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Saturday, 31 October 2009

The History of the Dinar & Dirham

In the beginning the Muslims used gold and silver by weight and the dinar and dirhams that they used were made by the Persians.

The first dated coins that can be assigned to the Muslims are copies of silver dirhams of the Sassanian Yezdigird III, struck during the Khalifate of Uthman, radiy'allahu anhu. These coins differ from the original ones in that an Arabic inscription is found in the obverse margins, normally reading "in the Name of Allah". Since then the writing in Arabic of the Name of Allah and parts of Qur'an on the coins became a custom in all mintings made by Muslims.

Under what was known as the coin standard of the Khalif Umar Ibn al-Khattab, the weight of 10 dirhams was equivalent to 7 dinars (mithqals)

In the year 75 (695 CE) the Khalifah Abdalmalik ordered Al-Hajjaj to mint the first dirhams, thus he established officially the standard of Umar Ibn al-Khattab. In the next year he ordered the dirhams to be minted in all the regions of the Dar al-Islam. He ordered that the coins be stamped with the sentence: "Allah is Unique, Allah is Eternal". He ordered the removal of human figures and animals from the coins and that they be replaced with letters.

This command was then carried on throughout all the history of Islam. The dinar and the dirham were both round, and the writing was stamped in concentric circles. Typically on one side it was written the "tahlil" and the "tahmid", that is, "la ilaha ill'Allah" and "alhamdulillah"; and on the other side was written the name of the Amir and the date. Later on it became common to introduce the blessings on the Prophet, salla'llahu alayhi wa sallam, and sometimes, ayats of the Qur'an.

Gold and silver coins remained official currency until the fall of the Khalifate. Since then, dozens of different paper currencies were made in each of the new postcolonial national states created from the dismemberment of Dar al-Islam.

Allah says in the Qur'an:

And amongst the People of the Book there are those who, if you were to entrust them with a treasure (qintar), he would return it to you. And amongst them is he who, if you were to entrust him with a dinar would not return it to you, unless you kept standing over him. Qur'an (3,75)

Qadi Abu Bakr Ibn al-Arabi, the greatest authority on Qur'anic Law wrote in his famous "Ahkam al-Qur'an" about this ayat:

"The benefit that can be taken from this is the prohibition of entrusting the People of the Book with goods".

Qadi Abu Bakr said: "The question concerning entrusting property is legislated by the text of Qur'an." This means that the ayat is a legal judgement of absolute validity and of the greatest importance to the deen.

Entrusting wealth to non-Muslims is not allowed, but furthermore, taking a non-Muslim as a partner outside Dar al-Islam (where we stand over them) is extremely restricted, because they might cheat or might use our wealth in forbidden transactions.

Since paper-money is a promise of payment, can it be permitted to trust the issuers while they hold the payment (our property) outside our jurisdiction? History has also demonstrated repeatedly that paper money has been a permanent instrument of default and cheating the Muslims. In addition, Islamic Law does not permit the use of a promise of payment as a medium of exchange.

(Islamic Mint)

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Need For Deeper Look Into Islamic Financial Products

KUALA LUMPUR, Oct 31 (Bernama) -- While Malaysia is doing a great job in promoting Islamic finance, the adaptation process to some of its products will need a deeper look or "a second visit", according to a renowned Muslim scholar.

Dr Hatem El-Karanshawy, founding dean of the Qatar Faculty of Islamic Studies, has voiced caution over the need to quickly Islamise products just to be at par with other conventional instruments.

"We should not rush to adopt products and Islamise them in a way because we would like the products to be on the same footing as other western institutions or non-Islamic banking that are not based on Islamic principles," he said.

Egyptian-born El-Karanshawy, who was previously director of the Central Bank of Egypt, however, declined to name the products concerned when interviewed by Bernama during a recent financial event in Doha, Qatar.

He said that he had discussed the matter with those involved in the industry in Malaysia.

However, El-Karanshawy said Malaysia had done a great job in promoting the industry by hosting important international associations working for Islamic finance with the government giving a push in the social development of the system.

He dispelled the notion that Islamic finance is not progressive, saying that it is one of the fastest growing industries in the world.

However, he pointed out that some Islamic financial institutions are not adhering as they should be to the proper Islamic finance and this is where the real challenge is.

"If they can develop innovative products that would really correspond to the needs of society and adhere to the basic principles, then the growth would be faster and attract more financial institutions," he said.

On the notion that Islamic bank should not be profitable, El-Karanshawy said no one said that financial institutions in Islam should be charitable organisations.

"Yes they have to make profits but what type of profits? They have to make profits, they have to be successful. They are talking about corporate social responsibility after the aggressive movement of the market," he said.

This, he added, has been the misconception of Islamic finance.

Asked whether Islamic finance should be incorporated into the new global financial architecture, El-Karanshawy said the market then should be involved in social responsibility.

"If the financial sector job is financing investments, in the sense, it will study what's the money, where the money is going to and then have its returns based on fundamentals of investment and develop ways to share the risks, I think that is the direction that Islamic finance principles would help," he said.

He added that some elements for venture capital companies in the world could be easily adapted to accept or adhere to the idea of Islamic principles.

At the recent CNBC Global live debate in Doha, El-Karanshawy said current banking and finance had strayed from its function of being the "servant of the real economy" in facilitating productivity and development.

"People are talking about the secondary market, derivatives. Thinking about making profits rather than the real reason for making investments," he said.

With the problems posed by derivatives, El-Karanshawy questioned the action taken by the free market to address this.

Such innovations, according to him, have to be balanced and not risking investors' money.
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Thursday, 29 October 2009

ISDA Writes Global Standards for Islamic Derivatives

Oct. 27 (Bloomberg) -- Global standards for Islamic derivatives contracts may be published as soon as December, helping companies and investors manage risk more effectively, according to the International Swaps and Derivatives Association.

“This is a real innovation in what could potentially be a huge growth area,” ISDA Chairman Eraj Shirvani said in an interview in Singapore yesterday. “Establishing market standards with the input of the scholars’ opinions, combined with the expertise and benefits of the ISDA framework, potentially opens up a significant array of new hedging possibilities for issuers and investors.”

The New York-based ISDA, which represents more than 830 organizations active in the $592 trillion derivatives market, started working on its Shariah-compliant master agreement with the Bahrain-based International Islamic Financial Market in 2006. The first version of their framework will focus on swaps for profit-rate and currency transactions, Shirvani said.

Islamic finance is the fastest-growing segment of the global financial system with $919 billion of assets under management, including $114 billion of Shariah-compliant bonds, known as sukuk, Prudential Financial Inc. said on Oct. 7. Assets will grow to as much as $1.1 trillion this year, Kuwait Finance House KSC forecast in July, as the world emerges from recession and a recovery in oil prices boosts Arab wealth.

Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates.

Bond Trading

“Investors will have the ability to trade in sukuk they perhaps wouldn’t have been able to before without a hedging tool available to them,” Angus Amran, treasury and capital markets head for Cagamas Bhd., Malaysia’s biggest buyer of home loans, said in a phone interview from Kuala Lumpur. The standards will “promote homogeneity and acceptance of Islamic financial products,” he said.

Because Muslim Shariah law prohibits payment or receipt of interest, speculation and uncertainty, many Islamic investors avoid derivatives. To ensure compliance with Shariah, new Islamic financial products must be vetted and approved by recognized scholars who are versed in its principles.

Standardized terms in derivatives agreements may help market participants focus on “developing a more innovative and diverse range of Shariah-compliant derivative tools and products instead of channeling resources to reduce documentation risks,” said Mark Toh, who helps manage about $525 million in Islamic funds at Prudential Corp. Asia in Kuala Lumpur.

Oil Prices

Created in the 1970s after an almost 20-fold jump in oil prices over 10 years, the Shariah finance industry caters to the world’s 1.57 billion Muslims. From being almost non-existent a decade ago, the Islamic bond market has grown to $130 billion, according to Moody’s Investors Service.

Sukuk have returned 27 percent this year, an HSBC Holdings Plc index shows, after the market fell four times as much as conventional investment-grade corporate debt last year. The Dubai government set up a $2.5 billion Islamic bond program on Oct. 25 as the emirate seeks to sell international bonds for the first time in more than a year.

Malaysia, which has 14 Islamic banks and the biggest sukuk market, said in July that it would introduce a trading platform to make it easier for companies to buy and sell commodities like palm oil and rice that are used to back Islamic securities. Sukuk are asset-based bonds that pay a profit rate to investors to avoid interest.

Government Efforts

South Korea said on Aug. 26 that it plans to exempt sukuk from tax on distributions, joining countries including Singapore, Hong Kong, the U.K. and France that are modifying regulations to help attract Islamic investments.

Islamic financial institutions have been more resilient to the global financial crisis than their conventional counterparts because direct investment in subprime assets and derivatives is prohibited to them, Moody’s said in February.

“We have had many enquiries regarding derivatives and some people say this is important for the industry and some people have done without them,” Mohamad Alchaar, secretary-general of the Accounting & Auditing Organization for Islamic Financial Institutions, said in a phone interview today.

The Bahrain-based AAOIFI, which promotes industry standards, is not part of the ISDA’s project with the IIFM, Alchaar said.

Market Contagion

U.S. and European regulators have called for the adoption of central clearinghouses to reduce risk in derivatives after President Barack Obama’s administration described the contracts as a “major source of contagion” in the credit crunch.

The derivatives market relies on counterparties negotiating their own buy and sell orders, with no guarantees either will complete the trade.

“In Islamic finance gambling is prohibited, but running a big un-hedged open position is gambling in my way of thinking, so I’m pleased to hear there will now be more alternatives available for reducing risk,” Deborah Schuler, Moody’s group credit officer for Asia, the Middle East and Africa, said in a phone interview from Singapore.

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Ireland outlines tax laws for Shariah-compliant products

Ireland, like other European countries, is warming to Islamic finance and Dublin has emerged as an Islamic investment fund rival to the Channel Islands and Luxembourg. Indeed several Shariah-compliant funds are registered there, including the Oasis Crescent Global Equity Fund which is based in Dublin and so is the planned CIMB Global Islamic Equity Fund which is due to be launched over the next month or so.

Last week the Irish Revenue Service, the tax authorities, outlined in detail the tax treatment of Shariah-compliant products and structures for the funds, leasing and Takaful (Islamic insurance) industries.

Part 27 of the Taxes Consolidation Act (TCA) 1997 governs the taxation of funds. Chapter 1A of that Part applies the gross-roll-up taxation regime to all funds set up after March 31, 2000. According to the Revenue Service, the regime does not impose an annual tax on the profits of the fund but requires the fund/fund manager to deduct and account for tax out of payments made to unit holders - except for certain classes of unit holder who can, by use of a declaration procedure, be paid gross. Provided the fund is constituted in accordance with Chapter 1A, these arrangements apply irrespective of whether the fund is a Shariah-compliant fund or a conventional fund.

Any income received by a service provider, which is linked to the profits or performance of a fund should be treated as fee income where it relates to duties performed by the service provider. There is no specific VAT exemption for funds but would depend on the activities of the fund.

There is no stamp duty on the issuance or redemption of units/shares in a fund. In addition, the transfer of units/shares in a fund is not chargeable to stamp duty to the extent that the fund is an investment undertaking within the meaning of section 739B of the TCA 1997 or a common contractual fund within the meaning of section 739I of the TCA 1997.

As for Ijarah (leasing) transactions, the Irish Revenue Service says the provisions of the Taxes Consolidation Act 1997 will apply as if the Ijarah arrangement in relation to operating leases were a conventional operating lease arrangement, or if the Ijarah Muntahia Bittamleek in relation to finance leases were a conventional finance lease. Accordingly, a company that accounts for the transaction as a finance lease under generally accepted accounting practice may be taxed in accordance with the provisions of section 80A TCA 1997, in respect of relevant short term leases on making a claim and the Ijarah arrangement in relation to hire purchase, were a conventional hire purchase arrangement.

However, this confirmation is limited to Ijarah that refers to the leasing of plant and machinery and other chattels. It does not apply to the lease of immovable property.

Where the lease contract requires the lessee to make an additional payment toward a charitable cause in the event of a lease rental becoming overdue, the transaction will be treated as if the lessee had made the payment directly to the lessor and the lessor made the payment toward the charitable cause (which is in fact the normal sequence of payments). The lessee will be entitled to a deduction and the lessor will be treated as having received the income but will be entitled to a deduction under section 848A TCA 1997, subject to the provisions of that section.

There is no stamp duty for Ijarah (Leasing and Hire Purchase) arrangements where the asset involved does not comprise immovable property or an interest in immovable property. The VAT treatment of an Ijarah (Finance Lease and Hire Purchase) arrangement in relation to immovable property transactions will depend on the specifics of the agreements. Generally, such agreements are likely to be regarded as the supply of a freehold equivalent interest by the lessor to the lessee at the time the agreement is entered into. As regards arrangements which cover goods other than immovable property, the normal VAT rules concerning leasing (a supply of services), transfer of title (supply of goods) or hire purchase (a supply of goods), as appropriate, would apply.

Previous guidance given by the Revenue Service in relation to the taxation of conventional operating and finance leases and to hire purchase arrangements will, in substantially similar circumstances, also apply to the equivalent Ijarah transactions.

In relation to General Takaful and ReTakaful arrangements, contributions received by a Takaful provider from policyholders (Takaful members) and by a ReTakaful company from Takaful companies, as members of the ReTakaful arrangement, are to be treated as taxable income. Whether the income is on the trading account will depend on the facts and circumstances of the case.

The Revenue Service confirmed the deductibility of expenses incurred by a Takaful company or a ReTakaful company for management, marketing, and claims and commissions should be treated in the same way as such expenses were incurred by a conventional insurance or a reinsurance company with the same level of activity. Similarly, the deductibility of a contribution payment paid to a Takaful or a ReTakaful company is to be treated in the same way as an insurance or reinsurance premium for a conventional insurance policy or a reinsurance arrangement.

The provisions of sections 76 to 83 of the Taxes Consolidation Act 1997 apply in respect of the taxation of a Takaful or a ReTakaful arrangement as if such arrangements were conventional insurance or reinsurance arrangements respectively. In addition, the taxation of a Family (Life) Takaful company, which is an assurance company within the meaning of section 730A TCA 1997, and its members (policyholders) is to be determined under Chapters 4 and 5 of Part 26 of the Taxes Consolidation Act 1997. In this regard, an amount paid by an insured person is to be treated in the same way a payment under a conventional life assurance policy is. Similarly, a maturity or claim amount paid by a Family (Life) Takaful company is to be treated in the same way a claim or maturity payment under a conventional life assurance policy is.

As there are no existing Family (Life) Takaful arrangements in Ireland, the provisions relating to the taxation of old basis business should not apply to the Family (Life) Takaful arrangements.

Under the VAT Act 1972, Takaful (General and Family (Life)) and ReTakaful arrangements are exempt from VAT under paragraph (xi) of the First Schedule to the Act. But a liability to stamp duty under the Stamp Duties Consolidation Act (SDCA) 1999 will arise in relation to policies of insurance or policies of life insurance issued under Takaful (General and Family (Life)) and ReTakaful arrangements where the risk is located in Ireland.

(By Mushtak Parker/Arab News 2009)
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Monday, 26 October 2009

Islamic asset management needs products, distribution to thrive

MANAMA, Oct 25 — The infant Islamic management industry lacks a large enough range of products and distribution channels to increase to challenge its conventional peers in catering to Muslim wealth, experts said.

The nascent US$1 trillion (RM3.5 trillion) Islamic finance industry is walking a fine line between replicating conventional products and establishing its own genuine products that adhere to Islam’s prohibition of interest.

Asset management is seen as a sector where the industry could easily create products according to its own set of values, but it has not yet established the range of products to compete with conventional asset management.

There were some 750 Islamic mutual funds with less than US$50 billion under management as of the first quarter of 2009, a fraction of global asset management, and there are only 14 funds larger than US$500 million, according to a report published by Ernst & Young this year.

“The demand is there, but we need products, products, products,” said John Sandwick, an Islamic asset management consultant.

“Pension funds are coming up in the Middle East,” he said, adding that the nascent but strongly growing Islamic insurance industry, or takaful, particularly in Saudi Arabia, will also give a boost.

Experts said that it has been a weakness of Islamic fund products to focus on equities and real estate, not offering the comprehensive asset diversification of conventional funds that typically allocate a large portion to fixed-income investments.

“There is still a gap in terms of plain vanilla products,” said Mark Smyth, managing director at consultancy Failaka.

Saudi Arabia and Malaysia are the only two Muslim markets with strong retail banking.

Smyth said Islamic fund managers were caught between catering to the contested Malaysian retail market with very low margins and creating off-shore funds to target Gulf Arab institutional investors.

But these, including the multi-billion sovereign wealth funds managing the region’s oil wealth, are almost exclusively investing in conventional products, he said.

“To attract liquidity without existing clients is very difficult,” he said. “It’s very difficult for Islamic funds to get it off the ground, and they’re all saying it’s distribution.”

Islamic asset managers are prohibited from investing in companies that are highly leveraged and in certain sectors, such as financials, alcohol and gambling.

A bigger Islamic asset management industry would give a much needed money injection to the market for sukuk, or Islamic bonds, a key product of the industry.

Issuance fell by more than half to US$14.9 billion last year, Standard & Poor’s has said, and issuance in the Gulf Arab region this year has entirely hinged on issuance from governments and state-affiliated institutions.

This in turn would provide asset managers the much needed fixed-income component, for which they have in so far used short-term money market instruments such as murabaha.

Only a handful of sukuk funds exist today, Failaka’s Smyth said.

“There is this wall between the products and the money that needs to be torn down,” said Silke Bernard, a Luxembourg-based lawyer specialising in funds at law firm Linklaters said.

She said Islamic funds lacked access to the large distribution platforms used by asset managers and that Islamic funds often lacked the required minimum size of typically US$100 million and a track record of several years required by large asset managers. — Reuters

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Saturday, 24 October 2009

Budget 2010: Malaysia To Drive Towards High-Income Economy

KUALA LUMPUR, Oct 23 (Bernama) -- Prime Minister Datuk Seri Najib Tun Razak has laid down a firm foundation to drive the nation towards embracing a high-income economy in the 2010 budget through bold proposals to raise private equity, invigorating the stock market, further developing Islamic finance while emphasising on micro-credit programmes.

Najib, who is also Finance Minister, said green technology would be promoted via a RM1.5 billion fund while small-and medium-scale industries development programmes and the construction sector -- both vital backbones to the economy -- would be given additional injection of funds.

As for the stock market, he said the government would liberalise the commission-sharing arrangements between stockbrokers and remisiers in two stages to enhance retail participation in the bourse.

Tabling the 2010 Budget in the Dewan Rakyat today, the prime minister said 100 per cent foreign equity participation would also be allowed in corporate finance and financial planning companies.

All public-listed firms too would be required to offer e-Dividend to shareholders to increase efficiency of the payment system.

Existing tax incentives for financial services, particularly Islamic finance, will be extended until 2015, with new measures put in place comprising a 20 per cent stamp duty exemption on Islamic financing instruments and deductions on expenditure incurred in the establishment of islamic stockbroking firms.

On the Ar-Rahnu micro-credit programme, the government will encourage all Syariah-compliant financial and banking institutions such as Bank Muamalat and Bank Islam to offer this scheme to assist those unable to secure financing from financial institutions and to obtain business capital fast.

To support implementation of private sector projects in regional corridors, the government will allocate RM3.5 billion next year as part of efforts to ensure they are developed according to schedule.

Planned investments totalling RM221 billion have exceeded the Ninth Malaysia Plan target of RM145 billion.

The government will issue 1Malaysia Sukuk (Islamic Bond) totalling RM3 billion to all Malaysians aged 21 and above, with a minimum investment of RM1,000 and a maximum of RM50,000 plus a maturity period of three years, with a five per cent annual return paid quarterly.

To further promote the construction industry, Najib said RM9 billion has been allocated to finance infrastructure projects including RM4.7 billion for road and bridge projects and RM2.6 billion for water supply and sewerage services.

He said RM899 million will be allotted for rail facilities, RM820 million for ports and sea services and RM276 million for airport projects.

Najib also said the maximum individual income tax will be reduced to 26 per cent from 2010 from 27 per cent as a result of which, the tax rate for cooperatives will be reduced to 26 per cent while the fixed tax rate for non-resident individuals will dwindle to 26 per cent.

This is to ensure the individual income tax remains competitive and continues the economic agenda based on creativity, innovation and high-value added, he said.

The government will also privatise companies under the Ministry of Finance Inc and other viable government agencies to enable them to operate more efficiently and ease financial dependence as part of efforts to gradually phase out involvement in economic activities especially in areas where it competes with the private sector.

In intensifying foreign direct investment, the Prime Minister said Khazanah Nasional Bhd and Permodalan Nasional Bhd (PNB) would join hands with foreign investors in education, tourism and infrastructure and allow them to have equity ownership in firms and joint ventures in local projects.

In focusing on niche areas, Najib said the tourism industry has been allocated RM899 million next year to initiate programmes including upgrading the quality of related infrastructures nationwide.

To promote the medical tourism industry, the government will raise the income tax exemption to 100 per cent from 50 per cent now to enable healthcare service providers to offer high-quality health services and attract more health tourists.

To raise computer literacy, the government proposed to give tax relief to broadband subscription fees by up to RM500 a year from 2010 to 2012 to individual taxpayers while civil servants can now apply for computer loans once in three years from five years before up to a maximum of RM5,000.

Najib said the government will also implement a more open automotive policy and will charge RM10,000 for each Approved Permit (AP) to distribute APs effective Jan 1 next year.

A portion of the fee will be channelled to the Bumiputera Development Fund in the automotive sector.

In ensuring fuel subsidies benefit the intended target groups, a fuel subsidy management system will be implemented in early 2010 by utilising the MyKad and existing infrastructures.

Najib said this approach of providing subsidies only for the targeted groups will also be used for other commodities.

Najib also announced that contributions to the Employees Provident Fund (EPF) can be increased voluntarily to 11 per cent again from eight per cent with immediate effect but it will be made compulsory in 2011 due to the expected recovery in the economy.

He said a basic insurance and takaful scheme will be offered to ensure the people continue to have access to motor insuranc protection as the current motor insurance scheme structure was rigid as it failed to take into account rising business costs and claims.

It will be introduced by mid-2010, he said.

The government also proposed that a five per cent tax be imposed on gains from the disposal of real property from Jan 1, 2010.

Meanwhile, the Government will allocate RM2.3 billion to build and upgrade infrastructures in rural areas.

Najib also brought cheer to civil servants when he announced a special contribution of RM500 to support staff recently will also be extended to all government employees from Grade S41 to Grade S54 to be paid in December.

This works out to RM400 million, he said.

In winding up his maiden budget speech themed "1Malaysia, Together We Prosper" which lasted for more than 90 minutes, the Prime Minister said the 2010 Budget was 11.2 per cent lower than this year's budget, amounting to RM191.5 billion.

Of the total, RM138.3 billion or 72.2 per cent was for operating expenditure and RM53.2 billion or 27.8 per cent for development expenditure.

Under the development expenditure, RM25.4 million has been provided for the economic sector to support the needs of infrastructure, industry and agriculture and rural development, he said.

In advancing towards a high-income economy, the Government will take a new approach based on innovation, creativity and high value-added initiatives.

These measures are expected to more than double the per capita income of the people in the next 10 years.

Najib also emphasised the private sector contribution in driving the economy will be intensified, with priority given to enhance domestic investment and encourage local firms abroad to remit their profits and re-invest in the country.

To provide a business-friendly environment and ensure an effective delivery system, individuals and companies are only required to use a single reference number in their dealings with government agencies.

"For individuals, the initiative known as MyID, uses MyKad number, while for companies MyCoID utilises the Companies Commission of Malaysia (CCM) business registration number," he said.

The Prime Minister also said a National Innovation Centre will be established, supported by a network of innovation excellence centres under the Science, Technology and Innovation Ministry and in collaboration with the Higher Education Ministry.

"This is part of efforts to intensify research and development initiatives and commercialisation. A strong foundation is needed for the economy to shift towards a high-income economy, he added.


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Friday, 23 October 2009

Five Indonesian banks set to launch Islamic units

JAKARTA, Oct 23 (Reuters) - Five Indonesian banks including Bank Central Asia (BBCA.JK), the No. 3 lender, expect to launch standalone sharia units next year, boosting the sharia market in the world's most populous Muslim nation, officials said.

Industry officials said the revised law on value added tax, which removed double taxation in the Islamic market, would encourage more banks to set up Islamic banking subsidiaries. The double taxation had made Islamic transactions more expensive than comparable conventional deals.

"We hope that it would be easier for us to expand business and seek strategic partners. We also hope to grow faster and attract investors from Middle East," said Barno Sudarwanto, head of planning and development at the sharia unit of Bank Negara Indonesia (BBNI.JK), the No. 4 bank, which will be spun off.

Others due to set up separate sharia banking units include mid-sized lenders Bank Panin (PNBN.JK), Bank Victoria (BVIC.JK) and unlisted Bank Jabar Banten.

Investor Daily newspaper on Friday reported that a U.S. insurance firm had met with central bank officials this week to discuss the possibility of buying an Islamic-compliant lender in Indonesia, without giving details.

Conventional banks typically set up their Islamic subsidiaries by first setting up Islamic banking departments and later on converting them into separate Islamic banks. Others, including BCA, may acquire smaller conventional banks and turn them into Islamic subsidiaries.

"I expect to see more banks spinning off their sharia units as the new VAT law which scraps double taxation from sharia transactions will take effect next year," said Adiwarman Karim, chief of Karim Business Consulting.

The firm offers consultancy services on the Islamic market, including the establishment of Islamic banks.

Indonesia currently has five sharia banks and 24 commercial banks with sharia units as of August 2009, out of around 130 commercial banks operating in Southeast Asia's biggest economy.

ACQUISITIONS BCA vice president director Jahja Setiaatmadja told Reuters the bank was in the final stage of setting up such a unit, adding that operations may start in January. He declined to give further details.

BCA, with a stock market value of $12 billion, acquired Bank UIB in October 2008 and planned to convert the small lender into a sharia bank.

Ramzi A. Zuhdi, director in charge of Islamic banking at the Indonesian central bank, said it took about a month for banks to obtain approvals to convert their Islamic banking units into Islamic banks if all the administrative requirements were met.

In neighbouring Malaysia, seen as the Islamic financial hub in Asia, domestic banks can immediately convert their Islamic units operating under the parent companies into separate entities, said Vaseehar Hassan Abdul Razack, chairman of Unicorn International Islamic Bank Malaysia.
Riawan Amin, the chairman of Indonesia's association of Islamic banks (Asbisindo), said it often took longer than initially expected to launch Islamic banks in the country due partly to administrative reasons such as in recruiting employees.


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Thursday, 22 October 2009

Jordan to cover deficit by sukuk

Jordan is considering issuing Islamic debt, or sukuk, by the year end to help it cover part of its spiralling budget deficit that has worsened due to the global downturn, finance ministry officials said yesterday.

They said a finance ministry committee was set up to study how to introduce the Islam-compliant paper for the first time in the kingdom, which relies on conventional six-month, one-year and three-year maturity T-bills and bonds.

Jordan's monetary authorities have resorted this year to issuing more public debt instruments that are auctioned to local banks and financial institutions to fund government spending.

Economic decision makers are seeking more innovative ways to finance a deficit worsened by the inability to cut down a bloated public sector that drains finances by high spending on salaries, pensions and debt interest, a government official said.

"Sukuk instruments could help finance government projects and finance the deficit, especially since the government now is resorting only to lending from local banks," said a ministry official.


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Wednesday, 21 October 2009

Syria - Devout Muslims Turn to Islamic Insurers

Ghayath al-Mahayni, 34, a Syrian employee in a private company, refuses to take part in any business that contradicts his religious beliefs.

So when he decided recently to take out a medical insurance plan, he chose an Islamic insurance company, which avoids practices forbidden by Islamic laws such as riba, meaning usury or lending money and receiving interest in return.

“I felt relieved when I got this insurance,” said Mahayni, who pays 300 US dollars a year for his cover with the Aqliah insurance firm.

“When I got sick, I didn’t have to pay exorbitant amounts of money for the treatment,” he added.

The private insurance business in Syria has developed strongly since the government decided in 2005 to end the state monopoly in the sector.

There are currently 13 private insurance firms. Two of them follow Islamic rules: Aqliah, launched in April, and the Syrian Islamic Company, which started operating in September. A third one is in the process of being established.

The companies offer a variety of products like insurance against car accidents, fire, and work-related injuries.

Syria also has three Islamic banks that were established in 2006 after the sector was opened to private enterprise. The banks, which are mostly owned by Syrian and Arab Gulf companies and businessmen, are financially linked to the Islamic insurance companies.

“Islamic insurance companies have been successful in attracting a section of the population keen on respecting Islamic teachings,” said Eyad Zahra, the Damascus-based general director of the insurance regulator.

He said he expected that in the medium term 30 per cent of people with insurance would choose Islamic insurance companies.

According to Ahmad Salouta, a professor of psychology at Damascus University, the interest in Islamic firms springs from the conservative nature of Syrian society, with many people making judgements not only on financial and commercial criteria but also on “a system of values, customs and religious beliefs”.

The idea behind Islamic insurance is to bring together a group of people with limited means to cooperate and help each other, said Abdelkarim al-Saqa, an official at the ministry of religious endowments.

The companies differ from other private firms by giving their clients the possibility to have their funds repaid if they do not make any claims.

Some strictly observant Muslims consider that paying fees to an insurance company, leaving it to fate whether they would receive benefits or not, could be regarded as a form of gambling, which they believe to be against Islamic principles.

Islamic insurance companies also generate income and profit by investing in projects that are deemed to conform to religious beliefs, Saqa said.

He added that these companies do not invest in areas that contradict Islamic teaching such as firms that sell liquor.

In addition to covering individuals against injury, they also distribute excess gains fairly between all the insured.

A council of four religious experts supervises the activities of the companies to make sure they comply with Islamic laws, Saqa said.

Despite their emerging popularity, the development of Islamic insurance companies like their private counterparts has been hindered by a general lack of awareness about their worth among Syrian people, experts say.

Some officials at the endowment ministry suggested that clerics should encourage people to join Islamic insurance companies during Friday sermons.

Another cause of the slow growth of the sector is the relatively high premiums they charge in comparison to average salaries, some observers say.

In addition, they add, the government has imposed restrictions on investments in these companies – foreign investments are limited to ten per cent of their capital – which could be deterring Arab investors from venturing into this field.

According to Firas al-Ashkar, an official at the state-run Syrian Insurance Company, this has benefited the new sector. By having limited investments outside Syria, insurance companies – especially Islamic ones - have shielded themselves from the effects of the international financial crunch, he argued. (Syria Briefing)

(Global Arab Network)
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Sunday, 18 October 2009

AAOIFI's Shari’a Standard No. 17 – Investment Sukuk

1. Definition of investment sukuk

Investment sukuk are certificates of equal value representing undivided shares in ownership of tangible assets, usufruct and services or (in the ownership of) the assets of particular projects or special investment activity.

2. Types of investment sukuk

Among the different types of investment sukuk are:

2/1 Certificates of ownership in leased assets

These are certificatesof equal value issued either by the owner of a leased asset or a tangible asset to be leased by promise, or they are issued by a financial intermediary acting on behalf of the owner with the aim of selling the asset and recovering its value through subscription so that the holders of the certificates become owners of the assets.

2/2 Certificates of ownership of usufructs

2/2/1 Certificates of ownership of usufructs of existing assets

There are two types:

2/2/1/1 Certificates of equal value issued by the owner of an existing asset either on his own or through a financial intermediary, with the aim of leasing the asset and receiving the rental from the revenue of subscription so that the usufruct of the assets passes into the ownership of the holders of the certificates.

2/2/1/2 Certificates of equal value issued by the owner of the usufruct of an existing asset (lessee), either on his own or through a financial intermediary, with the aim of subleasing the usufruct and receiving the rental from the revenue of the subscription so that the holders of the certificates become owners of the usufruct of the asset.

2/2/2 Certificates of ownership of usufructs of described future assets

These are certificates of equal value issued for the purpose of leasing out tangible future assets and for collecting the rental from the subscription revenue so that the usufruct of the described future asset passes into the ownership of the holders of the certificates.

2/2/3 Certificates of ownership of services of a specified party

These are certificates of equal value issued for the purpose of providing services through a specified provider (such as educational benefits in a nominated university) and obtaining the service charges in the form of subscription income so that the holders of the certificates become owners of these services.
2/2/4 Certificates of ownership of described future services

These are certificates of equal value issued for the purpose of providing future services through described provider (such as educational benefits from a university without naming the educational institution) and obtaining the fee in the form of subscription income so that the holders of the certificates become owners of the services.

2/3 Salam certificates
These are certificates of equal value issued for the purpose of mobilising salam capital so that the goods to be delivered on the basis of salam come to be owned by the certificate holders.
2/4 Istisna` certificates

These are certificates of equal value issued with the aim of mobilising funds to be employed for the production of goods so that the goods produced come to be owned by the certificate holders.

2/5 Murabaha certificates

These are certificates of equal value issued for the purpose of financing the purchase of goods through Murabaha so that the certificate holders become the owners of the Murabaha commodity.

2/6 Musharaka certificates

These are certificates of equal value issued with the aim of using the mobilised funds for establishing a new project, developing an existing project or financing a business activity on the basis of any of partnership contracts so that the certificate holders become the owners of the project or the assets of the activity as per their respective shares, with the Musharaka certificates being managed on the basis of participation or Mudaraba or an investment agency.

2/6/1 Participation certificates

These are certificates representing projects or activities managed on the basis of Musharaka by appointing one of the partners or another person to manage the operation.

2/6/2 Mudaraba Sukuk

These are certificates that represent projects or activities managed on the basis of Mudaraba by appointing one of the partners or another person as the mudarib for the management of the operation.

2/6/3 Investment agency Sukuk

These are certificates that represent projects or activities managed on the basis of an investment agency by appointing an agent to manage the operation on behalf of the certificate holders.

2/7 Muzara’a (sharecropping) certificates

These are certificates of equal value issued for the purpose of using the funds mobilised through subscription for financing a project on the basis of Muzara’a so that the certificate holders become entitled to a share in the crop according to the terms of the agreement.

2/8 Musaqa (irrigation) certificates

These are certificates of equal value issued for the purpose of employing the funds mobilised through subscription for the irrigation of fruit bearing trees, spending on them and caring for them on the basis of a Musaqa contract so that the certificate holders become entitled to a share in the crop as per agreement.

2/9 Mugharasa (agricultural) certificates

These are certificates of equal value issued on the basis of a Mugharasa contract for the purpose of employing the funds for planting trees and undertaking the work and expenses required by such plantation so that the certificate holders become entitled to a share in the land and the plantation.

(Accounting and Auditing Organisation for Islamic Financial Institutions-AAOIFI)

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Saturday, 17 October 2009

Investors Urged To Use Malaysia As Base For Islamic Finance

Manama (Bahrain), Oct 16 (Bernama) -- In line with efforts to promote Malaysia as an Islamic financial centre, investors are being encouraged to use the country as a gateway for investment and base for financial activities.

"Let's jointly promote Islamic finance in the international market and the mutual acceptance of each others' financial products while marketing them together," the Raja Muda of Perak, Raja Dr Nazrin Shah ibni Sultan Azlan Shah, urged in an interview here.

He pointed out that Malaysia is generally a business friendly place and there are lots of attractive policies in place for foreign investors, wanting to invest in the country.

Raja Dr Nazrin Shah, who is also the financial ambassador of the Malaysia International Islamic Financial Centre (MIFC), led a roadshow delegation comprising regulators and industry players to Qatar and Bahrain from Oct 10-15.

Tracing the development of Islamic finance in Malaysia, he said in 1983, the first Islamic bank was established in the country and in the 90s, banks were invited to open windows within their system to start trading in Islamic products.

He said the MIFC intiative was established in 2006 to establish Malaysia as the centre for Islamic finance and to integrate the country within the Islamic financial community.

"We (Malaysia) now have an Islamic capital market and are the largest producer of Sukuk (Islamic bonds).

"I think 60 percent of Sukuk originates from Malaysia. We have Islamic insurance, re-insurance and asset management, developed over the last few years," he explained.

According to Raja Dr Nazrin Shah, the underlying principle of Islamic finance is basically to prohibit accessive risk taking and speculative activities while it is also sound finance.

He said non-Muslims are also beginning to use Islamic products, especially in Malaysia.

"I think we have progressed much and Malaysia is the centre for Islamic finance," he said, when asked how far had Malaysia come as an international Islamic financial base.

He also said there was a need for greater collaboration and dialogue to promote Islamic finance in international markets.

"These are the basic pillars that have to be considered on a continuous basis in order to promote Islamic finance, he added.

"In 1997, Malaysia went through a financial crisis and that was a wake up for us. Since 1997, we have strengthened our financial system while putting in place stronger regulatory and supervisory considerations, for greater corporate governance and best practices.

"Because of these reforms, it has put us in good stead in withstanding the present economic crisis," he said.

He said Malaysia like many other countries had been affected by the economic crisis.

"Basically,there has been a contraction in demand for our exports.But the financial system remains strong as our banks are very well capitalised," he highlighted.

Raja Dr Nazrin Shah said Malaysia is a very open economy and its growth has been export driven.

In the present situation, he said, demand in the developed economies and Europe is low and it might take some time for them recover from the crisis.

He stated that countries like Malaysia, which traditionally depend on exports, now have to look to alternative markets as in South East Asia and boost domestic demand.

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Friday, 16 October 2009

Sound Bites - The U.S Dollar by Dr Mahathir Mohammad

1. When I wrote on the need to change trading currency from the US Dollar to some other currency I was accused of being anti-West.

2. Since then there have been many articles on the need to use other currencies for trading and even for other purposes e.g. reserve currency.

3. Today the headline in the Star's foreign news reads, "US Dollar reaches breaking point - central banks flushed with record reserves are increasingly favouring the Euro and Yen" (read article here).

4. If I had been critical of the West, it was always for good reasons. They invented a lot of ways of making money for their rich investors without producing any goods or services or creating any jobs. Because of their subprime loans, hedge funds and derivatives, currency trading, etc. etc. they had undermined the real economy. Their bubble has now burst, spilling over the rest of the world. And Malaysia has been affected by their crisis for no good reason.

5. When in 1997 we asked the International Monetary Fund and the World Bank to stop currency trading, they laughed at us. Now they know that people whose knowledge of finance can be written on the back of a postage stamp are not so ignorant after all.

6. And when so many people urge that other currencies than the US Dollar be used for trade and reserves, they cannot all be anti-West. In fact these views are coming from the West.

7. Labelling ideas as anti-this and anti-that will get us nowhere. Call a spade a spade. Only then can you find solutions to problems.

(Dr Mahathir Mohammad)

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Tuesday, 13 October 2009

First Shariah compliant money market fund in Europe launched

Bank of London and the Middle East (BLME) has launched the first Shariah compliant money market fund in Europe. Using Luxembourg's specialised investment funds law, BLME has appointed European Fund Administration (EFA) and Banque et Caisse d'Epargne de l'Etat (BCEE) for fund servicing and custody.

BLME Umbrella Fund SICAV-SIF, worth over $50 million, invests in a diversified portfolio of high quality Islamic money market instruments, such as commodity murabaha (exchange contract trade), sukuk (Islamic bonds) and ijara (assets leasing).

To respond to the significant market growth in Islamic investments, EFA has tailored the fund to its open fund accounting architecture and transfer agency platform while offering specific training to a dedicated team.

BLME is an independent UK wholesale Shariah compliant bank based in London authorised by the Financial Services Authority. It offers innovative Islamic investment and financing products to businesses and high net-worth individuals in the European, the US, South-East Asian and Middle East and North Africa regions.

EFA is an independent company specialised in administrating investment vehicles. It manages 2,700 funds units worth over €100 billion for more than 215 clients.
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Maldives: Islamic banking to be introduced

The government has signed an agreement with the private sector arm of the Islamic Development Bank to introduce Islamic banking services in the Maldives.

The signing ceremony between the Maldives and the Islamic Cooperation for the Development of the Private Sector (ICD) was held during an annual meeting of the World Bank and International Monetary Fund in Istanbul, Turkey last week.

Finance Minister Ali Hashim told Middle Eastern news portal that the partnership reflected investor confidence in the Maldives.

“The signing ceremony takes us a significant step closer toward the establishment of what will certainly prove to be a truly pioneering venture,” said Hashim.

“We have long maintained that this type of partnership is very important for the government, particularly due to its efficient contributions to national development.”

Khaled Al-Aboodi, CEO and general manager of IDB, told the online paper that the initiative symbolised another milestone in the bank’s relationship with the Maldives.

”I am confident that the establishment of Maldives Islamic Bank, the country’s first Islamic bank, will spur the economic growth of the country,” said Al-Aboodi. “Indeed, IDB is proud of this partnership and hope that it will be a fruitful initiative for both the bank and the country.”

Islamic banking is a system compatible with the principles of sharia law, which prohibits riba (usury and interest) and investing in businesses that provide goods or services that are considered haram (forbidden in Islam).

Islamic banks have advisory committees or consultants that ensure the bank’s activities confirm to sharia law.

Speaking to Minivan News today, Ismail Shafeeg, permanent secretary at the finance ministry, said the details were yet to be confirmed but the introduction of Islamic banking would benefit Maldivians who were hitherto unwilling to invest in other banks because they believed charging interest was un-Islamic.

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Sunday, 11 October 2009

Islamic Banking – Reality and Myth

By: Dr. Nimrod Raphaeli*


Islamic banking is based on Islamic law and principles known as shari'a, a system of rules derived from Islamic principles of jurisprudence and dictated by a sometimes modern and sometimes ancient interpretation of the Quran. It is equivalent to conventional banking, except that the investor is rewarded through a share in profit rather than through the payment of interest or riba (usury), which is prohibited under the shari'a. Islamic banking prohibits investment in, or lending to, companies that do business or trade in pork, alcohol, gambling, pornography, and a broad array of entertainment activities. On the other hand, Islamic finance does includes stocks, real estate investments, insurance, currency swaps, sukouk (Islamic bonds based on profit sharing rather than interest payment) and murabaha (a trading transaction where a bank sells a specific commodity at a price plus specific profit agreed upon in advance). There are also other financial vehicles, such as wadi'a and mudharabah, which were discussed in an earlier MEMRI report. [1]

Some Muslim bankers maintain that Islamic economic principles go beyond the narrow issue of riba into broader domains. They argue that these principles are applicable to all aspects of economic activity, and "guide the individual's relationship with his Creator (Allah) in respect to his wealth, as well as his relationship with society, with his partners, and with his legal heirs, and his overall dealings with them." Muslim bankers argue further that "Islam has laid down general principles for every aspect of economic activity, great or small, which are applicable to all situations at all times." [2]

The Islamic system does not allow the creation of debt through direct lending and borrowing; rather it requires the creation of debt through the sale or lease of real assets. Spelling out the regulatory regimes in the Islamic system, a Saudi economist and winner of the King Faisal International Prize for Islamic Studies, offers this explanation: "The asset which is being sold or leased must be real, and not imaginary or notional; the seller must own and possess the goods being sold or leased; the transaction must be genuine with the full intention of giving and taking delivery; and the debt cannot be sold and thus the risk associated with it cannot be transferred to someone else." [3]

This paper will argue that a) Islamic banking is relatively small in assets by global banking asset standards; and that b) there is a considerable amount of deception in many of the practices of the Islamic banks, as asserted by a number of Arab and Muslim critics.

Islamic Banking in a Global Context

Islamic banking has expanded at a considerable pace since the inception of the first Islamic banking institution in Malaysia three decades ago, and it is no longer restricted to banks owned or operated by Muslims. A number of multinational banks, particularly on the European continent, have opened their own branches or windows dedicated to practicing Islamic banking. According to a 2005 study by the International Monetary Fund, the number of Islamic institutions rose from 75 in 1975 to over 300 in 2005, in more than 75 countries. At the time of the study, the total assets worldwide were estimated at $250 billion, and growing at about 15 percent per annum. [4] In 2008, before the advent of the global financial crisis, the 100 largest wholly Islamic banks, ranked by assets, held approximately $520 billion in assets, 90.8 percent of which was owned by the Gulf countries, with Saudi Arabian Islamic banks controlling 49.5 percent, the UAE about 20 percent, Kuwait 17.4 percent and Bahrain about 11 percent. [5] Oman is an exception, being the only member of the Gulf Cooperation Council which does not allow the establishment of Islamic banks within its territory. The governor of Oman's central banks explained this by stating that there is no difference between the country's Islamic banks and conventional banks. [6]

When contrasted with the 50 top banks in the world, the total assets of Islamic banks are not very significant. Measured by their December 2008 balance sheet, the assets of the 10 top banks on the Bankers Almanac list ranged from $3.483 billion for the Royal Bank of Scotland Group, Plc (which is number one on the list) to $1,456 billion for UniCredit, Milan (which is number 10 on the list). Taken together, the 100 largest Islamic banks have assets equivalent to those of bank no. 48 on the December 2008 Bankers Almanac list, namely the National Australia Bank Ltd., with assets of $512 billion. [7] In the second half of 2009, the total assets of the top 25 Islamic banks in the Gulf Cooperation Council (GCC) stood at $218.76 billion. [8] This data indicates clearly that not a single Islamic bank is likely to be included in the world's list of top 50 commercial banks in the foreseeable future. Of course, the central banks in most Islamic countries, which are conventional banks, present a different picture. For example, Saudi Arabia's central bank, the Saudi Arabia Monetary Authority, would be rated fairly high on a global scale.

It should be pointed out that all the figures on the size and growth of Islamic banking must be treated with a degree of caution. As stated by Mahmoud Al-Jamal, a professor of Islamic economics at Rice University (Texas), no official authority is able to provide the International Monetary Fund with credible data on the financial and investment products of the Islamic banks. As he says, there are no "clear statistics about the activities of the Islamic banks, their number, and their branches." [9]

Criticism of Islamic Banking- Financial Smoke and Mirrors

Islamic economic institutions claim to operate on the basis of "zero interest." However, critics of Islamic banking argue that the fundamental practice of charging interest (e.g., charging a premium on the principal amount of the loan, for the time value of the loaned money) is not truly eliminated in Islamic banking, but is merely relabeled and disguised using various legal tricks. The Financial Times, drawing on the book Islamic Banking - A $300 billion Deception by a former adviser to Islamic banks, Mohammad Salim, [10] referred to these practices as "financial smoke and mirrors." [11] Arab and Muslim critics have likened them to "contractum trinius," a method devised by European bankers in the Middle Ages to circumvent the church laws against charging interest on borrowed money. [12]

In an article in the Kuwaiti daily Al-Qabas, titled "The Non-Usury Deception," Kuwaiti banker Ahmad Al-Sarraf maintains that dealing with conventional banks is less costly than dealing with the Islamic banks. Founded on principles and practices developed over centuries, the conventional banks know their way around, while the Islamic banks have yet to find their bearings, in the absence of traditions to guide their activity. Citing fundamentalist cleric Professor Hamid Al-'Ali, who teaches Islamic culture in a college in Kuwait, Al-Sarraf explains that the Islamic banks disguise usury by inventing documents that appear on the surface as sales documents, but that are actually interest-bearing loans. Therefore, anyone who distinguishes between traditional and Islamic banks is ignorant, he says. Al-Sarraf adds that most of the Islamic banks are guided by well-paid clerics who are employed by the bank, and issue rulings according to the bank's needs. The entire corpus of paperwork created by these Islamic banks, Al-Sarraf concludes, is in violation of the rules of the shari'a and is inherently deceptive. [13]

The Deceptive Mechanism of Murabaha

One common instrument of deception is what is known as murabaha (the word is derived from Arabic ribh, meaning "profit"). This refers to a mechanism in which a borrower enters into a mark-up or cost-plus financing contract with a lender. In daily usage, murabaha means a sale of an item on mutually agreed profit. Technically, it is a contract of sale in which the seller declares his cost and profit. As a financing technique, it involves a request by the client that the bank purchase for him certain merchandise, real estate, or consumer durables such as cars or household appliances. Since the client lacks the cash to make the purchase himself (otherwise he would not have turned to the bank), the bank buys the item and sells it to the client on deferred payment. Repayment, usually made in regular installments, is specified in the contract. The bank's profit is calculated either on a percentage of cost basis or as a fixed amount.

Critics have questioned the alleged religious foundation of murabaha because the profit margin attached to the total amount of the sale is tantamount to riba - it is interest in disguise. However, experience teaches that financial deals, no matter how religiously controversial, are nearly always sanctioned by the well-paid clerics employed by the Islamic banks. [14] Muqbil Saleh Ahmad Al-Dhukair, a professor of economics at King 'Abd Al-'Aziz University, points out that the Islamic banks determine their profit margin by checking the interest rates prevailing in the markets. [15] It is hardly surprising that customers have complained bitterly about these "deviations" from the Islamic banks' religious objectives. In fact, many have complained that most Islamic banks collect more profit than the conventional "usury" banks.

After 15 years of studying the Islamic banks, Dr. Mohammad Ibrahim Al-Rumaithi, a professor of Islamic economics at the University of the United Arab Emirates, has concluded that there are three types of Islamic banks: those that adhere to the shari'a and are less preoccupied with making profit; those that ignore the shari'a completely, and those that only carry the title "Islamic." All three, Al-Rumaithi maintains, violate the shari'a in various ways." [16] In fact, the head of the Salafi movement in Kuwait, Abdul-Rahman Abd Al-Khaleq, has denounced the system of murabaha as deceptive, stating, "Pursuing what is haram [forbidden] openly is kinder towards Allah than attempting to deceive him." [17] The issue of usury deception by Islamic banks was also the subject of a symposium held in Riyadh in 2007, in which the participants pointed to "an alarming expansion" of these deceptive practices. [18]

Professor Mahmoud Al-Jamal has said that Islamic mortgage companies likewise "use cheap tricks to attract customers and entice the believers to pay more for less. All that these companies sell to their customers is holy water sprinkled over a real estate mortgage." [19]

Absence of an Effective Supervisory Authority

As already mentioned, Islamic banks often employ resident shari'a scholars to rule on deals when questions arise regarding their Islamic nature. These scholars often issue contradictory edicts regarding what is permitted and what is forbidden. Experts on Islamic banking have warned that these jurisprudence controversies [al-jadal al-fiqhi] place the future of Islamic banks at risk. [20] At a symposium organized by the Dallat Al-Baraka Group (a major Islamic banking group in Saudi Arabia), held in Jeddah in 2008, scholars and experts called for sustained in-depth study and research into Islamic economy and banking, in order to make them more acceptable and viable. [21]

Professor Samir 'Aabid Sheikh, of the Center for Research in Islamic Economics at the King 'Abd Al-'Aziz University in Jeddah, has pointed out that most Islamic banks operate under a shari'a supervisory authority in their country. However, he adds, Islamic financial institutions work closely with many conventional (usury) banks all over the world, and it is difficult for the supervisory authorities to examine their dealings with these banks. 'Aabid Sheikh therefore suggests that "it is necessary to introduce [mechanisms] to actively supervise the banking transactions carried out by [the Islamic] banks." [22]


In order to survive, Islamic banking must observe the rules of the shari'a and at the same time keep afloat in a highly competitive market. So far, however, it has failed to establish a distinct identity or to draw a clear demarcation line between its mode of operation and that of the conventional "usury" banks. The establishment of a rigorous supervision system consisting of clerics, who do not necessarily understand the business of banking, could spell disaster for Islamic banking. How to remain Islamic but also competitive is the greatest challenge that Islamic banks will have to deal with in the future. In the meantime, they also have to contend with a chorus of critics who accuse them of, at best, violating the rules of the shari'a, and at worst of deliberate deception.

Although Islamic banking is gaining ground, it remains on a very small scale by global standards. In order for it to reach the economies of scale and play a significant role in a globalized world economy, Islamic banking will have to strike a fine balance between the rules of the shari'a and global banking practices that are rapidly changing, particularly with the advent of internet banking. In the 1970s, renowned economist E. F. Schumacher developed the notion that "small is beautiful." After last year's global crisis, the new slogan will most likely be "small is not competitive" - and if one cannot compete on a global scale, one is destined to perish.

*Dr. Nimrod Raphaeli is Senior Analyst (emeritus) at MEMRI.


[1] See MEMRI Inquiry and Analysis No. 297, "Islamic Banking - a Fast-Growing Industry," September 29, 2006,

[2] Arab News (Saudi Arabia), September 12, 2008

[3] Arab News (Saudi Arabia), October 23, 2008

[4] International Monetary Fund, "Islamic Finance Gears Up," Finance Development, Vol. 42 No. 4, 2005

[5] Al-Watan (Jordan), August 10, 2009



[8] Emirates, Business 24-7,August 31, 2009

[9] Al-Sharq Al-Awsat (London), May 26, 2009

[10] Salim, Mohammad 2006, Islamic Banking - A $300 billion Deception, XLibris Corporation.

[11] The Financial Times (London), September 23-24, 2006


[13] Al-Qabas (Kuwait), August 15, 2009

[14] Al-Iqtisadiyya (Saudi Arabia), June 30, 2007

[15] Al-Qabas (Kuwait), August 15, 2009

[16] of June 26, 2009

[17] Al-Watan (Kuwait), June 20, 2009


18 Al-Sharq Al-Awsat (London), May 26, 2009

[20] The International Islamic Federation for Economics and Financing ( ), June 20, 2009. See also the website of the Islamic Chamber for Trade and Industry, www.lccionline.nt/ar/News.aspx?id=161§ion=3.

[21] Arab News (Saudi Arabia), September 12, 2008


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Friday, 9 October 2009

Guide to Islamic Finance in Russia

This is the first part of the introduction into Islamic business and finance in Russia – a brief description of the infrastructure, within the framework of which we see the further development of Islamic business in the Russian Federation. It is a practical manual on basics of Islamic financial system with focus on legal, taxation and financial infrastructure issues (investment, banking, waqf, leasing and insurance).

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US Based Shari’ah-Compliant Insurance Funds OK’d

StoneCross Capital has been approved as the first U.S.-based asset management company that creates and customizes Shariah-compliant insurance-linked longevity products, and provides advisory services to global financial institutions with longevity product initiatives directed to Islamic investors.

In meeting Shariah legal guidelines, StoneCross Capital has created an opportunity for institutions in the Islamic community to diversify their holdings and satisfy future product demands using an alternative asset class that is not correlated to any other asset class in the market.

“By elevating its own standards and earning Shari’ah compliance, StoneCross Capital has solidified its commitment to the advancement of the insurance-linked longevity asset class as an alternative investment solution to institutions with limited Shari’ah-compliant investment options,” commented Todd D. Gillespie, Chief Investment Officer at Stone Cross Capital.

Longevity Assets Defined

A longevity asset is an in-force life insurance policy, purchased at a discount of the policy’s net maturity benefit but at a premium of the policy’s cash surrender value. The market for longevity assets exists because many policy owners would prefer to receive cash from a sale of their policy immediately, rather than the net maturity benefit proceeds their estate would receive at maturity. Often this is because net maturity benefit proceeds no longer meet a policy owner’s estate and financial planning goals, or the policy owner no longer is willing or able to pay future premiums.

Uncorrelated Asset Class

Longevity assets have seen tremendous attention from the capital markets in recent years because such assets offer above-average returns that are not correlated with traditional financial markets. Structured insurance-linked longevity assets have no correlation to the equity markets, are immune from real estate value changes, are unassociated with sub-prime mortgage exposure, are not tied to interest rate fluctuation and are separate from commodities volatility. In fact, historical data supports the actuarial assumption that there is zero correlation between mortality rates and the capital markets.

Shari’ah Longevity Collateralization Platform Strategy

StoneCross Capital’s Shari’ah-compliant platform will enable an investor to customize a financial structure that would couple an existing or newly acquired Shari’ah-compliant asset with longevity assets. The percentage of longevity assets would over-collateralize the entire structure and would ensure repayment of the principal and profit of the certificates without relying on the performance of the underlying assets, thus effectively protecting the investor’s principal. By bundling non-correlated longevity assets with volatile distressed Shariah assets such as Real Estate, Islamic Sukuk, etc., our financial structure can help an investor to lower their volatility as well as recover their losses in the distressed asset over time. We are providing investors a solution on how to recapture funds that have been marked down due to the economic meltdown with a stable long-term return using our financial platform.

About StoneCross Capital

StoneCross Capital’s principals have a strong investment track record spanning more than 15 years collectively in the insurance-linked longevity markets, making them some of the most successful global alternative asset managers in the longevity industry.

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Thursday, 8 October 2009

Malaysian pilgrim fund doubles stake in Bank Islam

KUALA LUMPUR, Oct 8 (Reuters) - Malaysia's state-run pilgrim fund will double its stake in Bank Islam to about 20 percent after taking up preference shares alloted to another shareholder, Dubai Group, the Business Times reported on Thursday, citing sources.
The sources said it meant Bank Islam, Malaysia's No 2 sharia bank, had managed to raise 540 million ringgit ($158 million) to strengthen its Tier 1 capital -- an exercise that stalled after Dubai Group refused the initial offer last week.

Bank Islam then gave its other shareholders Lembaga Tabung Haji, a pilgrim fund holding 23 billion ringgit, and Islamic banking group BIMB Holdings (BIMB.KL), a chance to take up shares alloted to Dubai Group that came up to 216 million ringgit.

Lembaga Tabung Haji, which previously held a 9 percent stake in the firm, took up all the shares, the newspaper quoted the sources as saying. The purchase now dilutes Dubai Group's stake in Bank Islam to 30 percent from 40 percent.

Bank Islam and Lembaga Tabung Haji could not be immediately reached for comment by Reuters.

Dubai Group, an investment vehicle owned by the ruler of Dubai, said last week it was reviewing options for its stake in Bank Islam as it moves its investment focus closer to home. [ID:nL1515289]

If Dubai Group eventually sells its stake in Bank Islam, it could spark a round of consolidation among Malaysia's Islamic banks.

Several Islamic bankers in Malaysia have said Maybank's (MBBM.KL) Islamic subsidiary wants to acquire a stake in Bank Islam. ($1=3.420 Malaysian Ringgit)
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Tuesday, 6 October 2009

Islamic Finance Events in Kuala Lumpur, Malaysia

16-17 November 2009 - Workshop on Islamic Structured Products: Sukuk and others

18-19 November 2009 - Workshop on Risk Management for Islamic Banks

8-9 December 2009 - Seminar on Islamic Wealth Management and Financial Planning

11-12 January 2010 - Seminar on Product Development & Marketing for Islamic Financial Services

4-5 April 2010 - The Third Global Islamic Finance Conference (GIFC2010)

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Sunday, 4 October 2009

Hong Kong: HKMA And Bank Negara To Advance Islamic Finance

KUALA LUMPUR, Sept 28 (Bernama) -- The Hong Kong Monetary Authority (HKMA) and Bank Negara Malaysia Monday announced the signing of a memorandum of understanding (MoU) on co-operation in development of the financial services industry, particularly in Islamic finance.

Aiming towards a long-term strategic partnership under the MoU, both parties agreed to further strengthen co-operation in a number of key areas, including capacity building and human capital development, they said in a statement.

Another area is facilitating and promoting the development of an effective financial market infrastructure through the exchange of information and experience in developing legal, regulatory and supervisory frameworks for Islamic finance.

Both parties will also promote cross-border financial activities through exploring harmonisation of standards and documentation relating to Islamic finance transactions and promoting the consistent application of Islamic financial contracts for cross-border transactions.

"The signing of this MoU marks the beginning of a new area of co-operation between the HKMA and Bank Negara," said HKMA chief executive Joseph Yam.

"It reflects our joint commitment to further developing the Islamic finance industry and paves the way for future initiatives that will benefit both Malaysia and Hong Kong," he said.

"This effort which extends the co-operation in the area of Islamic finance will provide further opportunities for increased economic and financial flows between Hong Kong and Malaysia," said Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz.

The HKMA is the Hong Kong government authority responsible for maintaining monetary and banking stability, managing Hong Kong's official reserves and developing its financial infrastructure.

Bank Negra, the central bank, is the regulatory and supervisory authority over the banking and financial industry in Malaysia, including Islamic banking and takaful industry.
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Islamic Financial Planning & Wealth Management by Ahmad Sanusi Husain