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Tuesday, 30 June 2009

The Economic System of Islam (part 1 of 2): The Sources of Islamic Economics


As a complete way of life, Islam has provided guidelines and rules for every sphere of life and society. Naturally, a functioning economic system is vital for a healthy society, as the consumption of goods and services, and the facilitation of this by a common medium of exchange, play a major role in allowing people to realize their material and other goals in life.

Islam has set some standards, based on justice and practicality, for such economic systems to be established. These standards aim to prevent the enmity that often occurs between different socioeconomic sections. Of course, it is true that the gathering of money concerns almost every human being who participates in transactions with others. Yet, while these standards recognize money as being among the most important elements in society, they do not lose sight of the fact that its position is secondary to the real purpose of human existence, which is the worship of God.

An Islamic economic system is not necessarily concerned with the precise amount of financial income and expenditure, imports and exports, and other economic statistics. While such matters are no doubt important, Islam is more concerned with the spirit of the economic system.

A society that implements Islamic laws and promotes Islamic manners will find that it bring together all the systems – social, economic, and so forth – that it deals with. Islam teaches that God has created provision for every person who He has brought to life. Therefore, the competition for natural resources that is presumed to exist among the nations of the world is an illusion. While the earth has sufficient bounty to satisfy the needs of mankind, the challenge for humans lies in discovering, extracting, processing, and distributing these resources to those who need them.

Islam consists of a set of beliefs which organizes the relationship between the individual and his Creator; between the person and other human beings; between the person and universe; and even the relationship of the person to himself. In that sense, Islam regulates human behavior, and one type of human behavior is economic behavior. Economic behavior is dealt by Muslims as a means of production, distribution, and consumption of goods and services. In Islam, human behavior -whether in the economic area or others - is not value free; nor is it value neutral. It is connected with the ideological foundation of the faith.

The Sources of Islamic Economics
The fundamental sources of Islam - the Quran and the Sunnah of the Prophet[1] - provide guidelines for economic behavior and a blueprint of how the economic system of a society should be organized. Therefore, the values and objectives of all “Islamic” economic systems must necessarily conform to, and comply with, the principles derived from these fundamental sources. The purpose of these articles is to outline the most salient characteristics of an economic system based on the fundamental sources of Islam. The focus here is on the principal features of the Islamic system.

The Islamic economic system is defined by a network of rules called the Shariah. The rules which are contained in the Shariah are both constitutive and regulative, meaning that they either lay the rules for the creation of economic entities and systems, as well the rules which regulate existing one. As an integral part of the revelation, the Shariah is the guide for human action which encompasses every aspect of life – spiritual, individual, social, political, cultural, and economic. It provides a scale by which all actions, whether on the part of the individual agents, society, and the state, are classified in regards to their legality. Thus there are five types of actions recognized, namely: obligatory; recommended; permissible; discouraged; and forbidden. This classification is also inclusive of economic behavior.

The basic source of the Shariah in Islam is the Quran and the Sunnah, which include all the necessary rules of the Shariah as guidance for mankind. The Sunnah further explains these rules by the practical application of Prophet Muhammad, may the mercy and blessings of God be upon him. The expansion of the regulative rules of the Shariah and their extensions to new situations in later times was accomplished with the aid of consensus of the scholars, analogical reasoning - which derived rules by discerning an analogy between new problems and those existing in the primary sources - and finally, through textual reasoning of scholars specialized in the Shariah. These five sources - the Quran, the Sunnah, consensus of the scholars, analogical reasoning, and textual reasoning - constitute the components of the Shariah, and these components are also used as a basis for governing economic affairs.

In summary, we can say that the Islamic Economic system is based upon the notion of justice It is through justice that the existence of the rules governing the economic behavior of the individual and economic institutions in Islam can be understood. Justice in Islam is a multifaceted concept, and there several words exist to define it. The most common word in usage which refers to the overall concept of justice is the Arabic word “adl”. This word and its many synonyms imply the concepts of “right”, as equivalent to fairness, “putting things in their proper place”, “equality”, “equalizing”, “balance”, “temperance” and “moderation.” In practice, justice is defined as acting in accordance with the Shariah, which, in turn, contains both substantive and procedural justice[2] covering economic issues. Substantive justice consists of those elements of justice contained in the substance of the Shariah, while procedural justice consists of rules of procedure assuring the attainment of justice contained in the substance of the Law. The notion of economic justice, and its attendant concept of distributive justice,[3] is particularly important as an identifying characteristic of the Islamic economic system. The rules governing permissible and forbidden economic behavior on the part of consumers, producers and government, as well as questions of property rights, and of the production and distribution of wealth, are all based on the Islamic view of justice.

The following topics will be discussed in the following articles:

(a) individual obligations, rights, and self-interest;

(b) property rights;

(c) importance of contracts;

(d) work and wealth;

(e) the concept of barakah;

(f) economic justice;

(g) prohibition of interest (riba);

(h) competition and cooperation; and

(i) the role of the state.

[1] The Sunnah is general body of narrations of the speech, deeds, and tacit approvals of the Prophet.

[2] “Substantive justice means reaching the ‘right’ result. Procedural justice means getting the result in the ‘right’ way.” (A speech entitled “Effective Arbitration Techniques in a Global Context” delivered by the Secretary for Justice of Hong Kong ,Ms Elsie Leung)

[3] “Normative principles designed to allocate goods in limited supply relative to demand.” Stanford Encyclopedia of Philosophy: (

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Opportunities for Islamic banking in Australia

Emirates Islamic Bank CEO Ebrahim Fayez Al Shamsi and Dubai Multi Commodities Centre (DMCC) CEO David Rutledge tell Business Spectator's Isabelle Oderberg:

* The bank is considering creating a presence in Australia through either acquisition or partnership
* The meltdown in traditional banking markets didn't affect the Islamic banking world, but the contraction in liquidity has
* The DMCC is examining whether the infrastructure it has developed could be deployed here
* Commodity traders in the Middle East are finding it difficult to secure financing

Isabelle Oderberg: I want to start by asking what sorts of opportunities you see in Australia for Islamic banking.

Ebrahim Fayez Al Shamsi: I think there is a huge opportunity for Islamic banking – and the demand for Islamic banking, globally, has been pleasing, especially after the recent international financial crisis. People believe that Islamic finance can provide a better solution for the financial environment.

IO: Are you targeting primarily the Muslim community or are you looking more broadly?

EA: The Islamic finance is not only for Muslims. Even in our own country, most of our customers have come to us not because of belief issues, but because of the variety of products and the service quality.

IO: Okay. Can you tell me a little bit about what sorts of opportunities have arisen in Islamic banking as a result of the financial crisis?

EA: The solutions and the products of Islamic by nature are based on trading – and assets trading always gives better solutions than trading in debts and using the currency as a commodity.

IO: I was wondering if you could tell me how you would operate in Australia. Would you be looking to take over an existing operation or would you need to start from scratch and set up something from the beginning?

EA: This is a fact finding mission and the options are open for us. We will try to use the easiest way, to start, if we decide to go ahead. It might be through acquisition. It might be through partnership with an existing partner. The options are open for us at this stage.

IO: You say that this is a fact finding mission – can you tell me about some of the conclusions that you’ve come to so far?

EA: We had an interesting meeting the last few days we’ve been here and we believe that the possibility for starting an Islamic banking corporation, even with limited capacity is a possibility.

IO: I understand there have been some government meetings. What has the attitude from Australian government been?

EA: I think the people have been very supportive, very cooperative – and they are willing, too. There is a need for introducing changes. They are willing to discuss that and to see how can we go about it.

IO: I did an interview recently with someone in Dohar about Islamic banking and it was explained to me that one of the key tenets is that there has to be a product behind transactions – some sort of commodity of some description. Does the fact that Australia has such an active commodities market give a good basis for Islamic products here?

EA: I think so, yes. Because the environment here is fit for that.

IO: Does it give more of an opportunity than a country that doesn’t have that kind of commodities market?

EA: Yes, of course. It’s got a diversified economy.

IO: One of the things that I understand has been quite difficult is standardising – what is and isn’t halal within Islamic banking. At the moment there are different religious bodies that give approval to certain products, but I understand there’s a move to do more standardisation. Can you tell me a little bit about that and how it’s progressing?

EA: I think in the beginning of Islamic banking that was the case. But now, actually, we are coming to standardised contracts and products. And we will see more of this in the future, too.

IO: Are there any challenges that face the expansion of Islamic banking in the world generally?

EA: Yes, I think there are challenges even in our own country. I mean, Islamic banking is a novelty sort of banking, so the challenges are always there. But I think we can accommodate ourselves in any environment.

IO: Globally, in finance, people have been pretty downbeat and traditional banking has taken a bit of a hit. What’s the feeling like in the Islamic banking world? Is it still pretty downbeat?

EA: I think Islamic banking is completely different and everybody believes today that the future is for Islamic banking. We very much believe in this and we have many products we can offer to different kinds of economic activities.

IO: Has it experienced the same kind of hit that traditional banking has experienced?

EA: No, not really because we are not involved in trading of loans. We are not at all in that, so we were not affected by the first hit. But of course the second hit, the liquidity issue, affected everybody.

IO: David, I was wondering if you could briefly introduce the Dubai Multi Commodities Centre for me and tell our readers exactly what it’s about.

David Rutledge: Sure. DMCC is a government of Dubai entity. It was established a little over seven years ago. It’s a free zone authority in Dubai, which means it has an area of land set aside which it has developed primarily for offices and residential space. That’s kind of the seed capital for DMCC that the government gave us. And that seed capital is being used firstly to promote a centre for companies that have an interest in trading commodities in one form or another, so we have about 1400 such companies that have now registered with DMCC as free zone companies.

In addition to that, we’ve developed a range of what we call market infrastructure for the commodity sector in Dubai – and to some extent in the region – so we’ve established some exchanges. We’ve established physical facilities for trading certain commodities – notably tea and cotton, which are important regional commodities – and we’ve established or created an electronic commodity warehouse receipt system to facilitate the financing of commodity trade, both in a conventional financing way and in the Sharia compliant way. So, we’re there substantially as a facilitator I guess, but also to establish businesses that have a commodities relevance and are consistent with building Dubai’s role as a significant trading centre for commodities.

IO: So, are you primarily set up to assist in the Islamic banking community or do you deal with other forms of financial operators? I mean, are you essentially a gateway between commodities and Islamic banking?

D: Well, no, I don’t think that’s our primary purpose, and I’d have to say that most of our relationships, historically, have been with conventional financial institutions. But as Mr Al Shamsi has mentioned – and you mentioned previously – the relationship between Islamic finance and the physical commodity sectors is a natural and very strong one. So I guess it’s kind of inevitable that over time we’ve built relationships with Islamic financiers and that many of the things that we do are of interest to Islamic financiers.

IO: What kinds of opportunities are you looking at in Australia?

D: Well, I’m here partly to see whether some of the infrastructure that we’ve developed could be deployed here. And I’m thinking about trade finance platforms that could be deployed here in Australia because of Australia’s very substantial commodities base. Also we have developed a range of investment products that are Sharia compliant and we’re interested in examining the possibility as to whether some of those products may be capable of being distributed here within the Australian market.

IO: And what are the opportunities looking like? What kind of reception have you had here?

D: Well, a positive reception. I mean, the delegation as a whole has been very well received. I think there’s a real burgeoning interest in Islamic finance here at the moment. But I think it’s too early to draw conclusions. We’ve still got one day of the delegation’s, or the mission’s, meetings to conclude – and then I’m sure once that’s done that the members of the mission will want to get together and compare notes and thoughts before reaching conclusions. But I think it’s been a very encouraging few days that we’ve had in Australia and I’m personally quite optimistic about various initiatives that may be able to be undertaken here.

IO: What’s the feeling like, generally, among the commodity trading market in the Middle East? Because in Australia it’s been pretty flat, with the demand tapering off quite sharply for a lot of our key trading partners.

D: Well, obviously the global slowdown has affected commodity markets and many commodity prices have fallen – and that inevitably is of concern to producers, which Australia primarily is. In the Middle East, I think it depends to some extent on what commodities you’re talking about. But I think for many commodities, particularly foodstuffs, it’s business as usual. I mean, the population consumes food basically no matter what stage of the economic cycle we’re at. And my understanding is that trading in many agricultural commodities is proceeding pretty much as before. I guess the one caveat I’d put on that is that, because of the banking crisis, it’s been harder for commodity traders to obtain finance – just because of the effect the liquidity in the banking markets and so on. But look, I think commodity markets are cyclical by their very nature and Australia knows that. I’m sure that the markets will move through the cycle, as they always have, and commodity producers in Australia will see better days again.

IO: I hope you have a successful trip and enjoy Australia.

EA: Thank you.

D: Thank you very much.

(Business Spectator)

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Pakistan Islamic Banks Join Hands

KARACHI -- Pakistan’s six Islamic banks are going to set up an Islamic inter-bank price market in order to stop relying on interest-based conventional banks in meeting their short-term funds requirements.

"Things are almost finalized and an official announcement in this regard will soon be made," Ahmed Ali Siddiqui, head of Product Development Shari`ah Compliance at Meezan Islamic Bank, Pakistan's first full-fledged Islamic bank, told on Monday, June 29.

There is already a conventional inter-bank price market for interest-based conventional banks in the South Asian Muslim country.

"Though, the exiting inter-bank price market is not completely haram, our customers and religious scholars feel awkward about that because of the involvement of interest-based banking sector," Siddiqui said.

"Therefore, the Shari`ah advisory boards of the six Islamic banks sat together a few months back and decided to set up their own interest-free price market," he added.

"The major thrust of the proposed market is that the Islamic banks should not depend on the conventional banking sector in order to meet short-term funds requirement, which is unavoidable in this field," Siddiqui explained.

"Therefore, we have decided to meet our respective funds requirements through each other. We believe that the Islamic banks have sufficient funds to meet each others’ funds requirements."

Dr Shahid Hasan Siddiqui, a Karachi-based veteran economist, welcomed the Islamic inter-bank price market plan.

"This is a very timely decision because the Islamic banks have been depending on interest-based banks to meet their short-term funds requirement, which confuses their customers," he told IOL.

"There is no doubt about its viability. It will work Inshaullah."

Pakistan has six Islamic banks, Meezan Bank, Bank-al-Islami, Global Islamic Bank, Al-Barka Bank, Dawood Islamic Bank and Global Emirates Islamic Bank.

They have around 500,000 customers in consumer financing and deposits sectors and hold 5 percent share in the overall banking sector in the country.

Meezan is the first full-fledged Islamic bank in Pakistan and was issued license by the State Bank of Pakistan in 1997.


The banks decision is the latest sign of the boom in Islamic finance in Pakistan.

"This is a major step which we are going to take vis-à-vis expansion of Islamic banking in Pakistan," said Siddiqui.

He asserted that Islamic banking has gained a boom during the last few years, especially after the simmering global financial crunch.

"We have witnessed a growth rate (in Islamic Banking) in three figures during the last year. And we are targeting 12 percent share in the overall banking sector by 2012."

Siddiqui says the current global financial crisis has diverted more and more Pakistanis towards Islamic banks.

"We have not received any direct impact of the global financial crisis because our investments are assets-based rather than speculations."

Islamic finance is already one of the fastest growing sectors in the global financial industry.

The Islamic banking industry, which began almost three decades ago, has made substantial growth and attracted the attention of investors and bankers across the world.

Currently, there are nearly 300 Islamic banks and financial institutions worldwide whose assets are predicted to grow to $1 trillion by 2013.

By Aamir Latif, IOL Correspondent

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Asian Finance Bank To Disburse RM1 Bln In Funds By Year-End

KUALA LUMPUR, June 29 (Bernama) -- Asian Finance Bank Bhd (AFB), a full-fledged Islamic bank, is confident of disbursing a total of RM1 billion in funding by year-end.

Its chief executive officer, Datuk Mohamed Azahari Kamil, said currently the bank has disbursed almost RM600 million in funding.

"Our funding has been growing tremendously, and hopefully by year-end, they will touch RM1 billion," he told reporters after the signing of the financing facility agreement for a Tawarruq Term Financing-i of RM65 million with TH Indo Industries Sdn Bhd, a subsidiary of Lembaga Tabung Haji here Monday.

Currently, the bank already provided funding to Malaysian government-linked companies for their business expansion especially in the Middle East.

AFB was incorporated on Nov 28, 2005 and is backed by a consortium of shareholders from Middle Eastern financial institutions -- Qatar Islamic Bank and associates (70 percent), RUSD Investment Bank Inc of Saudi Arabia (20 percent) and Financial Assets Bahrain WLL (10 percent).

It opened its first branch in Kuala Lumpur in early 2007 and in March 2008, it opened another branch in Johor.

Mohamed Azahari said the bank planned to open a branch in Kuching, Sarawak by first quarter next year.

"The bank is currently conducting feasibility study to set up a branch in the state," he said.

He said the bank has held talks with strategic partners in Brunei to set up representative office in the country.

Meanwhile, AFB has been appointed deposit collection agent for Lembaga Tabung Haji.

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Saturday, 27 June 2009

Europe banks eye IPO brief for $10 bln Islamic bank

LONDON, June 25 (Reuters) - European banks are showing interest in investing in and providing initial public offering advice to a planned $10 billion Islamic bank, the chairman of the Union of Arab Banks told Reuters on Thursday.
Adnan Ahmed Yousif said the bank, which would be the first Islamic bank of its size and which is to be launched by year-end, is attracting foreign investors.
"The good thing is that in the past two months we have received a good interest level from European banks, they want to contribute both capital and do the IPO for us," he said.
He declined to name the interested European banks, and when asked about their nationalities, he said "German banks... and other European (banks) also." He said no French bank was involved.
The bank has been mulled over for years by Saudi billionaire Sheikh Saleh Kamel, who is chairman of Bahrain-based Al Baraka Banking, of which Yousif is chief executive.
The emerging Islamic finance industry has boomed over the past years, with its assets being estimated at between $700 million and $1 billion, but is yet to produce a bank large enough to compete with the Islamic subsidiaries of Western banks.
Most Islamic banks are also focussing on only one of the three regions, in which the industry has established itself, South East Asia, the Gulf Arab region and Europe.
Yousif earlier said some $3.5 billion have already been raised from Middle Eastern private and semi-governmental investors including Islamic Development Bank and Saudi Investment Bank, with a $3 billion IPO planned for the end of the year.
"The bank is not going to compete with other Islamic banks, it will combine investment, wholesale and retail," he said on Thursday.
Yousif said he will not take any role in the new bank.
"I am just giving business advice, it is free and Sheikh Saleh is providing his expertise," he said.
Islamic banks cater to investors who would like to avoid earning or paying interest, viewed as usury under Islamic law.
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Islamic banks need stress test

Dubai: The US Treasury's stress test of 19 US banks was positioned as a confidence-building - not a solvency-ensuring - measure. Islamic banks need to undertake a customised stress test of their own.

The test should showcase a very different banking model that has so far avoided major bailouts and bankruptcies.

The subprime-induced credit crisis has flushed out the false premise that Islamic banking and fin-ance was disconnected from conventional finance. Islamic finance operates in the same tax, regulatory and legal environment and has the same vulnerabilities of liquidity and confidence crisis as the conventional sector.

Furthermore, as Islamic finance is young, its regulations are fragmented globally. Islamic finance has also been accused of being opaque, which can perhaps also be attributed to the embryonic nature of the industry.

In addition, because of the Sharia prohibitions on riba (interest), gharar (uncertainty) and misyr (speculation), the Islamic bank system has greater exposure to real estate and stock loans, with fewer risk and liquidity management tools and an excessive reliance on commodities (murabaha).

The Islamic finance industry also still has an incomplete information offering for customers, requires more qualified personnel and suffers from the usual complaint about lack of standards.

Should the stress test be extended to Islamic investment banks' wholesale divisions as well? The wholesale divisions of Islamic investment banks seem more vulnerable to the market movements of private equity and real estate.

The seal of approval after a stress test would objectively show that the Islamic finance model works better, or at least differently, than its conventional counterpart in a crisis environment.

While each country's central bank would be the natural lender of last resort for Islamic banks that fail stress tests, the multilateral Saudi Arabia-based Islamic Development Bank could have a role to play here by offering capitalisation funds in return for equity stakes.

The methodology of the stress test will be most important, hence it must be transparent, comprehensive and flush out impaired Islamic assets. This naturally leads one to ask if a "bad Islamic bank" or even asset management company should be set up to buy off-loaded assets as part of a cleansing process, assuming there's no Sharia prohibition issues such as discounting.

Potential top-line outcomes of an Islamic finance stress test could include:

- The encouragement of consolidation among smaller banks, presenting an interesting situation of (possibly) a conventional bank buying an Islamic bank and making the acquired entity an independent subsidiary.

- Sale of non-core assets of Islamic banks.

- The need for more and better risk and liquidity management tools, and because of the unique nature of Islamic banks, more frequent (unaudited) reports to the regulators.

- The need for better corporate governance, including independent boards of directors and non-executive audit committees.

- Islamic accounting rules harmonisation with International Financial Reporting Standards.

- The fast tracking of trust laws to off-load asset backed securitisations as Sukuk.

- Islamic depositor protection, as capital protection is already Sharia acceptable.

- Coordination among the Islamic "lobbying" bodies like the Accounting and Auditing Organisation for Islamic Finance Institutions, Islamic Finance Services Board, International Islamic Finance Market, Islamic International Rating Agency, etc., and the Islamic hubs of Bahrain, Dubai, London and Malaysia.

- A well capitalised global Sharia consulting firm modelled after an international law firm.

In a crisis, there are opportunities to build confidence. The subprime crisis has presented a compelling window of opportunity for Islamic finance to both showcase the merits of asset-based or backed financial intermediation as well as the deployment of savings into real investments without the "financial weapons of mass destruction" of leverage and derivatives.

Islamic finance can make friends and influence people, but it must undertake a confidence-building exercise and cross-sell to non-Islamic users, by way of a customised stress test.

By Rushdi Siddiqui

The writer is global head of Islamic finance at Thomson Reuters. The views expressed here are his and not necessarily those of Thomson Reuters.
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What are the sources of Islamic legislation?.

Praise be to Allaah.

The sources of Islam on which all beliefs, principles and rulings are based are represented by the two Revelations: the Qur’aan and Sunnah. This is what is implied by Islam being a divinely-revealed religion: its pillars are based on infallible texts that were sent down from heaven, which are represented in the verses of the Holy Qur’aan and the texts of the saheeh Prophetic Sunnah.

Imam al-Shaafa’i (may Allaah have mercy on him) said:

No view is binding unless it is based on the Book of Allaah or the Sunnah of His Messenger (peace and blessings of Allaah be upon him). Everything other than them should be based on them. End quote.

Jimaa’ al-‘Ilm.

From these two sources the scholars derived other principles on which rulings may be based. Some scholars called them the sources of sharee’ah or the sources of Islamic legislation. They are: ijmaa’ (scholarly consensus) and qiyaas (analogy).

Imam al-Shaafa’i (may Allaah have mercy on him) said: No one has any right whatsoever to say that something is halaal or haraam except on the basis of knowledge, and the basis of knowledge is a text in the Qur’aan or Sunnah, or ijmaa’ (scholarly consensus) or qiyaas (analogy). End quote.

Al-Risaalah (39).

Ibn Taymiyah (may Allaah have mercy on him) said:

If we say Qur’aan, Sunnah and ijmaa’, they all stem from the same source, because the Messenger agrees with everything that is in the Qur’aan, and the ummah is unanimously agreed upon it in general. There is no one among the believers who does not believe it is obligatory to follow the Book. And everything that the Prophet enjoined in his Sunnah, the Qur’aan obliged us to follow it. So the believers are unanimously agreed upon that, and everything on which the Muslims are unanimously agreed can only be true and in accordance with what is in the Qur’aan and Sunnah. End quote.

Majmoo’ al-Fataawa (7/40).

Dr. ‘Abd al-Kareem Zaydaan said:

What is meant by the sources of fiqh is the evidence from which it is derived and on which it is based. If you wish, you may say: The sources from which it is derived. Some people call these sources the “sources of sharee’ah” or “the sources of Islamic legislation.” No matter what they are called, the sources of fiqh all derive from the Revelation (wahy) of Allaah, whether it is Qur’aan or Sunnah. Hence we prefer to divide these sources into original sources, namely the Qur’aan and Sunnah, and secondary sources to which the texts of the Qur’aan and Sunnah refer, such as ijmaa’ (scholarly consensus) and qiyaas (analogy). End quote.

Al-Madkhil li Diraasat al-Sharee’ah al-Islamiyyah (p. 153).

With regard to sources other than these four, such as the opinions of the Sahaabah, istihsaan (discretion), sadd al-dharaa’i’ (blocking the means that lead to evil), istishaab, ‘urf (custom), the laws of those who came before us, al-masaalih al-mursalah (things that serve the general interests of the Muslims) and so on, the scholars differed as to how valid it is to use them as evidence. According to the view that they are acceptable – all or some of them – they are secondary to the Qur’aan and Sunnah and should be in accordance with them.

And Allaah knows best.

(Islam Q&A/Shaykh Muhammad S. Al-Munajjid: Fatwa No 112268)

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Thursday, 25 June 2009

Banking on sukuks in a crisis

The global financial crisis has taken the wind out of the sails of the equities market. More than that, it has hurt lending badly. But it has breathed fresh air into the bond market - be it Islamic or conventional.

Seizing the opportunity, Abu Dhabi, Dubai and Qatar all have issued billions of dollars worth of conventional bonds in recent months.

Bahrain went a step further and issued a $750 million sovereign sukuk that attracted an order book of about $4 billion with strong demand from the Middle East. (Islamic bonds, or sukuk, are underpinned by physical assets whose returns are used to pay bond-holders, to account for Islam's prohibition of interest.)

Are these isolated instances of Gulf governments trying to increase their liquidity?

They are not. Regional governments are co-coordinating efforts to develop secondary bond trading. In the past creditors tended to hold the few bonds that were issued to maturity. The new government issuance will help develop a yield curve, which will make for more efficient pricing and give corporate issuers a benchmark to price against.

Also, it is a push by the region to further develop their debt markets and shift the pressure of bank lending to fund the mega-projects that have come to characterise the region.

The high-cost and long-term nature of these ventures, which include new economic cities, refineries and airport expansions, requires longer-term financing that has been increasingly difficult to secure as the global recession has tightened credit markets and sapped liquidity.

After the sukuk, Bahrain now hopes that firms will follow the government lead. Aldar, one of the largest Emirati property developers, has reportedly retained advisers to consider issuing bonds.

"One of the major reasons behind this issue was to establish a yield curve benchmark for longer-term Islamic securities," says Sheikh Salman bin Isa Al Khalifa, executive director, banking operations, CBB.

"This is a testament to Bahrain's strong credit and the confidence which international markets place on the kingdom's financial sector," says Sheikh Salman.

The five-year sukuk was priced at the low end of expectations at 340 basis points over US Treasuries. The central bank says the bonds enjoy a solidly investment grade rating of 'A' by ratings agencies Fitch and Standard & Poor's.

"They've quickly realised when they saw the responses coming through they could increase the issue, the only constraint was in terms of assets," says Mohammed Dawood, head of debt capital markets at HSBC Amanah, one of the lead arrangers of the issue.

Some 55 per cent of the issue went to Middle Eastern investors, with Europe accounting for 26 per cent and Asia for 15 per cent of the investor base of almost 200 accounts, Dawood says.

He says there would have been more than enough demand from the Middle East to cover the whole issue.

"Previous issues would be placed internationally and bid up by local investors who received lower allocations. This Bahraini issue is a departure from that strategy to achieve tighter pricing," says Mohieddine Kronfol, managing director at Dubai-based asset management company Algebra Capital.

The strong demand for the sukuk is likely to encourage corporates eager to return to the market which has been lying idle for months after the global liquidity freeze hit the region late last year.

"That should be a promising sign for corporates to trade off their sovereigns for a premium relative to quality of credit," says Nader Al-Salim, a banker at Citigroup's Islamic banking operations.

The London Stock Exchange has welcomed the Bahrain sukuk. This is the first sukuk to be listed in Europe this year and highlights London's standing as a key global venue for Islamic finance.

What next? Kuwait and Saudi Arabia would be next in line to issue sukuks. Saudi Electricity plans to issue sukuk that could be worth about 5 billion riyals ($1.33 billion). Saudi Arabia also launched its new market for both conventional bonds and sukuk to offer firms new sources of funding amid tight credit conditions.

But, despite all the euphoria the fact remains that sukuks are more often illiquid.

According to a 2007 study by economists from the International Monetary Fund, sukuk have delivered lower returns to investors than conventional bonds and are more often illiquid, meaning they are hard to buy and sell in the secondary market.

It remains to the issuing governments to coordinate their efforts to develop a robust secondary market for sukuks so that bond-holders are not pushed to a corner because of illiquidity.

(by K S Sreekumar / Business Weekly)

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Wednesday, 24 June 2009

Islamic Banking Gains Momentum: Malaysia is the leader in market share

Governments trying to set framework for establishing Islamic Banking. Conventional banks trying to extend their line of service by Islamic Banking. And Islamic banks are expanding their network globally. Islamic Banking is on the rise! But despite that impressive growth standards have to be set in order to not dilute the quality of Islamic Banking.

Recently there is a lot of talk about Islamic Banking as it seems to have proofed more resilient than conventional banking. However the total number of Islamic banks is still small and according to online-researches conducted by Shariah-Fortune estimated at around 350-400 institutions worldwide. Compared to around 9,500 banks located in the USA the Islamic Banking sector still seems pretty small.

But its relativ small numbers bear potential for extraordinary growth rates. According to estimates Islamic Banking is one of the world's fasted growing financial sectors, rising 15-20 % p.a. Asian Banker Research Group found out that growth rate is as high as 26.7 % among the 100 largest Islamic banks.

Basically Islamic Banking is not only restricted to about 1.5 bn Muslims; indeed even non-Muslims can profit from the advantages of Shariah-compliant banking. Most of the banks offer their services to non-Muslims as well.

Islamic banks are located in 50 countries worldwide and can be found in countries like Algeria, Azerbaijan,...Yemen. Major Islamic Banking hubs are Malaysia, Bahrain, UK and UAE.

With regards to the above mentioned many countries and banks now trying to establish or expand Shariah-compliant banking.
A recent example is the mainly Muslim nation of Kazakhstan in which 3-4 Islamic banks are planning to set up operations soon. Special attention should be paid to China. The China Banking Regulatory Commission had given approval to a pilot project of Bank of Ningxia to undertake Islamic financial services in the People's Republic of China. Even African countries like Nigeria or Senegal trying now to expand their Islamic Finance systems. In March 2009, a framework for non-interest banking was released by the Central Bank of Nigeria. More examples could be named.

However many of these countries are not yet ready to offer Shariah-compliant banking services as they either lack human resources, expertise or the economical and political framework to do so. According to Dr. Al Jarhi, President of the International Association for Islamic Economics, ' of the most serious challenges is represented in the need for set standards and criteria for the governance of Shariah boards at Islamic banks'.

Shariah-Fortune is a service provider in the Islamic Finance Intelligence. It provides informational content with regards to Islamic banking & financing, insurance/takaful, real estate, investment, asset and wealth management and other services related to Islamic finance. Shariah-Fortune provides the world´s biggest company online directory for Islamic Finance with more than 800 institutions in 50 countries worldwide. It covers nearly every geographic region and segment in the Shariah compliant products industry, sourced from the internet through a substantial secondary research effort coupled with a high quality data cleansing process.
Periodically Shariah-Fortune issues a free market report about the size, market players and development of the Islamic Finance sector.
Shariah-Fortune is headquartered in Dubai. For more information on Shariah-Fortune please email
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Shariah-compliant funds present key opportunities: PWC

Investment houses willing to take on the Shariah compliant funds market will reap significant rewards as the sector continues to grow, according to PriceWaterhouse Coopers.

In a new research paper, the actuary adds current forecasts estimate Shariah equity fund assets to increase from $15bn in 2008 to $53bn by 2010.

Elizabeth Stone, investment management tax partner, says: "Funds structured on Shariah principles provide conventional asset managers with a new pool of investors.

"The relative infancy of the sector is evident by the lack of Shariah-compliant products being offered by asset managers, however as the technical gap narrows, and as new products are developed the market participants that are involved in this initial development phase of Shariah-compliant funds are likely to derive significant benefits."

However, PWC adds it is important to note difficulties do exist in entering the market, namely: higher costs to set up and finance mandatory Shariah boards, on which the best-known scholars can receive compensation in the millions of dollars per year, along with an expensive screening process and a lack of scale in many funds which amplifies the costs.

"The impact of such costs should start to reduce as the average fund size increases and economies of scale are found across the industry. As time goes on and the markets become deeper and more liquid, a solution should automatically present itself," the report adds.

(By Alwynne Gwilt/Investment Week)

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Tuesday, 23 June 2009

Gulf investors may set up Islamic bank ("participation bank") in Turkey

ISTANBUL - Investors from the Gulf state of Qatar and neighboring Syria may set up an Islamic bank in Turkey, according to a story in The Peninsula, an English-language daily published in Qatar.

A delegation of Qatari and Syrian investors, led by Sheikh Khalid bin Abdullah bin Thani Al Thani, visited Ankara recently to discuss plans to set up the Islamic bank, called a "participation bank" in Turkey, the newspaper reported over the weekend.

Discussions are at an initial stage for the proposal, the newspaper said, reporting that "Dr. Sheikh Khalid bin Abdullah bin Thani Al Thani was welcomed in Ankara by Tevfik Bilgin, chairman of the Turkish Banking Regulation and Supervision Agency."

According to the story, the possibility of involving prominent Qatari and Syrian investors with expertise and skills in Islamic banking in the proposed project was discussed at the meeting.

"It was mutually agreed upon to continue with follow-up meetings on setting up the proposed Islamic bank," The Peninsula wrote. "Bilgin assured Khalid of all possible cooperation and support for establishing a joint venture Islamic bank in Turkey."

(Hurriyet Daily News)
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Too much of a good thing led to bad times: lessons from global financial crisis

The returns from risky financial innovations - structured credit, securitsation of mortgages and tri-party repo - were so good that many investors did not subject them to risk analysis, thus laying the foundation for the global financial crisis, writes MOHAMED ARIFF

HEAVY losses incurred by the two hedge funds managed by Bear Stearns, made known in June 2007, heralded the beginning of what has turned out to be a global financial crisis.

That was followed, in July, by the downgrading of a large number of collateralised debt obligations (CDOs) with a heavy dependence on mortgages as collateral. Interbank markets around the world began to experience liquidity shortages in August.

Northern Rock, a British mortgage lender, was hit in September by a run on the bank.

In October, large bond insurers reported losses arising from credit enhancements they had provided to structured securities. In December, there were waves of margin calls in the repo markets.
In February last year, there was another wave of deleveraging hitting the fixed income markets, amid reports of a worsening economic outlook in the United States.

In March last year, the US investment bank Bear Stearns caved in and was rescued by JP MorganChase, a US commercial bank, with a US$30 billion (RM100 billion) lifeline thrown in by the US Federal Reserve.

Financial analysts have attributed the financial turmoil primarily to a wide range of financial innovations: structured credit, securitisation of mortgages and the tri-party repo.

In the structured credit category, CDOs have helped transform instruments with high risk into instruments with high credit ratings, while credit default swaps (CDS) have allowed CDOs to be created more easily, dubbed "synthetic CDOs".

Financial innovations have led to the creation of CDOs based on asset-backed securities (ABS) and asset-backed commercial paper (ABCP).

CDOs could proliferate because of the originate-to-distribute business model of the world's largest commercial and investment banks, which allows loans to be packaged into mortgage-backed securities.

In this process, the incentives of mortgage originators to rigorously screen loans were considerably weakened.

Tri-party repo transactions, in which the third party, that is, a clearing bank, takes custody of the collateral, have led to a wide range of collateral being accepted in the repo market.

This had enabled investors in securities to secure financing more easily until February last year, when lenders in the repo market became increasingly wary of some assets as collateral.

Credit expansion in the run-up to the crisis was aided by a long period of easy monetary conditions, with savings gluts in East Asia and the Middle East and low or negative interest rates in major economies.

The upshot of all this led to asset price hikes, increased leverage and excessive risk-taking. As financial institutions in major economies became more tolerant of risk, investor demand for disclosure slackened.

Apparently, the going was so good for so long that many did not bother to subject their financial instruments to sound risk analysis, overlooking maturity and liquidity mismatches, which culminated in a credit crunch.

The weakening of the real sector of the US economy may have precipitated the financial woes of the US, with rising loan defaults, tumbling property prices and mounting balance-sheet losses.

The speed, at which the subprime crisis spread from the US to other parts of the world, in part due to financial market connectivity and interdependence, was amazing. Liquidity dried up, even in markets where there were no signs of defaults or credit rating downgrades.

Central banks have understandably swung into action to stabilise the situation. The liquidity support by the Bank of England for Northern Rock is a case in point, although the stigma of borrowing from the central bank was preventing other banks from accessing this facility. Likewise, the US Federal Reserve rescued Bear Stearns.

Some central banks have resorted to liquidity operations through changes in the composition of their balance sheets. The US Fed, for instance, did this by providing preferred assets to, and removing toxic ones from, the repo market.

These short-term measures were necessary but not sufficient to stabilise the financial system.

There is a need for long-term measures to plug the holes created by financial innovations, and to subject financial institutions and instruments to tougher regulations. Existing regulations need to be enforced more forcefully.

Regulators have not been doing a good job. One wonders how the failed or besieged entities could have been in the good books of the regulators till they suddenly fell apart.

Believe it or not, Bear Stearns was Basel-compliant, while AIG (American International Group) was given a "triple-A" rating despite the financial mess it was in.

All this smacks of negligence or incompetence on the part of the regulators. Isn't there a need to regulate the regulators? All is not well with the present regulatory framework, especially with respect to perverse incentives.

Mechanisms are needed that will ensure that risks are quickly identified, accurately assessed and prudently managed, with no perverse incentives or conflicts of interest. In particular, liquidity risk management needs to be sharpened.

The Basel Committee's proposal to increase capital charges for complex structured credit products merits serious consideration.

The importance of transparency can hardly be overstated. The US sub-prime problem developed mainly because of the lack of transparency. Financial products are arguably prime candidates for special attention.

In the final analysis, the burden falls on investors themselves, underscoring the need to exercise due diligence on the risks they take against the returns they get. But investors do not act in isolation, and are influenced by the environments in which they operate.

At the centre of the systemic risks lies the tendency for investors to take too much risk in good times and shed it in bad times.

Recent experience has shown that excessive risk-taking is associated with innovative financial instruments. Market intelligence is needed to keep tabs on how these instruments are used, and to track the channels through which they proliferate.

While financial innovation is welcome, as it widens the array of instruments to meet the needs of investors and adds sophistication to the financial sector, there are pitfalls to be wary of.

In this regard, conventional finance may have lessons to offer to Islamic finance, which has also jumped on the innovation bandwagon with more syariah-based instruments.

While Islamic ethics may rein in excesses, no one can assume that Islamic finance is inherently stable.

To be sure, Islamic finance is less vulnerable to crisis than its conventional counterpart. It is much less leveraged, as Islam disallows debts to be packaged and traded.

The writer is the executive director of the Malaysian Institute of Economic Research


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Monday, 22 June 2009

Indonesia: Sukuk Rebound Gives Domestic Firms Chance to Tap Global Finance Demand

The recovery of the global sukuk market and a lack of Shariah-compliant assets around the world should encourage domestic firms to tap the Islamic financing market, executives at HSBC’s Shariah unit said.

The sukuk, or Islamic bond, market is showing signs of recovery, with Indonesia and Bahrain successfully selling international sukuk this year after almost a year-long hiatus due to the global recession, said Mahmoud Abushamma, head of HSBC Amanah Syariah.

Amid the downturn, the total volume of global sukuk issues halved to less than $15 billion in 2008 from $30 billion the year prior, HSBC said in a statement.

The market virtually ground to a halt in March 2008, it said.

But after Indonesia’s debut in the global sukuk market in April the country managed to sell $650 million Shariah-compliant securities on orders of $4.7 billion amid strong response from international investors for its dollar-denominated sukuk. At the time, it was the biggest sukuk issue since July 2007.

Mahmoud said Indonesia succeeded with its global sukuk issue partly because it tapped the market “at an opportune time, when there was a limited supply of dollar-denominated sukuk, investors were starting to search for investment assets.”

Gahet Ascobat, HSBC Amanah’s senior vice president of structured finance, said that many investors seeking Shariah-compliant investments have been unsure about where to put their money, due to a complete lack of sukuk issues for more than a year.

“But once a sukuk issue finally came along, investors grabbed it with both hands,” Gahet said.

Indonesia’s success was followed this month by Bahrain, which just issued a $750 million global sukuk, beating Indonesia’s offering.

The Bahrain issue also elicited strong demand, with an order book of $4 billion.

“The huge oversubscription for both the Indonesia and Bahrain sukuk clearly signals that the sukuk market is on the rebound,” Mahmoud said. “It also reflects the need for sukuk instruments among Muslim investors.”

Strong demand, combined with a lack of supply, said Mahmoud, should encourage Indonesian firms to “seriously consider the sukuk market as a viable funding source to diversify their investor base.”

A number of domestic firms, including state electrical utility PT Perusahaan Listrik Negara, cellular provider PT Indosat and shipping company PT Berlian Laju Tanker have issued sukuk this year.


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Sunday, 21 June 2009

Saudi developer Jabal Omar plans big sukuk issue

Jabal Omar Development Company said its shareholders have allowed it to issue Islamic bonds after the Saudi developer faced problems in raising a multi-billion dollar financing for its sole project.

Jabal made the announcement on the Saudi stock exchange website on Saturday after a shareholders' assembly on Wednesday. It did not elaborate.

Last month, the firm appointed an affiliate of al-Rajhi Bank, the world's largest Islamic lender, to arrange financing worth a previously estimated $3.31 billion.

Al-Rajhi Financial Services was named to arrange financing through sharia-compliant instruments for Jabal Omar's project in the holy city of Mecca, Jabal said then.

Jabal Omar said in April that its previous financial adviser, Saudi investment bank Jadwa Investment Company, had been unable to secure SR12.4 billion ($3.31 billion) to finance the project within agreed deadlines.

A Jadwa source said it had managed to secure just $400 million in financing because of tight credit conditions.

Earlier this month, the stock market regulator launched a market for debt securities, responding to a long-standing demand by some firms to diversify sources of financing.

A surge in lending over the past five years that was fuelled by record oil prices has brought several Saudi banks to curb their credit capacity with loan-to-deposit ratio exceeding at the end of last year the limit imposed by the central bank.

Bank loans in 2008 equalled their total during the previous two years. Concern over fallout of the global crisis has further slowed down credit growth as lenders became increasingly cautious.

The bourse currently trades Islamic bond issued by just two listed firms - Saudi Basic Industries Corporation and Saudi Electricity. The government is a major shareholder in both firms.-Reuters
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Saturday, 20 June 2009

Developing Islamic Banking in the Muslim Republic of Russia

The Islamic Banking is being developed and promoted all over the World. Recently not only Muslim countries such as Kingdom of Saudi Arabia, State of Kuwait, State of Qatar and others, but also countries not directly connected with Islam: England, France, Japanese and others have shown interest to it.

The Islamic Banking is very young. In contrast to the traditional European model of financial management it has no long history and development experience. Russian bankers got the experience of collaborations with Arabian colleagues three years ago. A Russian bank “Globaks’ announced an economical transaction of the attraction of credit of Dubai Islamic Bank in 2006 year. In 2007 year the agreement about the starting of the collaborations of Slavinvestbank with the financial institutes of the Meddle East countries was achieved.

And in the March a very major event was took place - The First International Conference Islamic Banking; specifics and prospects. It helped to apprise of the approaches an principle this direction for Russia

Nevertheless there is no actual promotion of the Islamic Banking yet. Though Russia is multi confessional country: by opinion of specialists up to 25 million of Muslims live in Russia. By diagnostic of experts, the Islamic Banking should continue to develop in Russia, to offer this service to Russian Muslims in the country in the Republic where people confess to hereditary of way of Islam.

In the early of 1990 years there were business negotiations about founding of financial institutions, offering products according of Seriate in Mahachkala the capital of Dagestan Republic. Now demands for the Islamic products are under examination. Now one of Dagestan Bank “Express” extensively offer of the Islamic debit card as one of hall products.

According to Mr. Ali Aliev, who is the First Vice President of Association of Dagestan Banks – “as of day Republic of Dagestan is a part of the investment processes, taken place at the south of Russia. Now it is profitable to invest in the regions, not to the traditional markets, which are already crowded.

The Islamic Banking will be developing say the Arabian economists. Though, it is difficult to assess the possibility of the durability of the Islamic Banking for Economic Crisis.

A lot of the Islamic financiers say about the big challenge for the Islamic Banking in 2009 year. And the one of goals for the Islamic Banks is the increasing of their business, offered products, a success which will be depend on product range, type of clients, which a bank is aimed, and the conditional of the market in this time.

If the Islamic finance products offered by professionally and a client has a good investment products for the private individual clients and also for corporate and government facilities, very often the Islamic products are more better then the other type of bank operations of a tradition bank said Mr. Aliev.

Despite that in Russia, as in other countries, it has no legislation which it is promoted to the Islamic Banking, anyway there is a possibility of the developing of the Islamic Banking in Dagestan through the structured products – pointed the Dagestan banker.

According to his version, it is not necessary that a share has been issued by an Islamic company. Shares, which are on the Russian stock exchange market RTS, are not be the Islamic shares, but they have Islamic characteristics according claims of the Muslim investors as there are company, for example, they do not business of the developing and selling of alcohol products. In other words despite companies are not Muslim their shares can be approach as social and mental shares for Muslim people. It is a decision of the situation which can become of the beginning of the developing the new model of financing which is the worth financial model by bankers and investors from the World.

Source: Press Release from Association of Dagestan Bank

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Friday, 19 June 2009

Islamic Financial System Has Opportunity To Grow

SEPANG, June 18 (Bernama) -- The Islamic financial system has opportunity to grow and expand while the global community is faced with challenges from the upheavals in the conventional financial system.

Minister in the Prime Minister's Department Datuk Jamil Khir Baharom said to meet that target three aspects had to be given attention.

Firstly, developing an Islamic financial industry that was truly sound, strong and established to face any crisis and challenge.

"Second, to encourage growth of the Islamic financial landscape based on instruments that can compete, were creative and innovative, and thirdly solidify monitoring and legal aspects to face the global financial environment that is getting more challenging," he said while officiating the 5th Muzakarah of Members of the Council of Syariah Advisors to Financial Institutions in Malaysia here Thursday.

He said the Islamic financial industry had begun to get a place and attention from the non-Islamic community when countries whose majorities were not Muslim like Singapore, Hong Kong, the United Kingdom, France and Japan showed interest in promoting Islamic finance.

"These developed countries were active in recruting expertise in Islamic finance to become global financial hubs," he said.

Jamil Khir said based on current data issued by Universiti Islam Antarabangsa Malaysia the Islam global financial industry needed up to two million skilled workers in the field compared to 92,000 in 2007.

He said this showed each year there was demand for 135,000 workers on average to support the industry.

"In this era of slowdown, we see many losing jobs in various sectors but the opposite scenario is happening in Islamic finance," he said.

He also said the time had come for Muslims to give serious consideration to the use of the gold dinar that is having currency backed by gold.

Jamil Khir said the collpase of a conventional financial system based on fiat money or currency not backed by assets represented the source of credit collapse that had an impact on the global economic slump.

He said study on the gold dinar as replacement to fiat money had to be done urgently.

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Tuesday, 16 June 2009

Customer-centric strategy ensures better Islamic funds: Al-Khabeer

JEDDAH - The global financial crisis that sent the conventional banking system reeling turned out to be a classic case of “a blessing in disguise” event for the Islamic financial system as it demonstrates to be a more viable and safe form of managing assets.
Recent data showed heightened interest in Islamic securities products which are spreading rapidly as a result of the “defects and faults” in the conventional system. Nowadays, the Islamic mutual funds industry is one of the fastest growing segments of the overall financial sector.
Andrew C. Broadley, chief executive officer, Al-Khabeer International B.S.C. (c), pointed out that total assets under management (AUM) by global Islamic funds industry totaled $44 billion, according to the 3rd annual Ernst and Young report.
Speaking at a “Scientific Forum on Asset Management from Islamic Perspective” held on Wednesday at King Abdul Aziz University - Jeddah, the chief executive of Al-Khabeer International noted however that “the concentration of Islamic funds has mainly been in the GCC and Malaysia, adding that “there is a lot of unfinished business in other countries.” He said the six GCC countries manage over 81 percent of the global Islamic fund AUM, which, according to CIA World Factbook data “are home to only 3.3 percent of the global Muslim population.
Under the present scenario, Broadley said there is a need to “properly” extend the Islamic financial products to countries where the bulk of Muslim populations are concentrated: Indonesia (207 million), Pakistan (160 million), India (151 million), Bangladesh (132 million), Egypt (71 million), Turkey (71 million), Iran (64 million), Algeria ((33 million) and Morocco (32 million).
According to Ernst & Young’s Islamic Funds & Investments Report, the largest concentration of Islamic funds remains in the Middle East and equity funds lead the field for choice of asset type. The report said 19 percent and 23 percent of Islamic funds are domiciled in Saudi Arabia and Malaysia, respectively. Saudi Arabia holds $19.28 billion in total assets under management for Islamic funds. Malaysia holds $4.579 billion in assets.
The report further said that Shariah sensitive investable assets in the GCC and Asia touched $736 billion in 2008 compared to $267 billion in 2007. This translates into a potential annual revenue pool of $3.86 billion for the Islamic asset management industry, it added.
In his presentation, Broadley pointed out that the opportunity for growth in Islamic asset management was intense even before the financial crisis surfaced. He said that out of 500 affluent investors surveyed in Saudi Arabia in 2003, 90 percent expressed the importance of Shariah-compliant investment and 65 percent “would use Shariah-compliant products even if I have to compromise some return or service quality.” He further said that Islamic investment vehicles are gaining popular appeal these days as they are regarded as “ethical investing” tools.
In Islamic asset management, he said relations between the managers and the clients are founded on “deep faith” where “value for money” is anchored in “honesty, truthfulness and transparency.”
Nonetheless, the CEO of Al-Khabeer International said “that many Islamic fund managers are (still) failing to translate investor needs into viable investment funds.”
He noted that there is “uniformity of investment style” such that equity funds are typically all relative return funds with performance clustered around the index… with insufficient management of downside risks.”
He further argued that “lack of alignment of interests of fund manager and investor, high fixed management fees and no segregation of duties of custodianship and administration from fund management” contribute to inability to satisfy investor’s needs.
Al-Khabeer International addresses the needs of institutional and high-net-worth clients who require Shariah-compliant private equity, asset management and capital market products and services.
In order to boost the performance of Islamic equity funds, which “has been mediocre” in the Kingdom, Al-Khabeer believes that the “best solution lies in managing funds with a dual focus on both risk and return.”
For Al-Khabeer, an alternative strategy would be “managing for the total return over an economic cycle, combining alpha generation from bottom-up stock selection with flexible asset allocation and strong operational risk controls,” Broadley emphasized.
“The ultimate goal is to lock in profits and limit the downside to an acceptable risk budget,” he pointed out.
The CEO of Al-Khabeer emphatically said that success could best be achieved by staying focused on addressing the specific needs of investor based on research.
He said Al-Khabeer’s “unique customer-centric strategy” would position the company to build better funds “faster than the competitors.”
He added that Al-Khabeer exercises “due diligence” to ensure that each fund is “very high quality” and “keep our fund sizes small and fairly price.”
It is essential that there is an “alignment of faith” between the fund managers and the clients, Broadley underscored, saying that in Al-Khabeer, “we (intend to) invest our own capital in the funds, so that we are aligned with our customers.” “We can focus on being the best in the industry and provide the total solutions that a growing number of clients seeks,” he added.
“The expected consequence of our vision is the establishment of a business which is capable of enduring for the long-term, the nature of the business cycle notwithstanding,” he concluded.
On the prospect of Islamic financial instruments amid global financial crisis, Al-Khabeer’s Chief Communications Officer Waleed A. Bahamdan said: “Many people (still) believe that the Gulf’s investment environment remains attractive for capitalization.”

By Querubin J. Minas Saudi Gazette
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