Latest from GIFC

Saturday, 31 May 2008

French aiming for Paris to be Islamic finance centre


By Shyamantha Asokan
Published: May 14 2008 03:00 | Last updated: May 14 2008 03:00

France will today take a significant step towards establishing Paris as a western centre for Islamic finance when plans to attract this fast-growing sector to the city are discussed in the country's parliament.
The move is a part of the French capital's wider aspirations to rival London as an international financial centre.
Christine Lagarde, France's finance minister, has already introduced several measures to attract global funds since taking office last June.
"This government's objective is to make France more competitive and one aspect of that is [attracting] Islamic finance," said Anouar Hassane, a credit analyst for Moody's, based in Paris. "We have to compete with the rest of Europe and the emerging economies."
Paris has been left in London's wake when it comes to Islamic finance, even though France has a Muslim population of about 6m - three times that of Britain.
The UK is home to five licensed Islamic banks, the only licensed ones in the EU, and lists £5.5bn in sukuk, or Islamic bonds, on its stock exchange.
Only a handful of French banks, such as BNP Paribas and Société Générale currently offer wholesale Islamic services. There are no retail products available.
The senate - the upper house of the French parliament - will bring together politicians, bankers and Sharia scholars to discuss how to support Islamic finance - by raising awareness and changing legal and fiscal frameworks.
Sharia principles forbid interest on the grounds that money should measure rather than create value, and the government must alter certain tax laws to better accommodate this approach.
"Paris has seen what London has done with Islamic finance and has realised there is money to be made, especially because there is a lot of demand from the Middle East," said Zoubair Ben Terdeyet, who founded Isla Invest, France's first Islamic finance advisory service, in 2004.
Islamic banking assets have been growing at a rate of just under 20 per cent a year since 2000 and are currently worth about $500bn globally, according to Moody's. This rapid growth has been driven by the oil wealth of Middle Eastern investors as crude prices have hit fresh records.
Arnaud de Bresson, managing director of Paris Europlace, which represents the capital's financial professionals, said: "The senate's initiative to organise a high-profile event on Islamic finance is a sign that the authorities are paying increased attention to this market."
The UK government has since 2003 been reforming laws to ensure that Sharia-compliant investments are not prone to higher levies than their conventional equivalents. Analysts say Paris will have to catch up with London by modifying rules such as double stamp duty, which affects Islamic mortgages.
Source: The Financial Times UK
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Malaysia widens sharia-compliant stock list

KUALA LUMPUR, May 30 (Reuters) - Malaysia has increased the number of Islamic stocks listed on its stock exchange to 843, the market regulator said on Friday, widening the range of assets offered to investors seeking sharia-compliant investments.
The list of sharia-compliant securities was updated to take include 23 stocks, such as top mobile phone company TM International and energy firm Dayang Enterprise, the Securities Commission said in a statement.
The list dropped 12 stocks including property developer Metro Kajang 
The list takes effect on May 30 and accounts for 85 percent of securities listed on Bursa Malaysia.
For the full-list of the newly-added Shariah-compliant companies and the removed stocks, please go to www.sc.com.my.
Mostly Muslim Malaysia aspires to become a global centre for Islamic finance. It is courting Middle East petrodollars by freeing up its Islamic banking, insurance, reinsurance and capital markets to allow the entry and licensing of new players.
The Southeast Asian country has the world's largest Islamic bond market, accounting for about 60 percent of global Islamic bonds outstanding which are worth about $100 billion, according to central bank estimates.

(Reporting by Soo Ai Peng; Editing by Liau Y-Sing & Louise Heavens)
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Call for sharia-compliant finance services to be available in Ireland

by Mary Fitzgerald
THERE IS an “urgent need” for sharia-compliant financial services to be made available in Ireland so that Muslims living here do not contravene religious teachings, representatives from Irish financial institutions were told at a seminar on Islamic banking yesterday.
The seminar was held at the Islamic Cultural Centre of Ireland (ICCI), which is based at Ireland’s largest Sunni mosque in Clonskeagh, Dublin.
“We organised this conference because there is an urgent need for the Muslim community here to have mortgages and other financial services that do not drive them to break their Islamic teachings,” said Ali Selim, a theologian and secretary to Imam Hussein Halawa of the ICCI.
During yesterday’s seminar Imam Halawa outlined the religious tenets of Islam that forbid the payment or receipt of interest, known as riba.
Representatives from the Arab Banking Corporation’s London subsidiary and the Islamic Bank of Britain gave presentations on how the market for Islamic finance has developed in the UK in recent years.
Several high street banks in Britain now offer a variety of sharia-compliant services, including mortgages.
One of the most common types is based on the Islamic principles of “diminishing musharaka” or diminishing ownership. Under this scheme, the customer and bank jointly acquire a property, with the customer’s share usually similar to the normal deposit, but the property is bought in the bank’s name only.
The customer makes monthly payments made up of rent and contributions towards the purchase price over an agreed period of time.
The amount of rent decreases as the customer’s share in the property increases. Ownership is transferred when the customer eventually buys out the bank.
Similar partnerships are available so Muslim business people in the UK can avoid interest repayments.
Mr Selim told the seminar that as Ireland’s Muslim population increased there would be more demand for such services here.
According to last year’s census there are 32,500 Muslims living in Ireland, although the real figure is believed to be higher
“Most Muslim businessmen, when starting their business, did not go to Irish banks because they do not provide facilities profitable to the bank and the customer without violating Islamic teachings,” Mr Selim said.
He outlined the dilemma faced by many Muslims here who, despite being able to afford property, live in rented accommodation because the conventional mortgage system goes against Islamic teachings.
“When we announced the possibility of facilitating Islamic mortgage in Ireland in less than two weeks we had a list of 400 potential purchasers,” he said.
“If we cross the sea we see Islamic mortgage and Islamic business loans available. Can we have them in Ireland?”
(Irish Times)
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Friday, 30 May 2008

GCC, Far East Shariah assets 'total $267bn'


Shariah-compliant investable assets in the GCC and Far East have reached $267 billion, said Ernst & Young in its Islamic Funds and Investments Report.
At the end of March 2008, there were more than 500 Shariah-compliant funds in the world, 153 of which were established in 2007 alone, it said.
According to the report, the total number of Islamic funds could reach 1,000 by 2010.
Commenting on the sovereign wealth funds (SWFs), the report estimated that SWFs in the GCC and Far East hold assets worth almost $1.3 trillion, while pension funds in the GCC have estimated assets of more than $46 billion.
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Islamic finance industry is set to grow 20%: QIB chief

DOHA: The Islamic finance industry is expected to grow annually 20% in the short to medium term, according to Qatar Islamic Bank (QIB) CEO Salah al-Jaidah. Addressing the 5th Islamic Financial Services Board (IFSB) summit in Amman, al-Jaidah also said the impressive year-on-year growth of Islamic finance augured well for the viability and future of the sector. The event was sponsored by QIB. Al-Jaidah highlighted QIB’s desire to promote standardisation and harmonisation of Islamic financial services. Top officials of QIB, a member of the IFSB, attended the summit, which was hosted by the Central Bank of Jordan and attended by 300 leading international Islamic organisations.

(Gulf Times)


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Thursday, 29 May 2008

Gulf Islamic bond sellers shun dollar, eye ringgit

By Stanley Carvalho and Souhail Karam

ABU DHABI/RIYADH, May 28 (Reuters) - Two Gulf borrowers are planning to sell ringgit Islamic bonds in Malaysia, in the latest move that highlights the rising cost of borrowing in U.S. dollars, the previous Islamic bond denomination of choice.

A global credit crunch triggered by defaults on U.S. home loans has made dollar borrowing more expensive, and bets that Gulf states could allow their dollar-pegged currencies to appreciate to dampen inflation has seen dollar assets fall from favour.

National Bank of Abu Dhabi NBAD.AD (NBAD) plans to sell up to $925.6 million in ringgit-denominated bonds, which could include an Islamic tranche, the lender told Reuters.

The Saudi-based Islamic Development Bank also told Reuters it plans to sell $1 billion of ringgit-denominated Islamic bonds this year.

Meanwhile, Dubai Electricity and Water Authority (DEWA) priced its benchmark size dirham-denominated Islamic bond sale at 125 basis points above the 6-month Emirates Interbank Offered Rate, the top end of initial price guidance, arrangers said.

"We see a lot of investors saying they do not have U.S. dollars available...The cost of lending dollars has gone up tremendously," a banker at one of Asia's largest banks who declined to be named said.

Almost all Islamic bonds, or sukuk, issued in recent weeks have been priced in United Arab Emirates dirhams and Saudi riyals.

Bankers say Gulf firms are trying to diversify their investor base, and that more Islamic banks are looking to raise cash in Malaysia's Islamic bond market, which is more liquid and has a better regulatory framework than local markets.

"More Gulf firms are looking at Malaysia for Islamic bond issuance. There is a better regulatory framework and the market is more established," Shamsun Hussein, head of debt markets at Malaysia's CIMB Islamic, told Reuters in Manama.

The Islamic Development Bank said its ringgit bonds were likely to have a tenor of five years and would finance infrastructure and industrial projects in Malaysia.

NBAD's sale was to finance expansion, and is part of the bank's $5 billion Euro Medium Term Note (EMTN) program, launched in 2006, through which $2 billion of bonds have already been sold, Investor Relations Officer Abhishek Kumat told Reuters.

He declined to give a timeline for the sale.

Indonesia: BRI to set up stand-alone sharia bank in June

Jakarta (ANTARA News/Thomson Financial) - Indonesia's third biggest bank by asset, PT Bank Rakyat Indonesia (BRI), said on Monday it is planning to set up a stand-alone bank that will run its sharia services in June.

Bank Rakyat said it is seeking to accelerate growth in its sharia banking operations, given that stand-alone sharia banking businesses in Indonesia have performed better than the sharia units of conventional banks.

The three existing sharia banks -- Bank Muamalat, Bank Syariah Mandiri and Bank Syariah Mega Indonesia -- hold a combined share of 76 percent of the market in the world's biggest Muslim country.

Comparatively, the sharia units operated by 74 conventional banks only have a combined market share of 24 percent. In 2007, the funding provided by sharia units and banks accounted for about 2 percent of total loans extended by the banking system.

BRI said in a newspaper announcement that under the plan, all the services currently provided by its sharia unit will be transferred to its newly-acquired PT Bank Jasa Arta, which will later be renamed PT Bank Syariah BRI.

Bank Syariah BRI will become the fourth sharia bank in Indonesia. A sharia bank normally does not charge or earn interests on loans. It generates profits from sharia-compliant investment activities and then shares the profit with its customers.

New Wave of Takaful Products Pioneered in Middle East Market


Nexus, the region’s leading financial adviser, today announced the launch of a Unit-Linked Takaful and Savings Plan in the UAE, designed to provide investors with a Shariah-compliant opportunity to protect wealth for the future.
Demand for Takaful products in the Middle East has increased sharply in recent months, with investors increasingly seeing the benefits of the transparency and security of such funds, as well as their adherence to Islamic ethical expectations.
The new Takaful and Savings Plan has been developed in partnership with Dubai Islamic Insurance and Reinsurance Company (AMAN) and an international market leader in Takaful, FWU Group.
Mahmoud Nodjoumi, Founder and CEO, Nexus, said: “The Takaful market is becoming increasingly sophisticated in response to customer demand, providing an equivalent level of return to conventional financial products, as well as a high level of transparency and flexibility. In launching this new Takaful and Savings Plan, we believe we are providing an important opportunity for our clients.”
The Unit Linked Takaful and saving plans can be adapted for either regular or lump sum contributions.
To support the launch of the new product range, Nexus has ensured that over 75 of its leading advisers in Dubai and Abu Dhabi have attended comprehensive training to work with Takaful products, as part of the Nexus ethical selling commitment to their clients.
While Nexus offers a highly comprehensive panel of personal and corporate financial products, it is confident that Takaful will emerge as one of its most popular lines over the next 12 months.
“We believe that demand for this product range will continue to rise over the coming months, particularly as customer awareness increases. We at Nexus have invested in our people to ensure the knowledge to promote and support this dynamic sector, and we anticipate a strong response,” concluded Nodjoumi.
Nexus was recently named as the Middle East’s Personal Lines Broker of the Year at the Middle East Insurance Awards 2008.




Al Bawaba (www.albawaba.com)
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Islamic Investment Malaysia: www.islamic-invest-malaysia.com



Wednesday, 28 May 2008

Indonesia looks for share of Islamic finance market


Indonesia's government is hoping new Islamic finance laws will entice foreign investment in the growing sector and secure a share of the $US700 billion global Islamic finance market.

Asian countries like Malaysia, Singapore and Hong Kong have been leading the way in the fast-growing sector, but despite being home to ten percent of the world's muslim population, Indonesia has so far held back.

Dr Muhammad Syafii Antonio, from the Central Bank of Indonesia, has told Radio Australia's Connect Asia program they are working hard to change the image of Islamic banking in both government and civil society.

"The issue of Islamic bond is a strategic instrument for the national economy," he said.

"We have to see the Islamic instrument not from narrow base religious approach, but from a wider approach how to accelerate the growth and development of Indonesia."

At the moment Islamic investment only makes up around 2.3 percent of Indonesia's national bond market.

The Indonesian government is hoping that new laws will attract investment from the Middle East, and Dr Antonio says with the new changes in legislation, investment could increase to 5 percent within the next two years.

And he says whilst they are still strides away from the volume of Islamic investment seen in neighbouring Malaysia, Indonesia still has the largest number of Islamic financial institutions in the world.

"We do have three fully fledged Islamic banks, and about 25 Islamic divisions of conventional banks, and we have around 106, or 110 Islamic rural banks," he said.

"So in terms of players, Indonesia is bigger, and in terms of market Indonesia is promising, so Indonesia is too big to be ignored."

(Radio Australia)
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A Look at Musharakah Bonds



Riyadh, Asharq al-Awsat- Musharakah Mutanaqisah bonds rank second in volume within the sukuk [Islamic bonds] market. What is meant by Musharakah Mutanaqisah bonds is that the financier (the issuer) regularly purchases his partners’ (sukuk holders) shares in the project until their full shares are purchased, which is called Idfa al Sukuk [full acquisition of bonds].

Such bonds are used to finance real estate and infrastructure projects, which are characterized by flexibility in issuance conditions. This means that the financing project need not already exist and the bonds may be issued to finance its construction or develop an existing project. Moreover, the issuing company is capable of using its assets as a share in these bonds, and the bonds are characterized by flexibility in the distribution of profits between the issuer and the sukuk investors.

Musharakah bonds represent part-ownership of a particular project. Although they are similar to shares, they are subjected to a limited duration of time and can also be adjusted to have a higher ceiling of profit for sukuk holders.

But Musharakah Mutanaqisah bonds have recently come under fire in jurist circles due to the presence of a commitment made by the issuers of some of these bonds to repurchase the bonds from holders using historical cost or predetermined values. The origin of this controversy lies in the fact that this commitment guarantees a given partner’s capital, which is prohibited by Islamic Shariah since Shariah provisions stipulate that there are “no rewards without risks” and that “profits must be accompanied with liability” in accordance with the Islamic Hadith. Furthermore, under this commitment, the partner’s capital is transformed into a loan and therefore, any increase in the loan value falls under the type of interest that is prohibited by Shariah.

However, the presence of such non-compliant Shariah elements does not invalidate these bonds and nullify them from the structure of Islamic bonds; rather the error must be rectified and Shariah-compliant alternatives must be sought to cover the risks that arise in the absence of such commitment.

One of the alternatives is to raise the return on these sukuk so that there can be an even proportion between risks and returns.

It is unreasonable that the return on these sukuk is calculated according to SIBOR (Singapore Interbank Offered Rate) and LIBOR (London Interbank Offered Rate), where the risks are almost absent with the exception of the usual credit risks entailed in this kind of finance.

This explanation of Musharakah Mutanaqisah bonds could be considered a preface to the subject matter, namely, the use of Musharakah bonds in financing the establishment of the King Abdullah Financial District (KAFD) which is a project owned by the Public Pensions Agency and is expected to cost 30 billion Saudi Riyals (US $8 billion).

The Agency issues Musharakah Mutanaqisah bonds at each stage of the project so that the assets at each point can be transferred to the company that has been established for specific purposes. At a later stage, the Agency acquires all these bonds by repurchasing them at a price that is specified in the issuer’s prospectus. In the prospectus, the issuer (the Agency) is not obliged to purchase [the bonds]. However, sukuk holders will be obligated to sell to the issuer at the price stated in the prospectus whenever the issuer wants; in this way, the Agency guarantees that sukuk holders will not be able to dispose of the assets, and the profits will be calculated according to the potential risks.

It is permissible to stipulate that the profits gained from sukuk holders should not exceed a certain rate that will be determined in the prospectus. The Agency appoints a bond assets director who will be given the profit surplus of sukuk as an incentive for efficient management.

Following this method to finance the KAFD will accomplish the following interests:

1 – It will provide the project with the necessary finance far from the complications and conditions of bank finance.

2 – It will contribute to absorbing part of the liquidity that exists in the market as a result of the reduction in interest.

3 – This kind of finance, and the financial and administrative requirements and procedures such as disclosure, transparency and administrative governance that it entails, will remain limited within the scope of this project and will not be used as part of the Agency’s other activities contrary to offering the Agency’s real estate branch as a public company.

4 – The bond holders’ ownership of the project is temporary, which will expire when the issuer acquires the sukuk in contrast to finance as it is presented as a public company.

5 – It will allow both institutions and individuals of the private sector to benefit from these massive projects.

6 – It will contribute to the development of the Shariah-compliant capital market in Saudi Arabia.

MUSHARAKAH: the bank provides funding to entrepreneurs, who also contribute capital. Profits from the venture are shared.

* Lahem al Nasser is an Islamic banking adviser.

QDB makes all housing loans Shariah-compliant

DOHA • Qatar Development Bank (QDB) yesterday announced all its housing loans will be given according to Shariah principles with the maximum amount that can be taken out raised to QR1.2m. loans will be granted only to nationals.
The new rules will come into effect from June 1, H E Sheikh Abdullah bin Saud Al Thani, QDB Chairman, said at a press conference yesterday. Sheikh Abdullah is also Governor of the Qatar Central Bank.
There will be a one percent charge attached to the loan and Sheikh Abdullah said it should not be considered to be interest but rather, an administrative fee.
Dr Ali Mohiuudin Qurradaghi, Islamic scholar, said: "The fact the QDB is offering loans according to Islamic principles comes as good news."
To avail a loan, nationals will have to provide proper documentation as well as a blueprint of the house they propose to build.

(The Peninsular)


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AAOIFI has made a remarkable headway over the years.

MANAMA: The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) has made a remarkable headway over the years.
Housing Minister and AAOIFI chairman Shaikh Ibrahim bin Khalifa Al Khalifa said the organisation has issued financial and Sharia-based standards which, by the next month, will reach 75 and are expected to attain 90 in the coming few years.
Shaikh Ibrahim was speaking at the opening of the two-day Seventh Conference of Sharia Supervisory Boards of Islamic Financial Institutions, being organised by AAOIFI with the participation of 500 Sharia scholars, senior Islamic financial institutions management and a number of university professors from all over the world.
The application of AAOIFI standards is spreading worldwide, while countries like Bahrain, Dubai, Jordan, Sudan, Syria and Lebanon are making compliance with these standards compulsory, Shaikh Ibrahim said.
All Islamic financial institutions are applying the AAOIFI standards to upgrade their products, Shaikh Ibrahim said, adding that the growing tendency to adopt the standards is likely to reinforce the markets confidence in Islamic financial and banking industry.
He called for training staff on the application of the AAOIFI standards, adding that the organisation has two programmes.
The first programme is called the Certified Professional Accountants and the second is the Certified Sharia Adviser and Auditor programme.
Central Bank of Bahrain (CBB) Governor Rasheed Al Maraj said the growing global popularity of Islamic banking, especially after it proved its resilience in the face of global credit crisis. He called on the Islamic banking institutions to apply international standards so as to enhance their credibility, noting that the Islamic finance sector is one of the bases of CBB's strategic future tendencies aimed at preparing the convenient legislative and supervisory climate for the development of Islamic finance and related services.
He also called for more co-ordination and co-operation between organisations in charge of setting up Sharia-compliant standards and products in order to achieve harmonisation in Islamic finance industry.
On the sidelines of the conference, Finance Minister Shaikh Ahmed bin Mohammed Al Khalifa hailed Bahrain's achievements in Islamic finance sector and its commitment to promote it.
The sector has great potentials to develop, generate new job opportunities and pump more investments, the minister said, underscoring the importance of having a trained and well-qualified cadre for the sector to grow and flourish.
Kuwait Finance House - Bahrain is the gold sponsor of the conference.
General Manager Abdulhakeem Alkhayyat praised the success of the event over the years.
"The rapid changes and developments on Islamic financial and banking levels, have become of immense significance in the development of the banking industry based upon the principles of Sharia.
"This calls for an urgent need for more up-to-date Sharia rules that must adapt to the growth of this industry. "That is why the events by AAOIFI are of considerable importance," Mr Alkhayyat said.
"In appreciation of the major role adopted by AAOIFI, we continue to support its major conferences that further enhance the role played by this organisation" he said.

(Gulf Daily News)

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Tuesday, 27 May 2008

UAE, Canadian investors eye halal ventures in Mindanao


COTABATO CITY (MindaNews/25 May) -- Investors from the United Arab Emirates, particularly from Dubai, and Canada want to venture into the halal industry in Mindanao, a senior regional government official here told reporters over the weekend.

Zenaida P. Laida, Department of Science and Technology (DoST) director for Central Mindanao, said investors from these countries signified their interest after she presented the Halal industry initiatives in the country at the 3rd World Halal Forum in Kuala Lumpur two weeks ago.

"A Canada-based based investor, for one, is looking for a Mindanao partner involved in (the manufacturing of) sweets that will be used for the production of marshmallows," Laidan said.

"The only problem, however, of foreign investors, like from Dubai, looking at dispensing Halal investments in Mindanao is the volatile peace and order condition of the island," she added.

Laidan noted the vast tracts of idle, fertile lands in Mindanao that can be utilized for halal livestock and plantation production by foreign investors.

She appeared bullish on the halal potential of the Philippines now that the country has finally "landed in the world halal map" through the invitation to speak at the World Halal Forum.

It was the first time that the Philippines was invited to speak at the forum since it started two years ago, she said.

This year's theme was "Sustained Development through Investment and Integration." Heads of states, trade ministers and halal experts from the fields of industry, science and Shariah Law around the globe took part in the annual forum initiated by Malaysia.

The global halal market has a putative monetary value of $580 billion with enormous potential for growth, industry figures said.

Halal could be food and non-food problems acceptable in Islam, the religion of Muslims.

"Before we get to the endpoint of Halal as a gold standard for consumers, we must develop the halal industry by bringing together best practices from all over the world, and this is what the World Halal Forum is about," said Khairy Jamaluddin, the forum's chair.

Laidan, the lone Muslim in the DoST, said she tackled at the forum the scientific and technical aspects of the halal industry development in the country.

"We are going to establish a halal laboratory and science research center which when fully operationalize within the year. This will ensure the halalness of the products," she said, adding the site would be in Koronadal City, the seat of government of Central Mindanao region.

The center will also integrate a business development tack mostly aimed in helping micro, small and medium enterprises carve a niche in the country's halal industry and eventually to the world.

An ulama- led national halal standards has already been crafted but it is still uncertain if Malacanang has endorsed.

Laidan said there is a need to review the standards to include scientific and technical aspects.

"I have nothing against the ulama (religious leaders). All I want is to ensure the credibility of our halal products and that can be ascertained only through rigid scientific and technical tests which we in the DOST will soon be able to do," she said.

"It will be the country that will be embarrassed if halal-certified products that will be shipped to other countries are discovered to be not halal at all," she said.

Laidan appealed to the different line government agencies, as well as private sector and civil society, to collaborate in helping develop the halal industry. (MindaNews)

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Islamic finance makes its case as the ethical choice - and not just for Muslims

Bankers respond to growing demand for Koran-compliant financial products

By Claire Shoesmith


The growing number of self-employed entrepreneurs amongst Manchester's estimated 40,000 Muslim community is boosting demand for shariah, or Islamic-compliant, finance, according to Bashir Timol, a director at specialist financial advisor 1st Ethical in Bolton.

While traditional bank loans are unacceptable under Islamic law — both the payment and receipt of interest is forbidden, as well as investment in certain industries such as gambling, tobacco or alcohol — Timol said 1st Ethical has started offering specialist shariah business investment plans in response to demand from clients.

Latest accounts, up to November 2006, show turnover of £2m, up nearly 30 per cent on the previous year.

“There is a very high level of entrepreneurship amongst the Muslim community here in Manchester and as a result there is significant demand for finance,” he told Crain's, adding that the group's business angels-type investment, whereby 1st Ethical provides money for start-up businesses in return for a stake in the individual operation rather than providing an interest-bearing loan, is proving very popular.

Islamic-compliant

Certain Islamic-compliant products, such as current accounts which offer no credit interest and no overdraft facility, and mortgages, whereby the bank buys as much as 90 per cent of the home on behalf of the customer and then rents the property to the customer while he or she pays back the money over an agreed period, have been available in the UK for several years now.

As early as 2003, HSBC entered the Islamic finance arena and since then most of the other high street banks, including Lloyds TSB, have followed suit in a bid to win business from the estimated 1.5m Muslims in the UK — equal to about 3 per cent of the population.

However, things are now starting to change and Timol said that a recognition that many Muslims are actually sitting on quite large amounts of money has led to the development of several new shariah products, including investment funds that put their money into Islamic-compliant companies, ie not involved in alcohol or gambling; current accounts for businesses that pay no interest; and commercial mortgages that operate in the same way as the shariah compliant residential mortgages.

Moreover, 1st Ethical has recently decided to put a greater emphasis on offering Islamic-compliant wealth management and tax advice for the growing number of wealthy Muslims in the city.

“By offering these services we are allowing Muslims to become much more mainstream,” he said. “They are able to do with their money what other wealthy people can do.”

In the same vein, Deloitte has recently set up a 12-strong Islamic Finance Group in Manchester to cater for the increased demand for shariah finance in the corporate arena.

Middle Eastern demand



While the group carries out business all over the world from its Manchester base, Dawood Ahmedji, one of its directors, said the growth in demand is coming mainly from wealthy Middle Eastern investors looking to bring their money into the UK.

“Being able to play in this market is extremely important,” he said. “There is huge growth in the industry emanating from the Middle East and Asia and we want to be part of it.”

While Deloitte has been doing work in this area for a while, the dedicated team, which incorporates audit, tax and corporate finance expertise, was only set up last November to cater for the growth in demand.

According to Ahmedji, in the “pre-credit crunch” environment UK finance deals were done on very thin margins, which were not attractive to Middle Eastern investors, so they stayed away. However, in the current environment where local investors are finding it harder to source funds, the cash-rich Middle Eastern investors are coming into their own.

“The City is making a strong bid in terms of becoming a hub for Islamic finance in the West,” he said. “The aim is to compete against Japan and Singapore.”

As with shariah personal finance, shariah business banking uses the principle of deferred finance whereby a contract is drawn up allowing a customer to purchase goods and pay later without taking out a loan, on which they would usually pay interest.

The customer can pay for the goods immediately, but normally the payment is deferred or paid in instalments. The financier makes a profit through the mark-up on the deferred sale.

In response to this increased demand, several Islamic banks have also moved into the UK, with the Islamic Bank of Britain opening its seventh UK branch on Stockport Road in Manchester in December 2006.

Since then, demand for its services has grown, with a spokesman telling Crain's the bank is not only attracting more and more Muslim professionals, but is also seeing an increase in non-Islamic customers seeking an ethical-type of investment.

“Islamic finance is a growing area across the broad personal finance and business corporate sectors,” said Emile Abu-Shakra, a spokesman for Lloyds TSB, which has been offering Islamic-compliant banking in its 35 Greater Manchester branches since 2005.

(Crain's Manchester Business)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant/Speaker/Motivator : www.ahmad-sanusi-husain.com 
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Monday, 26 May 2008

Islamic Banking makes headway in global finance—IMF

Since the inception of Islamic banking about three decades ago, the number and reach of Islamic financial institutions worldwide has risen from one institution in one country in 1975, to more than 300 institutions operating in more than 75 countries.

The entire banking systems of Sudan and Iran are based on Islamic finance principles. Although Islamic banks are concentrated in the Middle East and Southeast Asia, they are also niche players in Europe and the United States. According to McKinsey & Co., Islamic banking assets and assets under management reached $750 billion in 2006, and the Islamic finance sector is expected to reach $1 trillion by 2010.

Islamic or Shariah-compliant banking provides and uses financial services and products that conform to Islamic religious practices and laws, which, in particular, prohibit the payment and receipt of interest at a fixed or predetermined rate. In practice, this means that instead of loans, Islamic banks use profit-and-loss sharing arrangements (PLS), purchase and resale of goods and services, and the provision of services for fees form the basis of contracts.

Benchmark rate

In PLS modes, the rate of return on financial assets is not known or fixed prior to undertaking the transaction. In purchase-resale transactions, a markup is determined based on a benchmark rate of return, typically a return determined in international markets such as the London Interbank Offered Rate (LIBOR).

Islamic banks also determine return on deposits differently. In a commercial bank, the rate of return is set contractually (fixed in advance or tied to a reference rate) and does not depend on the bank’s lending performance. In an Islamic bank, the rate of return on a deposit is directly dependent on the quality of the bank’s investment decisions.

If the bank records losses as a result of bad investments, depositors may lose some (or all) of their deposits. The contractual agreement between depositors and the Islamic banks does not predetermine any rates of return, it only sets the ratio according to which profits and losses are distributed between the parties to the deposit contract.

There is a large body of descriptive literature about Islamic finance, but there has been relatively little empirical work on Islamic banking and financial stability, an area of increasing interest as Islamic banking grows. In a new IMF working paper, we attempt to fill this gap in the literature, using data on 18 banking systems with a substantial presence of Islamic banks to provide a cross-country empirical analysis of the role of Islamic banks in financial stability.

A prudential perspective

Are Islamic banks more or less stable than traditional banks? A majority of the relevant literature suggests that the risks posed by Islamic banks to the financial system differ in many ways from those posed by conventional banks. Risks unique to Islamic banks arise from the specific features of Islamic contracts, and the overall legal, governance, and liquidity infrastructure of Islamic finance.

For example, PLS financing shifts the direct credit risk from banks to their investment depositors. But it also increases the overall degree of risk of the asset side of banks’ balance sheets, because it makes Islamic banks vulnerable to risks normally borne by equity investors rather than holders of debt. Also, because of their compliance with the Islamic law, Islamic banks can use fewer risk-hedging techniques and instruments (such as derivatives and swaps) than conventional banks.

Moreover, most Islamic banks have operated in environments with less developed or non-existent interbank and money markets and government securities, and with limited availability of and access to lender-of-last-resort facilities operated by central banks. These differences have been reduced somewhat because of recent developments in Islamic money market instruments and Islamic lender-of-last-resort modes, and the implicit commitment to provide liquidity support to all banks during exceptional circumstances in most countries.

Less risky

In some ways, Islamic banks could be less risky than conventional banks. For example, Islamic banks are able to pass through a negative shock from the asset side (such as a worsened economic situation that causes lower cash flow from PLS transactions) to the investment depositors.

The risk-sharing arrangements on the deposit side thus arguably provide another layer of protection to the bank, in addition to its book capital. Also, it could be argued that the need to provide a stable and competitive return to investors, the shareholders’ responsibility for negligence or misconduct (operational risk) and the more difficult access to liquidity put pressures on Islamic banks to be more conservative.

Furthermore, because investors (depositors) share in the risks (and typically do not have deposit insurance), they have more incentive to exercise tight oversight over bank management. Finally, Islamic banks have traditionally held a larger proportion of their assets than commercial banks in reserve accounts with central banks or in correspondent accounts with other banks.

So, even if Islamic investments are more risky than conventional investments, from a financial stability perspective, the question is whether or not these higher risks are offset by bigger buffers.
Whether Islamic banks are more or less stable than conventional banks depends on the relative sizes of the effects discussed above, and it may in principle, differ from country to country and even bank to bank.

Islamic banks and financial stability

An increasingly popular way of assessing banks’ soundness is to analyze their so-called z-scores. The z-score combines a bank’s capitalisation, profitability, and a measure of risk faced by the bank into a single index. The interpretation of the Z-score is straightforward: the lower the score, the more likely it is that a bank will run out of capital.

Defining large banks as those with total assets of more than $1 billion and small banks as all others, the paper finds that:
• Small Islamic banks tend to be financially stronger (that is, have higher z-scores) than small and large commercial banks.

• Large commercial banks tend to be financially stronger than large Islamic banks, and
• Small Islamic banks tend to be financially stronger than large Islamic banks (see chart).
A plausible explanation for the contrast between the high stability in small Islamic banks and the relatively lower stability in larger entities is that it is significantly more complex for Islamic banks to adjust their credit risk monitoring system as they become bigger. For example, the PLS modes used by Islamic banks, are more diverse and more difficult to standardize than loans used by commercial banks.

As a result, as the scale of the banking operation grows, monitoring of credit risk becomes rapidly much more complex. That results in a greater prominence of problems relating to adverse selection and moral hazard. Another explanation is that small banks concentrate on low-risk investments and fee income, while large banks do more PLS business.

We also found that as the presence of Islamic banks grows in a country’s financial system, there is no significant impact on the soundness of other banks. This suggests that Islamic and commercial banks can coexist in the same system without substantial “crowding out” effects through competition and deteriorating soundness.

Sensitivity tests

These findings are subject to several caveats relating to the cross-country data. Databases often are incomplete in coverage of Islamic and commercial banks. Moreover, we focused only on full-fledged Islamic banks and did not cover Islamic branches operated by some commercial banks.

Data limitations also prevented the study from fully taking into account all aspects of Islamic financial contracts, for example, by distinguishing between PLS and other investments. Nonetheless, the main results are encouragingly robust with respect to a range of sensitivity tests, such as using different measures of financial soundness and different estimation methods.

Our findings underscore the importance of regulators paying attention to the prudential risks of Islamic banks, in particular those that are large. In addition, with the continuing above-average growth rates of Islamic finance, Islamic banks should invest into their credit risk management capabilities, as they are entering into more complex and larger projects.

(Vanguard, 26 May 08)

Sunday, 25 May 2008

Malaysia: Prasarana prices RM2b government guaranteed sukuk

KUALA LUMPUR: Syarikat Prasarana Negara Bhd has successfully priced its RM2 billion seven, 10 and 15-year sukuk issue which was guaranteed by the government.

The issue carries a semi-annual profit rate of 4.05% per annum for the seven-year series, 4.40% for 10 years and 4.65% for 15 years respectively.

In a statement yesterday, Prasarana said the initial orders received for the issue reached a high of RM8 billion and was four times over-subscribed. It said a broad range of investors, including insurance companies, fund managers and financial institutions participated in the issue, which was offered through a book-building process.

Prasarana chief executive officer Shaipudin Shah Harun said Malaysia had a vibrant sukuk market and the sukuk issue would enable Prasarana to remain on the radar screens of investors.

“Prasarana is pleased to return to the capital markets and looks forward to further financing opportunities to fund its expansion plans. The issue exhibits Prasarana’s full commitment to contribute to the further development of the sukuk market,” he said.

AmInvestment Bank Bhd and CIMB Investment Bank Bhd are the joint lead arrangers and joint lead managers for the sukuk issue.

The sukuk issue is based on the Syariah principle of Ijarah which entails a sale and leaseback of Prasarana’s railway assets, and the company would re-purchase the assets upon maturity of the sukuk.

“Prasarana’s obligations in relation to the payment of the rentals and the re-purchase price are guaranteed by the government. This is the first time that Prasarana is issuing securities based on Islamic principles and it underlines the growing significance of Islamic financing in the Malaysian financial system,” it said.

(Daily Edge, 23 May 08)

Saturday, 24 May 2008

Sukuk structures set for shake-up

Arrangers need innovative Shariah financing models.

The Islamic bond market is coming back to life following the credit crunch slowdown, but sukuk issuers need to ensure they follow Shariah principles, according to a senior figure at Badr Al Islami, the Islamic window of Mashreq.

The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) caused concern when one of its scholars suggested in November last year that certain kinds of sukuk in common use were not Shariah compliant.

"The underlying structures in most of the sukuk, unless it is otherwise specified, carries a purchase undertaking from the issuer by virtue of which the sukuk principal amount is repaid by the issuer to the sukuk holder without exposing them to any loss of capital," said Moinuddin Malim, head of corporate and investment banking, Badr Al Islami.

"However, the recent aggressive structures which included variations of mudaraba, wakala and musharaka sukuk have caused a great concern with Shariah scholars as in these structures the investment manager or issuer cannot provide a purchase undertaking to buy back the sukuk at par value."

These are equity-driven modes of financing, making it difficult to determine a final valuation. Malim says that guidelines by AAOIFI to discourage using these structures with a clear purchase undertaking should help the industry improve standards of Shariah compliance.

He added: "With recent AAOIFI guidelines, issuers as well as arrangers will have to decide whether to continue using the conventional bond platform to offer sukuk, which technically is a certificate of investment, or perhaps start using both equity as well as bond platforms.

"Some bold issuers who are truly looking to explore Shariah-based financing will need to take this to heart and agree to have the right risk/reward parameter to enable more quasi-equity based offerings, rather than quasi-debt based, which currently exists."

The uncertainty over five GCC currencies' pegs to the dollar has also changed the approach of sukuk issuers.

"Some US$10 billion worth of sukuk were postponed between August 2007 and December 2007," said Malim. "Now these sukuk are coming back to the market, but in local currencies."

Source: ArabianBuisness.com
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Islamic finance consultant: www.ahmad-sanusi-husain.com 
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Almulla Hospitality announces Shariah-compliant chain

Ties up with UK-based Jasper Capital Group to develop 150 hotels worldwide
EH Staff - Dubai
In order to tap the growing Middle East travel market, Dubai-based Almulla Hospitality has planned for an international chain of Islamic hotels, which will develop 150 hotels across the globe, with around 90 in Middle East and Mena region of North Africa, and 60 in other parts of the world with Muslim interests. The group has tied up with UK-based Jasper Capital Group for development of these hotels.
Chairman of Almulla Hospitality, Abdulla Mohamed Saeed Almulla, said, "These hotels will be in strict compliance with the Shariah and will primarily cater to the Islamic community." He said that this segment is growing at a fast rate responsible for around 10 per cent of global tourism.
He elaborated that these hotels will follow severe observance of universal codes like no-alcohol, no pork, only halal meat, exclusive prayer area with marked Kabah direction, etc. Informing about the various brands of these hotels, Abdulla said, "Our brand scheme is international so that guests can feel the consistency and uniformity. We will name our brands Adham, Cliftonwood and Wings." The group plans to develop its properties through management contracts, joint ventures and selective acquisitions following different investment arrangements.
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NEW ISLAMIC FINANCIAL PRODUCTS FOR PAKISTAN'S AGRICULTURE SECTOR

KARACHI, May 22, 2008 (AsiaPulse via COMTEX) -- -- A two day workshop held by AlHuda CIBE introduced Islamic Financial products aimed at promoting Pakistan's agriculture sector.

The workshop was held at NIBAF, State Bank of Pakistan in Islamabad on the topic of `Islamic Agriculture Finance' to facilitate the Islamic Banks and Financial Institutes in aiding the agriculture sector.
The CEO of AlHuda CIBE, Muhammad Zubair Mughal, said that it has become necessary to introduce Islamic Banking and its merits in the rural areas due to the rapidly growing network of Islamic Banks in order to facilitate banks in meeting the agriculture requirements of farmers in accordance with the Shariah.
Explaining in detail the Islamic Financial products introduced in the workshop, he said that these products have been designed while keeping in view the short, medium and long term requirements of the farmers and institutes.
He added that products like Bai Murabahah are designed to help in the procurement of Seeds, Fertilisers and Pesticides, and Ijarah for operating Lease of Tractors, Agriculture machinery, Harvesters etc. whereas Musharaka is meant for Purchase of Seeds, Fertilisers, and Pesticides along with assisting Irrigation facilities, Crop storage Godowns and Marketing. Likewise, Diminishing Musharaka is for the purchase of Agriculture machinery/equipment, installation of Tube wells wells and construction of Dairy/Poultry Farms etc. and provide farmer with professional agriculture facilities in view of the Shariah.
He stressed that Bai Salam is an excellent financial product for the agriculture sector and can assist the farmers in their Liquidity requirements (Short term financing and Consumption expenditure). Through Mutawazi Salam, It can also be used to fulfil other requirements. In fact it is an ideal product for Islamic Banks, Sugar Mills and Floor Mills.
The important feature of the workshop was that Sukuk Islamic Bond Models were introduced for corporate financing in the agriculture sector. Sukuks like Muzara'a Sukuk which is for partnership in the crop, Masaqa Sukuk for the Irrigation and Mugharsa Sukuk which is a form of agriculture partnership and Istisna Salam Sukuk. Various Products of Takaful such as Live Stock Takaful and Crop Takaful were also discussed in the workshop in order to find out how Takaful Islamic Insurance can assist in the growth and development of the agriculture sector.
The workshop was attended by a large number of representatives from Agriculture department, Islamic Banks, Conventional banks and agriculture related government and private institutes and the efforts of AlHuda CIBE for the growth of Islamic Agriculture Financial services were highly appreciated, a release said here Wednesday.
(PPI)
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Consultant/Speaker/Motivator : www.ahmad-sanusi-husain.com 
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Friday, 23 May 2008

Miss-selling risk in UK Islamic finance

Written by Adrie van der Luijt
Thursday, 22 May 2008


The Dutch central bank and regulator AFM have published a joint analysis of UK Islamic finance.
The reason for the study is the strong rise of Islamic financial products and services in the UK. Within a few years a broad range of financial products and services has been introduced for the professional and private market.
The UK has adapted legislation to create a level playing field with conventional financial products and services and from a consumer protection perspective.
Anticipating possible developments in the Netherlands, the Dutch central bank and the AFM have carried out a joint study.
Niche market
The offer of Islamic financial products and services has surged worldwide. In the UK the niche market for Islamic financial products and services is considered important for the position of London as a global financial centre.
In other European countries a centre of activities is yet to form and the range of products is largely limited to the professional market and wealthy individuals.
In the Netherlands the market is also in development. The first retail investment products have been launched and various financial institutions have shown interest in the retail market.
The Dutch report aims to improve knowledge of the Islamic finance sector and investigates whether the existing regulatory framework is fit for purpose.
With respect to improved knowledge, the study concludes that suppliers, consultants and consumers have only limited knowledge of Islamic finance at the moment.
The report warns that this poses a potentially heightened risk of miss-selling of financial products and services, which in turn may lead to reputational damage and legal action.
Regulatory framework
Islamic financial products meet the same economic needs as conventional ones, but generally have a different format.
There are many different Islamic types of contract for these products, which are moreover often of a complex legal nature. This brings with it specific risks, which require all parties to have ample understanding of the matters at hand.
With respect to the adequacy of the regulatory framework the study concludes that the most frequently used types of contract - for Islamic mortgages - are outside the regulator’s peripheral vision.
This is caused by the limited scope of the definition of credit in the Dutch law on financial market regulation. The criteria for a duty of care, however, are open to a much wider definition in this legislation.
As a result, the report concludes that they can probably also be applied to Islamic financial products and services. A similar problem arises in respect of other regulatory aspects. Not every Islamic financing contract qualifies as a loan.
Little transparency
The report notes that there is at present little transparency in respect of the compulsory alms (“zakat”) and halal elements of Islamic finance products such as Takaful (Islamic insurance), muamalat (Islamic banking transactions) and Sukuk (Islamic securities).
The regulatory emphasis is on the co-mingling of funds, the checks and balances in the verification of financial products by Sharia ("Shari'ah") scholars and compliance with Sharia law in general.
There are also marked differences with conventional banks when it comes to the specific risk profile of Islamic banks. The credit, operational, liquidity and financial risk profile differ. In addition, displaced commercial risk is a typical element in Islamic banking.
By contrast, Islamic banks do not carry interest liabilities, which limits the risk in comparison with conventional banks.
As a result, not every institution qualifies as a ' bank' under the terms of the law and, therefore, does not qualify for a banking license.
When an institution does fall under the legal definition of a ‘bank’, however, the report concludes that the existing regulatory framework of Basel II offers sufficient flexibility to address issues in respect of corporate governance and liquidity.
Definitions may need to be reconsidered
To what extent legislation may need to be adapted in future depends in part on the range of products and associated types of contract that may appear on the market, according to the report.
In particular, the report notes that definitions of common terminology such as “interest” may need to be reconsidered.
The study suggests that financial service providers may need to be better educated on Islamic finance products and services in order to achieve the objective of a true level playing field with conventional financial products and services in respect of legal consumer protection.
The analysis is currently only available in Dutch, although an English translation will be made available by the Dutch central bank in due course.
Source: Director of Finance Online, www.dofonline.co.uk
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Thursday, 22 May 2008

A German book about Islamic banking is now available


A German book about Islamic banking is now available!

The 152-page book is written by Daniel K. Bergmann from Germany.

My German friend attended a seminar on Islamic financial planning organised by GlobalPro in Kuala Lumpur in 2007.

I will provide more detail and comment on this book but here are some fact:

Islamic Banking
written by Daniel K. Bergmann
ISBN 978-3-8334-8974-7
152 pages

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant/Speaker/Motivator : www.ahmad-sanusi-husain.com 
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Wednesday, 21 May 2008

ECONOMICS & ETHICS - the quest for equity & justice

The mass anti-globalisation protests which have paralysed gatherings of G7/G8 leaders have highlighted a serious unease with the operations of unfettered markets. For many, the present arrangement leads to perpetuation of gross global inequity, and rampant globalisation is seen as making things worse. Similar sentiments underlie the protest against policies of the International Monetary Fund and the World Bank. These are seen to be pushing what has come to be called the “Washington Consensus” of policy prescriptions designed to institutionalise unfettered markets across the developing world. Unregulated markets are now seen as the primary mechanism generating inequity on a global scale.
At another level, the saga of Huntingdon Life Sciences (HLS) in the UK has become a landmark issue. The company, a leading user of live animals for experiments, fell foul of the Animal Rights lobby. Mounting a sustained campaign of mass protests, this powerful lobby was able to cut off all sources of bank finance to the company. HLS had to move its operational headquarters from the UK to the USA and rely on funding from non-banking sources. This was a dramatic illustration of banks bowing to pressure from the provider of their funds – the depositors. Not long a go the Bank of Scotland was also forced to withdraw from a deal with the US televangelist Pat Robertson because of the latter’s controversial views. The embarrassing about turn was forced on the bank by its shareholders and depositors.
In the UK unease is mounting about the Private Finance Initiatives (PFI) which seem to have delivered a pitiful level of public service at enormous cost to taxpayers. Again unfettered market principles are seen as not suitable for all purposes.
These developments provide an illustration of a major shift in public perceptions about how economies and businesses operate. At one level unregulated markets are seen as perpetuating inequity. An urgent need is seen to challenge the prevailing dogma about free markets and introduce regulatory regimes to safeguard the public interest. On another front, the freedom of financial intermediaries to provide funding for operations without taking into account the wishes of the providers of the funds is being seriously questioned.
These developments provide an interesting parallel with the ideals of Islamic economics and finance. The quest for equity and justice has been central to the thinking of Muslim economists. Indeed, most protest movements in Muslim societies have their anchor in the spirit of social equity and justice. At the same time Muslims are deeply concerned about the ways of financing businesses to ensure that ethical considerations are paramount.
In this spirit, Muslim economists have argued for tempering the market mechanism with regulations designed to embody the public interest. According to them, in designing all policy, the primary consideration should be justice and equity rather than laissez faire market operations.
Muslim jurists have argued the case for limits on land ownership and strict application of inheritance laws to avoid concentration of wealth. Some radical Muslim jurists have also argued that land is a communal resource and ownership is confined to period of active use rather than perpetual. Again, mineral and other natural resources are regarded as communal property.
In Muslim societies, the injunction of Zakat provides a vital mechanism for addressing social welfare issues. All Muslims are required to give away at least two and a half percent of their income to the poor and the needy as Zakat. As the principle is well established in Muslim societies, Muslim economists have argued for its institutionalisation with even higher levels of giving. A social welfare state is thus not alien to Muslim thinking at all.
As for national borrowing, Muslims are expected to have risk-sharing contracts rather than fixed rate loans. Translated into practice this would imply that lenders to Muslim countries would need to be convinced of the viability of the projects financed as their return would depend on the success of these ventures. This would have a mitigating effect on spurious debt build ups and repayment crisis as has become common.
Thus in theory Muslim societies should have a much more equitable ethos than they do at present. This discrepancy is there for a variety of reasons, but developments in banking and finance show that a slow evolution reflecting this basic ethos is taking place.
In the area of banking and finance, Muslims share common concerns, about the use of funds by financial intermediaries, with the growing body of ethical investors.
The best way to appreciate this is to look at the growth of Ethical funds and investments. Basically, these try to incorporate the desire of the providers of the funds to have a say in the use of their monies. Thus, some funds do not invest in companies which deal in tobacco, alcohol, or military hardware. Others, only invest in corporations which incorporate environmental sustainability criteria in their operations.
This is in sharp contrast to the traditional banking model whereby the providers of funds were expected to limit their concerns to the security of their investment rather than the use of the funds. It was little wonder that ethical investment notions were met with cynicism and ridicule when they were mooted in the early seventies. However, they did reflect a public desire and slowly but surely the movement has grown.
Islamic finance has a similar rationale. Indeed in some respects it goes further, being concerned not just with what kind of activities are being financed but also with the way in which they are funded. Thus Muslims are encouraged to invest in “permissible” (Halal) activities, via “permissible” means.
That means that while Islamic financial institutions will not invest in corporations dealing with forbidden items like alcohol and gambling, neither will they deal with organisations involved in riba, or usury, transactions. Indeed, the lending of money for a predetermined return (riba) is expressly prohibited in the Qur’an. Many Muslim jurists consider any form of interest as riba (usury) and thus do not allow dealing with or investing in banks per se.
In practice this is less dramatic than it sounds. Muslims still make everyday transactions like investing their surplus funds, house-buying, and taking out loans and working capital for their businesses etc. For investment purposes Islamic financial institutions employ criteria similar to those used by the ethical investment funds. The big difference comes in the way they structure lending transactions, both for personal finance and business purposes. In simple terms, lenders enter into risk-sharing contracts with borrowers; return is based on the outcome of the venture or investment, rather than a predetermined rate.
The principle of risk-sharing can have far reaching implications. For risks to be shared, borrowers have to be willing to provide much more information about their situation than normal banks would seek for lending against collateral or guarantees. It will include confirmation that the funds are to be deployed in permissible activities, as well as transparency in reporting financial information about the progress of the business or project for which the money has been borrowed.
Several modes of financing have been developed. The primary tenet of Islamic financial intermediation is that there should be a sharing of risk between the lender and the borrower. Thus the two prominent instruments are Mudharaba and Musharaka. The Musharaka is very similar to a partnership sharing profits and losses. Under a Mudharaba, however, the provider of capital and labour share the rewards, but losses are borne by the provider of capital only as the provider of labour is already deemed to have contributed his share. There are also two additional instruments utilised by Islamic bankers. These are Murabaha and Ijara. The Murabaha is a simple cost plus transaction and is not accepted as a genuine Islamic banking instrument by many Muslim jurists. Ijara transactions work in a similar way to leasing.
Present day Islamic financial institutions also invariably have a Shari’a (Islamic Law) Supervisory Board of Advisors. This is usually a body of qualified Muslim jurists well versed in commercial transactions. All new transactions and structuring of deals are vetted by these Boards for compliance with Islamic Law.
Over the last three decades Islamic banking and finance has grown manifold in Muslim communities and countries. In Malaysia, about five percent of all banking transactions are conducted by Islamic Financial Institutions. This is set to rise to ten percent by 2005. Pakistan’s Finance Minister has also announced plans for a similar phasing in of Islamic financial intermediation. Similar moves are afoot in most Muslim countries. Malaysian and Middle Eastern corporations have also begun to raise long and medium term finance by issuing Shari’a compliant bonds. There are plans for launching of primary and secondary debt and equity markets in Shar’ia compliant financial instruments.
In other parts of the Muslim world Islamic equity investment funds have also mushroomed. Very much like ethical funds, these restrict their portfolios to approved corporations, based on criteria devised by their Shar’ia Supervisory Boards. An increasing number of Muslim investors are channelling their savings through these funds. There is also a Dow Jones Islamic Index which acts as a benchmark for the performance of some of these funds.
In the UK and USA Muslim communities have started to experiment with saving and housing finance products which meet the stipulations of the Shari’a (Islamic Law). In the USA, the Islamic housing finance company Lariba, has had its funding augmented by Freddy Mac, the leading mainstream provider of housing funds. In the UK I-Hilal and Parsoli have started to market Shari’a compliant ISA (Individual Savings Account) products. Indeed, a recent survey by business information company, Datamonitor, concludes “the market for Islamic (Shari’a-compliant) finance in the UK is set to grow hugely. A huge gap exists for Shari’a compliant equity and mortgage products. Muslims have historically been underserved by UK financial institutions, but this is set to change.”
The closest situation to a possible scenario in the UK is the Malaysian example. There, a full range of banking products are available to customers from Bank Islam Malaysia Bhd or the “Islamic Banking” counters of all the major banks. The set up is fully regulated by the Central Bank of Malaysia and Islamic finance instruments seem to co-exist with traditional banking products without any problems. If such products are launched in the UK, then the Malaysian model would be ideal as it provides a precedent for a small Islamic banking sector harmoniously co-existing with a much larger traditional banking sector. In fact, two years ago, in a seminar hosted by the Islamic Foundation in Leicester, Eddy Gorge the Governor of the Bank of England and Ahmed Mohammed Don the former Governor of the Bank Negara Malaysia (Central Bank of Malaysia) had and exchange of views on this very subject.
The growth and public appreciation of Islamic financial institutions, just as with the ethical investment movement in developed economies, will in time help ‘persuade’ the big financial players to pay far more heed to their customers’ views in deciding where and how they invest their depositors’ money. In the process it will become easier for social and ethical criteria, like equity considerations, to be incorporated into financial intermediation.
The incremental growth of Islamic financial institutions also shows how Muslim societies will begin to incorporate the spirit justice and equity. Emerging from the colonial interlude, Muslim societies have begun to reflect on the basic precepts of their economic organisation. Understandably, there are a host of external and internal realities which impinge upon the way these societies are organised. However, as the move towards more representative societies gathers pace, the underlying thrust of the Islamic quest for equity and justice is likely to manifest itself in developments in Muslim societies over time.
In these endeavours Muslims will be in good company. Together with the growing protest against the growth of global inequity, the quest for ethical financial intermediation, will provide platforms for like minded players from across faith and ideological boundaries to come together. (Salaam)

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Islamic Financial Planning & Wealth Management by Ahmad Sanusi Husain