Latest from GIFC

Tuesday, 31 March 2009

Nigeria: Islamic Banking and Finance - a welcome alternative

The recently mooted idea of an Islamic finance system may be a welcome alternative to the age-old traditional Anglo-Saxon financial practices.
The credit crunch occasioned by the economic meltdown and the need to lever up with bailouts have created the need for a new approach to finance and banking. The Islamic financial system has been mentioned in this regard.
Although it is modelled on its interest-based counterpart in that both systems share the same material goals and adopt same institutional structures and so the products promoted by the Islamic finance industry are often seen as undistinguishable, there are sufficient differences to make for a viable alternative to orthodox banking practices.
Ordinarily, interest-based lending secured by collateral sufficiently absolves bankers from their clients' risks, which usually leads to conflict of interests. Oftentimes, the banker who endorses the loan deal has already collected his bonus and retired by the time the deal goes bad. This could scarcely be the case should the requirement of Shari'ah be implemented, where commercial banks would be required to share the profits as well as the losses of their clients, whether on business investments or home purchases. In such circumstances, banks would be more careful when choosing which deals to finance. This risk-sharing finance eliminates conflicts and ensures greater stability in economic activity, since there would be no sub-prime crises where the value of a bank's liability is determined by the performance of its assets.
Incidentally, risk-sharing techniques are not prevalent in modern finance practice. The reverse is usually the case. Both entrepreneurs and bankers actually increase risk, then insulate themselves from it, all in the bid to increase return on capital. If, as an example, the entrepreneur borrows from a bank at 5 per cent interest and then invests in a business that makes 20 per cent profit, he takes away 75 kobo in profit for every naira invested. Logically, he is encouraged to borrow heavily and grow his business operations. This results in a situation where a few large organisations become dominant players on the business landscape. Yet, when he is heavily indebted, a moderate rise in interest rates combined with a moderate fall in revenue can erode his entire profit margin.
Interest-based finance also biases the availability of funds in favour of those who are already rich. Individuals with great ideas but have no collateral, that is, the poor people, often fail to attract finance under the system. This increases the yawning gap between the rich and the poor from one generation to another. Under the practice of tawarruq, however, Islamic banks are allowed to provide their clients with interest-bearing loans in all but name, through a good combination of commodity trades.
One of the factors that engender market volatility is the facility that exists for buying shares on deferred payment terms, or for selling in deferred delivery terms. Price swings as large numbers of sellers and buyers appear in the market. Under Shari'ah, however, ownership of a share is a pre-requisite for its sale, such that there can only be one seller for each share at any particular time. Again, Shari'ah also restricts the use of margin trading and forward trading. This means that one or both counter values (shares or cash) must be exchanged in full on the spot when trading shares.
About the most powerful destabilising factor in modern markets is the issue of money creation by the banking system. For more than three hundred years in the western world, the creation of money out of nothing by central banks and lending it into circulation has caused age-long succession of inflationary trends, as such newly created monies that are spent on assets such as property and shares make their prices rise, naturally.
To address these, Muslim thinkers, such as Mahathir Mohamad, have canvassed for the use of gold and silver as legal tender as against the use of "representative" forms of money such as paper and economic data. Under such metal monetary system, gold and silver, unlike 'representative' money cannot be created out of nothing, and so no organisation has the power to create money without cost, which becomes an important guarantee of stability in a monetary system. The law of trust and the prohibition of interest are the two Islamic regulations that work to prevent money creation by the banking system.
Islamic finance experts, Haitham al-Haddad and Tarek el-Diwany have criticised the deviation from the norms of Islamic finance as the only reason it may not be offering alternative banking and finance practices that are much needed for these times.
Here in Nigeria, there had been facilities like the Small and Medium Income Enterprises (SMIEs) loans which had been put in place as an interest-free facility meant to bridge the yawning gap of wealth inequality between the poor and the super-rich. The scheme hardly achieved its set objectives as it was criticised for circulating only in Lagos and just amongst the few. This may be another opportunity to address what the SMIE failed to do.
Again, we are not unmindful of the religious coloration of our people's faith. The law regulating the practice of banking and finance in Nigeria does not allow the use of religious nomenclature in banking operations. This may be enough to allay the fears of individuals who might think that the Islamic banking and finance is a covert or subtle way of transforming Nigeria, a secular, nay, multi-religious State, into an Islamic State. The fact that the Bible itself discountenances usury is enough reason for all and sundry to embrace a banking system that would alleviate the problems of our people.
It is important that Islamic banking and finance be considered on the basis of its own merits and demerits, rather than seeing it from the viewpoint of religious divides. Practitioners and promoters of the ideals should also go the extra mile to enlighten their prospective customers and clients that it has nothing to do with furthering the cause of one religion over another, nor the promotion of terrorism.
The fact that Islamic finance is largely unorthodox is enough ground to believe that its jurisdictional challenges may not be as broad as the orthodox. To move it from its geographical territories to other lands must therefore be done within the context of adaptability.
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Qatar Islamic Bank to Start Europe-Based Sukuk Fund

March 30 (Bloomberg) -- Qatar Islamic Bank SAQ, the Gulf state’s biggest lender complying with Muslim banking rules, is seeking to raise $200 million for a Europe-based fund that will invest in Islamic bonds, known as sukuk.
The EFH Global Sukuk Plus Fund will be operated by QIB’s European Finance House Ltd. unit in London, and managed by Aleksandar Devic, a former Lehman Brothers Holdings Inc. credit analyst.
“There has been a growing amount of interest in Islamic finance and sukuk as a direct result of the problems of the conventional banking system,” said Mark Watts, head of asset management at European Finance House. “When capital markets start to free up, we expect sukuk issuance to take off with a vengeance.”
Islamic financial institutions have been more resilient to the global financial crisis than their conventional counterparts because direct investment in subprime assets and their derivatives is banned under Shariah law, according to a report by Moody’s Investors Service last month. The Islamic banking industry will grow as much 15 percent this year after expanding an average 25 percent a year since 2006, Moody’s said.
Sukuk funds are typically backed by assets or cash flow to avoid the prohibited practice of paying interest. EFH’s fund will be offered to investors that aren’t restricted by Muslim banking rules.
EFH’s Luxembourg-based fund is targeting this year a yield of 6 percentage points more than the three-month London interbank offered rate for dollars, Watts said. The fund will buy sukuk with an average credit rating of A, the sixth-highest investment grade ranking in Standard & Poor’s scale.

Monday, 30 March 2009

Beautiful recitation of Quranic verses from Surah Baqarah concerning Riba i.e. Usury or Interest

2:275 Those who swallow down usury cannot arise except as one whom Shaitan has prostrated by (his) touch does rise. That is because they say, trading is only like usury; and Allah has allowed trading and forbidden usury. To whomsoever then the admonition has come from his Lord, then he desists, he shall have what has already passed, and his affair is in the hands of Allah; and whoever returns (to it)-- these arc the inmates of the fire; they shall abide in it. 2:276 Allah does not bless usury, and He causes charitable deeds to prosper, and Allah does not love any ungrateful sinner. 2:277 Surely they who believe and do good deeds and keep up prayer and pay the poor-rate they shall have their reward from their Lord, and they shall have no fear, nor shall they grieve. 2:278 O you who believe! Be careful of (your duty to) Allah and relinquish what remains (due) from usury, if you are believers. 2:279 But if you do (it) not, then be apprised of war from Allah and His Apostle; and if you repent, then you shall have your capital; neither shall you make (the debtor) suffer loss, nor shall you be made to suffer loss. 2:280 And if (the debtor) is in straitness, then let there be postponement until (he is in) ease; and that you remit (it) as alms is better for you, if you knew. 2:281 And guard yourselves against a day in which you shall be returned to Allah; then every soul shall be paid back in full what it has earned, and they shall not be dealt with unjustly. (Quran-Surah Baqarah: verses 275-281)

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Sunday, 29 March 2009

Thai bank says to issue country's first Islamic bonds

KUALA LUMPUR, March 27 (Reuters) - State-owned Islamic Bank of Thailand will issue the country's first Islamic bond in a plan to raise funds for expansion, its president said on Friday.

The bank will sell 200 million ringgit ($55.42 million) of mudaraba bonds in neighbouring Malaysia, Dheerasak Suwannayos said.

"It is just to test the market," Dheerasak told Reuters by telephone. "Thailand has never issued anything in Islamic bonds before. I think we will start to work on it after April."

Mudaraba is a structure where a bank will provide capital for a project while the entrepreneur will manage the deal. Profits are split according to a pre-determined ratio and the bank will bear any monetary losses that arise.

The bank has appointed Zaid Ibrahim, a Malaysian law firm, as its legal adviser for the deal but has yet to select a bank, Dheerasak said.

He said Islamic Bank of Thailand may pick Malaysia's second largest lender CIMB Bank, the world's top arranger of Islamic bonds, to handle the deal.

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Friday, 27 March 2009

Malaysian Islamic bank eyes $500 mln deals in 2009

KUALA LUMPUR, March 26 (Reuters) - Unicorn International Islamic Bank Malaysia expects to do $400-500 million of transactions this year, with a strong market projected for medium-sized deals, the lender said on Thursday.

The bank, a subsidiary of Bahrain's Unicorn Investment Bank, is working on two financing deals each worth under $50 million, its chief executive Khalid Bhaimia said.

Unicorn Malaysia has a licence to do non-ringgit Islamic deals.

"We are very much focusing on some of the medium-sized issues, it could be a sukuk issue or cross-border transaction, which are not large but a $50-$100 million type of transaction," Unicorn Malaysia chairman Vaseehar Hassan Abdul Razack told reporters.

"There's plenty of demand for these kind of transactions from small- and medium-sized corporations."

Like conventional lenders, Islamic banks are bracing for a tough year ahead as a sharp global economic downturn hits corporate and consumer spending.

Falling property prices in the Gulf are expected to depress the Islamic financial industry.

Dubai Islamic Bank DISB.DU made a net loss of about 3.5 million dirhams ($952,900) in the fourth quarter, compared with a net profit of 605 million dirhams a year earlier, according to Reuters calculations.

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Thursday, 26 March 2009

Al Jazeera covers Guidance Financial Group (USA) - Islamic Home Financing (Reporting in Arabic & English)

The video is of Al Jazeera's coverage of the growth and success of Islamic finance. It begins at an Islamic finance conference in Washington DC where they interviewed a member of Guidance Residential's Sharia Supervisory Board, Shaykh Yusuf DeLorenzo along with footage of Guidance's office and interview with Guidance's President and CEO, Khaled Elsayed.

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Tuesday, 24 March 2009

CAIR LA Rep Explains Islamic Finance on Fox TV (USA) - Shariah Banking in Focus

CAIR-LA Executive Director Hussam Ayloush refutes Islamophobic claims about Islamic finance made in an earlier interview on Fox Business Network.
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Monday, 23 March 2009

Nigeria: Advocating Islamic micro-finance banking to reduce poverty

THE Principal, Association of Oasis Associates, Malam Ahmad Dogara has given nod to Islamic Micro financing in the Nigeria’s banking system, saying it could serve as a speedy remedy toward poverty eradication in the country.

Presenting a paper during Micro-Finance Investors Forum, organized by the Central Bank of Nigeria (CBN), held in Kano, Dogara believes that Islamic Micro-Finance could similarly be an excellent substitute for the conventional micro-finance currently being implemented in the country.

“In recent years, micro-finance has emerged as an important instrument to help a large number of unbreakable members of the society as a means of reducing poverty and encourage economic growth in neglected parts of the world”, the economist said.

Dogara, howeverm, lamented that inspite of its prior success, conventional micro-finance was found to be not fully reaching the poorest of the poor, while loans were going to activities unrelated to entrepreneurs.
“It was similarly discovered that over 1bn of the world population had lived under unacceptable condition of poverty and most of the people belonged to the developing nations, particularly the rural dwellers in Asia and the pacific Africa” he further explained.
“Still over the years, report had shown that over 30,000 people in the world die everyday because they were too poor to stay alive,” stressing that in some Muslim communities, conventional invest based microfinance has always been ejected, principally for its non compliance with the Islamic principles, particularly on the issue of interest” he said.

“While conventional microfinance institutions (MFIs) was always criticized for sharing exorbitant interest rates and fees, Islamic microfinance could arguably help current the short comings, since it focuses on achieving social justice, disallows exploitation and battles poverty as well,” he explained.

Another presenter, Hajiya Talatu S. Bashir while speaking on “the relevance of microfinance business in Nigeria: the need to establish microfinance banks” explained that even a cursory observer of the Nigerian economy could concede that poverty was assuming on alarming proportion in the country.

According to her over 75 per cent of Nigerians live below $1, which was equivalent to N178 per day expressing fear that this was more prevalent in northern Nigeria.

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In Jakarta, financial help comes via Islam

In the context of the financial crisis and with the Jakarta stock exchange losing 50% since the beginning of the year, the vice-president has called on his fellow citizens to turn to Islamic banks, which apply the principles of Sharia law
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Sunday, 22 March 2009

Islamic Finance in UK (Part 2/2) - Speech by Sir Iqbal Sacranie

Sir Iqbal Sacranie's Lecture in the Seminar "Asset-based and Mortgage-Based Financial Products from an Islamic Perspective", Organized by MIHE, The Islamic Foundation, IRTI and IDB. ---
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Islamic Finance in UK (Part 1/2) - Speech by Sir Iqbal Sacranie

Sir Iqbal Sacranie's Lecture in the Seminar "Asset-based and Mortgage-Based Financial Products from an Islamic Perspective", Organized by MIHE, The Islamic Foundation, IRTI and IDB. Learn More on Islamic Business, Finance & Management ---
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Sir Peter Soulsby (MP) Speech in the Seminar "Asset-based and Mortgage-Based Financial Products from an Islamic Perspective"

Sir Peter Soulsby (MP Leicester South) Speech in the Seminar "Asset-based and Mortgage-Based Financial Products from an Islamic Perspective", Organized by MIHE The Islamic Foundation, IRTI and IDB.
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Rt Hon Mark Hoban's (MP) Speech in the Seminar "Asset-based and Mortgage-Based Financial Products from an Islamic Perspective"

Rt Hon Mark Hoban's (MP) Speech in the Seminar "Asset-based and Mortgage-Based Financial Products from an Islamic Perspective", Organized by MIHE The Islamic Foundation, IRTI and IDB.
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Global Financial Crisis: Lessons for Islamic Finance (Part 2) - Dr. Habib Ahmed

Part 2/2- Dr. Habib Ahmed's Lecture in the Seminar "Asset-based and Mortgage-Based Financial Products from an Islamic Perspective", Organized by MIHE, The Islamic Foundation, IRTI and IDB.

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Global Financial Crisis: Lessons for Islamic Finance (Part 1) - Dr. Habib Ahmed

Part 1/2 - Dr. Habib Ahmed's Lecture in the Seminar "Asset-based and Mortgage-Based Financial Products from an Islamic Perspective", Organized by MIHE, The Islamic Foundation, IRTI and IDB.

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Islamic investors snapping up sukuk ijara

As the global downturn drags on, battering investor confidence and asset values, Islamic finance markets are expected to increasingly favour the certainty of lease-based bonds over profit-sharing structures to minimise risks.

With key sectors such as Dubai property and Malaysian manufacturing in a slump, Islamic banks have grown wary about financing through the once-popular musharaka structure that requires lenders to share a project’s risks and rewards.

“Musharaka-based sukuk involve market exposure and not solely exposure to default risk as with ijara sukuk,” said Rodney Wilson, an Islamic finance specialist with the Qatar Foundation.

“Given the current uncertainty in equity markets I do not believe many potential sukuk investors would want musharaka sukuk in present circumstances. If the market revives and confidence is restored, this may change, but this is unlikely in 2009.”

Issuers and investors are expected to lean towards ijara or rental-based financing where possible, or look to create new lending structures in the $100bn sukuk market.

In musharaka, parties contribute capital to a venture with profits to be shared according to an agreed ratio, while losses are generally divided as per the capital contribution ratio.

Standard & Poor’s estimated that more than 45% of Islamic bonds issued in 2008 were structured according to the ijara principle.

The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) ruled last year that repurchase undertakings - a pledge found in most Islamic bonds that the borrower would pay back their face value at maturity — violates the duty to share risk in sukuk mudaraba and musharaka.
Issuance of musharaka and mudaraba sukuk fell 83% and 68% respectively last year, Moody’s said. Some bankers and scholars attributed the drop to the AAOIFI ruling, which has prompted the industry to take a fresh look at current structures.

“Due to the current turmoil and the failure of conventional structures, especially the highly-leveraged ones, more investors are expected to be drawn into learning what the Shariah-compliant structures are about and that could re-define musharaka and mudaraba sukuk as a class of its own,” said Helmi Harunarashid, treasury and capital markets general manager at Bahrain’s Elaf Bank.

But ijara is not without its difficulties when used to structure sukuk.

“In project financing there should be less commercial issues but when using a sukuk in a similar way to a corporate bond issuance it can become difficult to find suitable assets which are capable of being leased,” said Davide Barzilai, a London-based Islamic finance lawyer with Norton Rose.

“Once you have located the assets, you then have to ensure that the sale to the issuer and the leaseback to the sponsor are permitted by law and do not attract any taxes or duties.”


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Trend Will Be Sukuk In Local Currency

KUALA LUMPUR, March 18 (Bernama) -- There will be a trend of issuing sukuk in local currency in the next two years as players will be reluctant to lend dollar due to the global economic slowdown.

Kuwait Finance House (Malaysia) Bhd's managing director, Datuk K.Salman Younis said compared with the dollar there was higher liquidity in the local currency in the Gulf Cooperation Council (GCC) countries and Malaysia at the moment.

"Normally, sukuk issuance outside Malaysia was basically in dollar. With the current shortage of dollar in the market, you will see an emergence of issuing sukuk in the local currency," he said during a media roundtable on economic and Islamic finance outlook organised by Dow Jones Indexes here today.

Salman also expects less new sukuk issuances this year.

However, in the long term the sukuk market is expected to remain strong due to rising popularity of Syariah-compliant products in Asia, he said.

On the growth for Islamic finance in Malaysia this year, Salman said the sector would continue to grow despite the global economic slowdown.

"It will grow by taking some market share from traditional banks and from the stimulus package. But once the economy is back to normal it will grow in the fastest phase," he said.

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World Bank: Global economy to dive

The global economy is set to shrink by one to two per cent this year, Robert Zoellick, the president of the World Bank, says.
Zoellick's comments, made at a conference in Brussels on Saturday, referred to an International Monetary Fund (IMF) forecast that the world economy would shrink by one per cent this year.
"We in the Bank will be coming up with ours again soon, probably in the range of one to two per cent ... We haven't seen a figure like that globally since World War Two, which really means since the Great Depression," he said.
The World Bank chief has raised concerns over existing efforts to tackle the crisis, warning of the risk of doing "too little, too late".
He said that fiscal stimulus without addressing the roots of the credit crunch will be a mere "sugar high" with no lasting impact on the economy.
Proposal reviews
Zoellick proposed that the Group of 20 major and emerging economies - whose leaders are due to meet in London next month - establish a review process to see whether further stimulus measures would be needed to kickstart recovery.
"Out of the G20 process one should have a monitoring system," he told the conference, suggesting a system of reviews on the impact of existing stimulus packages agreed by governments.
"Some of the packages actually withdraw stimulus in 2010. So given the uncertainty of this crisis I think you want to have a review process to see whether more would be needed in 2010."
Zoellick warned of a fall-off in world trade as countries retrenched into their domestic economies, and cited World Bank forecasts that up to 400,000 children would die this year as an indirect effect of the economic crisis.
"There are issues that go beyond the economics to political and social stability," he said. "If kids don't get proper nutrition in their early years, you lose a generation."
Zoellick cited some progress in persuading rich countries to help developing states struggling to cope with a slowdown that hit revenues from from commodities exports and remittances from expatriate workers, but acknowledged there was resistance.

"It's hard at a time like this. Everyone is feeling stretched."
(Al Jazeera)

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Thursday, 19 March 2009

Financial institutions to be more socially responsible

Financial institutions to be more socially responsible read more on the interview with Dr. Ahmed Mohammad Ali-President IDB, Jeddah

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Shariah-compliant gold funds offer better returns

Shariah-compliant gold funds are offering better returns than the other funds as investment in the yellow metal has lifted its price by "multiples of a thousand dollars," according to the managers of Shariah-compliant funds.

Eric Meyer the Chairman and CEO of US-based Shariah Capital Inc., said: "That's (gold) one commodity everyone has confidence in. And if it's a Shariah-compliant fund investing into gold the confidence levels of investors are all the more higher."

Meyer along with the Dubai Government formed the Dubai Shariah Asset Management that launched four funds in Dubai early this year. The funds include DSAM Kauthar Gold Fund (DKGF), DSAM Kauthar Energy Fund, DSAM Global Resources and Mining Fund Limited and DSAM Kauthar Natural Resources Fund Limited.

All these funds are Shariah compliant that compliment their strengths. "The transactions and investments need to be based on assets and that makes the investors feel confident. These funds are performing better than the other funds that we had " Meyer said.

The DSAM Kauthar Gold Fund now records a year-to-date (YTD) return of 5.63 per cent. "Gold investments have contributed to the cumulative performance of the four funds," Meyer said.

Currency devaluations have particularly shifted the focus to gold. Meyer said. "Printing more paper is eroding confidence in it. So, not only gold, but every hard asset is becoming more reliable. Gold especially has attracted a lot of investments."

The DKGF Manager John Hathaway said besides gold emerging as a safe haven for investors, jewellery demand has been a key contributor for driving up the prices. "Gold is in a long term bull market and the demand for jewellery is driving it. I am sure the gold ETF (exchange traded fund) that was launched recently will ensure a significant flow of capital," he said.

"Gold occupied five per cent of above ground financial asset in 2008. It occupied 22 per cent of it in 1982. In the depression of 1930s, the value of share of a company increased from $4 (Dh15) to $45 in a few years. It (gold), therefore, has a way to go," Hathaway said. Besides, gold the fund managers were also bullish on the other commodity funds. "Even in these circumstances the demand for gasoline in the US has increased 1.6 per cent year on year. One can invest in energy companies that have less than 15 per cent debt in balance sheets," said Ashton Lee the portfolio of DSAM Kauthar Energy Fund.

Meyer said decision by fund managers to increase investments in gold by 1.2 per cent may lead to 40,000 tonnes of gold being pulled off markets increasing the price of the metal by "multiples of a thousand dollars."
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VTB mulls Russian debut on sukuk market

MOSCOW, March 18 (Reuters) - Russia's second largest bank VTB may become the country's first issuer of sukuk or Islamic bonds and is considering a deal worth several million dollars, VTB's investment banking head said on Wednesday.
Russian companies need to be more creative about raising capital as usual sources of funding have dried up in the global credit crunch and around $100 billion of foreign corporate debt payments are due this year. "We are looking at the possibility of entering this market (Islamic finance) -- both for us and for our clients," VTB Capital head Yuri Solovyov told journalists, adding that an issue from VTB could be worth several million dollars.
He declined to name which other Russian companies had expressed interest in such financing.
Globally, $14.9 billion worth of sukuk were issued last year, less than half 2007's issuance, according to Standard & Poor's.
To comply with Islam's ban on interest, sukuk are structured as profit-sharing or rental agreements, and returns are derived from underlying physical assets such as commodities or real estate. Investment, pork, alcohol, gambling and pornography is banned.

To date there have been no Russian issuers of sukuk.
VTB Capital and Liquidity Management House, a subsidiary of Kuwait Finance House, on Wednesday signed a protocol of intention aimed at cooperating in the development of Islamic finance in Russia and other former Soviet countries. (Reporting by Oksana Kobzeva, writing by Toni Vorobyova; Editing by David Cowell)
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Tuesday, 17 March 2009

Scotland urged to create an Islamic finance house

SCOTS banking veteran John Wright has called for the creation of a dedicated Islamic finance house in Scotland to attract more investment from the Middle East.

Wright, the retired former chief executive of Clydesdale and Yorkshire Banks, who also headed up the Oman International Bank for seven years, said the presence of an Islamic bank north of the Border would signal an "open door" for Islamic investors to do business in Scotland.

The facility would ideally be a joint venture between Islamic groups with financial backing and an existing Scots banking institution, Wright said. The Scottish Government yesterday said it had had "preliminary discussions" with Islamic organisations about the issue through its Scottish Development International arm.

Islamic banking complies with Sharia law, which prohibits the payment of fees for the renting of money, as well as investing in businesses that provide goods or services considered to be contrary to its principles.

A number of banks offer a range of business and retail banking accounts for the Islamic community, but there is no dedicated Islamic bank in Scotland.

Wright's comments came at the launch of the Scottish Islamic Foundation's Etisal event, a conference of Scottish and Islamic businesses to be held in Glasgow in October. Wright told The Scotsman: "Scotland is a financial centre and, despite the recent setbacks in the economy, we should definitely create a capability in Islamic finance. Given our huge financial services capability, it would be logical to do this here.

"There is a huge opportunity to set up links to sell product and generate investment from the Gulf, which at the moment is left untapped."

He said a number of Scotland's larger companies – such as Weir Group, Wood Group and Aggreko – had a presence in the Gulf, but added that hundreds of other firms were missing out.

He added: "The building blocks are there. Whether there is enough appetite on the part of any commercial bank at the moment, is the question. We need someone to say 'what about forming a joint venture?' Royal Bank of Scotland would be the obvious partner, although this may not be the ideal time for them. An Islamic financial facility would be an open door to investors to show them that we want them to come here."

He added: "In the last few years, it has been clear that it isn't just Muslims who are interested in the principles of Islamic banking. In the current climate, people are perhaps looking for an alternative to the mainstream banks."

Wright said that there was a "vast opportunity" to tap into investment in renewable energy companies, such as those specialising in wind or wave power. He said: "Scotland has so much to offer in terms of natural resources. The environment is an issue which is very important to the Islamic community – there are a lot of funds which could invest in that area."

Representatives from the Scottish Islamic Foundation, including chief executive Osama Saeed, recently visited Jakarta in Sri Lanka for the World Economic Islamic Forum, where they made contact with sovereign wealth funds in Malaysia.

Saeed said: "In the Middle East, there is still plenty of liquidity in sovereign wealth funds. We have made contact with the head of a Malaysian sovereign wealth fund which may come to Scotland in October to attend Etisol and potentially do business."

He added: "Scotland stands to benefit a great deal through creating this gateway to the Muslim world."

A spokeswoman for RBS said there were no immediate plans to create an Islamic banking facility in Scotland, but pointed to the bank's existing Sharia mortgage provision.

She said: "We have a full range of banking products and services aimed to suit all customer and business sector needs, including a team of relationship managers who focus on meeting the demands of specialist customers."

Lloyds Banking Group said it offered a range of products for the Muslim community through its Lloyds TSB arm, but it did not comment on a possible tie-up to create an Islamic financial capability in Scotland.

(The Scotman)
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Sunday, 15 March 2009

Sharia Finance Provides Bridge Between Middle East and Indonesia

Mukhtar Hussain is global chief executive of HSBC Amanah and CEO of Global Banking and Markets Middle East and North Africa. He has been with HSBC Group since 1982. Mukhtar was appointed to both of his current positions in May 2008 after spending two years in London as co-head of global banking the first year, and global head of principal investment the following year.

He moved to Dubai in 1993 to establish HSBC’s regional investment banking business there. He advised the government of Dubai on the establishment of the Dubai Financial Market and served as a director of the Dubai International Financial Exchange from 2005 to 2007.

The Jakarta Globe spoke with him on March 3 on the sidelines of the World Islamic Economic Forum. He talked about global Shariah banking, as well as the challenges and prospects for Islamic finance in this country.

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He stressed that this kind of banking was relatively young in Indonesia, and thus there was a great deal of potential for growth. He also said that Shariah banking was a “natural bridge between the Middle East and Indonesia,” that could draw the two regions closer together.

The following are excerpts from the interview, including comments by Mahmoud Abushamma, the head of HSBC Amanah Syariah in Jakarta:

What do you think about the growth of Shariah banking in Indonesia?

We see Islamic banking continuing to be a major growth component in the financial services world. Historically, this is a business that has been growing by 15 percent to 20 percent per annum. Obviously, given the economic environment we have today, that growth will slow. But it will exceed the growth of the conventional sector and will continue to grow into the future.

Compared to the conventional sector, just how big is Shariah banking worldwide?

The comparison is a difficult one to make, because in reality the Islamic financial services market is still relatively small compared with the conventional industry. But, of course, we need to acknowledge that the conventional industry has developed over two centuries, whereas the Islamic financial services industry is probably only 40 years old. So it’s a young industry that’s growing quickly, but it’s still relatively small in proportion to the overall financial services industry.

What are the most promising markets for Shariah banking?

The logical places for growth are clearly those countries and regions with large Muslim populations, where it has a natural home. But I think that even in other parts of the world, there is growing interest in ethical banking. So, whether it’s Europe or the United States or elsewhere, I think the industry will continue to grow, because people like principles-based banking and Islamic banking is exactly that. We see the trajectory of growth being concentrated in Asia and the Middle East, with potential for growth in Europe and elsewhere.

Indonesian Vice President Jusuf Kalla has said that Islamic banking has proven that it can weather the global crisis. What do you think?

I agree with that. There is inherent discipline in Islamic banking, given the fact that it focuses on the real economy. It focuses on real, asset-based financing, which means that you know it is less involved in speculative activity. I also think that Islamic banking has very clear criteria on the amount of leverage that can be made available in transactions. Therefore it doesn’t promote the use of high leverage — this being one of the reasons the conventional banks have encountered the problems they have. The other reason is that conventional banks invested heavily in toxic assets. Many of those assets would not have been permissible in Shariah banking.

What do you think about the potential for Shariah banking in Indonesia?

We are very excited by the potential in Indonesia. This is obviously one of the biggest Muslim countries. There is a coherent approach, being led by the government in Indonesia, in terms of developing a framework for the growth of Shariah-based financing. The president has stated very clearly that Indonesia sees itself as a leader in this case and it has a natural role to play, given the consumer base you have here. I would be delighted to assist those efforts.

But Shariah banks in Indonesia only control 3 percent of the market in terms of assets.

Well, I wouldn’t call that a problem. Three percent to me represents plenty of potential for growth, and, secondly, in every industry you start small and you scale up. I think perhaps that in time to come you will see our market share hit double digits in Indonesia. That should happen over the course of time, as more Islamic banks start up and consumers become more aware of the products and the choices they offer. And that’s the right way for the industry to grow, because it’s consumer-led. Shariah banking in Indonesia is very young. You can’t compare it to Malaysia or the Middle East.

Does Indonesian law support the growth of Shariah banking here?

I think a lot has happened in the last few years. And if you looked last year, we have the sukuk law being issued by the House of Representatives. We have the Shariah banking law being issued as well. So a lot has happened in the last few years. You know, you shouldn’t look at Shariah banking as being too small in Indonesia. You should look at it as still being young and still not developed, still not matured to the level where we can actually compete with conventional banking. The regulations are getting better. The government realizes the potential, realizes the fact that it is a huge need in Indonesia. That was shown by the success of the retail sukuk [Islamic bond] sold by the government recently. There is demand and the demand needs to be satisfied. So, this should be a cooperative effort between government, market players, the regulators. In this way, we will be able to develop the next generation of products.

Will Shariah banking help Indonesia access financial resources from the Middle East?

[Mahmoud Abushamma]: It already has. Indonesia already has Middle Eastern funds to invest. HSBC has arranged a large syndicated finance package for Pertamina, totaling over $500 million, and has arranged more than $90 million for Krakatau Steel. As you know the Republic of Indonesia is now working to issue a global sukuk which is also aimed at Middle Eastern investors.

[Mukhtar Hussain] : I think Islamic finance provides a natural bridge between the Middle East and Indonesia. It is an area of commonality that should draw these two partners together. There is already evidence of traffic over the bridge. I think as time goes on the issue is for Indonesia to become increasingly aware of these issues both at the governmental level as well corporate levels. People will become more familiar with the risks, they will see opportunities to invest. But it takes time. Volumes will take time to develop. But most importantly, the first journey, the first transactions are already evident and have been successful. And the Middle East would like to see more of it’s capital being directed to and deployed in Asia, and Indonesia should be one of the primary recipients.

(Roffie Kurniawan/Jakarta Globe)

Islamic Finance: A Growing Industry - The Proliferation of Interest-free Finance

By Dr. Salina Hj. Kassim and Dr. M. Shabri Abd. Majid
International Islamic University – Malaysia

The recent financial crisis which originated from the 2007 US sub-prime crisis has been labelled as the worst financial crisis since the Great Depression by George Soros, Joseph Stiglitz, and the International Monetary Fund (IMF) (Jaffee, 2008; Tong and Wei, 2008). It has now become a full-blown global economic crisis.

Due to the borderless nature of the global economy, the economic downturn in the United States has created a systemic shock that has been transmitted to the economies around the world. So, the crisis has inflicted heavy damage on markets and institutions at the core of the global financial system (IMF, 2008).

While many believe that the "worst is not over", continuous deliberations are ongoing to diagnose the root of the crisis and find solutions to the current problems that the global economy is facing.

Just like the cases of previous crises, once the crisis sets in, continuous efforts are undertaken to improve and strengthen the current financial infrastructure so as to avoid such crisis from happening again in the future.

This crisis of 2008 is unprecedented in its nature. Even the well-established and what is considered "too big to fail" financial institutions are being badly affected by the crisis (Citibank, Lehman Brothers and AIG, just to name a few).

Successful Principles

On the contrary, the Islamic banking and financial institutions throughout the world are somewhat "sheltered" from the global financial shocks.

Despite slowing down, the top ten Islamic banks continued to show encouraging performance by recording an average annual growth of around 30 percent for 2008.

While conventional banks consolidate and retrench workers, Islamic banks particularly in the Gulf Coopeartion Council countries continue to expand and recruit new workers.

The resilience of the Islamic financial institutions to the current financial shocks, as well as their robust growth have led many quarters to conclude that Islamic banking could provide a solution to the current financial ills and be a viable alternative to the current financial system.

The current crisis seems to highlight the weaknesses of the conventional banking and finance philosophy on which the global financial system is built upon.

The conventional system allows multiple debt creation on a particular asset without a real underlying transaction made possible by credit default swap.

Quite the contrary, Islamic finance requires that financial dealings must be backed by real assets and be in line with the Islamic law, Shariah.

Generally, the principles upon which Islamic banking system is built on ensure the element of certainty and stability in financial dealings.

In particular, the requirements that the financial dealings must be free from Riba (interest), gharar (uncertainty), and maysir (gambling) ensure that the elements of exploitation and excessive speculation are avoided.

To ensure fairness and justice, financial dealings in the Islamic context must observe the concept of iwad (equal counter-value, which comprises of work effort, risk assumption, and product liability).

There are various supervisory authorities that are committed to oversee the overall compliancy of the financial instruments offered by the Islamic financial institutions, such as the Shariah supervisory board, as well as national regulatory authorities.

More importantly, financial dealings in Islamic banking and finance are guided by the ultimate objective of achieving the ideals of equitable justice where priority is given to equity-based financing rather than debt-based financing.

The conventional financial system which focuses largely on debt-based financing has resulted in concentration of wealth circulated largely among the deemed credit-worthy corporations and individuals.

In the Islamic economy, priority should be given to transactions that can benefit the society at large, rather than just the already wealthy corporations, so that wealth can be more widely circulated.

As such, the concept of equity-based financing along with its profit-sharing element is again another built-in stability aspect of the Islamic financial system.

The joint-venture nature in most equity based financing such as musharakah ( equal sharing) requires active participation from both the financier and the borrower to achieve the best outcome of a business venture.

Equity-based financing distributes risk and liability to both the lenders and borrowers so as to justify the return to both sides of the transacting parties.

In the end, this would influence the allocation of wealth and resources in the economy.
While conventional banks worldwide are nursing losses of more than $400 billion from the credit crisis, Islamic banks are virtually unscathed.

Demand for Interest-free Finance

Surprisngly, Islamic banks, such as Al-Rajhi Bank of Saudi Arabia, Kuwait Finance House, Dubai Islamic Bank and Maybank Islamic, grow steadily during the crisis.

Because of Islamic banking's merits and virtues, the demand for its products expanded not only in the Islamic countries, but also in the western countries, such as the United States and the United Kingdom.

In the light of the current crisis, it is expected that there will be a large scale re-evaluation of the guiding principles of financial transactions globally.

The Islamic economics model in general, and Islamic banking and finance in particular, are viable options as the search for more stable and safer global financial infrastructure continues.

The global credit crisis presents the $1 trillion Islamic finance industry with an opportunity to expand its appeal beyond Muslim investors, as a haven from speculative excess.

Already, Islamic financial institutions have made in-roads in many western countries such as the United States and the United Kingdom.

In fact, in these countries, the attention towards interest-free financial products, particularly for long-term financing such as home financing, has been there since the mid-1980s.

The demand for interest-free home financing product has led to the establishment of several Islamic financial institutions in the United States such as the MSI Financial Services Corporation which was established in 1985 in Texas, the American Finance House-LaRiba (1986) in California, and University Islamic Financal Corporation (2005) in Ann Arbor, Michigan.

Remarkable Growth

In addition, there are many Islamic banks outside the United States, like al-Ansar Co-operative Housing Corporation Ltd (1981) in Toronto, Canada, Islamic Bank of Britain (2004) and European Islamic Investment Bank (2005) in the United Kingdom, Faisal Private Bank (2006) in Switzerland, and many more throughout the world.

Apart from these full-fledged Islamic financial institutions, an increasing number of conventional financial institutions offer Shariah compliant financial products and services such UBS Switzerland, Citibank, Deutsche Bank, and BNP Paribas Bank.

In the aftermath of the sub-prime crisis, it is most likely that the demand for Islamic banking products and services to increase.

Moreover, the number of the Islamic financial institutions offering more innovative products and services is most likely to increase.

The Asian Development Bank estimates that Islamic assets globally have a combined value of about $1 trillion, with annual growth of 10 percent to 15 percent a year by 2010.

Despite this, it is important to highlight that even though the ideals of Islamic banking and finance lead to countless merits and virtues, the actual implementation and practices by the financial institutions is a whole different issue.

Thus, it would be beneficial that the Islamic financial institutions could learn from the current crisis that the expansion driven by stiff competition without being guided by the ideals proposed by Shariah and the true objectives of the Islamic economy could be devastating.

(Islam Online)
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Q&A with Muhammad Taqi Usmani: Exchange Of Currencies And Discounting OF Bills

I got your comments on our group's evaluation of Islamic banks and Mudarabah companies. The MBA project we are doing is in the second week of June, 1997. Your guidance would help us in presenting the true picture of an Islamic Financial Institition (IFI) at LUMS. It would be quite helpful if you answer following questions :

Q. (1) Why cannot currencies be sold at rates different than the market or spot rate? How are currencies of different countries different than ordinary goods which can be sold at prices different than the market?

(2) Why is discounting of bils of exchange in different currencies permitted when currency itself cannot be traded below the spot rate?

(3) Can one party in a 'promise to sell/purchase' agreement ask for a security, whether cash or any kind of collateral, from the other party?

(4) How can an agent's (agent being the bank) fee be determined if he is made responsibile to collect the amount written on bill of exchange on behalf of it's client? Wouldn't such kind of agency fee or service charge become an excuse for charging interest? How can one prevent it?

(5) Is it injustice if two or more partners agree on a ratio of profit, not the loss, which is different than the ratio of capital contributed by each partner?

(6) Are the following rules correct according to Shariah: a. It is permissibile for the lessee to let to a third party during the lease period whether for the same rental or more, as long as the asset is not affected by the change of user. b. It is permissible to stipulate in a contract of Istisna that price would be reduced by a specific amount per day upon delay in delivery by the seller.

(7) What steps can an Islamic Financial Institution take to prevent the concentration of wealth among the rich individual of a Muslim society?

A. Here are the answers to your recent questions:

(1) If the currencies are of the same country, they cannot be sold at a rate different from their face value. However, if the currencies are of different countries, they can be sold on spot at whatever rate agreed upon between the parties which can be different from the market rate. However, if the payment is deferred on either side, it must be in accordance with the market rate. This condition is put to restrict the use of this transaction to the genuine needs, otherwise it may be taken as a device to effect riba transaction. The details of the rules regarding the transaction of currencies are available my Arabic book Ahkam Al-Auraq Al-Naqdia which has also been translated.

(2) The discounting of bills of exchange even in different currencies is not permitted in Shariah. The reason is that a Bill of exchange stands for the amount of the bill which is a debt payable by a a seller. If it is sold or purchased for cash, it means that two currencies are being exchanged where the payment at one side is deferred and I have already mentioned in answer to question no. 1 that if the payment is deferred on either side, the price should not be different from the market spot rate.

(3) The promise to sell/purchase is merely a promise. It does not effect the contract of sale itself, therefore, no rights or obligations of a sale can arise out of a promise only. Hence no party can ask for security or a collateral for the fulfillment of a promise. Because the security or collateral is justified only where a liability or a debt has actually come into existence while in the case of promise no debt or liability is created. It is only an undertaking to sale/purchase a commodity in future. When the actual sale occurs on a deferred payment basis the debt will be created and at that time it will be justified to ask for a security.

(4) If the bank has been made an agent to collect the amount of a Bill of Exchange on behalf of its client it is permissible for the bank to charge a fee for this service. The fee may be determined by the parties on whatever basis they agree upon. However, it should not be tied up with the period of the maturity of the bill. With this condition this transaction will not, hopefully, be instrumental to charge interest.

(5) In a Musharakah contract the parties may agree on a ratio of profit different from the ratio of their investment with the only condition that a partner who in expressed terms, relieves himself from the liability to work for the partnership can- not claim a ratio of profit higher than the ratio of his investment, for example, if 'A' has invested 60% of the Capital while 'B' has invested 40% the parties can agree that 'B' will get 60% of the profit and 'A' will get 40% of the profit. However, if 'B' has, in expressed terms, put a condition in the contract of Musharakah that he will never work for the enterprise, he cannot claim more than 40% of the profit.

(6.a) A lesses can sub-lease the property to a third party with the permission of the lessor, if the rent charged by him from the sub-lessee is equal to the rent payable by him to the original lessor. This sub-lease is permitted with the consen- sus of all Muslim jurists. However, if the lessee charges from his sub-lessee a rent more than the rent payable by him to the original lessor, it is not permissible according to Imam Abu Hanifah, but it is permissible according to other Imams.

(6.b) It is permissible to stipulate in a contract of Istisna that price would be reduced by a specific amount per day upon delay in delivery by the seller. The contemporary scholars of Islamic Jurisprudence have allowed this type of contract on the basis of the following ruling given by the classic Fuqaha:

(7) In fact the answer to this question requires a detailed treatise, but without going into details the following steps may be taken by the Islamic financial Institutions to prevent the concentrationof wealth among the rich of its society :

Firstly they should maximise the use of Musharakah and Mudarabah instead of Murabaha or Leasing, because the real alternative to interest in a true Islamic economy is Musharakah and Mudarabah which paves the way for equal distribution of income among the members of the society and they are very competent and strong instrument diverting the flow of wealth from a few rich people to the common lot. Secondly, they should find out ways and means to finance the small scale trade and industry. For this purpose an Islamic financial institution should rise above the level of pure commercial and material benefits and should set their priorities in wider interests of society of which they, themselves, are an inseparable part.

(Darululoom, Karachi)
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