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Thursday, 22 March 2012

Riba in The Quran

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)

INFERENCES
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.

THE DEBATE
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.

TO SUM UP THE DEBATE
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.”

(By: Dr. Waquar Anwar)

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Alfalah Consulting-Kuala Lumpur: www.alfalahconsulting.com 
Islamic Consultant & Trainer: www.ahmad-sanusi-husain.com 
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Malaysia: CIMB Islamic plans to launch Ar-Rahnu Islamic pawnbroking


KUALA LUMPUR
:The CIMB Islamic Bank plans to launch the Ar-Rahnu Islamic pawnbroking business in Malaysia in the second half of this year following the success of the similar business in Indonesia under CIMB Niaga Syariah, said chief executive officer Badlisyah Abdul Ghani.

“We’ve been fairly successful in our Ar-Rahnu business in Indonesia and it’s time for us to do the business here. We”ve obtained Bank Negara’s approval and once we finalise our delivery framework, we’ll launch the business most likely in the east coast.

“Malaysia’s market size is large and we believe there are ample opportunities for us despite being a late starter,” he told Bernama in an interview.

Although Badlisyah was cautious about the performance this year, he expects CIMB Islamic Bank and the group’s overall Islamic banking franchise to experience another good year.
“I am cautiously optimistic about 2012 in the light of all that is happening globally and the tighter regulatory framework and the general election fever at home, but I believe we will do well this year, better than last year. We are focused on growing our CASA (Current Account Savings Account) and hope to see double-digit growth in both our financing and deposit base,” he said.

CIMB Islamic has done well in Islamic investment banking, topping the global sukuk (Islamic bond) league table again last year, and entrenching its position as the second largest Islamic bank by assets in Malaysia and in the Asean region. For its financial year ended Dec 31 2011, CIMB Islamic Bank registered another record year, posting RM447 million profit before zakat (tithe), about nine per cent of the group’s pre-tax profit.

He said the bank’s assets grew 24.7 per cent to RM28.4 billion while the total financing book grew 28.9 per cent to RM29.2 billion, 15 per cent of the group’s total financing and 13 per cent of the overall financing asset of the Islamic banking industry.
On group level, Badlisyah said total revenue from Islamic banking operations across the CIMB Group totalled RM1.47 billion, the highest Islamic revenue generated since the group established the “CIMB Islamic” franchise in 2002.

Badlisyah said Malaysia’s operations contributed 89 per cent of the group’s total Islamic banking revenue, with Indonesia and Singapore accounting for about seven per cent and one per cent, respectively.

“We believe there is huge potential upside in Indonesia and we hope to grow its contribution to overall business to 10 per cent or more this year. The idea is to have a regionalised Islamic business in tandem with CIMB Group’s conventional business,” he added.


(Bernama, 05 March2012)

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Alfalah Consulting-Kuala Lumpur: www.alfalahconsulting.com 
Islamic Consultant & Trainer: www.ahmad-sanusi-husain.com 
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Wisdom behind Prohibition of Riba - from Islam On-line Fatwa Bank

Question

Could you please furnish me with the wisdom behind the prohibition of Riba?

Answer:

In the Name of Allah, Most Gracious, Most Merciful.

All praise and thanks are due to Allah, and peace and blessings be upon His Messenger.

Dear questioner, we commend your pursuit of knowledge and your keenness to seek what is lawful and avoid what is not. We earnestly implore Allah to bless your efforts in this honorable way.

In an attempt to furnish you with a Fatwa regarding the wisdom behind the prohibition of Riba, we would like to cite for you what the eminent Muslim scholar Sheikh Yusuf Al-Qaradawi, stated in his well-known book The Lawful and the Prohibited in Islam, regarding the issue:

“Islam permits increase in capital through trade. Referring to this, Allah Almighty says, “O you who believe, do not consume your property among yourselves wrongfully, but let there be trade by mutual consent…” (An-Nisa’: 29)

At the same time, Islam blocks the way for anyone who tries to increase his capital through lending on usury or interest (Rriba), whether it is at a low or a high rate, reprimanding the Jews for taking usury, even though they had been prohibited to do so.

Among the last revelations are the following verses of Surat al-Baqarah: “O you who believe, fear Allah and give up what remains due to you of interest if you are indeed believers. And if you do not, then be warned of war (against you) by Allah and His Messenger, while if you repent you shall have your capital. Do not do wrong and you shall not be wronged.” (Al-Baqarah: 278-279)

The Prophet (peace and blessings be upon him) declared war on usury and those who deal in it; he pointed out its dangers to society, saying, “When usury and fornication appear in a community, the people of that community render themselves deserving of the punishment of Allah.” (Reported by Al-Hakim; Abu Y’ala has reported something similar on good authority)

Judaism, prior to Islam, had also prohibited interest. In the Old Testament we read, “If you lend money to any of my people with you who is poor, you shall not be to him as a creditor, neither shall you require interest from him.” (Ex. 22:25)

As for Christianity, the Gospel according to Luke reads, Give away to every one who begs of you, and of him who takes away from your goods, do not demand them back again. (Luke 6:30)

It is, therefore, sad to see that the Old Testament has been subjected to such distortions that the meaning of “my people,” which originally had a broader application, later became restricted to the Jews alone, as we read in Deuteronomy, You may lend on interest to a foreigner, but to your brother you shall not lend on inters”. (Deut. 23:20)

The wisdom behind the prohibition of interest

The strict prohibition of interest in Islam is a result of its deep concern for the moral, social, and economic welfare of mankind. Muslim scholars have sound arguments explaining the wisdom of this prohibition, and recent studies have confirmed their opinions, with some additions and extensions of their arguments.

We confine ourselves to what Imam al-Razi says in his tafsir of the Qur’an:

First: The taking of interest implies appropriating another person’s property without giving him anything in exchange, because one who lends one dirham for two dirhams gets the extra dirham for nothing. Now, a man’s property is for (the purpose of) fulfilling his needs and it has great sanctity, according to the hadith, “A man’s property is as sacred as his blood.” (Reported by Abu Na’eem) This means that taking it from him without giving him something in exchange is haram.
Second: Dependence on interest prevents people from working to earn money, since the person with dirhams can earn an extra dirham through interest, either in advance or at a later date, without working for it. The value of work will consequently be reduced in his estimation, and he will not bother to take the trouble of running a business or risking his money in trade or industry. This will lead to depriving people of benefits, and the business of the world cannot go on without industries, trade and commerce, building and construction, all of which need capital at risk. This, from an economic point of view, is unquestionably a weighty argument.
Third: Permitting the taking of interest discourages people from doing good to one another, as is required by Islam. If interest is prohibited in a society, people will lend to each other with good will, expecting back no more than what they have loaned, while if interest is made permissible the needy person will be required to pay back more on loans (than he has borrowed), weakening his feelings of good will and friendliness toward the lender. (This is the moral aspect of the prohibition of interest.)
Fourth: The lender is very likely to be wealthy and the borrower poor. If interest is allowed, the rich will exploit the poor, and this is against the spirit of mercy and charity. (This is the social aspect of the prohibition of interest.) (Tafsir by al-Fakhr al-Deen al-Razi, vol. 7, p. 4.)
Thus, in a society in which interest is lawful, the strong benefit from the suffering of the weak. As a result, the rich become richer and the poor poorer, creating socio-economic classes in the society separated by wide gulfs. Naturally, this generates envy and hatred among the poor toward the rich, and contempt and callousness among the rich toward the poor. Conflicts arise, the socio-economic fabric is rent, revolutions are born, and social order is threatened. Recent history amply illustrates the dangers to the peace and stability of nations inherent in interest-based economies.”

Source: Islam On-line Fatwa Bank

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Alfalah Consulting - Malaysia: www.alfalahconsulting.com 
Islamic Consultant & Trainer: www.ahmad-sanusi-husain.com 
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Takaful growth attracts domestic and multinational providers



Takaful insurance across the Middle East and South East Asia has seen rapid growth over the past five years. Francesca Nyman reports on what the future looks like for this sector.
The takaful insurance industry has seen remarkable growth over the past five years. Global takaful contributions grew by 31% in 2009 to reach $7bn, and by the end of 2011 the market was thought to have a value of $12bn, according to Ernst & Young.
Approximately 70% of all global contributions come from the GCC, the Cooperation Council for the Arab States of the Gulf, where low insurance penetration, demographic factors and the rise in Islamic consciousness have made the region a prime target for domestic providers and large multinationals alike. The second largest contribution comes from South East Asia, which accounts for 21% of the market.
In context

Analysts are keen to put this growth in context; after all, this is still a niche market. Swiss Re's Malaysia-based head of retakaful, Marcel Papp, points out "growth is always easier when the base is low and for takaful the base is very low". But, caution accepted, the numbers are impressive and, while the global economic turmoil took its toll on the conventional market, takaful has continued to see growth.

"Every year we have been anticipating a slowdown but, with conventional insurance seeing negative or single-digit growth, takaful insurers have maintained almost 20% growth," comments Ayman Alajmi, regional head of takaful and managing director Bahrain for Chartis Takaful Enya.

"GROWTH IS ALWAYS EASIER WHEN THE BASE IS LOW AND FOR TAKAFUL THE BASE IS VERY LOW." PAPP



Low penetration 

The low insurance penetration in this region is certainly a contributing factor as insurers do not have to canablise the conventional market. In addition, many have entered the market in joint ventures with the region's Islamic banks.

As E&Y's Islamic Financial Services leader Ashar Nazim explains, this is a significant advantage. "For takaful operators, distribution through Islamic banks allows easy access to a captive market who will only deal in Sharia-compliant insurance solutions. As the size and value of Islamic banking assets has grown in number and value, so has the attractiveness of this channel," he said.
Still challenging


But, despite the positive signs, the takaful market is still challenging. One concern for the multinational carriers that operate in the region is the dim view regulators are beginning to take of companies that peddle a little Sharia-compliant insurance on the side, from the same outfit that dispenses conventional insurance products.

"Previously ‘takaful windows' were permitted allowing a single entity to offer both conventional and Islamic insurance products. However, increasingly such arrangements are prohibited, as is the case in the United Arab Emirates where it is necessary to establish and capitalise a separate entity in order to offer takaful products," explains Peter Hodgins, partner at Clyde and Co.
"All eyes are now on Qatar, which last year banned similar windows in the banking sector."
However, some regions are introducing regulatory changes that actually permit companies to open windows. The Securities and Exchange Commission of Pakistan has recently issued draft takaful rules that allow conventional insurers to open takaful window operations, prompted by a desire to improve insurance penetration in the predominately Islamic region.

"FOR TAKAFUL OPERATORS, DISTRIBUTION THROUGH ISLAMIC BANKS ALLOWS EASY ACCESS TO A CAPTIVE MARKET." NAZIM

Takaful windows 


If Qatar did ban takaful windows and other countries in the region followed suit this would create a compliance issue for multinationals in the region. Mohammad Khan, UK Islamic financial leader at PwC, believes firms entering the market should seriously consider capitalising a separate company to mitigate the risks, but not all companies can, or want to, raise the capital for a separate entity.

Although Chartis' is one company considering taking a change of direction to concentrate on commercial lines reinsurance and become a fully-fledged retakaful company. "There is considerable opportunity for Retakaful insurers to support the growth of Takaful business. This is an area that we at Chartis Enya will look to address, particularly in respect of supporting commercial lines takaful business," comments Alajmi.
The sheer number of players operating, particularly in the UAE, is also a challenge. Competition ranked as the highest risk for most industry readers surveyed by E&Y for its World Takaful Report 2011. As Nazim explains: "The number of operators coming online in the last five years has led to significant downward pressure on pricing."
Overcrowding issue 


While most agree the Middle East's direct takaful market is "overcrowded" not everyone believes this is a cause for concern.

"In personal lines there are a lot of players," says Khan. "We will see consolidation within Kuwait, Qatar and some UAE territories such as Dubai and Abu Dhabi, but I expect the players that emerge from this to be stronger."
When it comes to specialised risks, there are far fewer players and much less capacity. Chartis offers takaful directors and officers and takaful professional indemnity, but it is believed to be one of only three companies that offer such products.

           "We will see consolidation within Kuwait, Qatar and some UAE territories such as Dubai                and Abu Dabi." Khan

Public awareness


A third, and somewhat surprising problem given the sector's rapid growth, is that of public awareness. In a risk survey last year Swiss Re asked muslims whether they felt they had good knowledge of or bought takaful. Only 30% of muslim respondents in Malaysia said they had bought takaful, or had good knowledge of it. Only 5% of respondents in Indonesia said they did.

Papp believes educating the distribution channel is a key part of overcoming this gap, but accepts that it will take some time. There has been a traditional ambivalence to insurance in these countries and, although this is changing with the help of government initiatives, it will not happen overnight.
Growth challenge


If the takaful market continues to grow, some have suggested that it could target territories beyond the Islam-dominated Middle East and South East Asia.

However, if takaful operators were to expand into geographical regions with higher penetration rates some of their current advantages would dissipate. They would be attempting to cannibalise the traditional market and would have to battle for business. But some believe this is a battle they could win.
"Takaful has an added appeal for non-Muslims with its positioning as being more ethical and a fairer means of insuring against risk," Nazim says.
It would be naïve to suppose that for most consumers ethical sensibilities are a stronger driver than their purse, but where price differences are negligible those desires may be given consideration.

"TAKAFUL HAS AN ADDED APPEAL FOR NON-MUSLIMS WITH ITS POSITIONING AS BEING MORE ETHICAL." NAZIM

Important ethics


"If I'm looking at an ethical motor product versus a non-ethical product they will be about the same price. On those grounds the ethical product seems the obvious choice," comments Khan.

If takaful vendors can convince the public of this, demand is likely to grow. But whether the financial results will be enough to maintain the interest of global carriers that have entered the market seeking "a slice of the pie" remains to be seen.
There is a ban on excessive profits in takaful, according to Khan, but there is nothing in inherent in the takaful structure that means it would generate less profit.
"What would make a takaful company unprofitable is the same thing that would make a conventional insurer unprofitable: not charging an adequate premium for the risk.''
(InsuranceInsight, 02 March2012)


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 Alfalah Consulting-Kuala Lumpur: www.alfalahconsulting.com
 Islamic Consultant & Trainer: www.ahmad-sanusi-husain.com
 Islamic Investment Malaysia: www.islamic-invest-malaysia.com

UAE: Dubai as the Dispute Resolution Centre for the Islamic Finance Industry


The below is an abridged version of the original piece written by the author. Detailed information about the courts, cases, processes and judge rulings were omitted.

There is no doubt that the Islamic Finance Industry is booming worldwide.  However, to the industrys detriment, there does not exist a sufficient regulatory framework through which to solve disputes in Islamic Finance transactions.  If this situation persists, the Islamic Finance Industry will not survive.

Currently the practice is to have Islamic finance disputes settled by the Law of England and Wales or the State of New York.  Inserting these two jurisdictions in the governing law clauses of Islamic Finance contracts is a grave mistake. These two jurisdictions generally do not recognize Shari'ah laws as a system capable of governing a financial transaction.  However, the Islamic Financial transaction itself is rooted in Shari'ah law and principles as well as the Quran.  Therefore, some aspect of Shari'ah must be applied in settling an Islamic Finance dispute.

Furthermore, a judge in England and New York may have had no exposure to Islam, Islamic Finance, or Islamic culture except in a negative light.  Therefore, when an Islamic Finance dispute goes before a judge in England or New York, the transaction by default turns into a conventional transaction irrespective of the Shari'ah upon which it was structured.

For example in Beximco Pharmaceuticals Ltd, Bangladesh Export Import Co. Ltd., Mr. Ahmad Solail Fasiuhur Rahman, Beximco (Holdings) Ltd. v. Shamil Bank of Bahrain E.C. [2004] EWCA Civ 19 In the Supreme Court of Judicature Court of Appeal Civil Division On Appeal From the High Court of Justice Queens Bench Division (Morison J), Lord Justice Potter confirms the judgment of Morrison J and explicitly denies that Shari'ah law could be applied to settle an Islamic Finance transaction.
   
According to the Appeal Case, the Court ruled that an Islamic Finance contract could not be governed by Shari'ah law in the UK even if so specified in the contract  and that in fact Shari'ah law is not a recognizable form of law that contains principles of law capable of governing a commercial dispute in the UK.

Article 3.1 of the Rome Convention (which by s.2 (1) of the Contracts (Applicable Law) Act 1990 has the force of law in the United Kingdom) contemplates that a contract shall be governed by the law chosen by the parties and Article 1.1 of the Rome Convention makes it clear that the reference to the parties choice of law to govern a contract is a reference to the law of a country.

There is no provision for the choice or application of a non-national system of law such as Shari'ah law.  English law is a law commonly adapted internationally as the governing law for banking and commercial contracts, having a well-known and well-developed jurisprudence in that respect which is not open to doubt or disputation on the basis of religious or philosophical principle.  

Need for Arbitration center 

It is advisable to create a world-recognized Islamic Finance Arbitration Center (the Dubai World Islamic Finance Arbitration Center (DWIFAC)) staffed with the worlds top Shari'ah scholars to settle disputes in Islamic Finance Transactions/Contracts.  This world-recognized Islamic Finance Arbitration Center should be based in Dubai, transforming Dubai into the pinnacle of the Islamic Finance Industry, surpassing Malaysia, Bahrain, and Saudi Arabia, and turning Dubai into the dispute resolution center for the all the worlds Islamic Finance Transactions.  The Dubai World Islamic Finance Arbitration Center (DWIFAC) could have its own set of rules and could have a Jurisprudence Office and Islamic Finance Education Institute attached to it.


It is imperative that the UAE legislate its own Federal Islamic Banking Law in conjunction to forming DWIFAC so that the parties to an Islamic Finance contract can designate the Laws of the UAE as the substantive law governing the Islamic Finance Contract.  For instance, when drafting the governing law clause of an Islamic Finance contract, it would become standard for the industry to put the Laws of the United Arab Emirates as the governing law of the contract and designate the Dubai World Islamic Finance Arbitration Center (DWIFAC) and the rules of the DWIFAC as the dispute resolution body and applicable procedural law.  Most, if not all of the top Shari'ah scholars have been highly educated in both Shari'ah law and conventional western finance and law and are highly capable of  resolving Islamic Finance Disputes.  Dubai would also save the Islamic Finance Industry by providing effective, streamlined dispute resolutions which preserve Islamic Finance concepts and through this would ensure the Islamic Finance industrys survival into the future.

The UAE could make agreements with other nations to use DWIFAC as the designated dispute resolution center for Islamic Finance disputes and encourage the country in question to implement the Federal Islamic Banking Law of the UAE into their domestic legal systems.  As it stands now, even the UAE does not have an Islamic Banking law, however, it has a law allowing Islamic Banks to exist.  The secretary-general of the Fatwa and Shari'ah Supervision Board in the UAE, Mabid Ali Al Jarhi has called for modifications to some civil laws and the introduction of an Islamic banking law.  Al Jarhi said that Islamic banks are presently guided by their own Shari'ah boards and have policies that often differ from those of other Islamic finance houses.  Therefore, attached to the Islamic Finance Arbitration Center, there should be an Islamic Finance Jurisprudence Officeentrusted with the task of creating a unified Islamic Banking Lawand to have it implemented in all countries around the world which are commercial centers.  This law may incorporate the AAOIFI standards and/ or be based on the 1985 law which was never officially enacted.

The Example of Bahrain

Currently, the Kingdom of Bahrain surpasses the UAE as a hub of Islamic Finance, as Bahrain houses AAOFI, the Accounting and Auditing Organization for Islamic Financial Institutions and the very popular Bahrain Institute of Banking and Finance (BIBF).  Bahrain also recently launched Bait- al- Bursa, the first Islamic Finance Division of a stock exchange (BFX) to exclusively offer electronically traded Islamic Financial instruments.  It currently monopolizes all the exchange traded business in the Islamic finance sector.  Furthermore, Bait al Bursa recently launched e-Tayseer, which is a fully automated platform for transactions in supply, purchase and sale of assets for facilitating Murabaha transactions.  E-Tayseer allows suppliers to place their assets onto the platform ready to be purchased by financial institutions.  Financial institutions can then purchase these assets and conduct Murabahah transactions with counterparties to fulfill their liquidity management requirements in a secure online environment.

Dubai World/Nakheel Default

The Dubai World/Nakheel debt re-structuring was essentially an Islamic Finance Dispute over a default in a Sukuk issuance. Instead of creating an ad-hoc tribunal based on a version of the DIFC insolvency laws; this matter could have been handled at the Dubai World Islamic Finance Arbitration Center (DWIFAC).

Blom Bank Judgment 

In the case of Investment Dar Co KSCC v Blom Development Bank Sal [2009] EWHC 3545 (Ch) High Court of Justice Chancery Division, TID successfully claimed that to uphold the Wakalah that it had entered into with Blom Bank would be un-Islamic and a breach of its statutes.  TID won the appeal case largely because the dispute was administered by an English Court where the judge had absolutely no understanding of Islamic finance and applied conventional finance and common law to the dispute which by default turned the transaction into a conventional transaction.

Conclusion

It is advisable to create a world-recognized Islamic Finance Arbitration Center (Dubai World Islamic Finance Arbitration Center (DWIFAC))to be set up immediately in order to handle current Islamic banking disputes staffed by the worlds top Shari'ah and Islamic Finance Scholars.  Currently, there is an Islamic Finance Arbitration Center in existence, but it is not widely used or recognized.  Other people are working on this concept now, such as in Cairo and possibly other locations, therefore, the process must be swift and speedy with immediate action and implementation in order to lift Dubai to the forefront of the Islamic Finance Industry.  In addition, a unified Islamic Banking Law should be enacted in the UAE as soon as possible. Attached to the DWIFAC, it is advisable to have  a Jurisprudence Office to oversee the creation and implementation of the Islamic Banking Law in the UAE and worldwide as well as oversee the creation of an Islamic Division to all UAE stock exchanges including the NASDAQ, the Abu Dhabi Securities Exchange (ADX) and the Dubai Financial Market (DFM). 

(Business Islamica: by Camille Paldi - a UAE-based Legal expert)

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Alfalah Consulting-Kuala Lumpur: www.alfalahconsulting.com 
Islamic Consultant & Trainer: www.ahmad-sanusi-husain.com 
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Islamic finance most dynamic area of financial services

Islamic finance is one of the most dynamic areas of financial services today. Financial and economic devastation caused by the recent financial crisis has provided further impetus to this healthy growth momentum as the Islamic financial system is increasingly being looked at as a prudent, stable and viable alternative to the conventional system.


This was stated by State Bank of Pakistan Governor Yaseen Anwar, who was speaking as chief guest at the inaugural session of two-day 2nd International Conference on Islamic Business here on Tuesday at National Institute of Banking and Finance.

The conference titled ‘Management Shariah Conforming Business: Prospects, Practices and personnel’ is being organised by Riphah Center of Islamic Business (RCIB), a constituent institute of Riphah International University (RIU) Islamabad.

Institute of Policy Studies Islamabad Chairman Prof. Khurshid Ahmad were the keynote speakers on the occasion.

A number of Islamic business and finance scholars and economists from all over the world will present papers and presentation on business and management systems and institutions, finance (institutions), banking, ‘Takaful’, HR, marketing , regulatory bodies and associations for Shari’ah conforming business and entrepreneurship during the working sessions.

The SBP governor said despite all these positive developments during the last decades there exist many critical issues to be addressed to sustain the growth momentum on a long-term basis.

He said it is very encouraging to see that Riphah International University has arranged the second International Conference to discuss the critically important issues pertaining to Islamic finance product, monitory policy in an Islamic economic system and liquidity management.

Prof. Khurshid Ahmad, in his keynote address, threw light on global economic problems and the role of Islamic Ummah. He said the present day economic problems and difficulties can be resolved adopting Islamic finance and banking. Dr. Abdelkader Chachi, Economist, IRTI-IDB, Kingdom of Saudi Arabia, in his address, appreciated the holding of International Conference on Islamic Business and extended full support of his organisation to achieve the targets of the conference.

Pro-Chancellor of Riphah International University Hassan M Khan, in his speech, said RCIB is holding the second conference ICIB-2012 for promoting and developing research culture and capacity building of different cadres in Islamic business and finance. Vice Chancellor of Riphah International University Prof. Dr. Anis Ahmad, in his welcome address, explained the aims and objects of the conference.


(InternationalTheNews, 01 March2012)

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The dynamism of Islamic banking

THE process of Islamisation of economic system appears to be gaining momentum over time as many international conventional banks have started to open branches, which operate in accordance with the Islamic Shariah principles not only in some Islamic countries but other countries as well. It has generated wide spread interest not only on the part of economists in the Islamic countries but also in economic profession at large.

Keeping in view the emerging trends, Riphah Centre of Islamic Business, a constituent of Riphah International University organised an International Conference on “Management Shariah Conforming Business” at which State Bank Governor Yaseen Anwar stated that IslamicFinance is one of the most dynamic areas of financial services today. In fact financial and economic devastation caused by the recent financial crisis in the West has provided further impetus to the healthy growth of Islamic financial system, which is increasingly being looked as a prudent, stable and viable alternative to the conventional system. 

The present day economic problems and difficulties can be resolved by the dynamism of Islamic finance and banking. Not only in Banking but also in other financial dealings Shariah compliant products are being offered nowadays. Chairman, State Life Insurance Shahid Aziz Siddiqi in an interview with this newspaper said the SLIC is in the process to offer Shariah Compliant products of Takaful or Islamic Insurance business as an option to the people who desire to get an Islamic Insurance.

World over and particularly in Muslim countries Islamic banking is increasing at a rapid pace. Even a number of USA based banks have started to offer Islamic banking services, especially for their customers in Middle Eastern and Islamic countries. Islamic banks do indeed achieve greater penetration and impact than conventional banks in unbanked and underserved communities in Muslim countries, particularly in low-income communities and those in remote areas to help over come poverty.We would however emphasise that the growth of any industry is subject to overall global environment and so the Islamic banking industry needs to be agile enough to adjust to the ever-changing requirements but at the same time ensuring social and economic justice.


( PakistanObserver, 01 March2012)

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Malaysia: Zakat (Tithe) collection in Federal Territory up 24% in 2011 to RM341.3m

Pusat Pungutan Zakat Majlis Agama Islam Wilayah Persekutuan (PPZ-MAIWP) tithe collection increased 24% to RM341.3 million compared to the RM275.6 million recorded in 2010.

PPZ-MAIWP said the collection was on the back of a 13% increase in number of payers to 100,497 from 89,110 in 2010.

“The increase in collection reflects the increase in public awareness due to PPZ-MAIWP’s campaigns and promotions throughout the year through mass media.

“This was also due to the continuous support from Jabatan Kemajuan Islam Malaysia, Jabatan Wakaf, Zakat dan Haji, MAIWP, the Federal Territory of Islamic Affairs Department Baitulmal-MAIWP and Yayasan Taqwa,” the zakat collection body said in a statement last Thursday.

It said collection of business zakat increased 63% to RM54.9 million from RM33.6 million recorded in the same period last year.

PPZ-MAIWP said it was due to the increasing number of companies paying tithe of 10% to 1,571 companies compared to 1,427 in 2010.

“Our recent approach where we allow companies and individuals to take 37.5% from zakat perniagaan (business) paid and 25% from individual tithe paid to be distributed to asnaf (group entitled to receive tithe) by themselves has encouraged companies and individuals to pay their tithe,” it said.

PPZ-MAIWP said as at Dec 31, 2011, 39 companies had used this approach with the pay back amount by the tithe collection body stands at RM10.5 million.

Meanwhile, PPZ-MAIWP targets to collect RM360 million tithe collection with 108,500 payers for 2012. The target will be revised after the first six months of the year, it said.

(MalaysianReserve, 16 Jan2012)


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Malaysian Takaful Association (MTA) expects takaful players to easily adopt new framework

KUALA LUMPUR: The risk-based capital (RBC) framework for the local takaful industry is expected to take effect by January next year or the following year but will not be onerous to industry players as it will likely be based on the parameters of the conventional insurance framework, according to the Malaysian Takaful Association (MTA).
Deputy chairman Zainudin Ishak said the capital requirements under the proposed RBC framework for takaful would not burden the industry and would be benchmarked to the RBC framework introduced in January 2009.
Under the conventional framework, insurance companies are required to have a minimum 130% of supervisory capital-adequacy ratio (CAR).
He told StarBiz that the guidelines for the new framework in the takaful industry may be issued this year. 
One significant change in the new framework would be the explicit mentioned of “Qard” (interest-free loan) and its proposed treatment by the operators.
This new rule imposed a legal obligation on the takaful operators to provide for Qard to the takaful funds that are in deficit.
The underlying formula in determining the CAR had been set in a manner that it required takaful operators to hold sufficient capital in the shareholders' fund to meet any potential deficits in the takaful funds, he said.
“Most of the takaful players are already benchmarking with the existing RBC framework for conventional insurance and it would not be a problem for them to adopt the new framework when it comes on stream.
“Although the level of preparation among takaful players towards the new framework may differ, nonetheless MTA is confident it will be a smooth transition,” he said during an interview.
He added the need for the framework was to ensure takaful operators at all-time maintained adequate capital level that commensurate with their operational risks and act as a financial buffer against any exposure to risks.
On whether the requirement to hold adequate capital under the framework would spark consolidation in the takaful industry as it did previously in the conventional insurance segment, Zainudin said he did not foresee it happening as most of the takaful players were well capitalised and had foreign shareholding base.
Most analysts agreedthat the RBC framework in the takaful industry would not lead to merger and acquisitionsunless the shareholders of smaller takaful operators are not willing to invest or inject capital as in the case of smaller general insurers which had to merge under the RBC conventional insurance framework.
There are currently 12 takaful operators in the country.
Asked whether the current eurozone sovereign debt crisis and the slowdown in the US economy would impact pricing of insurance or takaful, he said it would be if the crisis was left unabated, adding that most reinsurance was sourced from European reinsurers like Munich Re and Swiss Re.
Zainudin said: “If the situation in the eurozone worsens and causes the reinsurers to hike their pricing, then the takaful and insurance companies including those in Malaysia would likely see higher prices for takaful and insurance products.”
Growth wise, he said the new Financial Sector Blueprint (2011-2020) would provide the impetus for the takaful industry to grow further by promoting access to other financial services sectors by introducing a range of directives, guidelines and best practices that would indirectly facilitate and drive its growth.
Among the recommendations in the blueprint were to develop a vibrant private pension industry for retirement and old age and the provision of wealth management products and services to cater to the demand of the growing affluent segment.
The industry experienced a compounded average growth rate of 27% in terms of net contributions between 2005 and 2010, with family takaful driving the growth at 28% for the same period.
Family takaful growth dominated over 80% of the total takaful market in 2010, and MTA was upbeat on the continued strong growth momentum, underpinned by rising affluence amid strong economic fundamentals.
Given the large untapped market that still exists with only 54% of the population having a life insurance or family takaful policy, the takaful industry was poised to benefit in years ahead, Zainudin added.
He said some of the major issues in the industry were inadequate investment instruments to meet the needs and demands of businesses as well as the shortage of talent.
(TheStarOnline, 28 Feb2012)


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