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Sunday, 28 March 2010

Growing Interest: Islamic Banking Expands from the Gulf to India

On February 11, when Dubai Islamic Bank, the UAE’s largest Islamic bank, posted a profit of $327 million for 2009, it was a shot in the arm for those who have been preaching against the “greed” of the Western financial world and the advantages of Islamic banking. Profits were lower than the previous year’s $471 million, but that was almost entirely because of provisions for doubtful debts. At a time when many institutions in Dubai seem to be drowning in debt, the bank’s balance sheet has shown surprising resilience.

The bank has been spreading its wings. In early February, its subsidiary – the Jordan Dubai Islamic Bank – opened its first branch in Amman, the first of 10 branches planned this year. In December last year, it had opened 10 new branches in Pakistan. Its rapid pace of expansion has not been slowed by the global financial crisis.

Dubai Islamic Bank has not yet entered India, though Islamic banking is already making waves across the sub-continent. Last month an India-Arab conference in Delhi, organized by the Indo-Arab Economic Cooperation Forum and the Institute of Objective Studies, spent a day discussing Islamic finance. The subject was “Beyond the Meltdown: Search for Options”. A delegation later called on Union corporate and minority affairs minister Salman Khurshid to urge the introduction of instruments that are compliant with the Shariah (Islamic law).

Support for Islamic banking is still minuscule in India. In 2006, a Reserve Bank of India (RBI) committee came to the conclusion that Islamic banking did not fit into the country’s banking laws. In 2008, a Planning Commission panel on financial sector reforms headed by Raghuram Rajan, a finance professor at the University of Chicago and former chief economist at the International Monetary Fund, recommended the introduction of interest-free banking. The final report included this paragraph: “Another area that falls broadly in the ambit of financial infrastructure for inclusion is the provision of interest-free banking. Certain faiths prohibit the use of financial instruments that pay interest. The non-availability of interest-free banking products (where the return to the investor is tied to the bearing of risk, in accordance with the principles of that faith) results in some Indians, including those in the economically disadvantaged strata of society, not being able to access banking products and services due to reasons of faith. This non-availability also denies India access to substantial sources of savings from other countries in the region.”

Interest-free Banking

Islamic finance has been around in India since at least 1961, with the setting up of a Muslim fund in Deoband in Uttar Pradesh. The closest it came to becoming mainstream was through the Bait-un-Nasr Urban Co-operative Credit Society, set up in Mumbai in 1980. This firm ran on the Islamic principle of interest-free banking for 25 years through 19 branches in the city. But in March 2005, amid mounting losses, Bait-un-Nasr had to close down.

More recently, in October 2009, in the southern state of Kerala, a state development corporation received commitments of up to $214 million from non-resident Indians working in the Gulf region to set up an Islamic finance company, Al Baraka Financial Services, which would run on the principles of Shariah. Advised by Ernst & Young and Taqwaa Advisory and Shariah Investment Solutions (TASIS, which has a tie-up with Dubai Islamic Bank), this firm plans to invest in India’s infrastructure -- in ports, airports and expressways. Through a product called Ijara, or leasing, Al Baraka will buy capital equipment and receive rent in return for leasing them out.

The success of Al Baraka could lead to the setting up of India’s first Islamic bank, says T. Balakrishnan, principal secretary of industry and commerce in the Kerala government. Bait-un-Nasr was a cooperative, and an exception to the rule. But to introduce a full-fledged Islamic bank, amendments are required in the Banking Regulation Act, which states that Indian banks can accept deposits from the public only for further lending. Also, no bank in India can directly or indirectly deal in buying or selling or bartering of goods. While India’s private-sector players like ICICI Bank and Kotak Mahindra Bank have Islamic products, these are sold exclusively to clients overseas.

Al Baraka was ready for launch in January this year when it got caught up in a snag. Subramanian Swamy, a pro-Hindu politician and Harvard-educated economist, filed a petition against the Kerala State Development Corporation in the state’s High Court arguing that the firm would report to a Shariah body, and not to a constitutional authority. Investing public money in the firm – where the state government will own 11% – would be unconstitutional, he says.

The next High Court hearing is in April when presentations will be made by the Central government and the RBI. “We are confident of the removal of the stay order by then,” says Balakrishnan. “India is in need of funds for development, and there is a lot of investor interest from the Gulf region,” he adds. “There is no point in holding this money back.”

Success with Sukuk

Islamic finance has gained in popularity since the 1970s, and even more in recent times. (See Islamic Banking Comes of Age -- But What's Next?) According to a Standard & Poor’s report, assets of the top 500 Islamic banks expanded 28.6% to a total $822 billion at the end of 2009, compared with $639 billion at the end of 2008. “Only recently, the Indonesian government sold more than $850 million worth of sukuk bonds to domestic retail investors,” says Samir Nair, partner (business advisory services), at Ernst & Young. (Sukuk is an Islamic bond that represents proportionate beneficial ownership in the underlying asset. The issuer provides collateral security over the assets to sukuk holders to secure payment of the sukuk. In Malaysia, sukuk bonds account for nearly a third of the corporate bond market.)

But Islamic banking is really a variant of everyday banking. On the balance sheet, short-term trade finance, medium-term investments, long-term partnerships and fee-based services are listed as assets. Instead of charging interest, Islamic banks have a practice called Murabahah where the bank buys the item and sells it to the customer. The sale price includes a profit margin agreed upon by both parties and is repaid on a deferred basis. There is also Takaful, or Islamic insurance, which offers joint risk-sharing in the event of a loss by one of the participants.

Another product, named Mudarabah, is an investment partnership, where the investor provides capital to the entrepreneur to undertake a business or investment activity. Profits are shared on a pre-agreed ratio, while losses are borne by the investor alone. The banker is a passive partner with no right to interfere in management, but specifies conditions that ensure better management of money. Loans are permitted in Islamic finance, too, as long as the fee relates to service-related expenses.

As the market continues to develop, Islamic banking products have started to get more sophisticated. In a book titled, Islamic Finance: The Regulatory Challenge, by Simon Archer and Rifaat Karim, the authors argue that already the Malaysian procedure for securitization of the al bai bithaman ajil contract, which results in bai al dayn securities (sometimes referred to as debt securities) has proven contentious in the Arab world. Outside of Malaysia, a majority of Shariah scholars argue that any further trading in the income stream will be trading in debt, because the receivables are not directly attributable to the asset on which the investor has a beneficial title.

Emerging Hubs

Today the largest markets for Islamic products are Indonesia and Malaysia, but centers like London, New York and Hong Kong have emerged as hubs for Islamic finance. “There are (only) about three million Muslims in the UK,” says Parsoli Corporation’s managing director Zafar Sareshwala, “and yet London is a hub for Islamic finance. We have 160 million Muslims in India. Given our growth rate, this has potential to be the biggest market for Islamic finance.”

Muslims account for about 13% of India’s population, according to the Forum on Religion and Public Life. This is smaller than the Muslim population of Pakistan and Indonesia, but still accounts for 10% of the world’s Muslims. Yet Islamic finance in India has been marginal, provided by charitable trusts and loan societies. Among the few established Islamic finance companies is Al Idafa, with 750 clients and offices in Mumbai and Surat. More exist, but are under constant RBI scrutiny.

Take Parsoli Corporation, for instance, which has an office in Mumbai along a row of shops in the bustling Crawford market area. This is the only listed non-banking financial entity in India that sells Shariah-compliant Islamic investment products. Sareshwala has on his team a group of English-speaking, laptop-carrying Maulanas and Maulvis – educated at the Markazul Maarif Education and Research Center in Mumbai, which picks its students from 30 Islamic seminaries across India. They have devised the Parsoli Islamic Equity (PIE) Index, he says, where companies selected are compliant with the Shariah, the Muslim way of life.

Parsoli has interests in stock broking and offers depository services. It has an institutional equity sales and trading team, and offers portfolio management services. The firm has today about 15,000 clients spread across 70 locations in India, and it advises its clients to invest in companies that belong to the PIE Index.

The basis of selection of these companies, he says, are plenty. “Our scholars disqualify companies directly engaged in gambling, alcohol and sale of cigarettes.” What about taking loans and earning or paying interest; doesn’t every company take recourse to credit? “There is a concept of debt to market capitalization – where the former cannot exceed 33% of market capitalization,” he says. But what if a hotel company sells alcohol, and an aviation company serves pork? “In such areas we have introduced the term impure income, which cannot exceed 10% of the net worth or 8% of profit. So an equivalent of that impure income is passed on to charity,” he adds. Parsoli’s calculations allow nearly 58% of the Bombay Stock Exchange as eligible for Islamic investment.

Next on Sareshwala’s list is a unit-linked insurance product, developed by insurance company Tata-AIG that will be distributed through Parsoli’s outlets. “There is such a large segment of the Muslim community out of the financial net, and even fewer have access to insurance,” he says. “No matter how aggressive we are there is still a large market to capture.”

Unlike neighboring countries Muslims in India remain a minority community, and there are large sections in need of social upliftment. Rajesh Chakrabarti, assistant professor of finance at the Hyderabad-based Indian School of Business (ISB), notes: “These are devout people who do not go to the banking sector. Islamic products will help bring this community into the financial mainstream.”

A similar view is echoed in the Raghuram Rajan Committee report. Interestingly, the report does not name any faith in its analysis, simply referring to Islamic banking as interest-free banking. “This product doesn’t have to be attached to a faith,” says Sareshwala. “It can easily be sold as just another form of finance. If it has a captive customer base, that’s only the icing on the cake.”


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Wednesday, 24 March 2010

Nigeria: Islamic Banking is the Answer

Islamic banking is the answer to Nigeria's economy because it "promotes infrastructural development which Nigeria critically needs," says Mrs. Hajara Adeola, the managing director and chief executive officer of Lotus Capital Limited.She said the establishment of Islamic financing in Nigeria is rife following the plan by the CBN to discontinue universal banking for specialised banks.

The Jaiz International Bank has not been able to take off due to the N25billion compulsory capitalisation benchmark for banks. She said it is possible to have Islamic banking with the CBN relaxing the capitalisation base for banks. She said banks categorisation will: "bring banks nearer to the people and offering specialised service. Not all banks are international banks everywhere in the world" she said. Adeola spoke yesterday at the five-day training workshop on Islamic finance and investment products put together by Chartered Institute of Bankers of Nigeria (CIBN) and Lotus Capital Limited


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Removing barriers - Jordan moving to further Islamic Banking

Jordan is moving to further open its financial sector to sharia-compliant lenders, having unveiled plans to change regulations and legislation that will strengthen the regulatory environment for the Islamic component of the banking industry.

At present, Islamic banks have a relatively low profile in Jordan's finance sector, though this is in the process of changing. The country's older Islamic banks have assets representing some 11% of the total asset holdings of the banking system and 12.5% of all bank deposits and credit facilities, accounting to around 15% of credit extended by Jordan's financial institutions, according to Central Bank of Jordan (CBJ) data.

While these figures are expected to expand with the recent entrance of two new lenders into the segment - the Jordan Dubai Islamic Bank, which began its operations in Jordan in January 2010, and Saudi Arabia's Al Rajhi Bank, expected to start operating in the next two months - it will take more than issuing new licences to help the Islamic finance sector blossom, officials say.

Currently, Islamic banks and authorities have to contend with difficulties in developing the sharia-compliant finance model in Jordan, according to Khulud Saqqaf, the deputy governor of the CBJ.

In early March Saqqaf told delegates attending a seminar held at Sweimeh on the Dead Sea that among the biggest challenges faced by Islamic banks operating in Jordan are the absence of a secondary market for Islamic financial instruments and the lack of lender of last resort facilities. She added that there is a shortage of qualified and trained personnel skilled in the workings of Islamic banks.

Supervisory authorities have to contend with the dual challenges of understanding the Islamic finance industry and achieving a balance between providing effective supervision and facilitating the industry's legitimate aspirations for further growth and development against conventional finance, she said.

At present, the CBJ applies a single regulatory framework to govern both conventional and Islamic banks, though this "takes into account some issues related to the work of Islamic banks, especially in the management of liquidity and credit risks," said Saqqaf.

However, in an acknowledgement of the growing acceptance of the Islamic financial system, the CBJ is in the process of studying the standards issued by the Islamic Financial Services Board so they could be applied to the country's Islamic banks, she said.

The move would be a welcome one for the Jordanian government, which is increasingly looking to the Islamic finance market as a source of funds, though current restrictions limit the instruments it can access. The government is keen to avail itself of the broadest range of options as it is in need of resources to bridge the gap in the national budget, with the deficit this year projected to hit a record $1.5bn.

On March 8, the minister of finance, Mohammad Abu Hammour, said the government was considering putting in place new legislation that would clear the way for the issuance of Islamic sukuk, sharia-compliant bonds backed by assets.

The state has yet not tapped Islamic finance instruments to fund government projects, and with Islamic banks enjoying high liquidity levels worldwide the ministry is working to open the market to sharia-compliant financial institutions as soon as possible, said Abu Hammour.

"We are very interested in Islamic sukuk, especially since Islamic banks were less affected by the global financial crisis than commercial banks," he said.

The minister was speaking after signing a $100m murabaha contract - an instalment credit agreement for the sale of tangible goods - with the Jordan Islamic Bank to finance grain imports. Under the agreement, the bank will buy consignments of wheat and barley and resell it to the state at a marginal profit. Under the terms of the contract, the government is to repay the principal amount of the loan in three biannual installments, following a six-month grace period.

Though Jordan plans to push ahead with expanding its Islamic finance sector, it intends to do so only after putting the necessary safeguards in place, said the governor of the CBJ, Umayya Toukan.

While Islamic banking and finance proved to be the least vulnerable to losses and the least affected by the negative impact of the global financial crisis, the sector should be consistent with international benchmarks such as Basel II, Toukan said in his opening address to the Islamic Finance and Investment Forum for the Middle East on March 3.

To meet these benchmarks, Islamic banks in Jordan should have special monitoring and international auditing standards, allowing the sector to assume a larger role in the local and global banking system, he added.

Enacting a stronger regulatory and legislative framework will take time, something officials acknowledge, but by removing the barriers to a broad-based Islamic finance industry, both the private and public sectors in Jordan will be able to access higher levels of capital to fund their activities, in turn promoting faster economic growth.

Global Arab Network

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Monday, 22 March 2010

Abu Dhabi’s Al Hilal Opens First Islamic Bank in Kazakhstan

March 20 (Bloomberg) -- Al Hilal Bank, the lender owned by the state-controlled Abu Dhabi Investment Council, opened a branch in Kazakhstan, making it the first Islamic bank in the Central Asian nation.
The Kazakh branch, called Al-Hilal Islamic Bank, has capital of $36 million, the lender said in an e-mailed statement today. Al Hilal Bank committed in November to buy a $2.5 billion Islamic bond from the Dubai Financial Support fund, which aims to help Dubai’s state-owned companies amid the credit crisis.

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Saturday, 20 March 2010

Riba (usury) - Quran: Surah Al-Baqarah, verse 275

Those who eat Riba (usury) will not stand (on the Day of Resurrection) except like the standing of a person beaten by Shaitan (Satan) leading him to insanity. That is because they say: "Trading is only like Riba (usury)," whereas Allah has permitted trading and forbidden Riba (usury). So whosoever receives an admonition from his Lord and stops eating Riba (usury) shall not be punished for the past; his case is for Allah (to judge); but whoever returns [to Riba (usury)], such are the dwellers of the Fire - they will abide therein. 
(  سورة البقرة  , Al-Baqara, Chapter #2, Verse #275)

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Malaysia: SC to strengthen the role of the regulator’s Syariah Advisory Council (SAC) in the development of Islamic capital markets

KUALA LUMPUR: Changes to the Capital Market Services Act introduced last year by the Securities Commission (SC) will be enforced from next month.
SC chairman Tan Sri Zarinah Anwar said the changes would strengthen the role of the regulator’s Syariah Advisory Council (SAC) in the development of Islamic capital markets.
The SC had introduced changes to the act last year.
“The law now recognises the SAC as the central authority for the ascertainment of syariah principles for the Islamic capital market,” the SC chief said at the inaugural SC-Oxford Centre for Islamic Studies forum yesterday.
She added that the new provisions also enabled a licensed person, the stock exchange or a public listed company or other persons to refer matters to the SAC for its advice and ruling, which would be binding on the person or entity concerned.
“We believe this to be a crucial step in ensuring a clear and consistent development path for Islamic finance that ensures certainty whilst protecting investors,” Zarinah said.
Meanwhile, Perak Crown Prince Raja Dr Nazrin Shah, who is also the ambassador for the Malaysian International Islamic Finance Centre, said in his speech that the principles of Islamic finance were integral to financial reforms as the world grappled with the effects of the global recession and plotted the path to recovery.
“I don’t think that Islamic finance can substitute conventional forms of finance just yet but what it can do is inform, influence and ultimately improve the world of global finance,” he said.
Raja Nazrin said cases, lessons and views found in the field of Islamic finance could be applied and contribute greatly toward the renewed and stronger fabric of financial markets.

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Friday, 19 March 2010

Profile 025 - Dayax Islamic Bank - Somalia

Dayax Islamic Bank was incorporated on 7 June 2005 as a consequence of being awarded a banking license by the Government of Puntland, Somalia. 

The Bank commenced operation on 1st January, 2006 at its headquarters in Boosaaso, Puntland, Somalia. Upon commencement, the Bank will be a full service bank offering consumer banking, corporate banking, insurance and investment services.

All its financial products are Shariah compliant in accordance with Islamic principles.

Dayax Islamic Bank aims to be a premier financial institution providing Islamic financial products and services to our customers in accordance with Shariah principles and guidelines.

Dayax Islamic Bank is committed to provide innovative Islamic financial products and services by focusing on customer needs while serving the interest of all stakeholders and operating in accordance with Shariah principles and guidelines.

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Raja Nazrin: Islamic finance crucial to reform global finance rules

KUALA LUMPUR: The principles of Islamic finance are integral to reforming global finance regulations, especially as the world grapples with the fallout from the global financial crisis and maps out the path to recovery, said the Crown Prince of Perak Raja Dr Nazrin Shah.

In his keynote address at the inaugural Securities Commission-Oxford Centre for Islamic Studies forum here on Tuesday, March 16, he said Islamic finance could be an alternative to conventional finance due to the dissimilarity between Islamic and conventional financial products as the former afforded much consumer protection even before regulatory overview took place.

"However, I do not think that Islamic finance can substitute conventional forms of finance just yet, but what it can do is inform, influence and ultimately, improve the world of global finance," said Raja Nazrin, who is financial ambassador for the Malaysia International Islamic Finance Centre.

"I would argue that the principles of Islamic finance are integral to the reform of regulation," he said, referring to the process of rebuilding investor confidence in addition to regulatory processes in the global financial markets. Meanwhile, Securities Commission (SC) chairman Tan Sri Zarinah Anwar said the global financial crisis required an exploration of "every avenue of reconciliation with the recent past and with what the future holds".

"From bad design to unethical sales practices to poor governance, the financial crisis was fuelled by all that is wrong for business and finance," she said in her welcoming address at the event. "Participants in the market should not be driven solely by profits or, for that matter, solely by the desire to be charitable."

With regard to the extension of the Islamic financial space, she added it was important to ensure that form did not undermine substance and that uncertainty, lack of clarity as well as conflicting interpretations would not inspire confidence in the Islamic capital market.

"It is for this reason that the SC had last year introduced numerous changes to the Capital Market Services Act," she said.

"These changes which are expected to come into force next month, strengthens the SC's Syariah Advisory Council (SAC) and places it on sound legal footing to ensure that the SAC will continue to play an important role in the development of the Islamic capital market."

She added that the SAC was now recognised as the central authority for the ascertainment of syariah principles for the Islamic capital market.

"The new provisions also enable a licensed person, the stock exchange or other persons to refer matters to the SAC for its advice and ruling which shall be binding on the person or entity concerned," she said.

"We believe this to be a crucial step in ensuring a clear and consistent development path for Islamic finance that ensures certainty while protecting investors."

Zarinah also said the fact that the SC registered all syariah advisers for the Islamic capital market activities gave the regulators an opportunity to ensure that the advisers were aware of new developments and fully met the standards in the SC Guidelines on the Registration of Syariah Advisers.

In his speech, Raja Nazrin also said the lessons and views in Islamic finance could be applied and contribute greatly to the "renewed and stronger fabric of the financial markets" and that this alternative form of finance was increasingly recognised as seen by changing legislation and tax neutral policies adopted by countries such as the United Kingdom, Luxembourg, Hong Kong, Japan, Singapore and South Korea.

Despite such progress in recent years, he said Islamic finance would still need to broaden its acceptability and grow the market.

"For all its successes, Islamic finance still accounts for less than 1% of global financial instruments," he said. "Muslims make up over 20% of the world's population. Even in Muslim-majority countries, the assets of conventional banks far outstrip those of Islamic ones."

He also called for greater consultation among financial and supporting infrastructure so that "depositors and investors do not end up perplexed".

(The Edge)

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Halal hub can be catalyst for developing Islamic banking and finance industry

BRUNEI has to make use of its intentions to establish itself as a halal hub to further develop the Sultanate’s Islamic banking and finance industry, said Universiti Kebangsaan Malaysia’s Professor of Banking and Financial Economics Dr Abdul Ghafar Ismail.

Dr Abdul Ghafar said that Brunei “needs” to combine the two industries as it will allow the country to kill two birds with one stone in terms of economy diversification.

“The halal food and Islamic banking and financing industry goes together hand in hand. You want to produce halal goods but the big question I want to ask is, where does the money to produce this come from,” he said.

“If you want to create halal products then the money should come from halal financing … this is the concept. In this perspective, it will be good if the government can synergise these two because both industries should really go together,” said the professor.

He spoke of similar opportunities when it comes to Brunei’s oil and gas industry. “Oil and gas is the main revenue for the country and this needs money. In order to ensure that these big players can get the financing they need, they will have to be backed by a big financial institution,” he said. “They need these services so this is an area that these industries can cooperate, work and develop together,” he added.

Speaking on the topic of “Contemporary Islamic Finance: Challenges and Responses” at the International Conference on Islamic Finance 2010, the professor said the objective of establishing Islamic financial institutions in the country is not only to create wealth but also to contribute to the well being of the community.

“They have the task of distributing the wealth fairly and justly. It should not only be Syariah compliant but must also aim to achieve this objective,” he said.

When asked what would be the best Islamic banking model in Brunei, Dr Abdul Ghafar replied that there is no single best method. “There is no true answer because there are so many different models of Islamic banking in the world. The question should be which method or model can distribute the wealth most fairly. It depends on the design of the country,” he said. “It would be really good if you can have a variety of financial institutions that can offer the products or services that can fulfil what the community needs,” said the professor.

“If in Brunei, you need microfinancing services then why not do this to cater to the neglected individuals or community. Also those in the corporate sector will normally ask for corporate financing services so why don’t banking institutions offer this.”

(The Brunei Times)

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From Brunei - Quest for the ‘true Islamic economy'

AS THE Islamic finance market grows, debates remain on some of the Islamic financial structures which some scholars spurn for being too close for comfort to conventional finance products. The Brunei Times speaks with Sri Anne Masri, a local Islamic business consultant, about one of these controversial products, tawarruq, which is a subject of debate among scholars.

For those of us who are unclear about what tawarruq is, could you please elaborate?

Tawarruq is being used today as either a liquidity facility, also known as inter-bank placement, or a credit facility, and is a highly profitable business. There are a lot of debates on the issues whether Islamic banks should abandon tawarruq concepts like that done with the murabahah in the past. If we analysed the banking products, tawarruq in some forms, are being practiced in Brunei under different names, whether we realise it or not.

Why is this product controversial?

In April 2009, the Organisation of Islamic Conference Fiqh Academy ruled that organised tawarruq is not permissible, due to the elements of deception that leads to riba (interest or usury). … From the Islamic jurist point of view, the issue on tawarruq is just the “tip of the iceberg”. The Islamic banking industry must seriously differentiate itself from conventional banks, not just by replicating conventional products. Conforming or replicating to the ways of the conventional debt finance through legal tricks and ways to evade syariah restrictions epitomises the growing frustrations in truly defining the “true Islamic economy”. The industry must always make sure that in its goals to expand the market share, it does not fall into the trap of perpetrating mischief in the society, or mafasid. Organised tawarruq may result in the creation of a debt-based society.

How can Islamic banks be more aware of the way organised tawarruq works and be more responsible in their products and services?

Islamic banks should be more responsible in their marketing and ensure that we must not fall into the trap of promoting secular perspectives of “buy now pay later” through debt as a first resort, because this can lead to financial disaster that we had before. The customers should be transparently educated with the potential downside of debt and highlight that syariah allows debt only as a last resort and when there is a genuine need. However, Islamic institutions has evolved for more than 30 years and the market size has grown. It is high time for Islamic bank to come up with products which are based on mudarabah and musharakah structures. It does not mean that we have to abandon the existing structures but as least work towards minimising the use of tawarruq and maximising musharakah and mudarabah transactions.

Do you think this will be easy for banks and institutions to do to stay afloat in a market as small as Brunei?

Maybe these migration is easy in theory rather than in practice. However, the blueprint of transitions still should be well crafted by the stakeholders, in terms of supervision and regulations of the new system. All these should be addressed in consultations with the syariah scholars, economists, regulators, Islamic bankers, and other relevant bodies. The migration should be gradual and practical towards equity based model, taking into account the challenges that the Islamic bank and customers are facing based on substantiated market research.

In your opinion, do you think that tawarruq is syariah-compliant?

Unfortunately, there is no right or wrong answers to these issues or debate. We face similar conundrums in life. For example, a knife can be used harmlessly or harmfully to kill someone. We should then always weigh the benefits, or masalih, of the subject matter against the mafasid, that it may cause. If the masalih, outweighs the mafasid, or the mafasid is containable, then it should be permissible and likewise. The way forward for Islamic banks to grow its market size is by developing products through innovations with deep understanding of syariah and the trends in the market and balancing it with the objective of malahah, without falling into the trap of mischief.

(The Brunei Times)

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The Arabic term for interest is riba which means ‘to grow, to exceed, to increase.’ Technically it means ‘premium’ paid or payable by the borrower to the lender along with the principal amount as a condition for the loan or for the extension in its maturity. In other words it is the extra amount, benefit or advantage received on any loan.

Riba has been discussed in the following verses of the Holy Qur’ān in chapters, al-Baqarah, Aal-e-Imran, al-Nisa and al-Rum.

“Those who swallow usury cannot rise up save as he arises whom the devil has prostrated by (his) touch. That is because they say: Trade is just like usury; whereas Allah permits trading and forbids usury. He unto whom an admonition from his Lord comes and (he) refrains (in obedience thereto), he will keep (the profits of) that which is past, and his affair (henceforth) is with Allah. As for him who returns (to usury) –Such are rightful owners of the Fire. They will abide therein.

“Allah has blighted usury and made almsgiving fruitful. Allah loves not the impious and guilty. Lo! Those who believe and do good works and establish worship and pay the poor-due their reward is with their Lord and there shall no fear come upon them neither shall they grieve. O you who believe! Observe your duty to Allah and give up what remains (due to you) from usury, if you are (in truth) believers. And if you do not then be warned of war (against you) from Allah and His messenger. And if you repent, then you have your principal (without interest). Wrong not and you shall not be wronged. And if the debtor is in straitened circumstances, then (let there be) postponement to (the time of) ease; and that you remit the debt as almsgiving would be better for you if you did not know.” (2: 275-280)

“O you who believe! Devour not usury, doubling and quadrupling (the sum lent). Observe your duty to Allah, that you may be successful.” (3:130)

“Because of the wrongdoings of the Jews We forbade them good things which were (before) made lawful unto them, and because of their much hindering from Allah’s way. And of their taking usury when they were forbidden it, and of their devouring people’s wealth by false pretences. We have prepared for those of them who disbelieve a painful doom.” (4:160-161)

“That which you give in usury in order that it may increase on (other) people’s property has no increase with Allah; but that which you give in charity, seeking Allah’s countenance, has increase manifold.” (30:39)


Dr. Mohammad Nejatullah Siddiqi has discussed at length the inferences drawn from the above verses of the Qur’ān in his book “Riba, Bank Interest And The Rationale Of Its Prohibition” (published by Markazi Maktaba Islami Publishers, New Delhi). The following quotation from the book may be noted:

“These verses establish a number of important points. Firstly riba is categorically prohibited, secondly, it is stated that riba is what is over and above the principal and thirdly that it is unjust (zulm). It is also said that riba is destined to destruction (mahq). And last but not the least, the worst effect of riba mentioned in the above passage is that on human personality: riba demeans and diminishes individuals who indulge in taking it. Significantly, the claim of equating riba with trade is also rejected (trade being mutually beneficial whereas the benefits of riba may well be confined to one party only).”

Finally Dr. Nejatullah Siddiqi has summarised his masterly arguments under following heads:

Riba corrupts society.

Riba implies improper appropriation of other people’s property.

Riba’s ultimate effect is negative growth.

Riba demeans and diminishes human personality.

Riba is unjust.


Some scholars initiated a debate whether the word Riba used in the Qur’ān covers interest payment by banks or not. The whole argument by such scholars is to prove that interest is not the correct translation of Riba as it implies only usury, i.e. high rate of interest charged by money-lenders for consumption loan. In other words, according to this line of argument, bank interest is not Riba, as such, as it is meant for production. Premium on production loan is not prohibited. Riba implies only premium on consumption loan. This distinction between consumption loan and production loan is done on the logic that persons taking loan for production purpose use that for earning profit and they should pay interest like the rent paid on land and other resources. The person who is giving loan is parting with his resource and liquidity, the cash, and so he should be rewarded positively, i.e. on fixed rate for predetermined period. Taking interest on consumption loan is not judicious so it should be discouraged, either prohibited or made soft loan where interest may be as low as possible.


Maulana Syed Abu Ala Maudoodi has discussed related issues in the Foot Notes number 315-318 against verse 2:275 in Tafheemul Qur’ān [Towards Understanding the Qur’ān, published by Markazi Maktaba Islami Publishers, New Delhi]. A summary of the discussions therein follows:

“The proponents of this view argue that if profit on money invested in a business enterprise is permissible, why should the profit accruing on loaned money be deemed unlawful? …. Their argument runs as follows: A person who could have profitably invested his money in a commercial enterprise loans it out to somebody who, in turn, makes a profit out of it. In such circumstances why should the borrower not pay the lender a part of the profit? Such people, however, disregard the fact that no enterprise in which a man participates, whether it is commercial, industrial or agricultural, and whether one participates in it with one’s organising skill or capital, or by both, is immune from risk. No enterprise carries absolutely guaranteed profit at a fixed rate. What is the justification, then, for the fact that out of all the people in the business world, the financier alone should be considered entitled to a profit at a fixed rate in all circumstances, and should be protected against all possibility of loss?....

Let us consider only the question of loans for profitable enterprises, and confine our consideration to loans made at non-exorbitant rates of interest. The question, however, remains: Which rational principle, which logic, which canon of justice and which sound economic principle can justify that those who spend their time, energy, capacity and resources, and whose effort and skill make a business thrive, are not guaranteed profit at any fixed rate, whereas those who merely lend out their funds are fully secured against all risks of loss and are guaranteed profit at a fixed rate?”

Dr. Nejatullah Siddiqi in the above referred book has discussed this issue threadbare and proved that bank interest too is riba, the one prohibited by the Qur’ān. Another authority on Islamic economics Dr. M. Umer Chapra has also discussed this issue and showed that riba implies both interest on consumption loan and production loan [Prohibition of Interest: Does It Make Sense? published by Markazi Maktaba Islami Publishers, New Delhi].

The distinction between interest and usury and between low and high rate of interest done by the supporters of bank interest on production loan is not tenable in economics. For an economist theory no such demarcation is possible. Interest and usury have same meaning for him. The issue is simply a distinction between interest and profit (on trading) which the Qur’ān has highlighted by saying “Allah permits trading and forbids usury.”

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Wednesday, 17 March 2010

Kuala Lumpur a world financial centre through growth in Islamic banking

FORGET the City, Wall Street, Frankfurt and Tokyo, here's a revelation that will rock you, and probably Gail Kelly at Westpac too.

One of the world's biggest financial centres is Kuala Lumpur.

But a world leader it is. And here's the qualification - KL leads the world in Islamic finance, the fast-growing industry Australia's decidedly Christian Westpac recently decided it wants to get set-up in.

Just 27 years after Malaysia launched its first bank - unsurprisingly dubbed Bank Islam - to operate under Islamic principles, and only 17 years after the sector's own Big Bang, which meant lifting Bank Islam's monopoly - about 20 per cent of the country's banking transactions are conducted according to Koranic principles.

At one level that makes sense. Islam is Malaysia's official religion and about 60 per cent of the country's 29 million people are Malay, which under the Malaysian constitution means they are Muslims.

But the curious thing about Islamic banking in Malaysia is that among its most enthusiastic adherents is Malaysia's predominantly Buddhist Chinese community, which dominates business here.

''You tend to get a better return,'' admits Mohamed Rithuan Shamsudin, executive director of Malaysia's Association of Islamic Banking Institutions. ''And the service is a little more personal. You don't have to be a Muslim to bank Islamically.''

In Islamic banking, returns are reliant on the financial health of the deposit-taking institution and its investments. Common interest is ''earning money from money'', usury or riba as its known in Arabic and is haram, forbidden in Islam. Profit should be something created when money is transformed into capital via personal effort. Conversely, it applies that if a bank makes losses, depositors will bear that burden too. Except most of the world's Islamic economies are doing very well compared with the mostly Christian West that has traditionally dominated global finance.

Malaysia's central bank, Bank Negara, has a separate division to ensure transactions made under Koranic principles remain pure at all stages of the transaction. That means an entire infrastructure ensuring returns and profits aren't re-invested in industries or companies also regarded as haram, notably arms makers, tobacco companies or brewers and distillers. Gambling too is out.

After being monopolised for a decade by Bank Islam, which was spun out of an institution set up by Malaysia's Haj-goers to ease the cost of the annual pilgrimage to Mecca, Malaysia now has more than 40 financial institutions touting Islamic banking and more conventional offerings.

Malaysia is among the three leading Islamic banking centres - the others are Iran and Saudi Arabia - and the relative liberalism of its economy and openness to the world, unlike Iran and Saudi, makes it well poised to dominate Islamic banking, which has grown globally at about 10 per cent a year over the past decade. That decade has also coincided with the period since the 9/11 attacks on the US, when immigration and financial controls were instituted in the West, encouraging Muslims to keep money at home.

Curiously, Islamic banking has so far failed to take off in the world's biggest Islamic country, Indonesia, where sharia-compliant transactions comprise less than 1 per cent of all banking there. But that has less to do with Islam and the products offered than it does with Indonesia's wobbly economy - after the Asian financial crisis in the '90s - and politics.

Most of Indonesia's serious money is sheltered in ethnic Chinese-controlled Singapore, which has long been wary of its Muslim neighbours and where Islamic banking is in its infancy. Malaysia too went through pain in the '90s financial crisis, but Rithuan notes that not one Islamic bank in Malaysia or Indonesia required government rescue then, suggesting banks managed under Koranic principles, discouraging speculation, display a prudence non-sharia banks would be wise to mirror.

Which is fine but the economies where Islamic banking has prospered tend to be some of the world's least transparent. Do you really want your hard-earned to be salted away in Riyadh or Tehran?

Still, to the Gail Kellys and Cameron Clynes, and particularly the Mike Smiths, anxious to extend their Australian-based banks across booming Asia and the resource-rich Middle East, the jargon and diktats governing Islamic banking may take some getting used to.

(The Age)
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Thursday, 4 March 2010

Islamic Finance Must Harmonize Practices to Grow

SWEIMEH, Jordan, March 3 (Reuter) - Islamic banking must speed standardization to grow while monetary authorities should enact laws that allow expansion into new Sharia-based products in domestic markets, industry experts said on Wednesday.

The industry needs to surmount divergent views and practices, due to different readings of the sharia, and adhere to benchmarks as it looks for new ways to grow, industry experts said on the sidelines of an Islamic finance forum at the Dead Sea.

The fast-growing $1 trillion industry is now governed by a patchwork of national regulators, standard-setting industry bodies and Islamic scholars ruling on products and contracts.

Jordan's oldest Islamic bank, Jordan Islamic Bank , also urged monetary authorities in countries where Sharia-compliant banks operate to cater for their special needs.

"There is a need for legislation that does not set Islamic banks apart from other banks but rather grants them the opportunity to invest in goods and other areas of investment, " said Musa Abdelaziz Shihadeh, chief executive of the bank, whose main shareholder is the Bahrain-based Al-Baraka Banking Group.

Islamic finance, derived from sharia, or Islamic law, forbids charging interest and favors profit-sharing arrangements or structures that resemble rental agreements.

Islamic financing is usually underpinned by physical assets.

Mohamad Nedal Alchaar, secretary general of the Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), which helps set standards for the industry, said the priority was to establish common practices.

"I think harmony is a prerequisite to success. ... So the issue of unified practices is extremely important at this juncture especially now that Islamic banking is present across the world," Alchaar told Reuters.

Differences of opinion among scholars have seen some financial products deemed un-Islamic in certain centers but permissible in others, creating uncertainty in the industry.

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Wednesday, 3 March 2010

ISDA, IIFM Set Global Islamic Derivatives Standards

March 1 (Bloomberg) -- Global standards for Islamic derivatives published today will help Shariah-compliant borrowers and investors manage risk more effectively, according to the industry bodies that spent four years preparing them.

The ‘Hedging Master Agreement’ provides a structure under which institutions can trade derivatives such as profit-rate and currency swaps, the Bahrain-based International Islamic Financial Market and New York-based International Swaps and Derivatives Association said in a joint statement.

“Given the growing nature of the Islamic finance industry, institutions operating on Shariah principles can no longer afford to leave their positions unhedged,” IIFM Chairman Khalid Hamad said in the statement. The master agreement “gives the industry access to a truly global framework” that is approved by recognized scholars of Islamic law.

Islamic finance is the fastest-growing segment of the global financial system and sales of Islamic bonds may rise by 24 percent to $25 billion this year, CIMB Group Holdings Bhd., the top underwriter last year, said on Feb. 3. Demand for financial products that comply with Shariah is rising as the wealth of the world’s 1.6 billion Muslims increases, spurred by Gulf Arab oil earnings and export-led Asian economic growth.

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. Because Shariah prohibits payment or receipt of interest, speculation and uncertainty, many Islamic investors avoid the contracts.

Compliance Vetting

To ensure compliance with Shariah, new Islamic financial products must be vetted and approved by recognized scholars who are versed in its principles. The IIFM is advised by a panel that includes Sheikh Nizam Yaquby and Mohammed Daud Bakar, its Web site shows.

While the structure of the master agreement is “similar” to the ISDA’s rules for conventional derivatives transactions, counterparties using the new standards will “understand that no interest shall be payable or receivable and no settlement based on valuation or without tangible assets is allowed,” according to today’s statement.

The ISDA, which represents more than 810 organizations active in the derivatives market, is also working with the IIFM and countries including Pakistan, the United Arab Emirates, Indonesia and Malaysia to improve legal frameworks for close-out netting provisioning, Executive Vice Chairman Robert Pickel said in a telephone interview.

“It’s to provide certainty that if you’re doing a transaction with a counterparty in, say, the U.A.E. or another country in the region, and that counterparty goes bankrupt, you’d be able to close out your position under the contract and then go to a bankruptcy court in U.A.E. to have your claim enforced,” he said.

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Tuesday, 2 March 2010

Malaysia: More global banks may go for international Islamic banking (IIB) licence

More international banks may be keen to obtain the country’s international Islamic banking (IIB) licence as interest in syariah-compliant foreign currency business picks up, experts say.

RAM Rating Services Bhd head of financial institution ratings Promod Dass said foreign banking groups with a strong interest in cross-border non-ringgit deals were likely candidates for any future IIB licences.

“It is also possible to see some interest from Middle Eastern banking groups to obtain this specialised licence,” he told StarBiz.

The IIB licences are offered under the Malaysia International Islamic Financial Centre initiative which was launched in August 2006 to promote Malaysia as a major hub for international Islamic finance.

The licences enable financial institutions to conduct a full range of Islamic banking activities in non-ringgit foreign currency business.

So far, only four banks have obtained the IIB licence – Unicorn International Islamic Bank Malaysia Bhd, PT Bank Syariah Muamalat Indonesia Tbk, Al Rajhi Bank Malaysia and Deutsche Bank (Malaysia) Bhd, which announced yesterday that it had received the licence.

MIDF Research banking analyst Kelvin Ong said other global banks might be interested to use the country as a platform to tap the Islamic banking business in the Asian region.

“There is a possibility that these banks may be interested in obtaining an IIB licence. I am not surprised if this happens,” he said.

Ong said there were also attractive tax incentives offered to banks with IIB licences.

One such incentive is a tax exemption on income earned from international banking and takaful operations conducted in foreign currencies, either as a subsidiary or a branch, until 2016.

In addition, stamp duty exemption is provided for instruments executed on Islamic banking and takaful businesses conducted in foreign currencies until 2016.

Promod said that as the IIB licence was more institutional or corporate in nature and a distinct niche from the mainstream retail Islamic banking, it would help to deepen and broaden the country’s offerings as an international Islamic financial centre.

To be eligible for the licence, a financial institution must be well established and reputable, adopt international banking practices formulated by the Bank for International Settlements or other international standard-setting bodies, be regulated and supervised by a competent home regulatory authority and possess a sound track record.

The IIB entity can be set up as an incorporated company or branch, with the requirements for an incorporated entity to have a minimum paid-up capital of RM10mil and an annual licensing fee of RM50,000.

(The Star, M'sia)

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