethical system was well-described in Smith’s book: The Theory of Moral Sentiments which preceded his Wealth of Nation by a decade and half (Mirakhor & Askari, 2010; Mirakhor & Hamid, 2009). Whereas conventional eco-nomics considered Smith’s notion of “invis-ible hand” as a coordinator of independent decisions of market participants, in both The Theory of Moral Sentiments and in the Wealth of Nations the metaphor refers to the design of the Supreme Creator “who ar-ranged the connecting principles such that the actions of all those seeking their own ad-vantage could produce the most efficient al-location of resources, and thus the greatest possible wealth for the nation. This is indeed a benevolent designer” (Evensky, 1993, p. 9).

Major contribution of Smith in his Theory of Moral Sentiments is to envision a coherent moral-ethical social system consistent with the Supreme Creator’s design and how each member of society would enforce ethical po-sitions. Recognition of human frailties led Smith to recognition of a need for an organic co-evolution of individual and society in a stage-wise process of accumulation of ethi-cal system of values from one generation to next. Compliance with and commitment to a set of values – virtues of prudence, concern for other people, justice and benevolence – would insure social order and cohesion (Mi-rakhor & Askari, 2010; Mirakhor & Hamid, 2009; Smith, 2006).Smith and Arrow.

It was not until the second half of the last cen-tury when attempts were made to present a particular conception of Smith’s vision of the economy. This conception saw the economy as a market system guided by the “invisible hand” toward smooth functioning, coordi-nating “autonomous individual choices in an interdependent world” (Evensky, 1993). Two such attempts were the works of Arrow and Debrau (1954) and Arrow and Hahn (1971) that sought to show “that a decentralised economy motivated by self-interest” would allocate resources, such that it “could be re-garded, in a well-defined sense, as superior

to a large class of possible alternative dispo-sitions …” (Arrow & Hahn, 1971, pp. vi-vii). These attempts focused primarily on Smith’s idea of a decentralised market economy but in the process it abstracted from much of the well-spring of his thoughts represented by the societal framework emphasising mor-al-ethical values envisioned in The Theory of Moral Sentiments.

The work of Arrow-Debreu (1954) is fun-damentally about optimal risk sharing in a decentralised market economy. It addresses the question of how best to allocate risk in an economy. The answer is that risk should be allocated to those who can best bear it. It appears that Arrow-Debreu took for grant-ed the existence of such institutions as prop-erty rights, contracts, trust, rule of law, and moral-ethical values. Two key assumptions of this work were complete contracts and com-plete markets. By the former it was meant that it was possible to design contracts such that all contingencies were covered. The lat-ter assumption meant that there was a mar-ket for every conceivable risk. Crucially, all future payoffs were contingent on specific outcomes. Arrow-Debreu model did not in-clude fixed, predetermined rates of interest as payoffs to debt contracts.

Subsequently, Arrow made it clear that “the process of exchange requires or at least is greatly facilitated by the presence of several ... virtues (not only truth, but also trust, loy-alty and justice in future dealings) ...” (Ar-row, 1971, pp. 345-346). For example, if the institution of trust is strong in an economy, the universe of complete contracts can be replicated by simple contracts entered into by parties stipulating that terms and condi-tions of the contracts would be revised as contingencies arise.

Arrow himself was to place emphasis on trust as the lubricant of the economy (Arrow, 1974). Despite Arrow’s attention to some im-portant elements of the institutional struc-ture that were integral to Smith’s vision of an economy, such as its value system, the economics profession developed its own vi-sion of that economy focusing primarily on

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DO CONVENTIONAL AND ISLAMIC FINANCE SHARE COMMON EPISTEMOLOGY?Author: Abbas Mirakhor, PhD in Economics, Iran Edib Smolo, Researcher and Coordinator of Islamic Capital Market Unit, ISRA, Malaysia

The work of Arrow-Debreu (1954) is fundamen-tally about optimal risk sharing in a decentral-ised market economy. It addresses the question

of how best to allocate risk in an economy. The answer is that risk should be allocated to those who can best bear it.

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two concepts of “invisible hand” and “self interest.” The first was mentioned only once in The Wealth of Nations (see Smith, 1976, p. 456) and the manner in which the second was used by economists has been referred to by Vivian Walsh (2000) as “vulgar … mis-understanding” of what Smith meant by “self interest”. This “narrowing” of Smith’s view has been subjected to rather sharp criticism by Amartya Sen (Sen, 1977, 1987) who suggests that: “Indeed, it is precisely the narrowing of the broad Smithian view of human beings in modern economics that can be seen as one of the major deficien-cies of contemporary economic theory. This impoverishment is closely related to the dis-tancing of economics from ethics.”

Consideration of the above quotation as well as the rest of The Moral Sentiments, leads to, at least, three observations. First, this is the Smith that has been ignored by the eco-nomics profession. The Smith of economics is the author of the self-interest motive that is the basis of utility and profit maximisation at any cost to the society, including the im-poverishment and exploitation of fellow hu-man beings. Second, Smith makes clear in his Theory of Moral Sentiments that compli-ance with the rules prescribed by the Crea-tor and with the rules of the market was es-sential to his vision. Third, it is also clear that Smith considers the internalisation of rules – being consciously aware of ever-presence of the Creator and acting accordingly - as crucial to all human conduct, including eco-nomics.

Smith succinctly and clearly shares some of the fundamental institutional scaffolding of Islam: belief in One and Only Creator; belief in accountability of the Day of Judgement; belief in the necessity of compliance with the rules prescribed by the Creator; and belief that justice is achieved with full compliance with rules. To paraphrase Sen, no space need be made artificially for justice and fair-ness; it already exists in the rules prescribed by the Law-Giver.

Arrow-Debreu economyAn economy in which there are contingent markets for all commodities – meaning that there are buyers and sellers who promise to

buy or sell given commodities “if and only if” a specified state of the world occurs – is called an Arrow-Debreu economy. In such an economy, it is the budget constraint of the participants that determines how much of each of the contingent commodities at prices prevailing in the market they can buy. Since these commodities are contingent on future states, they are risky. Therefore, the budget constraint of individuals determines the risk-bearing ability of each market par-ticipant. Arrow himself recognised that re-quiring such a market is unrealistic. “Clearly, the contingent commodities called for do not exist to extent required, but the variety of securities available on the modern mar-kets serve as a partial substitute” (Arrow, 1971). Such securities, referred to as Arrow Securities whose payoffs could be used to purchase commodities, would reduce the number of markets required while replicat-ing the efficiency of risk allocation of com-plete contingent markets. Associated with complete markets are complete contracts.

These are agreements contingent on all states of nature. In the real world, not all contracts can cover all future contingencies. Therefore, they are said to be incomplete contracts and may indicate inefficiencies in exchange. However, as suggested above, optimal contracts can be devised provided there is mutual trust between the parties to the contract. That would be a simple contract with provisions for modification of terms and conditions and should contingencies neces-sitate change.

From ideal to actual: conventional financeBut, as Evensky suggests, “the Smithian story told by Arrow and Hahn – and they are representative of modern economists – is an abridged edition. The spring that moti-vates action in Smith’s story has been car-ried forward, but much of the rest of his tale has been forgotten” (Evensky, 1987, 1993). It can be argued, as Arrow himself seems to imply (1971), that the “rest of” Smith’s “tale” would have been his vision of the institution-al infrastructure (rules of behaviour) that is envisioned in The Theory of Moral Senti-ments, and, as such, abstracting from them would be unlikely to change the outcome of the mathematical analysis of Arrow-Debreu

and/or Arrow-Hahn. Furthermore, had ac-tual finance developed along the trajectory discernible from these works, i.e., steps taken toward completion of markets and of contracts, keeping in mind the overall insti-tutional framework for the economy as envi-sioned by Adam Smith, the result might have been emergence of conventional finance dif-ferent from the contemporary system. That system would instead be dominated by con-tingent, equity, risk-sharing financial instru-ments.

Perhaps the most influential factor in derail-ing that trajectory is the existence and the staying power of a fixed, predetermined rate of interest for which there has never been a rigorous theoretical explanation. All, so called, theories of interest from the classical economists to contemporary finance theo-ries explain interest rate as the price that brings demand for and supply of finance into equilibrium. This clearly implies that interest rates emerge only after demand and supply forces have interacted in the market and not ex ante prices. In fact, in some theoretical models there is no room for a fixed, ex ante predetermined rate of interest. For example, introducing such a price into the Walras or Arrow-Debreu-Hahn models of general equi-librium (GE) leads to the collapse of the models as they become over-determined.

Even though no satisfactory theory of a posi-tive, ex ante fixed rate of interest exists, all financial theory development post Arrow-Debreu-Hahn assumed its existence in the form of a risk-free asset, usually Treasury Bills, as a benchmark against which the rates of return of all other assets, impor-tantly equity returns, were measured. These include theories such as the Capital Asset Pricing Model (CAPM), Modern Portfolio Theory (MPT); and the Black-Scholes op-tion pricing formula for valuing options con-tracts and assessing risk. For all practical purposes, the assumption of a risk-free rate introduced an artificial floor into the pricing structure of the real sector of the economy, and into all financial decisions. It can be argued that it is the existence of this exog-enously imposed rate on the economy that transformed Arrow-Debreu vision of a risk-sharing economy and finance. The resulting

Dr. Abbas Mirakhor, born in Tehran, Islamic Republic of Iran, attended Kansas State University, where he received his Ph.D. in econom-ics in 1969. From 1969 to 1984, he taught in various universities in the US and Iran. From 1984 until 1990, he served on the staff of the IMF, and from 1990 to 2008, he served as the Executive Director at the IMF. Currently, he is The First Holder of International Centre For Education in Islamic Finance (INCEIF) Chair of Islamic Finance. He has received several awards including “Order of Companion of Volta” for service to Ghana, conferred by the President of Ghana in 2005; Islamic Development Bank Annual Price for Research in Islamic Econom-ics, shared with Mohsin Khan in 2003; and “Quaid-e-Azam” star for service to Pakistan conferred by the President of Pakistan in 1997. Dr. Mirakhor is the co-author of essays on Iqtisad: Islamic Approach to Economic Problems (1989), Theoretical Studies in Islamic Banking and Finance (1987), Introduction to Islamic Finance: Theory and Practice (2007), New Issues in Islamic Finance and Economics: Progress and Challenges (2009) and Globalization and Islamic Finance: Convergence, Prospects, and Challenges.


system became one focused on transferring or shifting of risk rather than sharing it. Such a system needed strong regulation to limit the extent of both.

However, further developments in finance theory provided analytic rationale for an ide-ologically aggressive deregulation. One was the Modigliani-Miller Theorem of neutral-ity of capital structure of firms. In essence this theorem asserted that the value of a firm is independent of its capital structure. This implied that since firms want to maxim-ise their value and since Modigliani-Miller showed that the value of the firm is indiffer-ent whether the firm debt finances or equity finances its capital structure, firms would prefer to incur higher debt levels for the firm rather than issue additional equity. Hence, the risk of additional debt would be shifted to other stakeholders (Jensen & Meckling, 1976).

Another was the development of the Effi-cient Market Hypothesis (EMH) that claimed that in an economy similar to that of Arrow-

Debreu, prices prevailing in the market con-tained all relevant information such that there would be no opportunity for arbitrage. Hence, the Arrow-Debreu vision of an economy in which risk was shared was first transformed into an economy in which the focus became risk transfer but which quickly transformed into one in which risks were shifted, ultimately, to tax payers (Mirakhor & Krichene, 2009).

An Ideal Islamic Finance SystemThe ideal Islamic finance points to a full-spectrum menu of instruments serving a financial sector imbedded in an Islamic economy in which the institutional “scaf-folding” (rules of behaviour as prescribed by Allah swt and operationalised by the Noble Messenger, including rules of market behav-iour prescribed by Islam) is fully operational (Chapra, 2000; Iqbal & Mirakhor, 2007).

The essential function of that spectrum would be spreading and allocating risk among market participants rather than al-lowing it to concentrate among the borrow-ing class. Islam proposes three sets of risk-sharing instruments:

1. mu’amalat risk-sharing instruments in the financial sector; 2. redistributive risk-sharing instruments through which the economically more able segment of the society utilise in order to share the risks facing the less able segment of the population; and 3. the inheritance rules specified in the Qur’an through which the wealth of a person at the time of passing is distributed among present and future generations of inheritors.The spectrum of ideal Islamic finance instru-ments would run the gamut between short-term liquid, low-risk financing of trade con-tracts to long-term financing of real sector investment. The essence of the spectrum is risk sharing. It is worth noting that transac-tion contracts permissible in Islam and the financial instruments intended to facilitate them are not the same thing. Islamic real sector transactions contracts (‘uqud) that have reached us are all permissible. Howev-er, it is possible that a financial instrument designed to facilitate a given permissible contract may itself be judged non-permissi-ble.

As the proliferation of derivative instruments in the period of run up to the global financial crisis demonstrated, the number of financial instruments that have some relation, even if only nominal, to a real sector transaction is limited only by the imagination of financial engineers. This is the essence of the theory of spanning developed in finance in the late 1960s and early 1970s which led to the design and development of derivatives. It is possible that a financial instrument may have weaker risk-sharing characteristic than the Islamic transaction contract it intends to serve.

Since Islamic finance is all about risk shar-ing, then the risk characteristics of a given instrument needs to become paramount in decisions. One reason, inter alia, for non-permissibility of the contract of riba is surely due to the fact that this contract transfers all, or at least a major portion, of risk to the borrower. It is possible to imagine instru-ments that on their face are compatible with the no-riba requirement, but are instru-ments of risk transfer and, ultimately, of shifting risk to tax payers. An example would be a sovereign ijarah sukuk based on the as-sets subject of ijarah but credit-enhanced by other means, say collateral. All costs taken into account, such a sukuk may well be more expensive and involve stronger risk transfer characteristic than a direct sovereign bond (see Mirakhor & Zaidi, 2007).

It appears that at the present, the energies of financiers and financial engineers are focused on the design and development of instruments to accommodate the low-end of time and risk-return, liquid transactions.

The work of Arrow-Debreu (1954) is funda-mentally about optimal risk sharing in a de-centralised market economy. It addresses the

question of how best to allocate risk in an economy. The answer is that risk should be allocated to those who can best bear it.

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Without effort at developing long-term in-vestment instruments with appropriate risk-return characteristics, there is a danger of emergence of path-dependency where the market will continue to see more – albeit in greater variety – of the same. That is more short-term, liquid and safe instruments.

This is what led to the explosion of deriva-tives which played an influential role in the recent global financial disaster. Similar de-velopment could be awaiting Islamic finance if the ingenuity of financial engineers and the creative imagination of Shari’ah schol-ars continue to serve the demand-driven ap-petite for liquid, low risk, and short-term in-struments. In that case, the configuration of Islamic finance would have failed to achieve the hopes and aspirations evoked by the po-tential of the ideal Islamic financial system.Epistemology of an Ideal Islamic Finance System

The fountainhead of all Islamic thought is the Qur’an. Whatever the theory of Islamic knowledge may be, any epistemology, in-cluding that of finance, must find its roots in the Qur’an. The starting point of this dis-cussion is therefore Verse 275 of Chapter 2 of the Qur’an, particularly the part of the Verse that declares contract of bay’ permis-sible and that of riba non-permissible. Argu-ably, these few words can be considered as constituting the organising principle – the fundamental theorem as it were – of the Is-lamic economy.

It is worth noting also that all Islamic con-tractual forms, except spot exchange, in-volve time. From an economic point of view, time transactions involve a commitment to do something today in exchange for a prom-ise of a commitment to do something in the future. All transactions involving time are subject to uncertainty. And, uncertainty in-volves risk. Risk exists whenever more than one outcome is possible. Therefore, it can be inferred that by mandating bay’, Allah swt ordained risk-sharing in all exchange activi-ties. Furthermore, it appears that the reason for the prohibition of the contract of riba is the fact that opportunities for risk sharing are non-existence in this contract. It may be argued that the creditor does take risk – the

risk of default. But it is not risk taking per say that makes a transaction permissible. A gambler takes risk as well but gambling is non-permissible (haram). Instead what seems to matter is opportunity for risk shar-ing. Riba is a contract of risk transfer or risk shifting. Achieving the Ideal: Uncertainty, Risk and Equity MarketsUncertainty is a fact of human existence. Humans live on the brink of an uncertain future. Uncertainty stems from the fact that the future is unknown and therefore unpre-dictable. If severe enough, uncertainty can lead to anxiety, decision paralysis and inac-tion.

Lack of certainty for an individual about the future is exacerbated by ignorance of how others behave in response to uncertainty. Yet, individuals have to make decisions and take actions that affect their own as well as others’ lives. In other words, uncertainty is converted into risk. Risk, therefore, is a con-sequence of choice under uncertainty.

Risk exists when more than one outcome is possible. It is uncertainty about the future that makes human lives full of risks. Risk can arise because the decision maker has little or no information regarding which state of affairs will prevail in the future, the per-son, nevertheless, makes a decision and takes action based on expectations.

It seems difficult, then, to imagine the idea of testing without uncertainty and risk. Stat-istician David Bartholemu (2008) asserts that: “It could be plausibly argued that risk is a necessary ingredient for full human de-velopment. It provides the richness and di-versity of experience necessary to develop our skills and personalities” (p. 230).

Islam, in particular, has provided the ways and means by which uncertainties of life can be mitigated. First, it has provided rules of behaviour and taxonomy of decisions – ac-tions and their commensurate payoffs in the Qur’an. Complying with these rules reduces uncertainty. Rules also promote cooperation and coordination (Mirakhor, 2009). Sec-ond, Islam has provided ways and means

Gulf Islamic Finance Industry Set on Single Shariah Board

The Gulf has made significant contribu-tion the facilitation of Islamic finance and banking and it now wants to see through the launch of a single Shariah board.

The United Shariah Board, which began drawing scholars from local Islamic institu-tions two years ago, now has two members from Saudi Arabia and one scholar each from Kuwait and Qatar, Scholar Hussein Hamid Hassan said at the launch of a pol-icy briefing on corporate governance in Is-lamic finance. It was also reported that the Islamic finance industry is moving towards a centralised Shariah board as scholars from leading countries join a common UAE entity, a leading Islamic scholar said.

“We have almost one united Shariah board for the Gulf,” he said. “I think within five to 10 years we will have one Shariah board for everyone.”

Shariah scholars serving the United Sha-riah Board also represent individual bank Shariah boards, thereby transferring the Islamic rulings, or fatwas, issued by the centralised board to their individual insti-tutions across borders.

While progress has been made, there are still differences in interpretations of Islam-ic law that is preventing a quicker adoption of a centralised Gulf board.

A unified Gulf-wide entity would boost corporate governance within the growing industry, said Nassar Saidi, executive di-rector of Hawkamah, which issued 55 rec-ommendations to Islamic financial institu-tions in its policy paper.

Saidi added that creating a centralised board is a first step but would need sup-port from regulators to give enforce its fatwas.

The policy report, which was based on a survey of 22 Islamic institutions across the Middle East and North Africa, also deter-mined that more should be done to limit the number of the same Shariah scholars serving on multiple boards.

“You shouldn’t have multiplicity which can create a conflict of interest,” he told report-ers. “If you have well recognised scholars on one central board, that would help.”

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Edib Smolo is a researcher and Coordinator of the Islamic Capital Market Unit, International Shari’ah Research Academy (ISRA) for Islamic Finance. He is also a Ph.D. candidate at the International Centre for Education in Islamic Finance (INCEIF), the Global University of Islamic Finance, Malaysia. Mr. Smolo received his double degree, Bachelor of Economics (Honours) and Bachelor of Islamic Revealed Knowledge and Heritage (Honours), as well as Master of Economics from International Islamic University Malaysia (IIUM), Malaysia. He also holds a Certificate for Professional Specialization in Political Management from Bulgar-ian School of Politics, jointly organized by the New Bulgarian University and the Council of Europe.


Arrow, K. J. (1971). Essays in the Theory of Risk-Bearing. Chicago: Markham Publishing Company.• Arrow, K. J. (1974). The Limits of Organizations. New York: Norton.• Arrow, K. J., & Debreu, G. (1954). The Existence of an Equilibrium for a Competitive Economy. Econometrica 22(3), 265-290.• Arrow, K. J., & Hahn, F. (1971). General Competitive Analysis. San Francisco: Holder Day.• Bartholomeu, D. J. (2008). God, Chance and Purpose: Can God Have It Both Ways? Cambridge: Cambridge University Press.• Chapra, M. U. (2000). The Future of Economics: An Islamic Perspective. Leicester: The Islamic Foundation.• Evensky, J. (1987). The Two Voices of Adam Smith. History of Political Economy, 19(3), 447-468.• Evensky, J. (1993). Ethics and the invisible hand. Journal of Economic Perspectives, 7(2), 197-205.• Iqbal, Z., & Mirakhor, A. (2007). An Introduction to Islamic Finance: Theory and Practice. Singapore: John Willey & Sons (Asia).• Jensen, M. C., & Meckling, W. H. (1976). Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Eco-• nomics, 3(4), 305-360.Mirakhor, A. (2009). Islamic Economics and Finance: An Institutional Perspective. [Keynote Address II]. IIUM Journal of Economics and Management, • 17(1), 31-72.Mirakhor, A., & Askari, H. (2010). Islam and the Path to Human and Economic Development. New York: Palgrave Macmillan.• Mirakhor, A., & Hamid, I. S. (2009). Islam and Development: The Institutional Framework. New York: Global Scholarly Publications.• Mirakhor, A., & Krichene, N. (2009). The Recent Crisis: Lessons for Islamic Finance. IFSB 2nd Public Lecture on Financial Policy and Stability, Kuala • Lumpur: Islamic Financial Services Board (IFSB).Mirakhor, A., & Zaidi, I. (2007). Profit-and-Loss Sharing Contracts in Islamic Finance. In M. K. Hassan & M. K. Lewis (Eds.), Handbook of Islamic Bank-• ing (pp. 49-63). Cheltenham, UK: Edward Elgar Publishing Ltd.Sen, A. K. (1977). Rational Fools: A Critique of the Behavioral Foundations of Economic. Philosophy and Public Affairs, 6(4), 317-344.• Sen, A. K. (1987). On Ethics and Economics. Oxford: Blackwell.• Smith, A. (1976). An Inquiry into the Nature and Causes of the Wealth of Nations (1776/1976). Edited in two volumes by W.B. Todd. See vol. 2 of the • Glasgow Edition of the Works and Correspondence of Adam Smith. Oxford: Clarendon Press.Smith, A. (2006). The Theory of Moral Sentiments (Dover Philosophical Classics). Mineola, New York: Dover Publications.• Walsh, V. (2000). Smith after Sen. Review of Political Economy, 12(1), 5-25.•

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by which, those who are able to, mitigate uncertainty by sharing the risks they face by engaging in economic activities with fellow human beings through exchange. Sharing al-lows risk to be spread and thus lowered for individual participants. However, if a person is unable to use any of the market means of risk sharing because of poverty, Allah swt has ordered a solution here as well: the rich are commanded to share the risks of the life of the poor by redeeming their rights derived from the Islamic principles of property rights. Islam’s laws of inheritance provide further mechanism of risk sharing.

It is important to note a nuanced difference between risk taking and risk sharing. The former is an antecedent of the latter. The de-cision to take risk to produce a product pre-cedes the decision on what to do with the risk in financing the project. The decision to share the risk in financing does not increase the risks of the project but reduces the risks for individuals involved in financing it as it is spread over larger number of participants. It is also to be noted that the Islamic contract modes that have reached us are all bilateral real sector contracts. What the contempo-rary IFI has accomplished is to:

1. Multilateral the bilateral contracts as the latter move from the real sector to the finance sector, and 2. Employ instruments of risk transfer avail-able in the conventional finance but made them Shari’ah-compatible.

Summary and Conclusion This article has sought to trace the episte-mological roots of conventional and Islamic finance. The reason for interest in the two fields, the articles contends, is that the present IFI evolved over the past three dec-ades from conventional finance to address a market failure to meet the demand for Shari’ah-compliant finance products. Most practitioners of Islamic finance were bank-ers and market players well familiar and of-ten well established in conventional finance sector.

Their focus was, and is, to develop financial instruments familiar to conventional finance market albeit with Shari’ah compatibility as an objective. Their ingenuity combined with active and creative imagination of leading Shari’ah scholars has managed to develop a rich array of synthetic and structured prod-ucts all of which, in one form or another, are replicated, retrofitted or reverse engineered from the conventional finance.

This article contents, however, that this is only meeting the second half of the part of verse 275 of chapter 2 of the Qur’an. It is crucial to note that in this Verse Allah swt first ordains exchange contracts and, sec-ond, He swt prohibits riba contracts.

The present approach of focussing on the second part of the Verse (prohibition of interest rate based debt contracts) while ignoring the first part, i.e., risk sharing has

further entrenched the present IFI within the conventional financial system rendering IFI a new asset class within the conventional system. The IFI could have taken a differ-ent course as a number of pioneer scholars had defined a trajectory for its development based on risk sharing (PLS). In the event, it was the conventional finance that gave IFI its take-off platform, thus making the study of the epistemology of conventional finance relevant.

A related concern is that by focusing solely on short-termism, there is the possibility of emergence of path dependency. There is a concern that such path dependency may well emerge that conveys a message that short-termism, safety and liquidity, as well as no riba, are all there is to Islamic finance. The thrust of this paper is that this is not so. Islamic finance is more about risk spreading and risk sharing.

That said, the current lack of equity and oth-er risk sharing instruments within the menu of Islamic finance is akin to a market failure. For a number of decades now, economic theory has made a compelling case for gov-ernment intervention when and where there is a market failure. In this case too, a strong case can be made for government interven-tion to remedy the current failure of the mar-ket to develop long-term, more risky, higher return risk-sharing instruments.


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Market Review

As the Islamic finance industry is growing at an unprecedented speed, Russia still re-mains to have changed laws in order to facil-itate sukuk. Russian borrowers are pitching plans to sell the nation’s first Islamic bonds even as regulators lag behind in customising laws for the industry.

Executives from Gazprom bank, the lending arm of gas export monopoly Gazprom, are in Southeast Asia to seek support for issuance by as many as five companies, Alexander Kazakov, director of structured and syndi-cated finance at the bank, said in Jakarta. Tatarstan, a Muslim-majority Russian repub-lic, will announce a dollar denominated sale soon, according to Kuala Lumpur-based ad-viser Amanah Raya Investment Bank, which is working on the proposal. Russia would join Thailand and Senegal in planning de-but sukuk this year, helping accelerate glo-

bal sales that increased 24 percent to $7.8 billion in 2011. Russia needs to change its legal framework to ensure Shariah compli-ant transactions get the same tax treatment as non-Islamic finance, said Aznan Hasan, associate professor at the International Is-lamic University Malaysia.

“It’s still very early days for Russia,” Aznan said. “A lot needs to be done before the first sale can happen. They need to level the play-ing field mainly for taxes.”

Islamic bonds pay a return on assets and may attract double charges on stamp du-ties due to the sale and purchase of goods to back the debt, Aznan, who was in Russia to speak at a conference last month, said on the 8th of June. Profits or capital gains incur taxes whereas interest is tax deductible, he said.

VTB bank aims to raise about $200 million this year selling debt that complies with Is-lam’s ban on interest, Herbert Moos, the lender’s deputy chairman, said in April.

The debut sale from Tatarstan will happen even as tax regulation issues linger, Adalet Djabiev, chief executive of Al Shams Capital Group, a Moscow-based Shariah-compliant advisory firm, said on the 8th of June from Astana, Kazakhstan.

“The Russian tax code and legislation in gen-eral create obstacles for Islamic finance,” Djabiev said. “We are not supported by the government or by the legislators. The regula-tors and the government today for different reasons are almost ignoring this phenom-enon.”

Amanah Raya Investment Bank, part of Kuala Lumpur-based Amanah Raya Capital Group, together with Kazan based financial advisory firm Linova and Kuwait Finance House (Malaysia) are “finalising the official mandate for the sukuk issuance” after con-ducting preliminary studies, Abas A. Jalil, chief operating officer at Amanah Raya Capi-tal Group, said .

“The sukuk will be offered to investors in Southeast Asia, Europe and the Middle East,” Abas said. “We expect the sukuk would be fully subscribed by Shariah-compliant funds across the targeted market.” Amanah Raya expects regulatory changes to be made to enable the offering, Abas said.

Shariah-compliant notes have gained 5.5 percent in 2011, according to the HSBC/NASDAQ Dubai U.S. Dollar Sukuk Index, while debt in developing markets has climbed 4.5 percent, JPMorgan Chase’s EMBI Global Di-versified Index shows.

RUSSIA NEEDS CHANGESTO LAW TO FACILITATE SUKUK


We are not supported by the government or by the legisla-tors. The regulators and the government today for differ-

ent reasons are almost ignoring this phenomenon.

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UNLEASH THE POWER OF INTERNAL MARKETING IN YOUR

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

Abstract: In this edition of the marketing and branding series, Global Islamic Finance Magazine is going to show you the key ways to unleash the power of internal marketing in your Islamic financial institution. Effective internal marketing can help

to spur growth in your business and also aid in further promoting the growing Islamic financial and banking industry. Global Islamic Finance Magazine will discuss the various different ways that internal marketing can be implemented in your Islamic financial institution. This article will give you a thorough insight into the internal marketing industry and would be beneficial to professionals, students and anyone wishing to know the key to unleashing the power of marketing. We will be discussing

marketing in the consensus of Shariah compliancy adhering to the principles of Islam in order to ensure that all promotion of the institution is done in a Halal way. This is an important part of marketing in the Islamic finance and banking industry. Many

Islamic financial hubs across the world have been successful due to effective and strategically planned internal marketing processes which have helped to aid their development in the Islamic finance and banking sector. This article aims to explain the various ways development of internal marketing can be facilitated in your company or institution to ensure success and

further spur the Islamic finance and banking industry which is expected to reach to over $2 trillion dollars by the year 2012. So if you want to know the key to success in internal marketing then this article is for you.

Keywords: Internal Marketing, Islamic Branding, Islamic Financial Institutions, Islamic Banks, Promoting Islamic Finance, Proc-ess, Strategies, Media, Imagery

ISLAMIC FINANCIAL INSTITUTION


An Introduction to Internal Marketing in Islamic Financial InstitutionsThere are various forms of marketing tech-niques and strategies that can help to spur the Islamic finance industry forward. How-ever one such technique which cannot be understated is the effectiveness of using internal marketing strategies. So what ex-actly is the concept of internal marketing? Internal marketing is the application of proc-esses and principles within the marketing framework of financial institutions. Internal marketing therefore involves a business or company using various different methods and dividing marketing roles within their de-partments transforming them into business units.

These business units control factors such as expenditure of marketing material. Busi-nesses that effectively use internal market-ing ensure that their employees gain sig-nificantly by treating them as customers to internal marketing with the goal of increas-ing their motivation to meet targets and fo-cus on customer needs.

When a company is considering imploring in-ternal marketing strategies it needs to close-ly look at the ways in which performance of their company can be improved in order to ensure sustainable growth of their products and services. It is imperative that compa-nies, businesses and Islamic financial insti-tutions place importance in assessing their effectiveness of their marketing strategies.

Firstly it is important to establish the rules and regulations of Shariah compliancy with-in Islamic financial institutions in order to ef-fectively market your product or services to any given company. Global Islamic Finance Magazine will go through the rules of Shariah compliancy which all companies, individuals and businesses should adhere to in order to ensure successful internal marketing.

A marketing professional or sponsor of Is-lamic finance marketing has to be aware of avoiding non Shariah compliant markets as figure 1 outlines the principles underlying Is-lamic finance and which markets should be avoided in order to remain Shariah compli-ant.

There are various forms and ways for inter-nal marketing strategies and both can be applied to Islamic banking institutions in addition to conventional Islamic financial in-stitutions. It is important for any business, professional or corporate of a company to familiarise themselves and their employees with the key concepts of internal marketing. Once familiarised with the key concepts your company can be equipped with the under-standing of the processes and many ben-efits that it will have in spurring your mar-

keting strategies for your company forward. So what are the key concepts and features of internal marketing? One of the main con-cepts of the internal marketing is that it arouses an ethos of employees promoting the core values of the organisation. It mo-tivates employees reframing them and em-powering them with responsibility to change their attitudes positively.

Internal marketing helps to retain a positive customer focused outlook in achieving the main business objectives. Some of the key features of internal marketing that you and your company should be acquainted with is that it gives room for creativity and innova-tion. All employees are individuals respon-sible for his or her decisions in marketing processes and will have to retain account-ability and responsibility for the decisions which they decide to make.

It also gives room for existing employees to be involved in the process of hiring new employees to further prosper the company. Internal marketing ensures equitable rec-ognition and reward whereby businesses must exercise employee recognition with reward to what the employee has achieved which will further motivate your employees

to get the best results from your campaign. Another key feature of internal marketing is that it demonstrates fairness during hard times including fair treatment of employees when faced with difficulty. It further creates an excellent organisational structure which promotes quality management, learning, educating and significant results.

How can you use internal marketing to spur your company forward?This is a question asked by many corporate investors and students wishing to know more about the benefits of internal market-ing in promoting Islamic financial institution-al products and services. Figure 2 outlines the ways in which internal marketing can be used in your company to spur further growth of your business’s products, services and events.

Internal marketing strategies can further help to educate and increase awareness amongst their employees by employing inter-nal marketing strategies. Especially in Islam-ic banking institutions many Islamic banks find that internal marketing is imperative in order to help build up the relationship be-tween business clients and the individual.

This will provide the following advantages to your company as outlined in Figure 3:

As outlined in Figure 3 there are countless advantages to develop internal marketing strategies in your business. These advan-tages outweigh the option of not developing internal market plans as any form of effec-tive ways to promote your company should be developed at the earliest. If you take a laid back approach to creating an internal market then all other processes in the mar-keting strategy could hinder the profits of your company.

It is especially important in Islamic financial institutions and Islamic banks that such measures are seriously considered in order to increase rewards and engage in excellent customer service which will not only benefit the company but also increase the reputa-tion. An Islamic financial institution which has built up a good rapport with its cus-tomers and has used effective techniques with employees working hard to focus on customer needs undoubtedly will prosper in success.

So there is nothing stopping you as an indi-vidual business, company or corporate con-sidering implanting changes in the approach to marketing in order to dedicate time to this important field. In addition to complying with Shariah principles it is also equally impor-tant to market your product effectively and it can be guaranteed that the effectiveness of internal marketing is unprecedented.

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KEY PRINCIPLES UNDERLYING

ISLAMIC FINANCE

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 compliancy rules and regulations

Source: Melbourne APEC Finance Centre

Develop internal marketing strategies within your department

Figure 2:

Diagram by Tasnim Nazeer

Divide your departments into business units focusing on different aspects of marketing

strategies from promotion to events

Ensure Shariah compliancy rules and regulations are discussed and clarified

with employees

Increase employee’s motivation to meet targets and focus on customer needs

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The importance of Strategic Planning in Internal MarketingProcesses of strategic planning in Islamic financial institutions cannot be understated as being the key to developing your company forward. Strategic planning involves review-ing and setting targets which need to be analysed in order to further spur successful customer relations. It also helps to identify and target customer needs focusing on a step by step route to successful marketing of products.

The Halal branding of Islamic financial insti-tutions has come a long way and many Is-lamic financial institutions are tapping into the sector of promoting its worth as a fully fledged Shariah compliant institution. Creat-ing strategic plans will help companies and businesses to do the following as outlined in Figure 4:

The emergence of Islamic Finance into mainstream finance and the growing inter-est in the industry globally coupled with the rising demand for Shariah compliant product seems to present the Islamic finance Indus-try a unique opportunity to develop a sound customer centric sustainable competitive advantage.

In order to further develop this advantage, a re-look at just the product build up or mar-keting communications in addition to the company’s operational standards would not be enough to sustain success in marketing. To create and deliver a sustainable competi-tive advantage the entire process of busi-ness planning and operations would need to be reviewed. This review is imperative in ensuring identification of key operational ef-ficiency areas coupled with strategic devel-opment which will identify the brand value benefit that the Islamic financial global mar-ket wants to see developed and would like to further utilise.

Internal Marketing Focusing on Custom-ers NeedsInternal marketing is totally customer fo-cused to ensure excellent standards are met and provisions are made which will hope to spur success within the company threshold and beyond. Especially in the Islamic re-tail banking sector, banks are increasingly aware that customers are the inspiration of the industry. Islamic banks therefore try

their utmost best to actively engage con-sumers in order to attract a wider customer base and generate a broad and stable rev-enue stream.

Islamic banking institutions are increas-ingly adopting a consumer-centric strategy, with an aim of tapping into the increased potential of the market. The Islamic finance industry is at its peak indulging in lucrative investments which are all tailored to attract the consumer.

Educating customers about Islamic finance is imperative to ensure that the Islamic fi-nancial institution understands their needs and delivers products and solutions that are innovative and adhere to Shariah principles. It has also been the aim of many Shariah compliant financial institutions to offer cost-effective, solutions in order to develop the sector more fully and enlarge their share es-pecially in the Islamic retail banking sector.

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Increased competitive advantages between other financial institutions in establishing excel-lent customer relations

A chance to gain insights through customer col-laborations and essential feedback

Will help to create solutions in fulfilling custom-er needs and wants

Will educate employees which will create moti-vation to generate higher demands for Islamic financial products

Will establish significant business units focus-ing on various aspects of marketing such as expenditure

Dedicated business units will create more qual-ity promotional marketing material and ensure smooth reviews of profits and expenditure

Figure 3: Advantages of Internal Market-ing for your Company

Figure 4: Companies Strategic Planning in Marketing Islamic Financial Products

Increase understanding of Islamic financial products so that the customer knows and un-derstands what they are getting

Dedicated to the Shariah compliant consumers needs

Leaves scope for re designing products and services

Can spur innovative to fulfil the expectations of the target customer

Can put strategies and targets into focus so that marketing material can be facilitated effectively

Avoids replication or the absence of certain marketing tools which can be followed in a plan of action

Resistance to change.

Figure 4: Companies Strategic Planning in Marketing Islamic Financial Products


“Players across the conventional sphere are moving away from product selling to solu-tions based on customer needs, and Islamic banks are doing this too,” says Wasim Saifi, the global head of Islamic banking for the consumer banking division of Standard Chartered Bank. “We take the same ap-proach as on the conventional banking side. We encourage staff to engage customers in need-based conversation rather than en-gage in product pushing - that’s the need of the day.” (Islamic Finance Asia)

The question remains as to how Islamic fi-nancial institutions and banks can further adopt methods to target the customer/consumer base. The answer lies in the fact that internal marketing strategies focused on customer needs can solve the question. There are various methods of focusing on customers needs as described by Amman Mohammed the managing director of Absa Islamic Bank in South Africa.

Mr Mohammed says in regards to achiev-ing customer satisfaction from market-ing that, “To educate via a customer focus group where we invite people from a certain area to congregate, and invite international Shariah scholars and members of our Sha-riah board to interact with them and answer questions. He further went on to say that “One of the challenges we face is creating enough awareness amongst Muslim and non-Muslim customers, potential customers and bank staff” (Islamic Finance Asia).


Internal marketing is totally customer focused to ensure ex-cellent standards are met and provisions are made which will hope to spur success within the company threshold and be-yond. Especially in the Islamic retail banking sector, banks are

increasingly aware that customers are the inspiration of the industry. Islamic banks therefore try their utmost best to actively engage consum-ers in order to attract a wider customer base and generate a broad and stable revenue stream

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Many conventional banking institutions have been rushing to facilitate and open up Islam-ic windows within their branches to cater for the growing demand of customers wishing to use Shariah compliant financing. Islamic financial institutions have an edge over con-ventional banks for catering for fully fledged, dedicated Islamic financial services.

This advantage could be highlighted in all marketing aspects as the employees which are involved in helping customers to get the best Shariah compliant service are expected to know and educate customers in order for them to understand the principles of Islamic banking efficiently.

Of course if employees in a conventional Islamic window were trained to be special-ists in the Islamic finance or have adequate knowledge to sell the products sufficiently then customers would consider it as a viable option. However Islamic banking and finan-cial institutions are a reliable source for fully fledged Islamic products and services and many customers will be attracted by this as-pect.

Highlighting and promoting customer centric advantages of products and services can further spur success. Enabling and educat-ing staff and employees by sending them on courses, conferences and events can also aid in the successful facilitation of internal marketing.

Overcoming Constraints and Challenges with Internal MarketingAll Islamic financial institutions including their conventional peers will undergo chal-lenges and constraints when dealing with marketing their services. However as a sim-ple rule of thumb it can be reassuring to know that a strategy of action can be used to deal with the level of constraints that may be causing a delay in facilitation or market-ing of an Islamic product and service.

Firstly it is important to identify the potential constraints and challenges that may occur when looking to the global Islamic financial market in promoting your company or serv-ices. These constraints are outlined in Fig-ure 5.

As outlined in Figure 5 there are some po-tential constraints of the Islamic financial in-dustry that can often hinder success, howev-er internal marketing can help to overcome the challenges and constraints of marketing

your Islamic financial products or services. Figure 6 outlines further problems which may affect successful implementation of in-ternal marketing. It is important to identify these problems at the earliest to ensure that constraints are overcome and necessary measures are taken to improve the overall service and delivery from your company. As internal marketing involves all employees of managerial level taking up employer brand-ing in addition to employer brand manage-ment it is particularly important that they know what they may need to overcome and deal with it.

As outlined in Figure 6 you may experience one or more of the potential constraints of implementing internal marketing. However addressing these problems at the earliest by working to overcome your objectives can help your employees to have a good under-standing and work towards an ideal goal. A resistance to change by employees shows a lack of understanding of the benefits of in-ternal marketing.

It is always best if you are in a managerial position to discuss the possible changes and benefits that internal marketing strategies can bring. Explaining the various rewards of internal marketing to your employees can help them to understand the reasons be-hind following an internal marketing proce-dure and they may come round to enjoying the perks from its profitable success.

Islamic financial institutions in particular will have benefits of using this form of marketing which the whole company can get involved in considering that Shariah compliant fi-nancing is a unique and ethical alternative to conventional financing methods. An un-derstanding of internal strengths within the company can further help to spur success within your business which will benefit it both internally and externally in every stage of marketing.

If you are a manager considering imple-menting internal marketing strategies for your company in order to facilitate Islamic fi-nancial services then it is important to have a thorough review of your employees and the cooperation between departments.

If you are confident that your departments and employees can work together in col-laborating with internal marketing strategies then the most confident move would be to discuss and implement internal market-ing within your company. You should also

Managerial incompetence in interpersonal, technical and conceptual skills is some of the stumbling blocks against successful internal marketing.

Poor understanding of internal marketing con-cept.

Individual conflict and conflict between depart-ments makes the implementation of internal marketing difficult.

Rigid organisational structure coupled by bu-reaucratic leadership hinders success of inter-nal marketing.

Ignoring and not listening to subordinate staff.

The tendency of ignoring employees’ impor-tance and treating them like any other tools of the business.

Unnecessary protection of information against employees.

Resistance to change.

Figure 6: Constraints of Implementing Internal Marketing

Source: Wickepedia

Language barriers – It is important to ensure that the language barriers are broken down and all internal marketing material is catered for the customer base and given with language options for them to understand.

Standardisation of Shariah compliancy - This has been one key challenge of the Islamic fi-nancial industry as a whole as what is deemed Shariah compliant in one country may not be compliant in another. Therefore it is best to stick to the overall consensus when making Shariah compliant decisions.

Assess to data - It has often been a problem for Islamic financial institutions to have read-ily available data on their lists due to problems with technological software. Thankfully Islamic software providers such as Path solutions have provided innovative Shariah compliant soft-ware.

Figure 5: Identifying Potential Constraints in Marketing your Islamic Financial Product

Table by Tasnim Nazeer

ensure that if you are in a managerial po-sition the ethos of internal marketing which to promote equality and designate tasks of responsibility in your work force is done in a way which does not treat your employees like tools. You have to give your employees the freedom to express their creativity, mak-ing the decisions and advising accordingly on matters that would benefit the company overall.

How can internal marketing help me to overcome constraints and challenges?There are many ways in which internal mar-keting can help your company or business to overcome constraints and challenges of the growing Islamic financial market and at-tract key consumers into your league. Firstly internal marketing provides your business with the framework to review expenditure and data effectively.

This tackles the problem of assess to read-ily available data. If you dedicate a business unit to deal with expenditure of marketing Islamic financial services then your team will be responsible for all entries of profits, losses, investments, marketing expenses and so forth.

The managing director or CEO will therefore have a little flexibility in having the reassur-ance of assess to data when needed and reviewing their expenses accordingly to plan marketing campaigns for the present and future. If you know exactly how much a cam-paign will cost, how much tools you will need and the overall costs then you are more likely not to go over budget and you can even save money. Therefore internal marketing can make this a realistic proposition for dealing with expenses of the marketing essence.

The training and education of staff in the Islamic Finance and banking arena can fur-ther help to give them a clear understanding of the concepts and principles of Shariah compliant financing. This will provide the employee and the customer with a basis of an easy relationship to communicate and foresee their customer’s needs effectively.

Understanding Shariah compliant financing is key in achieving success in your marketing strategies as if you do market your product in a Non Shariah compliant manner you are more likely to lose consumers at the first in-stance or potentially put them off.

You cannot risk this happening and there-fore it is important to invest a little time and

money in training and educating employees in your chosen business of Islamic finance or banking. Once trained a diverse network of players or translators can cater to overcome language barriers. If you identify the poten-tial for Islamic finance which has reached a global scale an employee with the skills of knowing more than one language can clearly help your cause.

In addition any marketing material that is brought out into a country could have trans-lations for the native languages of the popu-lation of that particular town, village or city. Making language accessible can break down the barriers and inform more people about your services who may not have English as their first mother tongue language.

Harnessing internal marketing practices can further help to create innovative new design structures which will attract the existing market in addition to further attracting other clients from around the world.

Unlocking the Keys to Internal Marketing for Your Islamic Financial InstitutionGlobal Islamic Finance Magazine has dis-cussed in this first for the marketing and branding series the ways in which you can unleash the power of internal marketing to ensure effective progression of your compa-ny in the highly competitive financial world. As discussed there are numerous benefits of making the change of implementing inter-nal marketing into the core essence of your company.

These positive changes range from motivat-ing employees to one marketing target, giv-ing and sharing responsibilities of tasks and creating an overview of expenditure for your successful marketing campaign.

Of course like with any strategy there will be limitations and as discussed there is in-evitably going to be constraints that need to be overcome before facilitating the internal marketing strategies. Once discussed with your employees and everyone understands the key concepts and benefits of internal marketing than you can really unlock the key to promoting a successful Islamic financial institution.

Internal marketing provides the new age ex-perience for all Islamic financial institutions and widens the scope for attracting quality employees and motivating your company to do well in every possible customer focused driven task. After all customers are the vital

component of any company and attracting them means your half way to success and profitability. Internal marketing may just be the answer you have been searching for in successful implementation of a broad mar-keting strategy which will affect your whole company at large. It holds many benefits for the Islamic financial institution of today and GIF hopes that you would have fully ac-quainted yourself with the necessary knowl-edge and study to implement internal mar-keting strategies in your company today.


Internal Marketing (2009) Marketing, Q • Finance the Ultimate Financial Resource, Retrieved from: http://www.qfinance.com/dictionary/internal-marketingProfessor S. Haron (2005) Marketing • Strategies of Islamic Banks, A Lesson from Malaysia, Retrieved from: http://docs.google.com/viewer?a=v&q=cache:sHykm6dUUdkJ:klbs.com.my/Pdf/Marketing%2520Strategy.pdf+Marketing+in+Islamic+Finance&hl=en&gl=uk&pid=bl&M Kabir Hassan & M. K Lewis (2007) • Handbook of Islamic Banking, Edward El-gar Publishing, Pg 125- 126The International Role of Islamic Finance • (2009) Q Finance the Ultimate Financial Resource: Retrieved from: http://www.qfinance.com/capital-markets-best-practice/the-international-role-of-islamic-finance?fullStrategic Planning in Islamic Finance • (2009) Daily Bakara EU, Retrieved from: http://dailybaraka.eu/2011/03/is-strategic-planning-necessary-in-islamic-finance/C. Klass (2009) All about the customer, • Islamic Finance Asia, Retrieved from: http://www.islamicfinanceasia.com/arti-cle.asp?nm_id=18904U.S Marshall (2010) International Mar-• keting, Country Decisions and Strategies, Retrieved from: http://www.consumerpsy-chologist.com/international_marketing.htmlInternal Marketing (2011) Definition • by Wickpedia, Retrieved from: http://en.wikipedia.org/wiki/Internal_marketing



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ANALYSIS OF SALE/DEBT BASED SUKUK: THE MALAYSIAN SAGA, PART IIAuthor: Mughees Shaukat, PhD researcher and assistant researcher in INCEIF & ISRA, Malaysia

Abstract: The success of the sukuk market’s growth rate in the past few years has brought along itself many scrutinising questions over its authenticity with Islamic law, all over the Middle eastern countries. In Part one of The Analysis of Sale/Debt based Sukuk: The Malaysian Saga, we expalined the meaning of sale/debt based sukuk by detaching it from its stigmas and understanding it in its true light. Also GIF discussed, in detail, the acceptance of Sukuk in Malaysia and their version of sukuk with its legal codes and conducts, to keep sukuk controversy free. In the second part of the article, Global Islamic Finance Magazine will be looking closely into the depth of the issues surrounding Sale/Debt based sukuk, to be able to understand the contention better and therefore have an analytical point of view over its legitimacy.

Keywords: Sukuk, Sale/Debt based sukuk, Malaysian Islamic Finance, Malaysian sukuk Practice.

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Underlying Issues: Sale/Debt Based Sukuk LegitimacyThe absence of bonds instruments in most al-murabaha project finance particularly in the ever liquid Middle-East countries may be explained by the controversy on the validity of using bai al-‘inah in the securitisation process and the application of bai al-dayn at a discount in bonds in secondary trading. The question now is; what are the underlying issues behind this controversy about the legitimacy of bai al-‘inah and bai al-dayn in Islamic law? What could explain its rejection in the Middle-East countries while gaining acceptance in Malaysia?

Analysis conducted on more than 300 sale/debt based sukuk issuance identifying a number of Shariah issues. Those issues had been classified into two categories, firstly termed as Primary or Common issues in term of the main principles which govern the issuance of most structures. Two most controversial principles namely, Bai al-Dayn and Bai al-Inah fall within this category. The BIMB Securities Sdn Bhd, outlines that the Ma-laysian Islamic bonds are structured on the basis of Bai al-inah (refinancing of assets) and subsequently traded on the basis of Bai al-dayn (debt-trading) which are commonly found in almost all structure. The second category of the possible Shariah issues termed as Secondary Issues or those involving secondary features of the sukuk issuance. The Shariah viability of issues like the position of SPV in sukuk issuance, hibah clause by a third party and re-hibah, proceed payment, collateral and guarantee, usage of proceed, and event of default clause will be put under the Shariah microscope.

Foremost IssuesThe Issue of Bai Al-Dayn

From the Islamic jurisprudence point of view, dayn encompasses a wide scope, includ-ing payment for product, qardh (loan) payment, mahr (dowry) payment before or after cohabitation, that is mahr which has not been given after the marriage `aqd (contract), rental, compensation for crime committed (arsy), compensation for damages, money to be paid for divorce (khulu`) and for purchase orders which have not yet arrived (muslam fih). In the context of the Islamic capital market, bai al-dayn is the sale principle i.e. the dayn which results from mu`awadhat maliyyah contracts (exchange contracts).

The sale of debt or bai’ al-dayn is one of the key elements in the development of Malay-sian Islamic Capital Market (ICM), as the trading of bonds in the capital market is mainly based on bai’ al-dayn. This is the consequence of the opinion of the Malaysian jurists as to the permissibility of the sale of debt. On the other hand, the majority of the scholars around the world and particularly the jurists from the Middle East opposed to the per-missibility of bai’ al-dayn or trading of debt. The main ground for its impermissibility as argued by opponent is due to the elements of gharar and riba. Whereas the proponents claimed that in the context of modern practice of bai’ al-dayn in the capital market, these two major prohibitions in Islamic financial laws could be eliminated. ‘Bai’ is the Arabic term for sale. Thus, the literal meaning of bai’ al-dayn can be translated as the sale of debt. Scholars have technically defined bai al-dayn in different ways.

THE SAC RESOLUTION

At its 2nd meeting on 21 August 1996, the Shariah Advisory Council (SAC) unanimous-ly agreed to accept the principle of bai` al-dayn i.e. debt trading as one of the concepts for developing Islamic capital market instruments. This was based on the views of some of the Islamic jurists who allowed this concept subject to certain conditions. In the context of the capital market, these conditions are met when there is a trans-parent regulatory system which can safeguard the maslahah (interest) of the market participants.

Author: Mughees Shaukat, PhD researcher and

assistant researcher in INCEIF & ISRA, Malaysia

The Shariah Advisory Council of Security Commission in Malaysia provided a specific definition of bai’ al-dayn which is being prac-ticed in Malaysia. They stated: Bai`al- dayn is the principle of selling the dayn which re-sults from mu`awadhat maliyyah contracts (exchange contracts), such as murabahah, bai` bithaman ajil (BBA), ijarah, ijarah mun-thiyah bi tamlik, istisna` and others. It means that the debt in Malaysia’s capital market is traded which originated from different types of exchange contracts like murabahah, bai` bithaman ajil, ijarah, istisna and others.There are three opinions on the permissibil-ity of sale of debt to a third party:

1. Some scholars from Shafie and Hanbali schools like Ibn Taimiyah and Ibn Qayyim opined that this type of sale is permissible. According to some scholars like Ibn al-Qayy-im, the creditor has the right to sell only con-firmed debt to the debtor or to a third party. This is based on the grounds that if he is al-lowed to sell it to the debtor, he can also sell the same to a third party too. This opinion is based on the following arguments:

There is no authentic source that pro-• hibits such kinds of selling or giving. Thus, it should be allowed and permit-ted;Creditor has full right on possession • and full right to sell it to a third party; andBased on a legal maxim which states • that all transactions are permissible until they are proven non-permissible by an authentic source. Since there is no authentic source prohibiting this transaction, then, it should be allowed.

2. This type of sale is permissible with con-dition by some Shafie and Maliki scholars. The Maliki School imposed eight conditions to permit this type of sale which are as fol-lows:

Expediting the payment of the pur-• chase;The debtor is present at the point of • sale;The debtor confirms the debt;• The debtor belongs to the group that is • bound by law so that he is able to re-deem his debt;Payment is not of the same type as • dayn, and if it is so, the rate should be the same to avoid Riba;The debt cannot be created from the • sale of currency (gold and silver) to be delivered in the future;The dayn should be goods that are sale-• able, even before they are received. This is to ensure that the dayn is not of the food type which cannot be traded before the occurrence of qabadh; and there should be no enmity between

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SWEETWATER SPV SDN BHD (BBA SUKUK ISSUANCE)

Issuer: Sweetwater Sdn Bhd [SPV]Lead Arrangers: Securities Sdn Bhd (ASSB)Trustee: Bank Trustees Berhad

‘SSPV’ used here as an SPV (Special Purpose Vehicle) is a wholly owned subsidiary of The Sweet Water Alliance (TSWA) incorporated in 0805 with the sole purpose of issuing purposed BaIDs. It also obtained approval from SC the security commission of Malaysia to raise funds of as much as RM195,000,000 through issuing BaIDS in October 2005 based on Bai Bithaman Ajil-BBA. This Sukuk deal is interesting because it contains not only all the common practices of other such issuances like the application of ‘Bai al-Inah’, ‘Hibah’ and ‘re-Hibah’ the practice of ‘Bai al-Dayn’ but it has even gone one step further by violating the basic requirement of an SPV that it should be a completely independent entity, but in this case the SPV in the form of SSPV is in fact a wholly owned subsidiary of TSWA i.e. the holding company. No wonder the underlying assets used in this deal are actually the very shares of the company in another company named ‘SPLASH’.

Prior to the issuance date the asset owner (TSWA) who is the holding company of SSPV which is also the SPV, will ‘Hibah the underlying assets to the issuer SSPV. For this pur-pose TSWA and the issuer will enter into a deed of ‘Hibah’ (deed of gift) whereby TSWA will give and convey to the issuer the beneficial interest in the identified assets thus entitling the issuer to deal with the beneficial interest in the identified assets.

Once this process is over, the issuer (SSPV) will then sell these ‘hibah’ assets to the pri-mary subscribers through asset purchase agreements (APAs). Then Primary Subscribers will straight away then sell these assets back to the issuer through asset sale agree-ments at a price higher than what they were purchased the first time. This unconditional obligation of the issuer to pay the selling price will be evidenced by the issuance of BaIDs. These BaIDS as normal with such other Malaysian deals is also tradable in the secondary market on the basis of ‘Bai al-dayn’. Figure 6.10 depicts the structure of the deal.

3rd party (TSWA) will first ‘hibah’ the underlying assets to be used for this deal to 1. SSPV.The Issuer (SSPV) will sell these assets to the investors at a purchase price through 2. Asset Purchase Agreements (APAs). The payment will be made to the issuer on spot.The Investors will then sell back the same assets straight away to the issuer but at 3. a higher price including a profit margin through asset sale agreements based on ‘Bai al-Inah’.The issuer (SSPV) will issue sukuk (BaIDS) to evidence his obligation to pay the sale 4. price.Once the Sukuk has grown to Maturity The Very underlying assets will then be given 5. back to the 3rd party (which by the way is not the real owner but the beneficial owner of the assets) through the process of ‘re-hibah’.

2. Primary Sub-scribers Purchase asset at Purchase

Price (APAs)

3. Payment of proceed

4. Sell asset at Sale Price, de-ferred (ASAs)

4a. Issue BalDS to evidence obligation

to pay sale price

Primary Subscribers

Figure.6.10: Sweetwater Spv Sdn Bhd (BBA Sukuk Issuance)

Case Study

Issuer (SSPV)

• Issuer hibah back to TSWA• TSWA hibah asset to issuerThird party

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Sukuk

buyer and seller, which can create dif-ficulties to the madin (debtor).There should be no enmity between • buyer and seller, which can create dif-ficulties to the madin (debtor).

On the other hand, the conditions imposed by Shafie jurists are the followings:

The dayn must be a spot debt in nature • otherwise it will not be allowed;The debtor must be a rich person and • he has to accept the sale or there must be strong evidence to prove the exist-ence of the debt in case of any denials from the debtor. Otherwise the sale should not take place; andThe buyer must pay the price of the debt • on spot basis otherwise, the sale will be considered as invalid and illegal.

The summary of the evidences that they pro-vided is that the sale of debt contains some kind of gharar or uncertainty which may cre-ate conflict between the contractors, there-fore, these types of conditions should be fulfilled to avoid gharar and other prohibited elements like riba and others.

3. The majority of scholars at the Hanafi School of jurisprudence and some Hanbali and Shafie scholars and Ibn Hazm did not permit selling debt to the third party with cash price at all. The arguments supporting their opinions are the followings:

The creditor is not able to submit the • sold item to the purchaser as the debt is under the liability of the debtor and to possess what is under others’ responsi-bility cannot be imagined, therefore, it is not permitted as it is not capable of submission, subsequently contains risk to the sale. The risk might also arise from the fact • that the debtor may deny his debt or de-lay in payment or he may become poor. In those cases, it is not possible to get the debt from him.

In the same line of argument, Koutoub Mus-tafa had listed more evidences supporting the view of this group which are summarised in the following:

There is a Hadith of the Prophet (peace • be upon him) which clearly states: (Don’t sell what you do not possess).It also based on another Hadith of the • Prophet (peace be upon him) which prohibits selling or giving an item that the seller or giver is unable to deliver to the buyer or given: (Don’t sell the fish while they are in the water) On the same ground, there is a Hadith, which states: (The Prophet prohibited the sale of a missing slave or the offspring of the offspring).

It is clear that the scholars held different opinion to the issue of bai al-dayn especially in the case of selling it to a third party. With these many opinions and arguments of the scholars, the task is now to find out the most accurate opinion. In fact, the contemporary scholars have looked into these arguments and disagreed on deciding the preferred opinion. Some scholars mostly from Ma-laysia preferred that selling debt with cash price to the third party is permissible. The Maqasidi approach was adopted in coming into this conclusion by looking into the reason

for the prohibition itself, and to avoid these reasons in the current scenario of bai al-dayn. They pointed out that the main reason for prohibiting bai al-dayn by the Hanafies and also conditions imposed by the Malikies and Shafies is mainly because of the element of risk and uncertainty for the buyer as the debt-or may not pay the debt.

It follows that if this uncertainty could be avoid-ed by having strong regulatory, supervision and control by the government then it should be permitted. Resolutions of the Securities Com-mission Shariah Advisory Council stated that: “The argument of the Islamic jurists that pro-hibited bai al-dayn to a third party for fear that the buyer will have to bear great risks (Hanafi Mazhab) has some truth in it.

This is especially true if there is an absence of supervision and control. In this context, the buyer’s maslahah should be safeguarded because he is the party that has to bear the risks of acquiring the debt sale while making the sale contract. In the Malaysian context, the debt securities instruments based on the principle of bai al-dayn are regulated by Bank Negara Malaysia and the Commission to safe-guard the rights of the parties involved in the contract.

Therefore, the conditions set by the Maliki Mazhab and the fears of risks by the Hanafi Mazhab can be overcome by regulation and surveillance.” Another important issue is riba when the debt securities are traded in the secondary market at discounted price. Riba

The majority of the scholars around the world and particu-larly the jurists from the Middle East opposed to the permis-sibility of bai’ al-dayn or trading of debt. The main ground

for its impermissibility as argued by opponent is due to the elements of gharar and riba. Whereas the proponents claimed that in the context of modern practice of bai’ al-dayn in the capital market, these two major prohibitions in Islamic financial laws could be eliminated

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gif Sukuk

might arise due to the rule of parity in the exchange of money with money in the same denomination. However, in Malaysian context, it is claimed that there is no riba element in-volved and the rule of parity does not apply in this context: “In the context of the sale of securitised debt, the characteristics of securi-ties differentiate it from currency, and hence, it is not bound by the conditions for exchang-ing goods.”

Adawiah forwarded 3 arguments to discard the element of riba and allowing debt dis-counting:

1) Securitisation of the debt has changed its nature into an independent financial right (haq maliyy) that is in itself an independent asset (mal). It means that after the Securiti-sation process, it becomes an asset which is capable of being bought and sold, at what-ever price agreed by the parties. Hence, the 2) Securitised debt is no longer bearing the nature of money but analogous to financial rights such as shares, copyrights and patent rights. It follows that the sale of Securitised debt is no longer governed by the rule of sarf or currency exchange, therefore discount is allowed. 3) The debt discounting also allowed on the basis of the principle of ‘da’ wa taajjal’. Originally, this principle refers to an arrange-ment between debtor and creditor whereby the later gives discount to the former on his debt due to the acceleration of the date of payment. The principle had been approved by some scholars like Ibn Qayyim and Ibn Taimiyyah. Though the original application of the principle is between debtor and creditor, it can also be extended to other than debtor or the third party. Thus, the case of debt discounting for trading of securitised debt could be allowed under the extended princi-ple of ‘da’ wa tajjal.’4) The third argument to allow debt dis-counting in the sale of debt to the third party is based on logical reasoning. It was argued that a debt which originated from deferred payment sales is different from straight loans. In the straight loans, the creditor is only allowed to take his principal amount. Thus, discounting the amount will cause a loss to the lender. On the other hand, in deferred payment sales, normally as in the banking practice there is a difference in terms of amount between the cost price and the selling price, such as in Murabaha sales. Therefore, if the creditor sells his debt to a party with discount, he is actually sharing his profit portion with the buyer of the debt.

However, these arguments were rejected by the majority of the contemporary scholars. For example, one of the famous scholars Mufti Taqi Usmani has obviously pointed out that bai’ al-dayn is in fact, selling the ribawi item with discount price which is not other

that riba al- fadl and riba al-nasiah. He stated that: “In fact, the prohibition of bai’al-dayn is a logical consequence of the prohibition of riba or interest. A “debt” receivable in mone-tary terms corresponds to money, and every transaction where money is exchanged from the same denomination of money, the price must be at par value. Any increase or de-crease from one side is tantamount to riba and can never be allowed in Shariah.”

According to the Organization of the Islamic Conference (“OIC”) Islamic Fiqh Academy’s ruling, sale of debt is permissible so long as it is free from any element of riba and gharar. Following such ruling, it is pertinent to deter-mine the nature and status of the debt. If the receivables of the debt are in the mon-etary form, the debt is considered as similar to money and the rules in the exchange of money will apply.

This means the transaction will have to ad-here to the rule of parity and it must be car-ried out on the spot. If the receivables are in the forms of non-ribawi goods, it is consid-ered as a non-monetary financial right and the rules in the exchange of money or ribawi items will not apply currency exchange and

the practice of discounting in the sale of debt is allowed. Although it has to be noted that the SAC’s ruling merely represents the minority view in the market. Although the sale of debt with a discount is allowed in Malaysia, such practice may not pass the more stringent requirements of such sale as imposed by the classical and majority of the contemporary jurists.

The Issue of Bai Al-Inah The Meaning of Bai al-InahBai al-inah is generally known as sale based on the transaction of Nasiah (delay). The majority of Islamic jurists state that there are three forms of trading categorised as bai` ̀ inah, whereby it can be concluded that all the assets sold come from the financier. The financier will sell a product to the buyer at an agreed price to be paid later.

The financier then immediately buys back the asset at a cash price lower than the de-ferred selling price. The difference between the two prices represents the interest. Such contract was evolved in the early period of Islam and it exists for the fundamental rea-

son that a loan for interest is forbidden be-cause it is equivalent to usury (riba). In this contract, there is an economic interest for both the borrower and the lender, which at the same time circumvents the prohibition of usury.

The issue which concerns us here is how Islamic law views such contract: The major-ity was of the opinion that bai`al inah was not permissible because it was the zari’ah (way) or hilah (legal excuse) to legitimise riba (usury). The majority of the jurists rejected the validity of Bai’ al Inah and considered it as a back door riba or using sales which at the end resulted in riba. Abdullah Ibn Umar reported that the prophet said:

“When men become frugal with money (gold and silver) and trade on the basis of Inah and (when they) follow the tails of the cows and leave jihad in the path of Allah, Allah will send down a trial that he would not remove until they revert to their religion.”

On the other hand, the Shafies and Zahiris approved the legality of Inah sales on the ba-sis of the completion of all requirements of sales, irrespective of the intention of the par-ties. Imam Shafie said in his book al Umm:

“When one purchases a commodity from another and takes its delivery and the price happens to be on deferred terms, it is not objectionable for him to sell it to the person from whom he had purchased it or to some-one else, for a cash price or on credit or against another commodity.” The hadith re-lied by the majority was considered as weak hadith for this group of jurists.

Another important hadith on bai’ al-inah is a famous narration from Aishah whereby 2 women came to her and asked: “O mother of believers, I sold a slave to Zayd ibn Arqam for eight hundred silver coins deferred un-til receipt of the grant, and I purchased him again for six hundred cash.”

Aishah replied: It was an evil purchase that you did and an evil sale, convey to Zayd that his jihad in the company of the Messanger of Allah is annulled, unless if he repents.” Imam al Shafei was of the opinion that the issue is one in which 2 companions (Aishah and Zayd Ibn Arqam) have different opinions pertaining to the validity of the contract.

When the companions have conflicting opin-ions, according to Shafei the matter must be resorted to qiyas, which is in favor of the position taken by Zayd. This is because a person is free to sell his asset to anybody he wishes. By applying qiyas, he may also sell it to the person from whom he bought the same asset. Another qiyas applicable here is if the person who bought a property may sell

THE SAC RESOLUTION

The SAC, at its 5th meeting on 29 January 1997, passed a resolution that bai` inah is a principle that is permissible in the Is-lamic capital market in Malaysia.

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it back at any time, whether after a passage of time or immediately after the purchase. The Maliki and Hanbali Mazhab, on the other hand, rejected bai` inah and considered it invalid, because according to them the mo-tive of the parties to the contract de-termines the legality or illegality of the contracts, and in the sale under con-sideration the motive of the parties is illegal and, therefore, the sales are not valid because they constitutes a legal device (Hilah) to get a loan with interest which should be averted at all costs according to the Shariah.

Ibn Qayyim, a Hanbali scholar states that intention influences legal acts: the formality of legal act can be the same but end results depend on the intention. The Maliki and Hanbali opinion was based on the principle of sadd zari’ah that aims to prevent practices that can lead to forbidden acts such as, in this case, riba.

The basis for the opinion of the ma-jority of the Islamic jurists was the hadith dialogue between Aishah and the slave Zaid bin al-Arqam which showed the prohibition of bai` `inah. They also held to the hadith of the Prophet (p.b.u.h) in which he warned that those who practiced bai` inah would suffer scorn.

From the above discussion on this issue, the following conclusion can be drawn.

1. It is obvious that Bai al-inah is a legal de-vice in order to overcome the prohibition of riba, (no person would affect such sale if he cannot realize profit), and is not deemed to be an act of sale, as there is clear evidence that such act amounts, in effect, to a con-tract of loan. Thus, it is forbidden as it is based on unjustified enrichment or “receiv-ing a monetary advantage without giving a counter value” (Saiful & Sanusi 1999).

2. Al-Shafii’s recognition of the validity (sa-hih) of Bai al-inah not based on interpreta-tion of any authentic Islamic authority and is one’s own view. However, according to other schools the prohibition of such sale was based on the consensus of the jurists (Ijma al-ulama’) on the authority of Islamic law sources. As Ibn Qayyim prohibited Bai al-inah quoting the following Hadith that Allah’s messenger says: “A time is certainty coming to mankind when they legalise the Riba un-der the name of Bai” (trade concerning that intending usury by words of a sale).

3. There is hardly any satisfactory evidence which enables one to say that al Shafii has expressly declared that al-Inah to be (Ha

lal). It should be pointed out that al Shafii’s method of determining the validity of any contract by its formal evidence that they are legally concluded, cannot be cancelled on account of the intention of the parties, the Shafii may, thus permits contracts because its legal preconditions are fulfilled, but for-bids the transacting act of the parties when it conflicts with Shariah principle (Saiful & Sanusi 1999). Al-Qaradawi states; Bai al-inah is a clear case of usury and the device: why should one practice transaction which contains elements of devices while one is in position to have a clear and apparent alter-native transaction?

To echo further Saiful & Sanusi (1999): “The use of legal device is therefore evidence that the niyyah factor is undermined or made secondary in the securitisation process of Islamic bonds in Malaysia. It is apparently clear that most underlying assets used in the Malaysian Islamic bond securitisa-tion have no direct relation with the actual project itself.

These assets were simply collaterals that serve as guarantees to the debt issued. To retain the basic structure of traditional bonds in Islamic finance, that is providing fixed return to investors, practitioners and

the relevant Shariah experts may have differently applied Shariah laws, which implies now that the le-gitimacy of Islamic bonds issued us-ing bai’ al-’inah is suspect”.

The Other Issues in Sale/Debt Based SukukAlongside the very foundational and prominent issues of Bai al-Inah and Bai al-dayn as detailed previously, a number of other issues which we have termed as secondary issues have also been pointed out which could be as controversial as the ones explained, if not more.

These issues have certainly added more to the gloom over these sukuk and have made the debate even more furious on their Shariah com-patibility which makes them wor-thy to be voiced and discussed. A number of such issues have been brought up from our research based on the study of more than 300 term sheets of these sukuk including the case studies integrated with the arti-cle. These secondary issues are:

1. The issues of SPV which directly links to the general and legal status of it i.e. on its degree of independ-ence from the sukuk issuing com-pany and on its basic requirement of being bankruptcy remote. Both

of these basic requirements has been friv-olously violated, where the SPV is in many issuance have actually been a subsidiary of the issuer which has been given a status of SPV only meant for the purpose of the su-kuk issuance which eventually makes it non-bankruptcy remote.

2. The frequent use of ‘Hibah’ and ‘re-Hibah’ in these forms of sukuk where a third party agrees in some way to hibah the relevant as-sets, which are to be used as underlying for the issuance of the required sukuk, in order to make the issuer who has no ownership of the asset the beneficial owner so that he can use the assets just for the purpose of the issuance to raise funds.

Eventually at the end of all when the sukuk is matured, those very assets after fulfilling the required purposes are then ‘Hibah’ back to the real owner. This whole process raises some serious issues which directly link to the concept of ownership of the relevant as-sets for the purpose of sale in the view of Shariah.

Shariah requires the seller to own the assets before he can sell them to the other party. This is the basic requirement before enter-ing into any sale contract. The asset should


gifSukuk

OXBRIDGE HEIGHT SDN BERHAD MURA-BAHA MUNIF/IMTN SUKUK FACILITY.

Issuer: Oxbridge Height Sdn Bhd-OHSBLead Arrangers: Amanah Short Deposits Berhad (“ASD”) Trustee: AmTrustee Berhad

Incorporated in September 2003 with principal activities of prop-erty development, based in Malaysia Oxbridge was permitted by the SC to raise funds up to RM154million through MUNIF issu-ance based on ‘Murabaha’ in April 2005 with tenure of 7 years. This deal is even more interesting because it not only involves the application of ‘Bai al-Inah’ it also includes the process of ‘Hibah’ and ‘re-Hibah’ of the underlying assets involved in the issuance which on the first occasion are owned beneficially before being used in hibah and re-hibah of it.

First Trade wind Sdn Bhd will make Oxbridge either the beneficial owner of the assets or will hibah-gift the underlying assets which in this case are pieces of lands to the issuer Oxbridge Sdn Bhd to be used for the whole facility. In this case the assets are gifted to the issuer. The investor(s) shall then purchase the Assets from the Issuer (APAs). The investor(s) shall thereafter sell back the As-sets to the Issuer (OHSB) at a Selling Price (ASAs) comprising the original Purchase Price and an agreed profit margin on a deferred payment basis. The obligation of the Issuer (OHSB) to pay the Selling Price shall be evidenced through the issuance of the ne-gotiable and non-profit bearing promissory notes (“MUNIF Notes” or IMTNs”). The Issuer (OHSB) shall give back the Assets to the said Beneficial Land Owner base on the concept of “Hibah” once the sale and purchase transactions are executed-i.e. the process of re-hibah. See figure 6.9.

3rd party (Trade Wind) will first ‘hibah’ the underlying assets 1. to be used for this deal to Oxbridge.The Issuer (Oxbridge) will sell these assets to the investors 2. at a purchase price through Asset Purchase Agreements (APAs). The payment will be made to the issuer on spot.The Investors will then sell back the same assets straight 3. away to the issuer but at a higher price including a profit mar-gin through asset sale agreements based on ‘Bai al-Inah’.The issuer (Oxbridge) will issue sukuk (MUNIF/IMTNs) to evi-4. dence his obligation to pay the sale price.Once the Sukuk has grown to Maturity The Very underlying 5. assets will then be given back to the 3rd party (which by the way is not the real owner but the beneficial owner of the as-sets) through the process of ‘re-hibah’

Case Study

2. Investors Purchase asset

at Purchase Price (APAs)

3. Payment of proceed

4. Sell asset at Sale Price, de-ferred (ASAs)

4. Issue MUNIF/ IMTNs to evidence

obligation to pay sale price.

INVESTORS

Issuer (OXBRIDGE)

Figure.6.9: Oxbridge Height Sdn Berhad Murabaha MUNIF/IMTN

1. Issuer hibah bank to TW (Beneficial owner)

• TW (Beneficial owner) hibah asset to issuer

Third party

be owned in such a way that the owner should have a full and real procession of them. In other words he should be the real owner and not a beneficial one meaning he should have full control over it so that he can run the risk of any loss or gain or even damage to it. The owner should be able to practice his/her free will over the assets meaning he can do whatever he wants and use it the way he likes but within the ambit of Shariah.

Beneficial ownership as is the case in a number of these sukuk con-tradicts all of these basic Shariah requirements and hence it violates and invalidates the whole Islamic concept of Sale. The whole trans-action will be invalid and hence contradictory to Shariah which is the most severe consequence to a so called Islamic transaction.

It means in such transaction the real ownership of the assets has never been transferred at any point be it to the issuer from the real owner or to the investors when it is further sold to the investors in an extensive approach and then re-sold back to the issuer using ‘Al-Inah’ as mentioned previously.

Thus it is very clear that although it is a sale transaction and the assets are sold, they are just used rather fictitiously to raise fund under the Islamic banner but in an un-Islamic way through financial artifice or Hilah (legal stratagem). The question is that how can you call this practice Islamic, how can one term it an Islamic Sukuk or even Islamic finance for that matter?

3. The issue here relates to the presence of collateral and often guar-antee by a third which has not even been found independent of the sukuk issuing party particularly when the issuance is not a sovereign one as has been the case in most of the sale based sukuk issuance in Malaysia. This issue can be seen in all the credit enhancement clauses given in the term sheets of majority of these sukuk. Before we explore any further, very briefly we understand what credit en-hancement is in sukuk?

This sort of Sukuk receives an irrevocable third-party guarantee, usually by a parent or original owner of the underlying collateral. The guarantor provides Shariah compliant shortfall amounts in case the issuing vehicle (usually a special purpose vehicle or SPV) cannot make payment. The ratings on this type of Sukuk largely depend on the creditworthiness of the guarantor or entity providing the credit enhancement mechanisms and other financial obligations of the guarantor.

When it comes to the act of ‘Guarantee’, Shariah has some basic rulings. It says very clearly that guaranteeing is a voluntary act and should not be a conditional one; it can be performed in form of a gift or donation also, hence the guarantor should not ask for any fee or compensation in any way for such guarantee as it will violate the very concept of a voluntary act. Therefore it must and cannot be stated in contract either implicitly or explicitly as a pre-condition or even after the contract has been concluded.

In other words the conclusion of a sale contract as in here should not be based or concluded on a decision of offering such a guaran-tee. The contract should be abrogated as a result of the absence of such voluntary offer of guarantee has been made conditional of the contract.

The practitioners as is the case in these sukuk should abstain from making such conditional guaranteeing recur, for its recurrence would mean that it has become an established custom, which would have the force of a condition according to the general Shariah rule. Never-theless there is no harm in such guarantees being offered as a pure gift or donation meaning that they are voluntarily done. Shariah also further ordains that such guarantees alongside being done volun-


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Primary/Common Shariah Issues Secondary/Specific Shariah Issues

Issues Description Issues DescriptionBai al-Dayn This issue arises from trading of

the sukuk at discount. Secondly, This may also include the issue of type of asset used for securitisa-tion whereby the assets securitized are financial receivables (debt).

SPV Analysis on the legal position of the SPV from Shariah per-spective, independence of SPV from the originator.

Hibah and re-hibah clauses Hibah clause from a third party as a legal device to enable the sale and subsequently re-hibah to return to the original position

Proceed payment Flow of the fund and the stages of the Shariah contracts. The issue of which contract performed first. The APAs or ASAs the whole transaction is simultaneous.

Bai al-Inah Sale and buy back arrangement between the same parties on the same asset, one with cash price which is lower and another with de-ferred higher price. Investors made profit on the difference between the two prices

Collateral and guarantee Credit enhancement for the sukuk whether in Shariah compli-ant manner, guarantee of third party with fees.

Usage of the proceed Usage of the proceed whether for Shariah compliant purpos-es?

Event of Default Clauses What constitute the event of default clause, whether the con-ditions imposed contrary to the sale contract and compliant with the Shariah requirement, effect of the event of default on the sale contract.

tarily should be done by third party, a party who is completely independent to the other concerned parties, meaning this third party should not be a party having an interest or stake in the deal in anyway. However in the sukuk that we have studied the third party i.e. the guaranteeing party envisaged have most likely been an interested party some-how or the other. Such party is no longer considered a third party any longer and thus would not serve as a legally acceptable do-nor of the guarantee in the eyes of Shariah. Not only this, they also seek certain amount of fee (Ujrah) for their guarantee.

Ujrah refers to rental or fees for usage of la-bour and benefits. In the current economic context, it may be applied to salaries, wages, fees, commission and the like. The majority of past Islamic jurists were of the view that the charging of fees on kafalah is not per-missible.

This view is based on the argument that a ka-falah contract falls under `uqud tabarru`at which is voluntary and benevolent in nature. Hence, no fee is to be charged. Wahbah Al-Zuhaili was of the view that to charge ujrah on kafalah is permissible based on masla-hah and society’s needs.

Syeikh Ahmad Ali Abdullah was of the view that when there is a condition that the ka-falah bears a fee, the said condition is considered valid. He also emphasised that kafalah contract is not qardh. He supported his views with qiyas, referring to fees that are permissible to be collected on utilising someone’s reputation and also on perform-ing incantation using Quranic verses.

Some of the past Islamic jurists allowed both situations and can be used as fees on the guarantee since it is similar from the aspect of work done. The OIC Fiqh Academy and

the Shariah Council AAOIFI resolved that uj-rah on kafalah/dhaman is not permissible. However, the guarantor may claim for actual expenses incurred on the guarantee.

4. The issue of whether the proceeds, which has been raised from the sukuk issuance, have been used in a Shariah complaint or a Shariah contradictory way. In the case study of TESCO MALAYSIA MURABAHA NOTES (as published in Part one of the Article), it is evi-dent from its term sheets that a significant portion of the proceeds raised from the is-suance has been used to refinance existing external debt (up to RM410 million).

Another example of such a case is in the mu-rabaha sukuk deal of Bumiputra-Commerce Holdings Berhad (BCHB) where again a part of the proceeds raised were used to settle the already existing borrowings of the is-suer.

The question is how valid is it to raise anoth-er debt to settle the previously existing one? Were the investors aware of such usage of proceeds beforehand? Is it not a financial artifice to raise fund to settle pervious debt by not letting the investors know? It seems a clear case of legal stratagem to raise money in a so called Shariah complaint manner which it seems not to be.

The sukuk issued by the International Fi-nance Center and the World Bank based on BBA deal also rings the bell with such issue, where the proceeds raised from BaIDS were just used for general operations of Interna-tional Finance Corporation (IFC).

The challenge to Shariah is that IFC and nei-ther the World Bank has an Islamic portfolio, so for which general operations were the proceeds applied? The point to stress here is that not only raising the proceeds should

be Shariah compliant but also the end use of them in the same manner is what com-pletes the circle for a true Shariah complaint product. The above examples miss not one but both the points substantiating a clear effort of “Them molding Shariah accordingly rather than the other way round”.

5. One of the more contentious topics in the market today is the rights of sukuk holders in the event of non-payment or default. Do they have a claim on the underlying assets in the sukuk formation?

Where do they stand in the line-up of credi-tors, given the general belief that sukuk are the more secured investments compared to their conventional counterparts. Given the Shariah emphasis that financing should be raised with respect to an economic activity, all sukuk shares a common feature in that they often take shape with an asset (or as-sets) at their core.

Where there has been a real (true) transfer of asset ownership to a special-purpose ve-hicle (SPV) that has been formed to issue the sukuk, then the investors would have a legitimate claim on that particular asset that has been sold to them, but not so without a true sale (i.e. assets have not been trans-ferred to the sukuk holders), and if the asset is present simply for the purpose of Shariah compliance, we believe that the legal re-course and cure for the sukuk holders are likely to be no more than those of unsecured creditors.

Even from the rating perspective, an analysis of the asset will be inconsequential; instead, we will focus on the creditworthiness of the corporate obligor, with the final assigned rat-ing depending on the ranking of the sukuk vis-a-vis the obligor’s existing senior unse-cured obligations.


gifSukuk

Wahbah Al-Zuhaili, Al-Fiqh al-Islami wa Adillatuhu, Dar al-Fikr, Damascus, 1989, vol. 4, • p. 432.Usmani, Taqi. What Shariah Experts Say about Bai al-Dayn, Dealings in Shares. Interna-• tional journal of Islamic financial Services, Vol. 1, No2.Securities Commission Malaysia, Resolutions of the Securities Commission Shari’ah Advi-• sory Council, (Kuala Lumpur, 2nd edition, 2007) p. 16.Al-Nawawi, Yahya Ibn Sharaf, Rawdat al-Talibin wa ‘Amdat al-Muftin, (Beirut: al-Makhtab • al-Islami, 1985) vol. 3, p. 514; Ibn Taymiyyah, Majmuwatu Fatwa, vol. 29, p. 506; Ibn al-Qayyam, Mohammad Bin Abi Bakr, I’lamu al-Muqiw’in an Rabb al-’Alamin, (Cairo: Daru al-Hadith, 1st edition, 1993) vol. 4, p. 5.Amin, Hanudin, “An Analysis Of The Classical And Contemporary Juristic Opinions On Bay • Al- Dayn”, Labuan e-Journal of Muamalat and Society, Vol. 1, 2007, pp. 29-40.Al-Nawawi, Rawdat al-Talibin wa ‘Amdat al-Muftin, vol. 3, p. 516; Al-Hattab, Mohammad • Bin Abdu al-Rahman, Mawahib al-Jalil Sharh Mukhtasar al-Khalil, (Beirut: Daru al-Fikr, 1978) vol. 4, p. 368.See: Al-Hattab, Mohammad Bin Abdu al-Rahman, Mawahib al-Jalil Sharh Mukhtasar al-• Khalil, (Beirut: Daru al-Fikr, 1978) vol. 4, p. 368; Translated version of these conditions are adopted from: Securities Commission Malaysia, Resolutions of the Securities Commission Shari’ah Advisory Council, (Kuala Lumpur, 2nd edition, 2007) p. 17-18.These conditions are adopted from: Amin, Hanudin, “An Analysis of The Classical and Con-• temporary Juristic Opinions on Bay Al- Dayn”, Labuan e-Journal of Muamalat and Society, Vol. 1, 2007, pp. 29-40.Al-Sharkhasi, Samsuddin, al-Mabsut, (Beirut: Dar al-Marifah, 1986) vol. 5, p. 141; al-• Kasani, Badawe’ wa al-Sanawe’ fi Tartib al-Sarawe’, vol. 5, p. 148; al-Suyuti, Zalalu al-Din Abdu al-Rahman, al-Ashbah wa al-Nazair, (Beirut: Dar al-Kutub al-I’lmiyyah, 1983) p. 331; Al-Sharbini, Mohammad al-Khatib, Mughni al-Mahtaj, (Beirut: Daru al-Fikr, without date) vol. 2, p. 466-467; Ibn Hajm, al-Muhalla, vol. 9, p. 6.Al-Sharkhasi, al-Mabsut, vol. 12, p. 71.• Koutoub Mustafa, The sale of Debt as Implemented by the Islamic Financial Institutions • in Malaysia, p. 49.Sunan al-Tirmidi, Hadith no. 1153.• Sunan Ibn Majah, Hadith no. 2178.• Sunan al-Tirmidi, Hadith no. 115• Securities Commission Malaysia, Resolutions of the Securities Commission Shari’ah Advi-• sory Council, (Kuala Lumpur, 2nd edition, 2007) p. 19.Ibid.Engku Rabiah Adawiah Engku Ali, Issues in Islamic Debt Securitisation, in Mohd Daud • Bakar and Engku Rabiah, Essential Readings in Islamic Finance, Kuala Lumpur: Cert Pub-lication Sdn Bhd, 2008, pp 482-484Ibnu Àbidin, Hasyiah Rad al-Mukhtar, Dar al-Fikr, Beirut, 1992, vol. 5, pp. 273, 325. • Al-Syaukani, Nail al-Authar, Dar al-Fikr, Beirut, 1994, vol. 5, p. 294. Al-San’ani, Subul al-Salam, Dar al-Kitab al-Arabi, Beirut, 1987, vol. 3, pp. 76–77. Yusuf al-Qaradhawi, Bai` al-Murabahah li al-Amir bi al-Syira’, Maktabah Wahbah, Cairo, 1987, p. 64. Al-Zuhaili, Al-Fiqh al-Islami, vol. 4, pp. 466–467.Ibnu Àbidin, Hasyiah Rad al-Mukhtar, vol. 5, pp. 273 & 325. Al-Syaukani, Nail al-Authar, • vol. 5, p. 294.Al-San’ani, Subul al-Salam, vol. 3, pp. 76–77. Yusuf al-Qaradhawi, Bai` al-Murabahah, p. • 64. Al-Zuhaili,Al-Fiqh al-Islami, vol. 4, pp. 466–467.The Hanafi, Maliki and Hanbali Mazhab.• Narrated by Darulqutni and Baihaqy• Ibn Qayyim al-Jawziyya-Iclam al-muwaqqicin, vol. 3, pp 98-99; and see for example the • saying of the Prophet (saw) “deeds are judged according to intentions and every human being will have to take responsibility for what he intended” Sahih al-Bukhari.Ibnu Àbidin, Hasyiah Rad al-Mukhtar, vol. 5, pp. 273 & 325. Al-Shaukani, Nailul Authar, • vol. 5, p. 294.Al-San’ani, Subul al-Salam, vol. 3, pp. 76–77. Yusuf al-Qaradhawi, Bai` al-Murabahah, p. • 64. Al-Zuhaili,Al-Sanàni, Subul al-Salam, vol. 3, pp. 76–77, see also Al-Fiqh al-Islami, vol. 4, pp. 466–• 467.Ighatha al-Lahfan, vol. 1, p.352.• Al-Qaradawi, Islam and Current Issues pp. 40-42• OIC, Majallah Majma` al-Fiqh al-Islami, no. 4, vol. 3, p. 1980). However, the OIC Fiqh • Academy, disagrees with the basis of third-party guarantees that are based on debt and resolved that third-party guarantees have to be in the form of tabarru`. Otherwise, the contract is deemed to be an interest-bearing debt which is not permissible.Securities Commission, Guidelines on the Offering of Islamic Securities.• Al-Hattab, Mawahib al-Jalil, Beirut, Dar al-Fikr, 1992, vol. 5, pp. 111, 113.• Al-Zuhaili, Al-Fiqh al-Islami, vol. 5, p. 161.• OIC, Majallah Majma` al-Fiqh al-Islami, Jeddah, 1986, no. 2, vol. 2, pp. 1146–1147.• OIC, Majallah Majma` al-Fiqh al-Islami, no. 2, vol. 2, pp. 1134–1135.• OIC, Majallah Majma` al-Fiqh al-Islami, no. 2, vol. 2, pp. 1209–1210. AAOIFI, Al-Ma’ayir • al-Syar’iyyah,

Asset ownership, in this instance, would strength-en the investors’ rights on the underlying asset(s) in the event of default or liquidation. However, in the Malaysian Sale/Debt based sukuk the issuer customarily declares a trust over the assets in favor of the sukuk holders, with the latter having beneficial ownership of the underlying asset(s). Legal ownership, however, remains with the orig-inal asset owner as has been made clear earlier. The intent of the issuer in this instance is to have an unsecured funding source.

However, the event of default clauses in nearly all the sukuk deals studied add further to the gravity of the controversy when/where it clearly also states that if the issuer even defaults on any other of his obligation which may have no direct or indirect link to the concerned deal will also render the issuer as similar to defaulting in the sukuk deal. The exact wordings of the clauses in a condensed form are as follows:

Any indebtedness of the Issuer becomes • (after the expiration of any applicable grace period) due or is declared due before its stated maturity as a result of default or is not paid on its due date;Any guarantee or similar obligation of the Is-• suer is not discharged at maturity or when called;Any security for such indebtedness be-• comes enforceable.

The legal documentation governing the transac-tion firmly renders the sukuk a financial obliga-tion, listing the sukuk holders as creditors (as opposed to owners or equity holders) and rank-ing them pari passu with conventional creditors (within the same class of creditors).

No wonder the investors are provided with even a “Recourse Clause” in the deal where the in-vestors are provided a full recourse and in some deals partial if the issuer defaults as per the above ‘Events of Default’ clauses.

The Table 6.2 depicts in a summarised form all the Primary and Secondary Issues that our study has raised after researching through more than 300 of such sukuk deals. By understanding the origins of the practices that give birth to Shariah issues involving sukuk, the nature of Islamic bonds issued in Malaysia can be very transpar-ently understood and its heavy structuring also becomes understandable.

All of the great criticism that Malaysia bore due to its strict structure involving sale/debt based sukuk has been vain and it has been able to prove the criticism wrong by becoming a leader in the global islamic finance sector, which in its effect shows that sukuk in itself is not question-able, it is how it is structured and practiced is what makes it abiding by the Islamic law.


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gif Market Review

It has been reported that Oman is to add a staggering $6 Billion worth of assets for the development over the next few years, ac-cording to estimates by Ernst & Young’s Is-lamic Financial Services Group (IFSG). Total banking assets in Oman in 2010 were esti-mated to be $42 billion. Shari’ah-compliant financial institutions, which are expected to commence operation in the country within a short period, are expected to capture a substantial share of this market and of total banking assets within a few years.

Speaking at Ernst & Young’s Islamic Bank-ing session at the Muscat Holiday Hotel, Ashar Nazim, Executive Director and Head of Islamic Financial Services, Ernst & Young Mena said “The Islamic banking opportunity could be substantial as we expect the indus-try to reflect its performance in other GCC markets.

As an indication of how Islamic banking would evolve in Oman, we can look at the neighbouring UAE market, where it has cap-tured a significant share in a short period of time. New Islamic banks and Islamic bank-ing windows in banks are set to capture a significant share of the market over the coming months.” Global Shari’ah-compliant assets are estimated to have crossed $1 tril-lion in 2010, growing at a sustainable 15-30 per cent per annum. He added “Given the size of the local market, early movers are set to create a strong advantage in both Islamic banking and takaful. The next 18 months

could materially change the competitive landscape in favour of Islamic windows and banks.” The Central Bank of Oman has permitted conventional banks to operate their Islamic banking business through a ‘window’ operation. As a result, the market could see a number of conventional banks entering the Islamic finance space in the next couple of years. Ahmed el Esry, Senior Director, Tax, Ernst & Young Oman, said “The Islamic banking window operation is ac-cepted as a successful model and in many markets such as Saudi Arabia, where Is-lamic windows account for nearly half of the Shariah assets, and UAE where they have an 11 per cent share. Given the similarities in

the demographic landscape and appetite for these services, we see great potential in the Omani market for Islamic offerings. Successful Islamic windows understand the various Shari’ah implications on the banking business and are able to apply its require-ments in their strategy, operations, product, and governance and risk management func-tions.”

The concept of Islamic banking window re-quires the conventional financial institution to have a distinct operational infrastruc-ture for its Islamic business. Compliance is monitored by the regulator as well as the Shari’ah authorities and further strength-ened through independent Shari’ah audits conducted by professional firms. Oman is expected to benefit from the most notable development in the Islamic finance market in 2010 — the growth of the Sukuk market.

Sukuks are the Shari’ah-compliant form of conventional bonds and have a growing ac-ceptability in international markets. Omani Sukuk instruments could be used for financ-ing infrastructure projects and stimulating corporate activity, which would add to the growth of Oman’s buoyant economy.

OMAN TO ADD A STAGGERING $6 BILLION WORTH

OF ISLAMIC FINANCIAL ASSETSSource: GlobalIslamicFinanceMagazine.com

The Islamic banking window operation is accepted as a successful model and in many markets such as Saudi Ara-

bia, where Islamic windows account for nearly half of the Shariah assets, and UAE where they have an 11 per cent share. Given the similarities in the demographic landscape and appetite for these services, we see great potential in the Omani market for Islamic offerings

„

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Business News

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gif Market Review

Saudi Arabia’s finance minis-ter has reportedly urged Mus-lim countries to adopt suitable economic reform programs and adapt to the changing global financial economic changes to confront the challenges of fac-ing them and building solutions. “We should also strengthen our joint efforts to overcome devel-opment obstacles,” Finance Minister Ibrahim Al Assaf told the annual conference of the Jeddah-based Islamic Develop-ment Bank.

Al-Assaf called for greater ef-forts for manpower develop-ment and achieving sustainable economic progress in the mem-ber countries. The minister’s call is significant in the backdrop of anti-government protests in some Arab countries as a result of unemployment, poverty and political corruption.

Saudi Arabia is the largest contributor to the IDB, holding 25 percent of its capital. “We have also contributed immensely to the capital of other regional and international development organisations. Moreover, we have been at the forefront of donors provid-ing emergency assistance to countries hit by natural calamities,” the minister said. Refer-ring to IDB’s annual report, Al-Assaf high-lighted the assistance offered by the bank to member countries to help them overcome the global economic crisis.

The minister welcomed a joint IDB-World Bank initiative to finance infrastructure projects. He supported the program pro-posed by IDB President Ahmed Mohamed Ali to transform the bank into a source of knowl-edge and efficiency to mobilise resources. The opening session at Jeddah Hilton was attended by more than 1,000 delegates including ministers, businessmen, bankers and economists. Abdul Karim Al-Arhabi,

Yemeni deputy prime minister for economic affairs and minister of planning and interna-tional cooperation, presided over the meet-ing. IDB Chief Ali said Muslim countries were incurring heavy losses due to lack of coop-eration among them.

“If we take Maghreb Union as an example, the figures are really frightening. Some stud-ies indicate that the stagnating level of eco-nomic cooperation among these countries cost them 2 percent of their annual growth and lowered their GDP by 5 percent. It is in-deed surprising that trade among the coun-tries of this group constitutes less than 2 percent,” he explained.

The president also spelled out IDB’s plans and initiatives for the next four years. “We would like to improve the economic devel-opment facilities offered by the bank and stimulate the Islamic Solidarity Fund,” he said and urged more cooperation among

member countries in the fields of knowledge economy and trade. “Who will lead the world in the 21st century is the question raised by Arab youth,” Ali said, and urged Muslim countries to play a leading role on the world stage. He said the global financial crisis proved the relevance of Is-lamic banking and finance. “Our confused world is in dire need for financial, economic and social systems that are more balanced and more responsive to man’s material, moral and spiritual re-quirements.” Ali said the renais-sance of the Ummah sought by the youth was not different from the IDB’s Vision 2020. “Ours is a vision for human dignity and is inspired by the resolutions of the emergency Islamic summit in Makkah in 2005. The IDB has taken strategic initiatives aimed at combating poverty and unem-ployment,” he said referring to the Solidarity Fund.

The IDB chief pinpointed some of the major shortcomings, calling for urgent remedial action. The development models in member countries are based on outdated systems; the role of the Zakat and Awkaf has become ineffective in containing economic upheav-als; there is a lack of strategic orientation to-ward knowledge economy; and debt-based products outweigh financing tools and in-vestments in the real economy, he said.

Ali said the IDB had signed an agreement with the UNDP to establish an effective mechanism for monitoring and taking pre-ventive action in times of crises and dis-asters in favour of the citizens of member countries. The IDB has signed a memoran-dum of understanding with Jeffrey Sachs, head of the Earth Institute at Columbia Uni-versity, with the objective of benefiting from its millennium village experience.

ISLAMIC COUNTRIES URGED TO ADOPTECONOMIC FINANCIAL REFORMS


„O u r

confused world is in dire need for financial,

economic and social sys-tems that are more balanced and more responsive to man’s material, moral and

spiritual requirements

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gifMarket Review

Islamic trade finance has grown progressively towards Shariah-compliant banking and could serve as one of the key growth drivers to aid the $1 trillion Islamic finance industry in its growing global expansion. The global Islamic finance industry, which has been growing be-tween 15 to 20 per cent a year is widely expected to reach $2 trillion in the next three to five years. While Islamic banking and Islamic bonds, or sukuk, are expected to lead growth, bankers say Islamic trade fi-nance could serve as the dark horse emerging to propel the industry further. Trade finance, the lifeblood of global com-merce, underpins 60-80 per cent of the $12-13 trillion trade in global merchandise and practitioners say it is safer than other forms of lending.

Total trade finance among the 57 members of the Organisa-tion of the Islamic Conference, which includes Saudi Arabia, Malaysia and Turkey, is expected to reach $4 trillion by 2012, said Mohamad Nedal Alchaar, secretary general of the Accounting & Auditing Organization for Islamic Financial Institutions (AAOIFI). “(Islamic finance) could tap 20 per cent of the total trading financ-ing, that’s very reasonable,” Alchaar said, adding that while the current Islamic trade finance market remains fragmented and non-competitive, there has been a shift to-wards pushing trade finance among Islamic practitioners. Part of the increased interest in Islamic trade finance is that the Islamic fi-nance industry, which prohibits interest, has matured and can provide complicated instru-ments, such as Shariah-compliant hedging products to protect trade transactions, said Yakub Bobat, global head of HSBC Amanah commercial banking. “If you don’t have ac-cess to Islamic hedging, there will be a cur-rency conversion impact. In the absence of

those solutions, people go for conventional,” Bobat said. “But the proposition is now com-plete and you can now use Islamic hedges for trade transactions.” Bobat said such in-novations in the industry will help persuade people inclined toward Shariah-compliant business to opt for Islamic trade finance over conventional forms. In Islamic trade fi-nance, a bank will provide a letter of credit, guaranteeing import payments using its own funds, for a client based on sharing the profit from the sale of the item. But some banks are still wary of providing Islamic trade fi-nance services, citing it as more costly and time consuming. In addition, some see lit-tle difference between conventional and Islamic trade finance as both are fee-based products, resulting in lower demand for the Islamic product. Changing that view will be key for the industry, said Shabir Randeree, chairman of the European Islamic Invest-

ment Bank. “There is a very com-pelling reason to promote this product given that the returns of trade financing can be very attrac-tive, much more than real estate financing, for example,” he said. “Providers of this product have not been as aggressive in pro-moting it.” But with increasing cross-border trade among Asian and Middle Eastern countries, de-mand for more Shariah compliant financing from Muslims is still ex-pected to increase. Asia to Middle East trade flows more than dou-bled between 2005 and 2008, according to the World Trade Organization. “If I compare three years back, volumes have gone up overall in the Islamic trade fi-nance market,” said Ghazanfar Naqvi, managing director, Islamic origination and client coverage at Standard Chartered Saadiq. “It’s a function of more awareness and more offerings. Today we are see-ing customer preference changing and trade finance is a key compo-nent of growth in Islamic finance.” Naqvi said it was difficult to pin

down tangible global figures for Islamic trade finance as the majority of deals are not pub-lic transactions.

The International Islamic Trade Finance Corp. (ITFC), an independent entity within the Islamic Development Bank, said in its annual report that it approved $2.17 billion in Islamic trade finance transactions at the end of 2009. That grew to around $2.55 bil-lion in 2010, with a majority of transactions taking place in OIC member nations. HSBC Amanah’s Bobat said Islamic trade finance will be a significant contributor to growth in Islamic finance but the industry will have to look beyond asset finance. “The industry to-day is pretty much focused on asset finance and it needs to have the ability to capitalise on trade,” he said. “(Islamic trade finance) should be as much bread and butter busi-ness as it is for conventional trade flows.”

ISLAMIC FINANCE TRADE SECTOR EXPANDSIN ASIA AND MIDDLE EAST


„But with increasing

cross-border trade among Asian and Middle Eastern coun-

tries, demand for more Shariah compliant financing from Muslims is still expected to increase. Asia to Middle East trade flows more

than doubled between 2005 and 2008, according to the

World Trade Organi-zation

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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

The growing Muslim population, finan-cial regulations and infrastructure within Europe contributes to boost the growth of Islamic finance in the region. The IFN Europe forum hosted by Islamic Finance News (IFN) located at One Bishop Square, London took place on the 7th and 8th of July 2011. The purpose of the event was to generate fresh ideas, views and solid plans to take advantage of Islamic finance opportunities within the region.

The event endorsed by the London Stock Exchange, UKIFS/TheCityUK also included a range of sponsors such as Allen & Overy, BLME, Busi-ness Bermuda, CIMA, CIMB Islamic, Gatehouse Bank, IFAAS, Trasset and Vinson & Elkins. It is only a matter of time before Europe becomes a significant player within the Islamic financial industry, with the growing Muslim population and boost in cross-board-er trade and investments with the Middle East. European countries can offer a vari-ety of strengths such as regulation, expertise and knowledge. The IFN Europe Forum cov-ered a wide range of topics for issuers and investors. The Issuers day commenced on the 7th of July and gave influential people in the industry a chance to express their views. The first panel of speakers spoke about Islamic finance and capital market developments in Europe, the panel included Badlisyah Abdul Ghani, Chief Executive Officer from CIMB

Islamic, Neil D Miller global head of Islamic finance from KPMG and other major players within the industry. The Issuers day ended with the Shariah Scholar’s roundtable includ-ing Dr Humayon Dar, Chief Executive Officer from BMB Islamic, Mufti Abdul Kadir Barkat-ulla, Shariah Advisor from Islamic Bank of Britain, Sheikh Bilal Khan, Executive Director and Shariah Scholar from Islamic Finance Education Council and Sheikh Muddassir Sid-diqui, Partner and Shariah scholar from SNR Denton & Co.

The Investors day took place on the 8th of July and covered a range of topics such as takaful and re-takaful in the developing Islamic finance industry and crucial issues for investors in the UK and European Islam-ic financial markets. The day also included a presentation from Rafael Dalmau, global head of Shariah compliant management from BNP Paribas covering the topic of ‘Su-kuk as part of a global portfolio allocation strategy’

There are already major financial cent-ers in regions such as Luxembourg and London which have a collection of 51 Shariah-compliant funds adding to US$500 million in assets and 16 listed Sukuk issuances totalling to US$5.5 bil-lion. There is also proof that there has been an increase in the market interest and participation in these sectors and countries such as France and Ireland

have been seeking changes in their regulato-ry system in order to integrate Islamic finance into the economy. The Chartered Institute of Management Accountants (CIMA) the world’s largest professional body of management ac-countants used the IFN Europe Forum as a platform to launch its certificate, diploma and advanced diploma in Islamic Finance. The purpose of their launch was to expand the Is-lamic Finance qualifications market in order to increase human capital and improve the talent pool.

Event Review gif

IFN Europe Forum opens its doors to investors and issuers

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

Global takaful contributions rose to USD 3.4 billion in 2007, compared with USD 2.5 billion in 2006. This shows the success in the Takaful

industry, the contributions have currently surpassed the $10 billion mark and have been predicted to go beyond $12 billion by the end of the year

„

The International Takaful Summit 2011 com-menced on the 12th and 13th of July locat-ed at Jumeirah Carlton Tower, London. The theme ‘mainstreaming and globalising taka-ful’ gave the panel speakers the opportunity to voice a range of topics such as challenges in making takaful the default option in Mus-lim countries and capital analysis of takaful companies. Economies around the world are showing signs of stability and growing enthu-siasm for the niche and specialist insurance markets. Takaful is predicted to become one of the fastest growing sectors within the in-surance industry.

The Takaful Summit aimed to discuss issues such as the education and acceptance of the consumer and the lack of experienced human resources. The Summit’s goal was to solve the problems between the takaful and insurance industries. The Summit’s first day included major players within the indus-try such as Ajmal Bhatty, president and CEO from Tokio Marine Middle East, Dawood Tay-lor, senior regional executive from Takaful, Middle East, prudential corporation Asia and

Chakib Abouzaid, CEO from Takaful Re Limit-ed. The first speaker at the Summit’s second day Dr Ludwig Stiftl, Head of Center of Com-petence Retakaful from Munich Reinsurance Company gives his views about the Summit. “There is a message to convey, London is a very focal point and the summit consisted of all the scholars gathering and having dense discussions, sharing fresh ideas and food for thought.”

Dr Stiftl gave his presentation about the reflec-tions on long term Qard al Hassan in Takaful/Retakaful. He says “it doesn’t depend what you put in the fund it depends on the size of the fund”. The companies that sponsored the Summit are Norton Rose, AON Benfield, Dar Al Takaful and Hannover Re. Organiser Mohaned Abdullah is very pleased with the outcome of the Summit saying, “the feedback is fantastic with a collection of international discussions about a sector that is more rel-evant in Non-Muslim and Muslim countries” He added “Takaful is Shariah compliant but it’s for everyone”. The Summit’s second day covered a range of topics such as getting

takaful providers to utilise retakaful capacity as a first option, takaful pro-vision for long term care needs and Shariah issues in the Mudharabah, Wakalah and Waqf modes in Taka-ful. Datuk Noripah Kamso, CEO from CIMB-Principal Islamic Asset Man-agement gave her views on an asset manager’s take on optimising invest-

ment returns from contribution pools she says “today, Islamic investment product has shown evidence that it is resilient”. Global takaful contributions rose to USD 3.4 billion in 2007, compared with USD 2.5 billion in 2006. This shows the success in the Takaful industry, the contributions have currently sur-passed the $10 billion mark and have been predicted to go beyond $12 billion by the end of the year.

Maulana Faizal Manjoo gives his views on the need for longevity Sukuk for takaful-based pension provision. He shares his knowledge saying “an average of 3 months is added to life expectancy each year, there would be a million centenarians worldwide by 2030” he added “people are living longer than data shows”. Media partners also attended the event and took part in the networking op-portunities and maintaining business rela-tionships. The companies included Islamic Finance News, Global Islamic Finance Maga-zine, Islamic Business and Finance and Mena Insurance 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

Event Review gif

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

The International Takaful Summit fills the gap between takaful and insurance industries


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 2011Doha QatarOrganised by Fleming Gulf

2nd Abu Dhabi Investments Forum26th - 27th September 2011Abu DhabiOrganised by Fleming Gulf

2nd Annual Investment Opportunities in Abu Dhabi26th - 27th September 2011Abu DhabiUnited Arab Emirates Organised by Fleming Gulf

Quant Invest Middle East 201126th - 28th September 2011, Dubai, UAEOrganised by Terrainn

September

2nd Annual Retail Banking Asia Pacific2nd – 5th October 2011Kuala-Lampur, MalaysiaOrganised by Fleming Gulf

SME Conference3rd – 4th October 2011-07-18Abu DhabiOrganised by Fleming Gulf

Petrochem Arabia9th & 11th October 2011Dammam, Saudi Arabia

3rd Operational Risk Forum10th – 11th October 2011DubaiOrganised by Fleming Gulf

Strengthening the Arab-African Coopera-tion10th – 12th October 2011Abu DhabiOrganised by Fleming Gulf

8th Annual CEE Retail Banking11th & 12th October 2011BudapestOrganised by Fleming Europe

3rd Annual World Islamic Retail Banking18th – 20th October 2011DubaiOrganised by Fleming Europe

Islamic Investment and finance forum24th – 27th October 2011Istanbul Organised by IIR

Solar Investment Summit – Middle East 201126th – 27th October 2011Abu DhabiOrganised by Datamatrix

October

7th Operational Excellence in Banking - OPEX 2011November 2011, DubaiOrganised by Fleming Gulf

Risk Management in Oil & GasNovember 2011, QatarOrganised by Fleming Gulf

Islamic Finance Conference 11th November 2011Frankfurt, GermanyOrganised by Maleki Group

Kurdistan – Iraq Oil & Gas11th – 15th November 2011KurdistanOrganise by CWC GROUP

18th Annual World Islamic Banking Con-ference (WIBC 2011)20th & 22nd November 2011Republic of BahrainOrganised by MegaEvents

Advanced Well Integrity Management21st – 23rd November 2011, Qatar Organised by Fleming Gulf

Private Equity World MENA 201121th -24th November 2011, Dubai, UAEOrganised by Terrainn

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

8th GCC Financial Markets Listed Com-panies conference29th – 30th November 2011DubaiOrganised by Datamatrix

November December

Event Calendar Event gif

Saudi Water & Power Forum4th - 6th December 2011-07-18Jeddah, Saudi ArabiaOrganised by CWC group

Saudi Infrastructure11th – 14th December 2011Jeddah, Saudi ArabiaOrganised by CWC group

Commodities Week Middle East5th-7th December 2011Dubai, UAEOrganised by Terrainn

1st Annual Islamic Project Finance & Trade Finance Conference10th & 11th December 2011United Arab Emirates Organised by Global Islamic Finance Magazine

Gulf Banks are mak-ing significant efforts to boost Arabian Gulf banks saying that they are more ready to accept Asian Islamic debt as Shariah-compliant, allowing them to invest in a market that has issued twice as much sukuk as the Middle East this year. Institutions from the two regions are work-ing to overcome differ-ences over whether Southeast Asian notes comply with Islam’s ban on interest, accord-ing to Albaraka Banking Group, Bahrain’s biggest publicly traded lender, and Asian Fi-nance Bank, the Malaysian arm of Qatar Is-lamic Bank. Last year, Saudi Arabia’s Al Ra-jhi Group helped Cagamas Bhd, Malaysia’s largest mortgage holder, structure a sukuk after Gulf investors balked at debt sold by the same issuer in 2009.

The co-operative approach is a change for investors from the Gulf who are seeking to diversify their investments amid political up-heaval in the Middle East. It may also help Malaysia to raise more funds from oil-rich nations to support a 10-year $444bn de-velopment plan announced last year. “Gulf investors aren’t allergic to Asian sukuk any-more,” Malek Khodr Temsah, assistant vice president of treasury and investments at Al-baraka, said in an interview from Manama on the 2nd of June.

“Middle East and Asian financial institutions have a better understanding of each other’s regulatory framework so we are more com-fortable with exposure to Asian credits.” Sales of sukuk from Asia have amounted to $5bn so far this year, more than double the $2.2bn from the Gulf, according to data compiled by Bloomberg.

Malaysia accounts for about 60% of the glo-bal Islamic debt market. Issuance of ringgit-denominated Islamic bonds increased 70% to 13.9bn ringgit ($4.6bn) this year, the data show. Malaysia and Indonesia plan to issue sovereign global Islamic bonds in 2011. Al-baraka’s Temsah said he bought Malaysian government sukuk in the fourth quarter of last year to diversify his holdings and take advantage of Southeast Asia’s economic

growth. Both Albaraka and QIB, the Gulf na-tion’s largest Shariah-compliant lender, said this year they plan to acquire Islamic banks in Indonesia. The “Shariah gap” between Malaysia and the Middle East has started to narrow but there are still significant dif-ferences, Rohit Chawdhry, who helps man-age $350mn of assets at Bahrain Islamic Bank, the country’s second-largest Islamic lender, said “I’m sure that within the next 6 to 12 months the issues will be sorted out,” he said. “It’s a general recognition from the Malaysians that they need to make some compromises if they want to attract Gulf in-vestors, but there is also an understanding that regional investors are starting to warm up to the norms in Malaysia.”

Qatar plans to spend $88bn on building roads, hotels and other infrastructure be-fore it hosts the soccer world cup in 2022, QNB assistant general manager Enrico Grino, who oversees project finance, said on the 16th of May. Malaysian companies seeking to win contracts in Qatar may need to raise funds in the Middle East, Mohamed Azahari Kamil, Kuala Lumpur-based chief

executive officer at Asian Finance Bank, said in an interview. “We’ve been discussing with Malay-sian companies how to take advantage of the infrastructure projects in Qatar,” he said on the 4th of June. “There’s abundant liquidity in the Middle East for these companies to tap. Malay-sian firms would need to

structure the sukuk and loans to meet the Shariah standards required by the scholars in that region.” The lack of standardisation has hindered growth in the Islamic finance in-dustry, which has around $1tn of assets and is expanding by about 15% a year, according to the Kuala Lumpur-based Islamic Financial Services Board. Scholars at the Auditing and Accounting Organisation of Islamic Financial Institutions, a standard-setting body based in Manama, are making efforts to develop global rules for the industry.

Global sales of sukuk reached $7.7bn so far this year, from $6.2bn in the same pe-riod in 2010, according to data compiled by Bloomberg. Offerings reached a record $31bn in 2007. Shariah-compliant bonds gained 5.4% this year, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index. Debt in developing markets rose 4.4%, JP-Morgan Chase & Co’s EMBI Global Diversi-fied Index shows.

Dubai Department of Finance’s 6.396% note due November 2014 widened three ba-sis points to 238, data compiled by Bloomb-erg show. “The fundamental Shariah issues aren’t going to change,” Jawad Ali, the Du-bai-based global deputy head of the Islamic finance practice at King & Spalding, said on the 6th of June. Islamic finance fatwas, judg-ments of scholars based on their interpreta-tion of Shariah, from Malaysia aren’t gener-ally accepted in the Middle East, he said.

“Gulf-based Islamic finance institutions penetrating the Malaysian market will no doubt help bridge the gap between the two Islamic finance centers,” he said. “Whether this understanding is going to lead to more harmonisation will depend on the particular product in question.”

Gulf Banks Tackle Challenges to Boost Shariah Investments


The lack of standardisation has hindered growth in the Islamic finance industry, which has around

$1tn of assets and is expanding by about 15% a year, ac-cording to the Kuala Lumpur-based Islamic Financial Serv-ices Board. Scholars at the Auditing and Accounting Organ-isation of Islamic Financial Institutions, a standard-setting body based in Manama, are making efforts to develop glo-bal rules for the industry

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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.

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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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Aaqilah Mutual Help, which was an arrangement of mutual help or indemnification customary in some tribes at the time of the Prophet Muhammad (pbuh). This is a foundation doctrine based on which Islamic insurance practices, known as Takaful, have been developed.

Adl A general term which conveys the meaning of justice, equity and fairness.

Ajr A payment or compensation such as commission, fees or wages charged for services.

Ajr-un-kareem A generous reward.

Al-Ghurm bil Ghunm

The principle that one is entitled to a gain only if one agrees to bear the responsibility for the loss. Earning profit is legitimised only by risk-sharing and engaging in an economic venture. This provides the rationale and the principle of profit-sharing in Shirkah(partnership) arrangements.

Al-kharaj bil daman

Link of exposure to risk, one can claim profit only if one is ready to bear the business risk, if any. The principle in Islamic jurisprudence that entitlement to return or yield ( al-kharaj) is for the one who bears the liability ( daman) for something, say an asset, and one who does not bear the liability has no claim to the yield.

Amanah

Trust. Lit.: reliability, trustworthiness, loyalty, honesty. Technically, an important value of Islamic society in mutual dealings; it also refers to deposits in trust. A person may hold prop-erty in trust for another, it entails the absence of any liability for loss, except for breach of duty. By extension, the term can also be used to describe different financial or commercial activities such as deposit taking, custody or goods on consignment. Deposits in current accounts (usually non-interest bearing) with Islamic banks are regarded as Amanah. If the bank obtains authority to use the funds in the current accounts to invest in its business,Amanah transforms into a loan from the depositor to the bank and the bank is liable to repay the full amount in the current account, irrespective of profit or loss made by the bank.

AmilLiterally it means worker. One who performs a task, an agent. One who deserves compensation for performing a task, such as the mudarib (manager) in a mudarabah contract or a zakat collector. However, inFiqh it also refers to the working partner inmudarabah contract. Under this contract, one partner provides the capital and the other provides the labour who is called amilor mudarib.

Amin One who holds honestly the trusts of other people; trustworthy.

Amwal Plural of Mal which means worldly possessions including both property and money (wealth).

Aqd Contract, Agreement, Bond. Synonymous with the word «contract» in modern law.

Aqd-al-Mua-wadah A contract of exchange in which compensation is given against the goods or services received.

Aqd Ghair Lazim A contract in which any one of the parties has a unilateral right to revoke it with the consent of the other(s).

Aqd Lazim A contract in which none of the parties has a unilateral right to revoke it without the consent of the other(s).

Ariya Loan, which means to give any non-fungible commodity to another for use, without taking any return for its use.

ArbunA non-refundable down payment or deposit paid by a buyer for the right to purchase goods at a certain time and certain price in future; if the right is exercised, it becomes part of the purchase price. If the buyer does not complete the purchase or backs out for any reason, the seller has the option to forfeit the deposit. Also known as Urboun and Bai al-Arbun. Also see Hamish Jiddiyah.

Ayn Monetary wealth. A tangible (physical) asset. Also, refers to currency or ready money. Ayn is often contrasted with Dayn.

Islamic Finance GlossaryA


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The Best Global Franchising Opportunities in Islamic FinanceIn this edition 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, pro-fessional or entrepreneur. There are many Islamic financial franchising opportunities which are ex-hibited globally around the world. In this article GIF will give you a comprehensive insight into the various franchising opportunities that the Is-lamic finance sector has across the globe. We will also look closely at the principles of the Shariah in dealing with franchises in addition to present-ing the best 10 franchising opportunities in the Islamic Finance sector...

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