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Wednesday, 28 November 2007

Sukuk - new bonds that are Islamic-friendly

The financial needs of Britain's 1.6m Muslims have been given a boost after the Government announced that it is looking to launch Islamic-compliant bonds.
Products that meet Muslim religious requirements include those that do not pay or receive interest, and that only invest in suitable companies or prohibit dealing with industries such as gambling or alcohol.
Many Islamic financial products already exist, including Islamic bank accounts, mortgages and Child Trust Funds (CTFs). But this is the first time that the Government has considered offering Shariah-compliant investment certificates or "sukuk".
Sukuk, which are often referred to as Islamic bonds, make similar types of payments to investors as conventional bonds but the payments are not interest-based.
The precise way a sukuk works depends on the type of contract used, but one common way is to use a lease - or Ijara - contract.
In this instance, the money from investors is used to buy an asset, which must be compatible with Shariah law.
Once the asset is purchased, it can be leased to generate a rental income, which is paid to investors. At the maturity of the sukuk, the underlying assets are sold, allowing investors to get back their original investment.
Mr Abdul Rahman Al Baker, executive director, financial institutions supervision, at the Central Bank of Bahrain, said: "As an ethical form of finance, Islamic finance epitomizes the creation of value, productivity and development, as opposed to pure profit making.
"In the area of personal finance, loans taken on Shariah-compliant basis are more likely be used to purchase an asset, such as a house or car, rather than for non-productive consumer spending, such as financing a holiday."
The Government sees Islamic finance as a high-growth area. The global market for Islamic financial products is currently worth £40 billion and could reach as much as £250 billion in the years to come.
Kitty Ussher, the Government's economic secretary, said: "This is the first time that a G7 country has considered issuing sukuk and so we want to make sure that we get it right.
"The potential benefits are enormous and it would be great news for the City of London, sending a very strong signal that if you want to issue sukuk you should come here to do it."
The ban on interest under Shariah law means that Muslims cannot put money into a traditional current account.
As an alternative, Lloyds TSB offers an Islamic Account which does not pay any credit interest or offer an overdraft facility – although it does provide a debit card.
The funds within Lloyds TSB Islamic current accounts are held in accordance with Islamic law and are not invested in industries which are forbidden under Islam.
Catherine McGrath, Lloyds TSB director of transaction banking, said: "Britain is home to a large and fast growing Muslim community, but many have found that their financial needs have been left wanting.
"We have brought Islamic banking into the mainstream and we are giving the Muslim community access to financial services that meet their needs without compromising their religion."
Lloyds TSB also offers an Islamic mortgage known as Islamic Home Finance. But instead of lending money for a property, the bank buys the home on behalf of the customer, contributing up to 90 per cent of the purchase price. The customer provides the remaining percentage upfront and then pays the outstanding sum over an agreed term, together with a rental payment.
Shariah law also dictates that Muslims cannot invest money in companies that are involved in areas such as tobacco or alcohol, which can limit the choice of CTFs for Muslim families.
CTFs are available to all children born on or after September 1, 2002. Parents of these children are given £250 in vouchers to open accounts, although those from less well-off homes receive £500.
A second payment of £250 or £500 is sent out when children reach the age of seven, and Gordon Brown has raised the prospect of a third payment during secondary school years. Parents, grandparents, relatives and friends can then top up the government vouchers with up to £1,200 per child per year.
To cater to the Muslim market, The Children's Mutual offers the the Shariah Baby Bond as a stakeholder CTF, with charges capped at 1.5 per cent a year.
This ethical fund invests in the shares of companies around the world that are not involved in activities banned under Shariah law.
David White, chief executive of The Children's Mutual, said: "It is vital for families to act now so that their child isn't allocated an account that is not Shariah compliant.
"The CTF allows families to start saving for their children's futures in a way they prefer."
Products that meet Muslim religious requirements do not pay or receive interest, and only invest in certain companies or prohibit dealings in industries such as gambling
Sukuk, which are often referred to as Islamic bonds, make similar types of payments to investors as conventional bonds but these are not interest-based
The precise way a sukuk works depends on the type of contract used, but a common way is to use a lease - or Ijara - contract
Consumers can now find financial products compliant with Shariah law ranging from current accounts and mortgages to Child Trust Funds (CTFS)
Case study: Sitting pretty with shariah-compliant accountBy Michelle de Klerk
When Sana Ayub-Shah, 26, and her husband Sajib Shah, 30 - pictured above- from Ilford, Essex, found out they could open Islamic current accounts through their bank, Lloyd's TSB, they jumped at the opportunity of having the "peace of mind" that their money would be handled in a Shariah-compliant way.
The couple have held the accounts since their wedding in April this year. Mrs Shah, an investment banker, said she had been very satisfied with the product and would advocate its use to other Muslim families.
She said having an Islamic bank account meant their money was being handled in a way that did not breach their beliefs: "It offers features, like no interest received, that allow me to follow my religion through my bank account."
The couple also have money invested in Premium Bonds, but would be willing to move their money across if further Islamic product options came on to the market.
Mrs Shah said the couple was more than happy to forgo the small amounts of interest paid on normal bank accounts in favour of being "better Muslims" by holding an Islamic account. - (Telegraph, 28 ov 07)

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