Global Islamic Finance Magazine November 2011

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Islamic Finance

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November 2011

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BEST COMPANIES TO WORK

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Unleashing the Power of Innovation in Islamic Finance Institutions

How to Run an Islamic Bank Marketing, Branding and Leadership

Choice of Law and Islamic Finance

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P. 32

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Addressing

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Global Risk Management Group provides Banks, Investment companies, Insurance Companies, Brokerage Houses, Leasing, investment banks and other major companies, across all industry sectors, with assistance and support on a broad range of risk management services and practical issues affecting an employee’s ability to perform their best at work.

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Contents;QWERTYUIIOPDFHJUIIOPDFHJJ Islamic Finance

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10 Best companies to work for in Islamic Finance

Global Islamic Finance Magazine highlights the 10 best companies to work for in Islamic finance. Any company that appears on the list were chosen based on the research gathered from websites and the comments gathered from some of the companies after contacting them…

News

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9 Islamic Finance News Islamic Finance 22 Unleashing the Power of Innovation in Islamic Finance Institutions

Many key leaders from Islamic financial institutions have recognised the need for innovation in Islamic products and services to further cater for the growing demand of the highly competitive financial world…

28 Shining the Spotlight on GIF’s Brand Ambassadors 42 Hydrocarbon Resources and Islamic Law

The future of peace and prosperity of our world is heavily reliant on our ability to find suitable answers to the problem of energy and hydrocarbon resources, which remain an integral part of any feasible solution…

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Islamic Banking 32 How to Run an Islamic Bank, part 2

When spreading awareness of Islamic finance it is important to educate the customers. They will be more willing to emerge themselves into Islamic finance if they have the knowledge…

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50 Choice of Law and Islamic Finance, part 1

Financial experts estimate the current worth of Shariah-compliant assets at almost one trillion U.S. dollars globally. As measured by these assets, the global market for Islamic financial services has grown ten percent per year since the mid-1990s. The potential market for Islamic financial products could be as high as four trillion U.S. dollars…

World Islamic Finance Review 58 The Past and Future of Islamic Finance in Nigeria

Nigeria is one of the biggest Muslim communities in the world, with 65 percent of an estimated 150 million people identifying themselves as Muslim. With a thriving Islamic business industry, the country has established itself in the Islamic financial industry with growing consumer and corporate banking sectors…

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Risk Management 65 Risk Management Framework in Islamic Banking, Part 1

Although Islamic banks and Islamic financial institutions are precluded from getting involved in the kind of complex credit trading that has paralysed their conventional competitor that’s no reason for complacency…

Market Review

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30 Authority for Islamic Banking in Oman

In Oman the Global Islamic banking asset industry is estimated to be above $1 trillion in 2010 and is expected to grow at the rate of around 20 percent...

39 Pakistan to Focus Islamic Finance in Rural Areas

Pakistan is hoping to nearly double Islamic banking in the South Asian state by 2015, focusing on poor, conservative villages to drive growth and has ordered Islamic lenders to open 20 percent of all new branches in rural areas…

72 Value of Global Sukuk Rises to $47 billion

Sukuk (Islamic bonds) issuance last July worldwide amounted to about $5 billion, down 37 percent from the previous month, Kuwait Finance House (KFH) said Saudi riyal formed about 15 percent of those Sukuk, it noted…

74 Kuwait to Develop Cooperation in Islamic Finance Sector in Luxembourg

A four-member delegation from the Kuwaiti parliament visited the Luxembourg financial centre, called Luxembourg for Finance in order to get first-hand information on the way the banking and finance sector functions in the small European country…

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49 Qatar’s Islamic Banking Sector Performance Improves

Qatar is a predominant Islamic finance hub whose Islamic banking sector substantially improved its financial performance in the first half (H1) of this year mainly due to robust core earnings, which is reflective of the buoyancy of the fastest growing country’s economy…

76 Event Review 78 Book Review 80 Events Calendar 82 Business Directory 84 Glossary 86 In the Next Issue GIFM Online Latest Issue Get the instant access to Islamic finance news & articles

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Editor-in-Chief Farhad Reyazat PhD in Risk Management

International Editorial Board Prof Dr Khawaja Amjad Saeed, Principal of The University of the Punjab, Pakistan Prof Habib Ahmad, Sharjah Chair in Islamic Law and Finance in the School of Government and International Affairs at University of Durham, United Kingdom Prof Rodney Wilson, Professor in the School of Government and International Affairs at Durham University, United Kingdom Prof Humayon Dar, Chief Executive Officer at BMB Islamic UK, United Kingdom Prof Muhammed Shahid Ebrahim, Professor of Islamic Banking and Finance at the Bangor Business School, United Kingdom Prof Andrew White, Director of International Islamic Law & Finance Centre, Associate Professor of Law, Singapore Management University, Singapore Prof Simon Archer, ICMA Centre, Henley Business School, University of Reading, United Kingdom Hailey College of Banking & Finance, University of the Punjab Dr Majdi Ali Ghaith, King Saudi University Assistant Professor Business Administrator Department, Saudi Arabia Dr Abu Umar Faruq Ahmad, School of Law University of Western Sydney Australia, Australia Dr Julien Pelissier, Lecturer in Islamic economics’ law, France Dr Alberto Brunoni, Founder and Director of AASAIF, Italy Dr Aznan Hassan, Shariah scholar Bursa Malaysia, Malaysia

Dr Zukifli Hassan, PhD Research Scholar at University of Durham, United Kingdom Dr Mohammed Obaidullah, Economist at the Islamic Research and Training Institute (IRTI) of the Islamic Development Bank, Saudi Arabia Dr Amal El-Kharouf, Head of Research and Consultancy Department at University of Jordan, Jordan Dr M.Kabir Hassan, Associate Professor and Associate Chair of the Department, University of New Orleans, USA Dr Abdelhafid Benamraoui, Westminster Business School, United Kingdom Dr M. Ishaq Bhatti, Faculty of Law and Management, La Trobe University, Australia Mughees Shaukat, PHD researcher and Assistant Researcher in INCEIF & ISRA, Malaysia Warren Edwards, CEO of Delphi Risk Management, United Kingdom John Sandwick, Islamic Wealth & Asset Management Independent Consultant, Switzerland Brian Kettel, Director at Islamic Banking and Finance Training, United Kingdom Salina Hj. Kassim, Department of Economics at International Islamic University Malaysia, Malaysia Kasim Randeree, Saïd Business School, University of Oxford, United Kingdom Abbas J. Ali, School of International Management Eberly college of Business, Indiana University of Pennsylvania, USA

Contributors Tasnim Nazeer Maged Ezzeldin Shelina Janmohamed Nima Mersardi Tabari Julia C. Colón Farhaa Xha

Aluwalu Ado Farhad Reyazat Jal Othman Norliza Mohammed Ehsan Waquar Ahmad Muhammed Farook Mirak

Dioumel Ka Muhammad Usman Baig Muhammed Rafeek Mohammad Alami Abdulrahman Usman Daud Vicary Abdullah

Amy Thompson Nelly Ahmedova Ritika Banerjee Ajay Surti

Beata Jagorow Patricia Ke-Hsuan Tsai Tajah Brown

Bouhssine Ben Jadda, Morocco Auwalu Ado, Nigeria Abdulrahman Usman, Nigeria Adeeb Zaki, Pakistan Asim Hameed, Pakistan Muhammad Farrukh Saleem, Pakistan

Said Bunu, Qatar Farhaa Xha, Saudi Arabia Mirak Farook, Sri Lanka Kareem Hammour, UAE Muhammad Zeeshan, UAE Majd Ghanem, UAE

Haraja Adeola David McLean Paul-Henri Pruvost

Editing and Proofreading Colette Sensier

Carina Lewis

Executive staff Agnes Gradzewicz David Smith Gareth Platt Simon Hartshorne

Top Brand Ambassadors Saleem Uddin Faisal, Bahrain Amjad Suri, India Syed Ilyas, India Mahamoud El Aref, Egypt Shuhratbek Iskandarov, Germany Basil Armoush, Jordan

Ichrak Bennani, UAE Muhammad Athar Khan, UAE Ichrak Bennani, UAE Anees Razzak, United Kingdom Dian Kartika Rahajeng, United Kingdom

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Editorial Letter

„

Global Islamic Finance magazine is proud to announce the 10 best companies to work for in Islamic finance. We would like to thank all those that took part in our listing and congratulate each of the 10 companies that have been featured in the list. These results confirm that Islamic finance is still going strong in countries all over the world.

Islamic finance is growing at an unprecedented rate and it is estimated to reach over $2 trillion dollars by 2012. With the growing number of Islamic financial institutions which are being set up around the world there has been a diverse range of career opportunities. In this edition of Global Islamic Finance magazine we will look closely at the many opportunities available including the top 10 best companies to work for in the lucrative Islamic finance industry.

Education is key to excelling in the Islamic finance industry as it is a relatively unique sector of finance it is important to get acquainted and familiarise yourself with the principles of Shariah finance. The London School of Islamic Banking and Finance offers courses for delegates, business professionals and anyone who wishes to educate themselves in the lucrative sector to have a better chance of obtaining a lucrative job in the competitive industry.

Global Islamic Finance magazine has worked hard to gather these top 10 companies based on invaluable research and studies and hopes to further encourage other growing Islamic financial institutions to further improve and pave the way for many opportunities.

Being well informed about Shariah-compliant financing is a must if you wish to join the industry as it is a highly competitive sector which is rapidly emerging. The more knowledge and expertise that you can bring to your chosen pathway in Islamic finance will enhance your chances of obtaining a career in one of the best top ten Islamic financial institutions as outlined in this invaluable edition of Global Islamic Finance Magazine.

Many Islamic financial commodities such as Sukuk and Takaful are providing investors and financial institutions with countless opportunities.

This is the reason why many countries around the world have tapped into the Islamic finance and banking sector, setting up subsidiaries and Islamic windows as a means to get a slice of the lucrative openings available.

Due to the demand for Shariah-compliant finance it has opened up the scope for various career opportunities within the sector. Islamic finance and banking gives employees a chance to excel in a unique sector which is growing rapidly around the world. Islamic financial hubs such as Malaysia and the Middle East hold a diverse range of opportunities for potential employees or business professionals wanting to tap into the sector.

The last decade has seen an increasing demand for Shariah-compliant banking with well established conventional banks opening up Islamic windows to cater for the rising demand. The UK alone has an estimated US$300 million of combined assets and overall the Islamic finance industry is expected to rise to over $1 trillion US dollars.

Some of the best Islamic financial institutions to work for which are outlined in this edition are based in major Islamic financial hubs such as the Middle East. It is therefore worth looking into the various careers available as there is a great range of sectors in Islamic finance from Sukuk to Micro finance there is something for everyone.

To write the letter to the editor, send an email to editor@globalislamicfinancemagazine.com.

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With almost 2 billion Muslims worldwide and a vast number of Non-Muslims who prefer to use the ethical methods of Shariah-compliant financing there is much scope for the development and success of Islamic financial institutions which will promote more job opportunities.

Knowing the best Islamic financial institutions to work for and recognising their invaluable contribution to the sector and various opportunities can further enhance the sector and ensure that key industry leaders are encouraged to excel.

Farhad Reyazat PhD in Risk Management Editor in Chief

News

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Islamic finance news Central Bank of Oman Formulating Standards for Islamic Banking Sector It has been reported that the Central Bank of Oman (CBO) is in the process of forming a central national committee for determining the legal regulations and standards for Islamic banking in the country.

CBO executive president H E Hamoud al Zadjali said that it has already initiated coordination with the Grand Mufti’s Office in this regard, which is in addition to forming legal committees inside the same establishments to ensure that they are in line with Islamic law.

Speaking at the fourth Ramadan meeting organised by the Oman Chamber of Commerce and Industry (OCCI), H E Zadjali said that the bank will pursue efforts for crystallising the Islamic banking sector within a legal regulatory environment. He said that since the existence of Islamic banks in the country has become a reality following the Royal Directive, CBO has rushed to take the necessary steps for establishing a regulatory atmosphere.

He added that CBO specialists are currently studying the legal issues and required amendments to the banking law, pointing out that CBO has executed several measures in this regard, including a circular distributed to banks stating the ability to practice the Islamic banking business as one of the licensed practices. The circular has already determined the necessary requirements for establishing Islamic banks. He also stressed the necessity of making this sector separate from the funds, transactions, accounting and regulatory requirements and other financial requirements of the general banking system.

Khalil al Khonji, chairman of OCCI, said that the meeting touched on the approach of the banking and financial system in the sultanate after the concerned departments announced the approval for Islamic banks.

“Within its framework of organising Ramadan nights on economic issues, OCCI was keen to highlight the experience of Islamic banking in GCC states,”

Khonji added, during the meeting, an official of Qatar National Bank Islami made a presentation on the evolution of Islamic banks.

CBO had recently organised two seminars to provide knowledge and training about the sector in collaboration with a specialised bureau. Statistics indicate that the volume of Islamic banking assets in the GCC states is about US$240.3bn.

Indonesia Eyes Financial Halal Industry Share Indonesia is eyeing a greater share of the Shariah compliant halal industry pie, the Indonesian government is working to become the center of the world’s expanding industry, VIVA news website reported.

“We must respond constructively to the request on halal products so as to boost the economy,” Hatta Rajasa, the Coordinating Minister for the Economy, said on Friday, August 12th 2011. “Indonesia has to be the center of the world’s halal-labelled products.”

The concept of halal, meaning permissible in Arabic has traditionally been applied to food. Muslims should only eat meat from livestock slaughtered by a sharp knife from their necks, and the name of Allah, the Arabic word for God, must be mentioned.

Now other goods and services can also be certified as halal, including cosmetics, clothing, pharmaceuticals and financial services.

Serving approximately 1.4 billion of Muslims and non-Muslims worldwide, the growing industry was attracting different countries around the world, on the top of which comes Malaysia.

To achieve a part of the industry success, the country has to pay attention to global standards of halal labelling in that people will not hesitate to purchase halal-labelled products. “The standards of excellence for halal products must be made regular,” Rajasa said. Islamic finance is also one of the fastest growing sectors in the global financial industry. Currently, there are nearly 300 Islamic banks and financial institutions

worldwide, whose assets are predicted to grow to $1 trillion by 2013. Maintain price stability and implement monetary policy, including exchange rate policies, management of foreign reserves, currency issuance, management, and organising internal and external payments.

Al Baraka Islamic Bank Operating Income Soars Al Baraka Islamic Bank continued its efforts in expanding business operations in Bahrain and Pakistan by building sustainable business relations with major industrial and commercial companies in the first six months of 2011.

The Bahrain-based bank, a subsidiary of the Al Baraka Banking Group (ABG), worked towards providing clients with the products and services that meet their needs.

That strategy has paid off with the bank announcing total operating income up by 57.97%, net operating income by 48.94% and total assets ahead by 8.46% in the first half. Net income for the period reached BD1.28 million ($3.4m) compared with a loss of BD96,000 last time. This reflects an improvement in the total income to BD8.4m compared to BD5.32m in the first half last year. After deducting operating expenses, net operating income amounted to BD954,000.

Total assets reached BD550.6m as of the 30th of June. In the second quarter net income amounted to BD601,000 compared to BD131,000 for the same period last year, a significant increase of 359%.

Meanwhile, the international rating agency Capital Intelligence reaffirmed in early August the credit rating of Al Baraka Islamic Bank at BB+ for long-term foreign currency obligations and A3 for short-term foreign currency obligations with a stable outlook.

According to the agency, this rating reflects the good quality of the bank’s assets, its strong capital base, adequate liquidity and high capital adequacy ratio as well as the strong support from the parent company.

2011 November Global Islamic Finance

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The banking sector took a heavy blow during the financial crisis and is still recovering. There were many redundancies and they’re still not many vacancies. It’s no longer a guarantee that you’ll land a new job in the conventional banking industry even if you have all the credentials. Islamic banking, in comparison, is an up and coming alternative form of ethical finance. This exciting new industry is in real need of genuine talent and there are numerous vacancies and opportunities to choose from.

Global Islamic Finance Magazine Collection features several articles that bring you up to speed on Islamic banking and give you all the information you need to break into the industry. Articles that are essential for any future Islamic banker include:

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‘Islamic Banking-Differences, Growth and Future Challenges’: Find out what Islamic banking is, what it’s achieved and where it’s heading.

‘The Rise of Islamic Bank of Britain-Interview with Steven Amos’: Gain a fascinating insight into the UK’s most famous standalone Islamic bank through this interview with its Head of Marketing.

‘An Introduction to Risk Management in Islamic Banking’: Learn why risk management is as vital to Islamic banking as it is to conventional banking.

‘What is Basel II?: What it means for Islamic Banking. Part I’: Get to grips with the most iconic symbol of banking regulation and how it affects Islamic banking.

‘The Suitability of HSBC Bank Mauritius as a Test Case for Shariah-compliant Banking Services on the Island’: Discover through this case study how Islamic banking is breaking into brand new markets.

‘The British Bankers Association Seminar: From Amanah to Iijhara’: A candid look at one of Britain’s biggest banking events from the Islamic finance perspective.

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News

“These results also reflect the soundness of the financial position of the bank, expansion of its operations in Bahrain and Pakistan, the expansion of branch network, enhancement of foreign trade financing and other initiatives that have had a good impact during this period,” he added.

Markets like certainty and standards help to provide that. Over the past couple of years I have been encouraged by the level of focus and understanding on how important standards are to our growth. The challenge, of course, is the implementation. Once you have gone beyond the stage of determining that standards are required, you then need to start tackling the issues of how they will be implemented?

our relations with customers and launching many financing and savings product,” added Al Baraka Islamic Bank’s chief executive Mohammed Isa Al Mutaweh.

“We embarked upon a number of major initiatives and arranged a number of major finance transactions in which banks inside and outside the region participated,” he added.

Moody’s affirms ‘Aaa’ rating for Islamic Development Bank Moody’s have affirmed an Aaa rating for the Islamic Development Bank (IDB). Moody’s stated that IDB’s rating reflects the presence of strong shareholder support.

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“Despite the continuing difficult international, regional, economic and financial conditions in the first half we have continued to achieve good financial results and we were able to achieve satisfactory returns to our shareholders as a result of a steady and clear improvement in the performance of the Bahraini economy, which quickly returned to normal thanks to the sound economic policies of the government,” said Al Baraka Islamic bank chairman Khalid Rashid Al Zayani.

There are about 70 million Muslims in Nigeria. Research shows that approximately 30% of the Muslim population would typically be interested in Islamic finance and if you look at the projections made for the size of the market, it is really quite tremendous -and that’s just the domestic business

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Banking Supervision in 2004 and the European Union in May 2007. IDB is an international financial institution, which started operations in 1975 with the purpose of fostering economic development and social progress of member countries and Muslim communities in non-member countries in accordance with the principles of Shariah (Islamic Law).

Ahmed Mohamed Ali, president of the IDB Group, referred to the strong and generous support that IDB enjoys from its member countries and congratulated the staff of the IDB Group for this achievement.

He also considered it as an opportunity for IDB to reaffirm its pledge and endeavour to further the achievements of this noble in-

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The increasing presence of Islamic financial institutions in new jurisdictions together with the growing international interest in Islamic financial markets and instruments represent a tremendous opportunity for cross-border flows that are Shari’ah compliant

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Daud Vicary Abdullah,

president and chief executive officer, International Centre for Education in Islamic Finance (INCEIF)

Hajara Adeola,

managing director, Lotus Capital Limited

“The series of initiatives taken by Al Baraka Islamic Bank since the beginning of the year had clear positive effects on the bank’s performance,” said vice-chairman and ABG chief executive Adnan Ahmed Yousif.

A high level of liquidity, the tested preferred creditor status and a low level of debt partly because of the Islamic (asset-backed) nature of its operations and that it is unique among MDB’s.

“The conversion of the bank’s branches in Pakistan to an independent Islamic commercial bank following the merger with Emirates Global Islamic Bank in Pakistan had an evident positive effect on the bank’s operations. As a result of the merger and thanks to the bank’s long experience in this market, Al Baraka Islamic Bank was able to continue to expand and grow its operations in Pakistan,” he added.

Moody’s concluded that the bank’s risk profile is likely to remain healthy over the medium term and the prevailing situation in certain member countries appears unlikely to impact the bank’s creditworthiness.

“We also focused on improving the work environment, enhancing and developing 12 Global Islamic Finance

November 2011

IDB is one of the few multilateral development financial institutions rated by the three leading international rating agencies - Standard & Poor’s, Fitch and Moody’s with the highest possible rating (Triple-A). Moreover, IDB has been recognised as eligible for “Zero Risk-Weight” by Basel Committee on

David Mclean,

Managing director, The World Islamic Banking Conference (WIBC)

stitution through adherence to the highest levels of professionalism, due diligence and prudent practices while conducting tasks with integrity and sincerity.

He noted that during the past year, Islamic Development Bank continued its reform process with the view to strengthen performance through completion of the first phase of the implementation of SAP - the world’s leading ERP solutions.

This, along with the enhanced internal capacity and governance structures will help achieve greater developmental impact in consonance with the “Year 2020 Vision” with the ultimate goal of making IDB a customer and quality focused organisation.

News Eversheds Advises Barwa Bank on First Islamic Window Acquisition The Doha office of international law firm Eversheds has advised Barwa Bank on the acquisition of Al Yusr, International Bank of Qatar’s Islamic banking operations.

Steve Troop, Chief Executive Officer at Barwa Bank commented, “This transaction was very important for Barwa Bank and the efficient, pragmatic and timely input from the Eversheds team was key in delivering a successful conclusion for us.”

Egypt Makes A New Shariah Compliant Finance Offering

Following Qatar Central Bank’s decision, in January 2011, conventional banks must close their Islamic banking windows by the end of the year, this is the first purchase of an Islamic finance window by an Islamic bank in Qatar, and also the first deal of its kind in the region. As a result of the acquisition Barwa Bank is able to accelerate its growth and expansion plans in the local market to position itself as one of the leading Islamic banks in Qatar. The deal has received Qa-

It has been reported that Egypt’s National Bank for Development (NDB), in collaboration with Abu Dhabi Islamic Bank (ADIB), launched a new Shariah-compliant service that can help customers finance their education or travels with up to LE 150,000 and LE 200,000.

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We believe that a global Islamic banking template would give Islamic banks in their respective domestic markets a chance of greater success. This would, for instance, require a basic set of commonly agreed standardized products to smooth out operational differences, central bank liquidity mechanisms, and reporting and regulatory requirements

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Paul-Henri Pruvost,

banking credit analyst, Standard and Poor’s, Paris

NDB launched Ijara Services, which hopes

Major Islamic financial hubs such as those found in the Middle East, Asia and Europe are tapping into Islamic franchising opportunities around the world and collaborating working on a united front to further spur Islamic financial industry forward

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Farhad Reyazat,

Editor in Chief, Global Islamic Finance Magazine

tar Central Bank approval and the customer transfer process has already begun.

to cater to new clients who are in need of a wider range of Islamic finance products.

The Eversheds team was led by partner and Head of Islamic Finance Amjad Hussain, assisted by senior counsel Arfan Tinawi and solicitors Jaime Oon and Sarah Lisgo from the Doha office.

“These Ijara finance services are very rare in Egypt’s market and offered by a limited number of banks in Egypt, topped by NBD and accordingly, this new product Ijara Service Finance will increase the bank’s competitiveness in the Egyptian banking market,” said Nevine Loutfy, NBD managing director and CEO.

Partner Andy Nunn and associate Dawn Sanderson from Eversheds’ Abu Dhabi also lent their expertise on the deal. Amjad Hussain commented, “This deal is the first of its kind in the region and as a result it threw up a number of interesting legal, operational and Shariah based challenges. We were pleased to find a solution that worked for all stakeholders and allowed us to execute the deal within a very tight timeframe.”

“The new innovative product to finance Ijara education and travel services reflects NBD’s banking policy, which is based on diversity in providing a range of banking products in order to expand its customer base and attract new customer segments,” she added.

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The service, which is a lease contract, allows the bank to lease to a customer and specific service to “exist in the future,” like education or travel, for a certain period of time with a set number of regular instalments. Ijara can either be provided from the bank or a service provider like a school, university, or travel company through a signed parallel lease agreement.

“This is quite achievable by providing our best practical banking solutions according to Islamic Shariah principles, to finance vital services to the market, such as education and travel, especially Hajj and Umrah trips,” said Loutfy in a statement.

If a student wishes to use the Shariah-compliant payment system, they can apply for the Ijara Education Finance, which is via Al Nour Program. NBD then leases the education service that includes tuition and book fees, whether it is for a private university or school that the bank already has established an agreement with.

Leased to the customer depending on their request, the customer can finance their education up to LE 150,000 in exchange for equal monthly instalments over a period of up to 60 months. Moreover, the travel finance program can allow travellers, such as Muslim clients wishing to go to Hajj or Umrah, to borrow a maximum of LE 200,000 in order to finance their trips.

This amount would also be paid back in equal monthly payments over an extended finance period of 60 months. Ijara, however, is not NBD’s only Shariah-compliant service. The bank currently has Shariah-compliant savings account where a percentage of the deposited funds are invested on the absolute “Mudharabah” basis, which is one of the financing methods that Shariah dictates, according to the bank.

The account is available in several currencies, allowing users to have a debit MasterCard, which is offered to Egyptians as well as foreign residents. Profit calculation for the account is of course, compatible with the Islamic finance system. Losses and profits are calculated based on the lowest credit balance during each month and are also capitalised semi-annually for both foreign and local currency savings accounts.

The bank also offers an Islamic-compatible system that allows customers to finance their auto purchases though the Shariah compliant finance method, Murabaha. According to NBD, Islamic financing helped Islamic banks evade the banking crisis of 2008 that heavily slammed banks in the United States, Europe, and Asia-major who offered. gif 2011 November Global Islamic Finance

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Islamic Finance

10 BEST COMPANIES TO WORK

FOR IN ISLAMIC FINANCE

Author: Dr Farhad Reyazat, Editor in Chief, Global Islamic Finance Magazine, United Kingdom Tajah Brown, Global Islamic Finance Magazine Editorial Team, United Kingdom Tasnim Nazeer, Global Islamic Finance Magazine Editorial Team, United Kingdom Dioumel Ka, Global Islamic Finance Magazine Editorial Team, United Kingdom

Keywords: Islamic Finance, Islamic Banking, Careers, Working, Shariah Compliance, Employees, Education, Takaful

14 Global Islamic Finance

November 2011

Islamic Finance

2011 November Global Islamic Finance

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Islamic Finance

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lobal Islamic Finance magazine highlights the 10 best companies to work for in Islamic finance. The best place to work is one where the employees feel confident in their environment and develop their skills.

They have pride in what they do and enjoy working with the people in their team day to day. The companies featured in the list were recognised for their relationship with employees, the training and the benefits they offer.

A total of 10 companies made the list with a mixture of law firms, investment companies, Islamic banks, takaful and ReTakaful companies. The companies chosen are located all around the world in countries such as United Arab Emirates, Malaysia, Dubai, Bahrain and the United Kingdom.

Commenting on the Top 10 companies to work in Islamic finance, the editor of Global Islamic Finance Magazine, Dr. Farhad Reyazat says, “Global Islamic Finance magazine is proud the announce the 10 best companies to work for.

We would like to thank all those that took part in our listing and congratulate each of the 10 companies that have been featured in the list. These results confirm that Islamic finance is still going strong in countries all over the world.”

Any company that appears on the list were chosen based on the research gathered from websites and the comments gathered from some of the companies. The order of the list was based on the different qualities of each company.

The different ways they motivate their staff, the focus on the customers and the missions and goals of each company. It is important that we recognise the companies in this list and also encourage the companies not featured in this list to improve.

There has been an attempt to contact all the companies and inform them about the article. The order of best companies was decided based on the information such as amount of branches, how many years of establishment, their goals and aims and employee benefits. Global Islamic Finance magazine celebrates the companies that work with staff to make the working place effective and profitable.

16 Global Islamic Finance

November 2011

An Introduction to Working in Islamic Finance The Islamic finance and banking sector holds many opportunities for careers within this growing and lucrative sector. As the Islamic finance industry is expected to reach to over $2 trillion dollars by 2012 there are countless openings for the industry to further expand with the knowledge and expertise of experts and professionals. Global Islamic Finance magazine reveals the 10 best companies to work for in Islamic Finance conducting research from companies all over the world.

The Islamic banking sector alone has many opportunities for employees to further better themselves and engage in the Islamic financial progression within the industry.

The sectors of Takaful also provide sufficient scope and GIF magazine will give you a review of working in this promising industry.

Islamic banking and financial services have really opened up the scope for countries around the world wishing to tap into a slice of the lucrative sector. These institutions are offering invaluable educational qualifications in addition to the London School of Islamic Banking and Finance which specialises in such innovative courses which are invaluable for anyone thinking of entering the industry or those already working in the sector wanting to further advance.

This article is a must read for students, business professionals and executives giving a comprehensive review of working in the sector and a chance to view the best companies to work for in Islamic finance.

The need for education is a must and it is often beneficial to obtain a form of Islamic financial qualification in order to further excel in the industry.

Islamic finance is a unique form of socially responsible investment and provides an ethical alternative to conventional financing. It is imperative to Islamic banking and finance for employees to form an understanding of the importance of risk sharing as part of raising capital and the avoidance of riba (usury) and gharar which means risk or uncertainty.

There are many sectors within the Islamic financial industry that one could consider to work in as outlined in Figure 1.

Careers in Islamic Banking Many students studying Islamic finance or banking courses and even business professionals choose to go down the pathway of Islamic banking to further excel in employment.

To obtain a career in Islamic banking an individual would find it beneficial to take an educational qualification or course in the sector.

Islamic banking is the fastest growing sector from the banking industry and there are more than 250 Islamic banks worldwide and the number is growing rapidly with mainstream banks offering Islamic windows.

There is at least £300bn in assets, up from £5bn in 1985 and the industry is expected to reach to over $2 trillion dollars by 2012.

The global economy can further prosper from the opportunities that the Islamic banking industry holds and it is growing at an astonishing 15 to 20 percent a year.

The Islamic finance industry is a widespread sector operating in many countries around the world. Islamic finance and banking corporations and institutions have to adhere to the main principles of Shariah financing which are outlined in Figure 1.

Rising oil prices and Europe’s growing Muslim population are driving an unprecedented surge in financial Shariah-compliant products and services which show the vast interest in the industry to further engage in gathering more employees and experts to cater for the rising demand of the industry.

This involves the prohibition of interest (riba), a system of profit and risk sharing and the prohibition of forbidden assets and an existence of an underlying asset. It is crucial for employees within the industry who are working in Islamic financial organisations to be fully familiarised with these principles as these form the basis of all Shariah-compliant products, services and investments.

There is much scope for job opportunities in Islamic banking in the mainstream Islamic financial hubs of Malaysia, the Middle East such as countries like Dubai, Abu Dhabi, Qatar and Saudi Arabia. In addition there are many opportunities in developing Islamic financial hubs such as Sri Lanka and India which are recruiting more employees to cater for the rising demand of Islamic banking

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Islamic Finance

services. Customers are benefiting from utilising Shariah-compliant services, in addition employees are equipping themselves with the necessary knowledge and qualifications to further progress in the Islamic banking and finance industries.

There are many reknowned fully fledged Islamic banks around the world that offer opportunities for training and job prospects. In addition there are many educational institutions around the world which offer qualifications in Islamic finance.

The London School of Islamic Banking and Finance also offer the following courses in Islamic Banking such as an MBA in Islamic banking. These qualifications are invaluable for anyone who is already a business professional wishing to enhance their skills or a student wishing to excel in this growing sector.

Takaful Providing Innovative Career Opportunities The Islamic financial sector of Takaful (Islamic insurance) provides many career opportunities for the individual. Figure 2 highlights the following sectors of Takaful which you could enter employment in.

There are many sectors in the Takaful industry which have lucrative specialisms for further advancing in employment especially if you have prior knowledge of these sectors. There may be other sectors which each individual company may offer as a form of insurance but the ones listed in Figure 2 are industries are the main sectors covered under Shariahcompliant insurance. Perhaps you have some medical or health related experience which gives you an upper hand on medical terminology and wish to dwell into Takaful medical insurance.

You may have had experience in the travel industry and are used to offering conventional travel insurance but you can further expand your skills into Takaful insurance. Whatever your niche is you can utilise your specialist area of knowledge into a career in Takaful.

The scope for the Takaful industry is extremely positive and it provides an excellent opportunity for potential employers. Figure 4 highlights the growing success of the Takaful industry. Figure 3 shows the global Takaful market which has increased potentials for employees, students and professionals who want to tap into the Islamic insurance industry.

The graph spans from the year of 2006 which shows that the market for Takaful was at $2.10 billion dollars however the demand for Takaful insurance has increased year by year 18 Global Islamic Finance

November 2011

and is expected to reach $7.39 billion dollars by 2015 if it maintains growth in the highly competitive financial insurance industry.

Positive Future for Careers in Islamic Finance The future of working in the Islamic finance industry looks promising as there are many Islamic financial and banking institutions opening up around the world. In addition there is much scope to enter into careers in the sectors of Takaful as it has a strong potential for employment in the future.

There are many educational institutions and professional financial bodies which are offering leading advice and qualifications in Islamic banking and finance which is invaluable if you want to have a progressive career in the sector.

The need to be educated and informed about Shariah finance is a must in the developing Islamic financial sector which is growing by the day. Many countries around the world are tapping into the market and you will be more at an advantage if you have the relevant knowledge and expertise through qualifications in the sector to get that dream job.

The Islamic finance and banking industry can further prosper with the support from excellent employees who work hard to spur the industry forward and build the level of trust in Shariah compliancy around the world.

GIF magazine reveals the top ten best companies If you’re looking for a job or want to know where your company features in the list, Global Islamic Finance magazine reveals to you the 10 best companies to work for in Islamic finance. GIF magazine celebrates and recognises the companies that have mastered the happy working environment and motivating the staff. The top companies are located all over the world in countries such as Dubai, Qatar and Germany. The companies were chosen based on aspects such as the number of braches, the mission and vision of the company, the date established and the employee benefits of each company.

The employees are seen as the driving force and value of any company, the companies featured in this list believe this when finding, hiring and training their staff.

The work place should focus on work ethic, talent, team work and development of skills.

Companies should focus on their staff by maintaining a productive and happy environment.

Islamic Finance

Global Islamic Finance magazine would like to thank and congratulate all those that are featured in the list. The purpose of this article is to highlight the importance of the working environment and we hope that more companies are willing to take part in our next listing.

Dubai Islamic Bank “To be the leading provider of innovative financial services in accordance with the legislation of Allah” Country: United Arab Emirates Established: 1975 Sector: Islamic Banking Dubai Islamic bank’s mission statement confirms why they are high on our list. “We are proud to be the first Islamic bank worldwide that has translated true Islamic economic principles into practice, out of firm belief in the need of mankind for an economic system based on the final revelation.

By partnering with our customers in halal earnings, employing best business practices, the latest financial services technologies and placing our trust in Allah, we are confident of our success.” Being the first fullservice Islamic bank the company are at the top of its field.

The company are customer centred and focus on have a close relationship providing a personal service and understanding with their customers. This bank provides quality, service and value for money to its customers. The bank not only search for talent to join their team but they also offer a variety of training and development programs for their staff covering the external and internal. Annual bonuses and rewards are given to their staff for their performance and also medical insurance facilities and other interest financial services are offered to staff.

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Figure 1: Successful Shariah Compliant Employment Sectors Islamic Banking Islamic Finance Firms Accounting Firms with Islamic Divisions eg CIMA Takaful Insurance Companies Islamic Banks Islamic Banking Head Offices

CIMB Group “We think ASEAN. We believe in the power of scale and diversity of ASEAN and draw on our people, knowledge and insights to serve and connect our customers” Country: Malaysia Established: 1924 Sector: Banking CIMB Group operates under a range of entities which include CIMB Investment Bank, CIMB Bank, CIMB Islamic, CIMB Niaga, CIMB Securities and CIMB Thai. The Group also has a place in 14 different markets world wide, including countries such as Malaysia, Singapore, Thailand and Indonesia. With these and many more impressive statistics this company was rightfully put in second

Figure 2: Careers in Takaful Sectors Medical Health Insurance Family Insurance Child Education Insurance Personal Accident Insurance Investment Insurance Travel Insurance Marine Insurance Fire and Accident Insurance Engineering Insurance Motor and Vehicle Insurance

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place. The company is Malaysia’s second largest financial services provider and fifth largest in the southeast of Asia, they also offer a range of financial products and services. Presently the company serves up to seven million customers in over 600 locations with over 36,000 employees.

MEGA “MEGA Brands. MEGA Clients. Market Leaders.”

Country: United Arab Emirates Established: 1993 Sector: Event Services Mega Events reach third on our list through their strong and impressive portfolio of Islamic finance brands such as The World Islamic Banking Conference, The World Takaful Conference and The World Islamic Funds Conference. With over 17 years running each brand has been developed securing a high position in the Islamic financial market.

The business information firm focuses on the Islamic finance sector creating profit and meaning for the market leaders in the industry across the globe.

With a strong team of employees and the average stay is 7 years this is the place where people do enjoy working. In addition, Mega Events awards their staff with the Mega Star Awards Programme aimed to recognise the achievements and performance of the team.

Employee benefits include the opportunity to work with the industry leaders and internationally respected guru speakers.

Employee also gains international business experience by running events in the key financial centres across the world. The Mega Events team are entitled to highly attractive compensation, performance based annual bonus, yearly staff off-site holiday gathering.

Sophie Shah McLean, Director, Business Development, MEGA “I have now completed 7 years at MEGA and have enjoyed huge professional growth during this period. Joining at an entry-level sales position and then being promoted several times through the years to now be the Director of Business Development continues to be an exciting growth curve. Engaging our international portfolio of clients, building our globally respected brands, 20 Global Islamic Finance

launching new events across the world , and working with the great members of the MEGA team ensure each day is stimulating and challenging” Qatar Islamic Bank “A leading, innovative and global Islamic bank adhering to the highest Shari’a and ethical principles; meeting international banking standards; partnering the development of the global economy and participating in the advancement of the society” Country: Qatar Established: 1989 Sector: Islamic Banking Branches: 28 Qatar Islamic Bank has earned their place fourth on our list. With a range of values it just shows that this bank is focused on principles. The values are integrity, transparency, justice, cooperation and teamwork, loyalty and commitment and excellence.

The bank aims to expand their reputation globally becoming the leading Shariah compliant bank by increasing business and offering above the normal returns to shareholders. The banks ambitious vision “A leading, innovative and global Islamic bank adhering to the highest Shariah and ethical principles; meeting international banking standards; partnering the development of the global economy and participating in the advancement of the society.”

Clifford Chance “Exceeding Clients’ expectations, local excellence, global standards, an ambition for success, investing in talent, an adaptable and approachable team, thinking ahead, strength through diversity, community” Country: United Kingdom Established: 1987

Sector: International Law Branches: 34 Clifford Chance has a strategy for their employees focusing on their responsibilities and also considers the development and diversity within their staff. The companies put time into their community, people and environment priding themselves in being creative with what they do.

This company focuses on the development and diversity within their team. Changes have been made to the career structure within the company resulting in a six-band global career framework in order to bring more precision and tailored approach in training, the global appraisal system and career development.

Allen & Overy “We mean being able to pull together all our resources and respond to our clients’ needs in almost any country, at any time” Country: United Kingdom Established: 1930 Sector: International Law Branches: 38 The successful international law firm also reaches top in our list with a strong global network of offices and running for 80 years.

They give their staff the opportunity to work globally in offices located in countries such as Beijing, Hong Kong, Madrid, Moscow, Sydney and Amsterdam.

Allen & Overy focus on expanding business and fulfilling the needs of their clients. The company recruits a variety of different staff such as lawyers within banking and finance, corporate, litigation and international capital markets.

KPMG “To turn knowledge into value for the benefit of our clients, people and our capital markets”

Figure 4 : Growing Takaful Sector $8 $6 $5

4.22

$4 $3 $2

7.39

Global Takaful Market $bn

$7

2.10

2.42

2.78

3.19

4.86

6.42 5.59

3.67

$1 $0

2006 2007 2008 2009 2010

Source: Celent.com

November 2011

2011 2012 2013 2014

2015

Country: United Kingdom Established: 1870 Sector: Accounting KMPG have a team of over 10,000 employees and partners located in 22 offices around the world. This company has secured a place on our list through the range of employee’s benefits, focus on staff and the strong global network. The

Islamic Finance

KPMG working environment encourages the staff to develop their abilities and skills. The company provides mentoring and training to bring their staff up the career ladder. Diversity is embraced and working life flexibility is essential.

There is a long list of employee’s benefits on offer which include health, dental and life insurance, vision insurance, pension plan, disability coverage family paid leave, flexible hours, leave plans, domestic partners benefits and gym reimbursement.

The company also have a focus on the clients, skills and resources in order to tackle the issues and opportunities within the industry.

Islamic Development Bank “Together we build a better future” Country: Saudi Arabia Established: 1975 Sector: Islamic Banking

Abu Dhabi Islamic Bank “Islamic financial solutions for the global community” Country: United Arab Emirates Established: 1997 Sector: Islamic Banking Branches: 66 Abu Dhabi bank has been running for many years earning the title of third place. Their mission statement is simple but powerful and their vision statement does the same “to be the top tier Islamic financial services group”. When considering their staff the mentoring programs give them the leadership guidance they need. Providing opportunities for them to develop professionally and contribute to the culture of mutual respect and support. The bank also offers graduate development programs and careers for students and talented professionals. Their The top 10 best companies to work for in Islamic finance by Global Islamic Finance Magazine

This company has a team of up to 1,000 employees working towards the development and social progress of the countries they work with and the Muslim communities.

The current bank membership is located in 56 countries around the world. Islamic Development Bank gives its customer a choice of different types of development assistance focusing on a range of sectors.

The company’s board of executive directors of made of up fourteen members and seven were chosen by the major shareholder. The company aims to make a difference by dealing with equity capital and grant loans for project and enterprises and also providing financial support to member countries.

Dubai Islamic Bank CIMB Group MEGA Qatar Islamic Bank Clifford Chance Allen & Overy KPMG Islamic Development Bank Abu Dhabi Islamic Bank Takaful Emarat

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values consist of “simple, sensible, transparent, mutual benefit, hospitality and tolerance and Shariah inspired.”

Takaful Emarat “To promote the concept of Takaful as a genuine Shariah compliant alternate to Insurance” Country: United Arab Emirates Established: 2008 Sector: Takaful Insurance Branches: 3 Takaful Emarat based in Dubai aim to provide Takaful insurance in the Middle East with the goal of expanding to other parts of the world. The company abide by the Islamic principles and also offer life and health product tailored to suit individuals and corporate needs. Their mission states “To manage participants financial security with full compliance of Shariah, to gain trust and confidence by providing value added products and services back by international expertise and to act fairly and transparently in the best interest of participants”.

Global Islamic Finance Magazine would like to congratulate all the companies featured in this list. The purpose of the listing is to celebrate successful and effective working environments within Islamic finance. We hope that more companies are encouraged to take part in our next listing. The next issue of Global Islamic Finance Magazine will feature the ‘10 most influential people in the Islamic Finance industry’ highlighting the achievements and impact the selected people have made in the Islamic Finance industry. If you would like to feature in our listing or recommend some one please feel free to contact us at info@gifmagazine.com gif

References and Further Reading Include all the website of the companies in the list

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AME Info (2007) working with Islamic Finance, Retrieved from: http:// www.ameinfo.com/128722.html N. Jackson (2008) As Islamic Banking Takes Off New Courses Set Up, The Independent, Retrieved from: http://www.independent.co.uk/ student/postgraduate/postgraduate-study/as-islamic-banking-takesoff-new-courses-are-being-set-up-in-the-universities-770759.html Takaful Press Report (2006) Celent, Retrieved from: http://reports. celent.com/PressReleases/20061129/Takaful.htm Sohail Jaffer (2007) Islamic Insurance: Trends, Opportunities and the Future of Takaful Brian Kettell (2010) Frequently Asked Questions in Islamic Finance (Wiley Finance Series) Abu Dhabi Islamic Bank from: http://www.adib.ae/

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Qatar Islamic Bank from: http://qib.com.qa/english/site/topics/index077b.html ABC Islamic Bank from: http://www.arabbanking.com/En/IslamicBank/Pages/default.aspx Allen & Overy from: http://www.allenovery.com/AOWEB/Home/AllenOveryHome.aspx?prefLangID=410 Clifford Chance from: http://www.cliffordchance.com/home.html Dubai Islamic Bank from: http://www.dib.ae/en/index.htm KPMG from: http://www.kpmg.com/uk/en/pages/default.aspx CIMB Group from: http://www.cimb.com/index.php?&tpt=cimb_ group Islamic Development Bank from: http://www.isdb.org/irj/portal/ anonymous?guest_user=idb_eng Mega Events from: http://www.megaevents.net/

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Islamic Finance

UNLEASHING THE POWER OF

INNOVATION IN ISLAMIC FINANCIAL INSTITUTIONS Author: Tasnim Nazeer, Global Islamic Finance Magazine Editorial Team, United Kingdom

Abstract: Global Islamic Finance Magazine will be looking the need for innovative flair in promoting products and services in Islamic financial institutions. The Islamic financial industry is growing at an unprecedented rate and in order to keep up with the demands of the highly competitive financial world the industry has to unleash innovative and creative ideas into the forefront. All innovative flair must adhere to the principles of the Shariah and guidelines set out by the Islamic principles in order for any product, service or brand to be Shariah compliant. Successful leadership calls for the need to be creative and exhibit innovative ideas to the forefront to cater for the demand for up-to-date services and products that can further spur the success of your company. This article is ideal for any CEO, investor, entrepreneur or student wishing to learn more about unleashing the creativity within and tapping into the innovative methods of successfully moving your company forward. Global Islamic Finance Magazine will go through the various ways of unleashing innovative ideas into the forefront to further spur the success of your company.

Keywords: Islamic Finance, Innovation, Creativity, Marketing, Promoting, Support, Team, Leadership, Management, Shariah Compliancy

22 Global Islamic Finance

November 2011

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The Scope for Innovation in Islamic Products and Services Many key leaders from Islamic financial institutions have recognised the need for innovation in Islamic products and services to further cater for the growing demand of the highly competitive financial world. Although there is demand for innovative and creative products one also has to recognise that these products and services must adhere to the principles of Shariah finance. Shariah compliancy plays an important part in product innovation for Islamic financial institutions.

Many Islamic scholars and governing bodies around the world have been called to account for certain products or services which have not been deemed as Shariah compliant in one country but are readily available in another.

Therefore standardisation of Shariah compliant guidelines is needed in order to further harmonise the sector. Daud Bakar, the renowned Malaysian Islamic scholar and entrepreneur and managing director of Amanie Islamic Finance Consultancy & Education LLC, said in a statement that the “Islamic finance industry was allowing Muslims to rediscover their identity and Shariah advisories were the custodians of the Shariah governance process within the prescribed legal limitations”.

Shariah advisors are of utmost importance when it comes to introducing new products into the Islamic financial market and all products have to undergo some form of establishing if it is genuinely in Shariah compliance.

The Islamic financial industry has seen a proliferation of Islamic services and products which have come close to their conventional counterparts. Additional Islamic financial institutions have also offered products which utilises various Shariah compliant financial instruments such as Mudaraba and Ijara leasing.

The Range of Innovation in Islamic Products and Services In the current Islamic financial climate the industry offers a range of products and services such as the standalone and hybrid Islamic financial products, in addition to many other products and services as outlined in Figure 1.

Islamic Synthetic Products These products have been designed to match or be equivalent to conventional financial products to cater for the growing market. The most popular structures of these equivalent Islamic financial products are shown in Figure 2.

24 Global Islamic Finance

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Re-crafting of Islamic synthetic products: Drawing from the core products identified above, re-crafting of Islamic synthetic products have been possible in some cases such as the reverse Murabahah, diminishing Musharakah to provide housing finance and Sukuk. In addition there have been variants along with Musharakah Term Finance Certificates (MTFCs) which is a form of Sukuk.

MTFCs have a stronger appeal since these are issued against the strength of issuer’s balance sheet rather than specific assets of the corporate and are close to PLS framework.

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Hybrid Islamic products: These products are supported by advancements in Islamic securitisation such as the acceptance of Islamic Investment Certificates,

and Sukuk bonds that are Shariah compliant and tradable asset backed securities. The Islamic financial Industry has a hybrid of different types of Sukuk with AAOIFI recognising about 14 different types of Sukuk. Most Sukuk are sponsored by sovereigns, both in domestic and international markets which are also further supported by approved Government assets. Although Ijarah (asset based) are successful the Islamic bond arena of Sukuk are the most popular, in addition the other hybrid-Sukuk which is backed by synthetic loans, sale-lease backs or head-lease/sublease ijarah and profit sharing structure are now emerging to be quite popular. The pool of assets for some Islamic bonds which have comprised of Istisna’ and Murabahah receivables as well as Ijarah.

Another example is the convertible Sukuk – whether genuine Ijara or hybrid it can have an embedded option allowing them to be converted into another asset form depending on specified conditions so there is many innovational products in the hybrid structure.

Figure 1: Products and Services for Innovation in Islamic Financial Institutions Standalone and Hybrid Services Capital Market Options for Fund Management, Takaful products Sovereign and Corporate Services for Retail Banking Sector

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Islamic Synthetic Products Hybrid Islamic Products Islamic Mortgages Islamic Insurance

Figure 2: Popular Islamic Synthetic Financial Products Murabahah synthetic (debt based) products that are backed by salerepurchase agreements or back to back agreement of a borrower held asset or lender’s purchase, Ijarah leasing (asset backed) provide financing; and

Islamic Investment Indices: This type of innovative product uses the system whereby equity benchmark indices track the performance of leading trading institutions who are involved in activities consistent with Islamic Figure 3: Shariah Principles for Islamic Financial Products/Services Shariah law. Examples of this are Dow Jones Prohibition of Riba (interest) and FTSE Islamic indiand Uncertainty ces which focus on limited range of companies and exclude companies which are involved in Profit Sharing/Risk Prohibition of Existence of Underlying products or businesses Sharing Forbidden Assets Asset which do not adhere to the principles set out in Shariah finance.

November 2011

Equity based profit sharing contracts Musharakah or Mudarabah or crop sharing (Muazarah).

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Islamic mortgages: These products have really grown in customer base and have established the structure of the Ijarah (lease) contract along the lines of conventional mortgage; in addition to the equity partnership (diminishing Musharakah), where the mortgagee (lender) and mortgagor (borrower) jointly share ownership, which over a period of time is transferred to the mortgagor. The mortgagor then buys shares in interest of ownership by contributing each month toward buying out the mortgagee’s share in the property and return to the lender is generated out of the fair rental value of the property/ The Murabahah (sales transaction) aspect which is practiced in the United Kingdom utilises the concept of property transfer tax (stamp duty) and discriminates against the Ijarah or Musharakah-based mortgage.

Islamic Finance Islamic Equity Funds: This type of innovative funds includes Shariah-compliant equity and hedge funds, commodity, leasing and trade related funds. Barring equity funds, other funds are low risk. In the case of leasing, the fund is a securitised pool of lease contracts dealing with collateralised assets generating a steady stream of cash flow. Similarly in comparison to conventional counterparts there are commodity funds that have a shortterm exposure in markets that are efficient and have developed forward markets, thus reducing the level of risk. If we compare equity funds can be similar to conventional mutual funds which are exposed to a higher degree of risks. Such funds are designed to ensure that equity stocks included in the fund are not only well diversified but also fully compliant with the Islamic principles of the Shariah finance guidelines.

Risk management in Islamic finance is another aspect of innovation which has come to the forefront of Islamic banking and finance.

The financial industry of intermediation is relatively a recent proposal to the Islamic Shariah. It has been developed in the Western countries over the past four centuries or so. Recognition of financial intermediation as an independent industry is crucial in understanding the system of the hybrid financial contract Scholars and governing bodies of Islamic finance who fail to recognise this industry still dispute for preferences of sharing over other modes of financing instead of taking such preference to be decided by the basis of market circumstances and forces.

When a merchant sells at deferred price or lease an assest she is providing financing to the purchaser or the lessee. But if a corporation specialises in getting the savings of those who have them to businesses that need them for investment, that is a specialised industry of financial intermediation. In other words, financial intermediation is a specialty of those who recruit deposits and provide funding while merchants and producers provide commercial credit from their own resources while dealing with the daily decisions of a production line or buying and selling of goods and services.

The role of Islamic financial recrafting or most popularly known as reengineering has been developed in contracts that fit the Shariah compliant financial industry and its success or failure can be assessed on the basis of the extent to which new contracts maintain the main characteristics implied by the prohibition of Riba and preserve the objectives of this no interest policy. There are numerous Islamic financial products in the market and they are rapidly increasing by the day.

New products are always developed through a process of combining existing contracts and arrangements. We have essentially nine main hybrid Islamic financing contracts prac-

ticed in Islamic banks today: Murabahah to the purchase ordered, installment sale, Mudarabah investment deposit, current account deposit, three-party Istisna’, leasing to the purchase ordered, compound Salam, Buy Back and Tawarruq with scope for more.

Islamic Financial Innovation Paving the Way Forward Many Islamic financial institutions that introduce new products and services that adhere to the principles of Shariah are doing successfully well. Some companies use existing products and Islamic financial instruments to further unleash innovation in a Shariah compliant manner offering collaborations with leading sponsors to further attract key customers to their brand.

The Islamic financial industry has commonly used the term engineering or re-engineering of financial products to meet the specific needs that some conventional counterparts offer but in a Shariah compliant manner. In order to ensure that these types of products are facilitated effectively there is a constant need for the Islamic finance industry and regulators to consider a change in mind set accompanied by enhancement of the legal, regulatory and supervisory infrastructure backed by proper governance framework to allow banks to transact in equity based transactions.

Many conventional financial banks drew their main business from debt financing and Islamic financial regulators have not been impressed with this system. However, consolidation of the industry has pushed the financial industry to universal banking and other structures to retail better and different products. One aspect of innovation in presenting Islamic products is the promotion of PLS modality which could help move the financial system from being focused on the bank to market based and thereby ensure that a system is facilitated with scope for financial and risk diversification.

There are many viable solutions to reducing principal-agent problems and built in supportive screening and monitoring of projects upfront would go a long way to promote efficiency in capital allocation as it links returns with actual project. Promoting more equity based products would also tackle the inconsistency of assets and liabilities which has aggravated since IF has relied excessively on short-term, low-profit and fixed-income assets. In addition the risk-sharing edge of IF products can be neutralised when Islamic banks pay investment account holders benchmark return regardless of the performance and profitability of business venture. The complexities of the Shariah compliant ruling of proper risk and reward sharing mechanism is the need to enhance understanding of management and mitigation of the specific and multiple

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risks associated with certain types of Islamic products. This requires a mindset change of both Islamic banking industry and regulators whose primary focus has been debt-based financial intermediation.

At the same time, it requires development of financial legal and regulatory infrastructure which will help manage principal agent-entrepreneur relationships, while catering for investment account holders concerns. There is also a need for standardisation amongst the Shariah rulings in order to further prosper the industry forward and create harmonisation amongst what is deemed Shariah compliant and what is not.

Many disputes amongst Islamic financial scholars have left institutions confused as to what is truly Shariah compliant therefore it is worth ensuring that a proper regulatory board is consulted before endorsing and bringing your product to the financial Islamic market. Therefore it always best that any Islamic financial institution follows the principles governed by the Shariah when introducing or proposing a potential product or Islamic financial instrument as outlined in Figure 3.

Figure 3 shows the principles of Shariah compliant finance which should form the basis of all instruments and products that are introduced by Islam to financial institutions and banks. It is important to stay clear of investments which you feel doubtful of as this may hinder your chances of being recognised as a fully fledged Islamic financial institution.

It is important to harness these principles in proposing any product or working on reengineering existing products to further excel in the Islamic financial industry.

Challenges faced by the Introduction of Innovation in Islamic Finance As with any financial system or products there is bound to be challenges that will need to be faced and overcome in terms of the Islamic financial products and introducing innovation into the forefront. One of the key challenges as discussed above is standardisation and harmonisation of the Islamic financial industry as a whole.

There have been many instances when a company is unsure of whether their Islamic financial product is Shariah compliant due to the fact that there has been a dispute about it between scholars who have different forms of opinions. Therefore a standardised regulatory body needs to come together to create a unified approach to tackling Shariah compliancy on products, brands and services.

Differing interpretations of the Shariah also make regulation across jurisdictions a tricky task. For example, some Islamic contracts such as the ‘Bai Bithaman Ajil’ (deferred payment sale) are approved by Malaysian regu2011 November Global Islamic Finance

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Islamic Finance

lators but rejected by those in the Middle East. Another key challenge that the Islamic financial industry faces is in providing satisfactory products, services and results to our existing clients eventually make sure they are want to use their services again. This need for creating in depth products and services is paramount to exhibiting creative flair in a Shariah compliant manner and therefore arousing innovation.

help to increase demand for these types of products. There needs to be more improvements made on the Diminishing Equity Participation (DEP) as a bridging tool to encourage more people to look at Musharaka as an ultimate and strongly rooted instrument in Islamic finance and these are just a few of the challenges that the industry needs to combat in order to spur innovation in Islamic finance forward.

Many Islamic financial institutions face the challenge of attracting Muslims and Non Muslims who have been in business with conventional banks and have already established their business needs with them.

Islamic banks therefore have to work on promoting their products so that the customer base can see a shift from conventional to Islamic financial institutions. The Islamic financial industry has to provide competitive products & services in order to tempt and persuade both Muslims and Non Muslims around the world to buy into Islamic products and services.

In terms of the application of innovation through people we know that this industry of Islamic finance has the most three important factors for success which will derive from the customer base and global individuals around the world.

In terms of products innovation applied in the form of liquidity management products can further help to solve issues related to liquidity, exit strategy, and funds mismatching. Innovation can also spur growth in the liquidity instruments which can pave the way for the long term investments.

Similarly leases and even synthetic leases hold scope for investment grade assets which were placed as up to an average life of 5 years. Furthermore, the Islamic bond Sukuk arena was an excellent solution in the beginning of the century to attract investments and enhance yields. Moreover, these instruments provided secondary market opportunities for banks as well as institutions to further enhance in innovation and cater for the growing demand of Shariah compliant products.

It would be beneficial to the Islamic financial industry if more products of handling and transferring risks particularly cross border risk and particularly currency risks are facilitated. Confirming, adapting or evolving Islamic financial products such as the Islamic Profit Rate Swap (IPRS), or Islamic Cross Currency Swaps (ICCSs) can spur innovation and 26 Global Islamic Finance

November 2011

Encouraging employees through incentives through bonus schemes of profit sharing and maybe buying into the equity for further commitment can help spur the success of your company. A need for a high The quality level of training both at the entry role of Isranks and senior ones can further spur innovation within the industry. There is lamic financial recrafting much scope for creative and innovative or most popularly known as re Islamic financial products to be sucengineering has been developed in cessful in the global financial industry contracts that fit the Shariah compliif given the chance. Proper regulatory guidelines for Shariah investments and ant financial industry and its success products need to be laid out in a standor failure can be assessed on the basis ardised format in order to make things of the extent to which new contracts easier for investors and business promaintain the main characteristics fessionals.

Paving the way forward for Innovation in

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Innovation is crucial to the survival of a business and in our the Islamic finance industry it helps to revitalise Islamic roots, improve meeting customer needs, offer businesses a competitive edge, thus resulting in new and sustained source of profits and income.

What can we therefore identify as the four main areas of application for innovation in Islamic finance? This can be identified in Figure 4.

products that have spurred innovation in the Islamic financial industry such as Islamic hybrid islamic products, synthetic products, equity funds, indexes, Islamic mortgages and Islamic insurance in addition to Sukuk Islamic bonds. This will provide scope for the various applications of innovation in the growing sector which is estimated to be worth over $2 trillion dollars by 2012. Innovation in this aspect has to attract good, qualified and experienced people into the industry but also in how to retain them. Another challenge is that the Islamic finance industry needs to find adequate and competitive packages to cater for the demand and be on par with conventional financial institutions.

implied by the prohibition of Riba and preserve the objectives of this no interest policy

Figure 4: Four Main Areas of Application for Innovation in Islamic Finance Products People Market Place Regulatory environment Islamic Banking Institutions Islamic Finance In this edition of Global Islamic Finance Magazine have described and comprehensively shown you the ways in which innovation has facilitated and unleashed into the forefront of Islamic finance. There are many challenges which need to be overcome in order for the industry to further prosper however the Islamic finance industry is growing at an unprecedented rate and there is much scope and demand for such innovative products to cater for the growing market. In this article we have equipped you with the necessary

The Islamic finance industry can further progress with the introduction and facilitation of new inventive products such as Takaful Islamic insurance and Sukuk Islamic bonds which have made it easier for Muslims wishing to use Shariah compliant forms of bonds and insurance.

Even Non Muslims have been attracted by the interest free policy of Shariah compliant financing and find this a highly ethical option in managing their wealth and finances. Having identified the challenges that the Islamic finance industry faces in facilitating innovation in products and services it is important to try to find solutions to overcome these challenges.

Once the challenges have been addressed and improved the industry can further move forward by introducing and implementing innovative products into the industry. With the facilitation of hybrid Islamic products to provide alternatives to match those of conventional counterparts the Islamic financial industry can further prosper and look to the road ahead. The Islamic banking and financial sector can also see scope to be a direct key player for their conventional peers and hope to achieve global success as a world renowned financial system. gif

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SHINING THE SPOTLIGHT ON GIF’S BRAND AMBASSADORS What do you think about the evolution of Islamic Finance in your country?

Muhammed Rafeek,

Farhaa Xha,

Msc Islamic Banking and Finance, Durham University, United Kingdom

Student, Economics and Development Studies, Saudi Arabia

“Banks in India can be categorised into scheduled banks and non-scheduled banks, (scheduled banks constitute commercial banks and cooperative banks) and they follow an interest based banking system. Currently there are 88 Scheduled Commercial Banks (SCBs), 27 public sector banks (that is with government of India holding stakes), 31 private banks (no government stakes,: they may be publically listed and traded on stock exchanges) and 38 foreign banks in the country. But Indian banking law implicitly prohibits functioning of any full-fledged Islamic banks or Islamic windows with any local conventional banks.

As far as the Muslim population (13.5%) as well as the developmental needs of India is concerned, there is a higher future potential for Islamic banking in the country. But it requires either new legislation or change in the current legal and regulatory framework.

The only remaining option is, starting Nonbanking financial companies to meet interest-free financial needs of the country. The Islamic business activists noted this option very lately and made certain experiments.

But timely changes in the law as well as the high level completions from their conventional counterparts crated much constraint in their performance.

But it is to be noted that countless advocates and well-wishers of the Islamic banking system trying their best for propagating Islamic banking. But support from the authority is minuscule in India. At the same time different government appointed committees like Raghuram Rajan committee 2008, has emphasised the about the vitality of interestfree finance in the country.

As such many national and International conventional as well as Islamic banks have shown interest to open Islamic banks in India. One of the successful steps was taken in Kerala state; with support of the state government some business group just launched an Islamic NBFC, named Al Baraka. Similarly, Reserve bank of India waiting for the permission from government to allow working a Turkey based Asia Islamic bank in the country.”

28 Global Islamic Finance

November 2011

“Saudi Arabia has the dubious honour of being the heartland of Shariah and yet having an inconsistent attitude towards Islamic finance. In its 30-year history, Islamic finance in the country has taken two steps forward, one-step back and sometimes ‘stood’ there.

After intense lobbying in 1987, a bank was allowed license to offer strictly Islamic financial products.

Today, the country is the largest Islamic banking competitor in volume of funds, has $92b above in Sharia accommodating financial assets. The mounting enthusiasm for Shariah compliant products in real estate financing, the development of Sukuk market and it’s aspiration to become largest Sukuk issuer induces optimism in Islamic finance’s growth. However, with laidback, vague regulatory framework and with no particular laws overseeing Islamic finance and high barriers to entry in the sector, it will be immature and hasty to conclude Saudi as a role model for Islamic finance.

Islamic finance sector is also crying for some women’s wisdom, currently there are no female scholars in the Middle East while women in other Muslim countries are walking up the ladder. The industry should embrace a positive attitude towards hiring and training fresh graduates. Saudi Arabia needs to empower Islamic finance by genuinely innovating not replicating from conventional finance. Adopting a systematic, transparent way is the only smart option to mature in the sector, gain trust and thrive.”

Muhammed Farook Mirak, General Manager, Crescent Schools International, Sri Lanka

“In March 2005, CBSL issued an ordinance to include provisions for Islamic finance in which Sri Lanka became one of the few countries to have specific legislation for Shariahcompliant financial operations. The amendment also provided flexibility for conventional financial institutions to establish windows to offer Islamic banking and finance products and services. According to Islamic Finance News Malaysia Islamic, the banking sector in Sri Lanka is estimated around US$900 million. Sri Lanka has a number of Islamic financial service providers including market leader Amana Bank Limited, Muslim Commercial Bank (MCB), People’s Leasing Company Islamic Financial Services Unit, First Global Group, and ABC Investments (Baraka Islamic Financial Services). Commercial Bank Islamic Banking Window, LOLC Islamic Finance unit, Amana Takaful Limited (ATL), the only Takaful provider in the country, was introduced in 2002 and ATL was listed on the Colombo Stock Exchange (CSE) in late 2006. Amana Securities Limited (ASL), a subsidiary of Amana Investments Limited, is a trading member of the CSE and is one of just 20 stock-broking companies licensed to operate on the CSE. The country’s largest bank, Bank of Ceylon, was planning to launch an Islamic banking unit in early 2008, but the bank decided to delay due to the global financial crisis. The island’s first ever full-fledged Islamic licensed commercial bank named Amana Bank Limited has been established under Section 5 of the banking Act No. 30 of 1988 to carry out Islamic banking business in Sri Lanka aiming to deliver retail, business, and private banking facilities including wealth management, infrastructure financing, bonds, corporate treasury placement and many other financial products and services in the country to attract Shariah-compliant investment funds from the Middle East and the Far East. The Sri Lankan government has allowed enough avenues in the fiscal and regulatory policy framework to facilitate Islamic finance since 2005. Furthermore, positive support and a favourable financial regulatory environment are encouraging for Islamic financial institutions to set up operations and for local and international investors to participate in taking the country’s Islamic finance industry to new growth.”

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Mohammad Alami,

Abdulrahman Usman ALFA,

American university of Science and Technology, Lebanon

Executive Officer, Legacy Pension Managers Limited, Nigeria

“Even though, the two existing Islamic banks in Lebanon represent less than 1 % of the total assets of Lebanese conventional banks ‘According to statistics provided by central bank officials’. Recently, Islamic banks especially in Lebanon are one of the world’s fastest growing financial sectors.

In my opinion, this came as result of the global financial crisis, and the reserve of gold in central bank in Lebanon, which had been clarified that Lebanon is the largest gold reserve in the Middle East and North Africa.”

“The evolution of Islamic banking and finance in Nigeria dated back to the midnineties, through various involvements by the academia, which saw to the involvement of leading universities in Nigeria towards the debate, and understanding of Islamic economics and financial system. The prominent pioneering institutions in this direction where Usmanu Danfodio University Sokoto, Ahmadu Bello University Zaria and the University of Maiduguri the trio from the Northern part of the country, a region with the highest number of Muslim population in the country.

The initial efforts by Usmanu Danfodio University to train a chunk of its graduate students in Islamic economics banking and finance in far away places like, Malaysia and Pakistan can’t be over emphasised. Usman Danfodio University and the University of Maiduguri, were the first to make Islamic economics an elective-course for their undergraduate students.

However, the Ahmadu Bello University, follow suite in rigorous enlightenment through seminars and conferences especially the prominent ‘student-seminar’ series pioneered by the economics department. The university make the first efforts to bring together academia, students, financial experts, bankers Muslims and Christian clergies to a common fold to the discuss Islamic economics banking and finance at a broader level.

The ground breaking efforts in the real evolution of Islamic finance in Nigeria reaches its peak through the efforts of some financial and professional bankers to establish the first Islamic banking services in Nigeria in 2003, following the amendment to the provisions of the CBN Act of 1991. This amendment provided for the establishment of Non-Interest banking and financial services in Nigeria, with greater mandate for prudential regulation by the apex bank.

The erstwhile Habeeb Nigeria Bank was the first to introduce the Non-interest Savings Account, back in 1997. Though people welcome the move with great enthusiasm, the proposal could not see the light

of the day, as the banking reform season came up same year when the central bank peg the overall banking capitalisation at N25,000,000,000, and this led to the disruption of the whole process. Fortunately after nine years of conceptualisation, in 2011 a tentative license has been granted to Jaiz International Bank Plc, to operate full fledge Islamic finance businesses, with two other banks to operate Islamic finance windows, they are Stanbic IBTC bank, and Standard Chartered Bank. The first Annual General Meeting (AGM) of Jaiz International Bank Plc was held last week as a follow up to the CBN six month probation period of which they are expected to commence actual banking businesses, which means the bank is to go live next month, meeting up with CBN directives.

Finally the dreams of an estimated seventy five million Nigerians and above has been fulfilled, on the introduction of non-interest/ Islamic banking in Nigeria, it has come to stay in Africa’s most populous country, and the second biggest economy after south Africa. With high hopes and expectations, Islamic economics will bring much needed developmental impact in alleviating poverty and killing the monster of interest rate which has held our continent in captivity and slavery for long.

However this success was not without hue and cries from different quarters especially the Christendom, that licensing Islamic banking is a designed ploy by the MuslimNorth to Islamize Nigeria. Therefore it calls for more and greater enlightenment in education and awareness that Islamic finance is good for the prosperity of all nations.

Central Bank of Nigeria is set to take up the challenge of prudent Non-Interest/Islamic banking supervision as a notch to maintain level playing ground, transparency openness and competitiveness in the overall financial industry. The current Central Bank governor and I were both alumni from the same university, same department, where Islamic economics is being highly promoted and linked to the real world as an alternative vibrant economic model.” gif

2011 November Global Islamic Finance

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Market Review

Authority for Islamic Banking in Oman Source: GlobalIslamicFinanceMagazine.com

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Among the many attractive features of the interest-free Islamic banking is that it does not involve buying and selling of debt, rules out speculative activities and is based on ethical investments will be required to set up Shariah Boards to ensure that their products and services are in accordance with the principles enshrined in the Holy Quran. In response to a query, the CBO chief said all Islamic banks will be required to invest their deposits in Oman only. The CBO has so far granted licences to Bank Nizwa and Al Izz International Bank to operate as fully Shariah-compliant institutions. These local banks will be up and running by early 2012 in partnership with their foreign partners, he added.

In Oman the Global Islamic banking asset industry is estimated to be above $1 trillion in 2010 and is expected to grow at the rate of around 20 percent. The Central Bank of Oman (CBO) will establish a national authority for monitoring Islamic finance and banking sector, Hamood bin Sangour al Zadjali, CBO Executive President, said here yesterday.

This authority (National Shariah Board) will be responsible for regulating Islamic finance and banking institutions, the told the Observer, after his speech at a workshop on “Islamic Finance and Banking,” organised

by Horwath Mak Ghazali LLC. Al Zadjali said the CBO has issued some directives for this sector and work on a complete legal framework of rules and regulations are currently under way. According to these directives, all Islamic finance and banking organisations 30 Global Islamic Finance

November 2011

Until May this year, Oman was the only GCC country where Islamic finance did not exist.

Following the Royal Decree issued by His Majesty Sultan Qaboos in May this year to establish an Islamic financial services sector, almost every bank in Oman is considering launching an Islamic window in addition to the two full-fledged Islamic banks being launched. They are keen to tap the unfulfilled demand for Islamic banking.

Oman, say experts, holds out an Islamic finance and banking market of not less than $8 billion. The CBO chief said global Shariah-compliant assets are estimated to have crossed $1 trillion in 2010 and are expected to grow at the rate of around 20 percent.

More than 600 Islamic financial institutions now operate in more than 75 countries. He stressed the need for robust Shariah governance (Islamic laws outlined in the Holy

Quran) framework as a foundation to achieve the objectives. In his keynote speech, Dr Omar Mustafa al Sharif, a renowned international trainer and expert on Islamic finance, said Islamic banking is growing the world over because there is a huge demand for it from people of all faiths and beliefs.

Among the many attractive features of the interest-free Islamic banking is that it does not involve buying and selling of debt, rules out speculative activities and is based on ethical investments.

This in turn helps higher rate of return, lower risk exposure, and better risk management compared to conventional banking. Interest and speculation-free Islamic financial model is attracting everyone’s attention not only for the huge business prospects but also for the solid stability that it provides.

The two-day workshop (September 20-21) is aimed at making awareness on Islamic banking and its way of operating. In his speech, Davis Kallukaran, Managing Partner, Horwath Mak Ghazali, said Islamic banking has gained broader acceptance in a major international financial market and there are ongoing research and studies on its merit as a viable alternative financial system in the world.

While Islamic banking has tremendous potential for Oman, the level of success will depend on the industry’s investment in research and in developing the talent pool. At stake is the credibility of the system. Customers would want to see progress towards a holistic alternate financial system, even if it has to be step by step process. gif

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Islamic Banking

HOW TO RUN

AN ISLAMIC BANK

Marketing, Branding and Leadership, part II

Author: Shelina Janmohamed, Senior Strategist, Ogilvy Noor Maged Ezzeldin, Executive Director, Bridge Capital Limited Tajah Brown, Global Islamic Finance Magazine Editorial Team, United Kingdom Abstract: Islamic banking and finance has changed the financial systems creating an alternative to the conventional way of banking. Part 2 of How to run an Islamic bank will discuss the aspects that encourage the demand for Islamic finance and banking and explore the perspective of the consumer.

In order to attract Muslims a connection between Islamic banking and religion can be made. The question remains what attracts non Muslims to Islamic finance? This article will outline the spreading of awareness in Islamic banking, marketing, promotional strategies, branding and the demand and need for Islamic banking and finance. The article will also cover topics such as Leadership within Islamic finance exploring the qualities of a leader and the Islamic work ethic. an Islamic institution.

Keywords: Brands, Islamic Banks, Leadership, Non-Muslims, Marketing

32 Global Islamic Finance

November 2011

Islamic Banking

Spreading awareness of Islamic Banking When spreading awareness of Islamic finance it is important to educate the customers. They will be more willing to emerge themselves into Islamic finance if they have the knowledge. It is vital to provide guidance on areas such as imagery, wording, symbolism and even colours when looking at branding and logos.

Educating the customers could also change the views of non-Muslims on topics such as Islamic banks, the principles of Islamic banking and finance and the different types of services and products available.

Shelina Janmohamed, Senior Strategist, Ogilvy Noor She is a senior strategist at Ogilvy Noor, the world’s first bespoke Islamic branding practice, offering expert practical advice on how to build brands that appeal to Muslim consumers, globally. She is also an award winning blogger and author, and was named by The Times newspaper as one of the UK s 100 most influential Muslim women.

or experts, any wider networks with Islamic banking and word of mouth from peers. She says “this is the area where new Islamic banks can make a real difference through education and the appropriate education techniques. Partnering with credible authorities and influencers can be effective methods”.

With developments in Islamic finance for example an increase in the number of financial institutions offering Islamic finance products and services, the industry is becoming a significant role in the financial system. We need to expand our understanding and awareness of Islamic finance in order to ensure strong regulatory frameworks and suitable jurisprudence.

Shelina Janmohamed, Senior Strategist at Ogilvy Noor gives her views on the importance of education when establishing an Islamic bank in an area that is Figure 1: Shariah-compliant company rules not familiar with Islamic finance.

She says that it is key to engage in conversation with the conSetting up a Products’ Development Unit that creates the firms products sumer, but first Islamic banks and services targeting its audience that can both compete with rivals and must understand the key asadhere to Shariah principles. pects of the Muslim consumer, Forming a Shariah Board to review and approve all products and services the values they are looking for extended by the firm. The board function could be outsourced to specialand the communications that ised firms. The board should review all conceptual frameworks, processes, fulfils their needs. She continfees and related issues to any new product and modify if needed in coorues saying “The consumer is dination with the Business & IT sides of the firm, and consulting the legal department regarding any conflict with regulators. on a journey to find the product and brand that best suits their Choose a proper IT system that serves the firms operations without comneeds. First we need to underpromising the Shariah principles. stand, what are their internal Attract and train talents that mainly believe in the Islamic finance industry, starting points? What beliefs and getting them through strict screening as most of the operational risks do they start their journey with in Islamic banks are employee related. which will provide the backdrop to their choices?”

Islamic banks also need to think about what influences the consumers externally? What are the outside influences that could change their decision making and change their views on brands and products? Shelina Janmohamed says that the external influences could consist of the materials the consumer reads from established banks

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Set up Shariah Audit office internally, and it’s also recommended to deal with External Audit firms specialised in Shariah Risk Audit.

Choose a top management team with strong belief & understanding of the Islamic banking industry. Many of the harm done to the industry are to top management crossing over from conventional to Islamic banks just for the sake of the lucrative compensation.

Plan all steps in full coordination and compliance with the regulator to build confidence.

Manage banks treasury cautiously to prevent any need to borrow from central bank or rival conventional banks in case of liquidity squeeze.

A challenge that could arise with Islamic banking regarding the lending of products is far greater than transactional products. One of the big challenges is the isolation of the cash movement with Islamic banking divisions.

Shelina Janmohamed also mentions important aspects of establishing an Islamic bank saying, “If you wish to establish Islamic banking, these stages in the consumer’s journey need to be mapped, understood and built into awareness building strategies.”

She continues saying that the Islamic banking industry have overcome some challenges but when thinking about promoting Islamic banking to Muslims and the consumer’s internal starting points. There are two major challenges to face, such as the education of the consumers about Islamic banking and persuading the consumers with products and communications ensuring that it is Shariah-compliant.

2011 November Global Islamic Finance

33

Islamic Banking

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Promotion and Marketing Strategy Promotion consists of informing, persuading and influencing the customer’s decision process. There is wide range of ways to promote your Islamic bank such as: • • • • • • • • • • •

Website Television Radio Newspaper Leaflet Email Magazine Billboards Seminars Annual Reports Community Relations

Maged Ezzeldin, Executive Director, Bridge Capital Limited

There are also different types of marketing which consist of campaigning, direct marketing, telemarketing or phone banking and booth, trade or exhibitions. Another important aspect of Islamic finance is having a strong marketing strategy, it is a way of developing and expanding Islamic banks as well as competition with other Islamic banks in the industry. Promoting and developing an Islamic bank in a non-Muslim dominated society can bring challenges. The majority of a non-Muslim society believes that service quality and financial returns are the main aspects when looking at the customer’s point of view. The changing customer views and competing with their conventional counterpart makes it very important for Islamic

He is a seasoned Islamic finance professional with over 15 years of experience in the services industries, mainly within Islamic banking and finance. Having experienced the full product cycle in Islamic Banking, which included Product Development to Day-to-Day operations for over 7 years. Maged have also worked for almost 7 years in Investment Banking, taking companies public; from proposal to floatation. He also held C-level positions in Compliance in Islamic Investment Banking, with strong background of Capital Market regulations. Currently, Maged is the Director of Bridge Capital Limited an FSA authorised and regulated Shariah compliant corporate finance firm.

banks to focus on their marketing strategy.

Marketing goals and plans should address matters such as product and service price, distribution, communication and the process of developing new products. The goals of Islamic banks within the marketing sector are to gain the interest of Muslims and non-Muslims within conventional banking, create competitive products and services and expand the share of existing customers.

Shelina Janmohamed expresses her views on the importance of keeping up-to-date with the target audience.

She says her company focuses on Muslim consumers and their first job is to understand everything about them such as their driver, their attitudes, the role religion plays in their lives, the most effective brand strategies and how brands best deliver. By conducting qualitative and quantitative research as well as an extensive literature review, brands can really get the consumers point of view and respond to their needs. She says that brands need to be responsive both verbal acknowledgement as well as demonstrable action.

Consumers will grow to love the brand and see them as a trusted friend.

She continues saying “Brands are fortunate today to have multiple channels to create such a dialogue. Social media is very powerful, but must be used with caution and wisdom. Research can garner useful and tailored insights into burgeoning trends. And employees who come into contact with staff

Figure 2: The development of Islamic financial services over the years 1970s

1980s

1990s

2000s

Institutions: - Commercial Islamic banks

Institutions: - Commercial Islamic banks - Takaful - Islamic investment companies

Institutions: - Commercial Islamic banks - Takaful - Islamic investment companies - Asset management companies - Brokers/Dealers

Institutions: - Commercial Islamic banks - Takaful - Islamic investment companies - Islamic investment banks - Asset management companies - E-commerce - Brokers/Dealers

Products: - Commercial Islamic banking products Area: - Gulf/Middle East

Products: - Commercial Islamic banking products - Takaful Area: - Gulf/Middle East - Asia Pacific

Products: - Commercial Islamic products - Mutual Funds/Unit trust - Islamic bonds - Shariah-compliant stocks - Islamic stock broking Area: - Gulf/Middle East - Asia Pacific

Source: Islamic capital market face finding report 34 Global Islamic Finance

November 2011

Products: - Commercial Islamic products - Mutual Funds/Unit trust - Islamic bonds - Shariah-compliant stocks - Islamic stock broking Area: - Gulf/Middle East - Asia Pacific - Europe/America - Global Offshore Market

Trade

Finance

services A business can grow only as much as its horizon allows.

www.otfonline.co.uk

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Islamic Banking

are an excellent resource for interacting with and understanding the cutting edge of consumer desire amongst the target audience.”

The main goals for Islamic banks when focusing on the Marketing aspects is to expand the share of existing customers, gain the attention of Muslims and non-Muslims within conventional banking and having the ability and resources to produce competitive products and services. Franchise value is another important aspect it determines the strength of a banks market with a geographical market or business niche. A strong franchise value gives banks the opportunity to generate and sustain recurring earnings, resulting in economic value which could improve the rick protections in the particular market.

The consumer’s perspective Gaining customer feedback and working with your customers to improve your institution is very important. When thinking about the relation of the potential customers and your institution it is important to consider who the target audience is? What do they want? For example the use of automated services, personal services or a good value for money on their products and services.

Lastly what does the bank or institutions

want to achieve, which could be a regulatory compliance or being a profitable bank.

Maged Ezzeldin the executive director of Bridge Capital Limited expresses his views about the importance of education, being the first step to establishing an Islamic bank.

With over 15 years experience in the services industry, focusing on Islamic banking and finance, He says “working according to Islamic Shariah is similar to socially responsible or ethical way of running a business”.

He outlines the rules applying to Shariahcompliant companies within the banking and financial services sectors, shown in figure 1.

The institutions image is an important aspect because it gives the institution the chance to show the public how they are different from their competitors. The products and services available to the customers help and determine what the public think about the particular institution. The customer’s experiences also determine what the public think and confirm that image is very important. When considering product strategy the customers must be able to link a specify image with a specific product or service, since customers do purchase products and serv-

Figure 3: Six secrets pyramid: indispensible management human relations practices of highly effective bosses

ices to fulfill there needs and appreciate the benefits. Some of the key benefits that customer expect are a good value for money, novelty, availability of products and services and easy to use or access.

Banks must have a planned strategy, established policies and a constant monitoring of prices and cost when providing products.

The seller can determine what the price of the products will be but it must be fair and not oppressive. Another important aspect that customers have complained about is the charge put on the customers when borrowing. They have complained that financing with Islamic banks are more expensive then loans given from conventional banks. This is a problems that will not help Islamic finance compete with conventional.

There are five points to consider when marketing within Islamic finance, which is the product, the prices, promotion, the location and the public. When establishing an Islamic bank there are 4 main points to apply, which are to offer new products in a rapidly growing market, develop credibility and spread awareness of products, educate the staff and keep up dated with the customers demands and strong infrastructure for operating smoothly.

Flexing to different people styles Advanced Rapport-Building Maintaining Proper Boundaries

Criticising Skilfully

Building judgment, perspective, diplomacy, and tact Expanding Self-Awareness

Practising Empathy

Following Golden Rule Principles

Basic Foundation Skills Source: 6 Secrets of Highly Effective Bosses by Stephen Kohn and Vincent O’Connell

Taking the Brand to a new height It is important for brands to keep up to date with their target audience, in order to stand out from the crowd. People make the mistake of thinking that branding is all about advertising but it is not, branding is about the people because they are the only part of the business that can produce an advantage over the competitors in a constantly developing world. To achieve this, the organisation must educate their staff in understanding the roles involved when launching the brand. Certain aspects can bring the brand to life such as brand personality, values and inserting the brand within major corporate procedures. To be the best, brands must focus not just on the logo and marketing aspects but also about being a valuable and honest brand

Figure 4: Islamic model of leadership Societal characteristics

Personalism

Idealism

Culture Weak shared beliefs Great expectation Deeply and widely shared beliefs

State of society

Type of leaders

Empathy and indifference

Ordinary person

Caliphal model

Lack of institutionalism

Content and positive involvement

Great person

Prophetic model

Institutionalism

Source: Islamic Perspectives on Management and Organization by Abbas J. Ali 36 Global Islamic Finance

November 2011

Leadership model

Outcome

Islamic Banking that is consistent in values and custom internally and externally. The strongest brands have their own value system which gives the brand the advantage of self regulation and balance. The brands can also compare themselves to the competitor’s offers, creating customer loyalty enabling the brand to take more control over their promotions and distribution techniques. Brand loyalty along with a strong brand value could result in introducing protection against competitive brands. The four key points that banks should focus is guidance, values, behaviour and culture. Brand management is also important to those working in the marketing side because it is a way of communicating complex message to the public.

Maged Ezzeldin gives advice to those wanting to keep up-to-date with their target audience. He says that the continuous use of the mystery shopper method can be very useful and minimise the customer complaints. He continues saying “a research and development department that screens the world markets and choose the best practices to introduce to the local client base is essential.” Economic performance is not the only important thing when creating a strong brand but also attracting and building a relationship with the customer and having a memorable visual identity that is easy to recognise and consistent with strong advertising slogans.

Maged Ezzeldin also mentions the idea of think tanks which will include bank employees, local university professors and international experts developing solutions. He says that Islamic banks should all have a team in the research and development department focusing on businesses asking for advice to developing new products and services.

He ends by saying “finally, market research is important to find out audience requirements, for example, even if the Islamic bank doesn’t have an Insurance subsidiary, if the bank’s business or individual clients require such service, the bank could be an agent for a local or international company providing such services in alliance with such firm.” There are three steps that banks should consider when creating a brand, the first step is to have a strong principles leadership, a clear view of the brand, what it means and a strong guardianship.

Shelina Janmohamed says that “brands are fortunate today to have multiple channels to create such a dialogue. Social media is very powerful, but must be used with caution and wisdom. Research can garner useful and tailored insights into burgeoning trends. And employees who come into contact with staff are an excellent resource for interacting with and understanding the cutting edge of consumer desire amongst the target audience.”

Demand for Islamic banking There is a rapidly growing demand for Islamic finance all around the world. Shelina Janmohamed says that Muslims make up around 1.8 billion of the world population and with this brings traditions and different schools of thought. She continues saying that marketers should not be fearful of the vastly diverse Muslim population, but should embrace it and take the opportunity to tailor offers and communications. The first step for marketers within Islamic banking is to identify the Shariah values that relate most with the Muslim consumer. Shelina Janmohamed ends by saying “The key is to remember that whilst Muslims around the world share common values, the conversations that brands engage in with them must be through the language and sensitivities of their local cultures and contexts.”

Shelina Janmohamed focuses on the Muslim consumer, this article will also explore the views of the non-Muslim consumer. Do nonMuslim consumers know the difference between Islamic and conventional banking and finance? One of the reasons Muslims take part in Islamic banking and finance is because they may believe that

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seconds interview…

Muhammad Usman Baig,

Assistant Vice President, Key Accounts Manager, Mashreq Bank, Qatar

What sector within Islamic finance do you believe is most successful and why?

In general, Islamic finance is ideal for traders and manufacturers.

The most famous and customer friendly product is Murabaha finance which smoothly fulfills customer’s working capital requirements.

The reason is that in trading and manufacturing, customer’s deal with raw materials and commodities which fulfills the basis requirement of Islamic finance about delivery of goods with clear transfer of related risk and rewards to the other party.

The Islamic finance industry is trying to be innovative for the services sector but due to shariah issues, this sector is still untouched (in majority) so leaving manufacturing and trading to take the most of it.

How high do you think the current demand for Shariah compliant investments are?

Shariah compliant investment’s demand is very high. Shariah compliant Funds/ treasury and equity products provide good opportunities to rich businessmen/ investors who don’t want to deal with the interest based/ speculative investment options.

Especially after the recent global financial crises, investors are more convinced that current conventional banking/ investment systems promote speculation to forcefully increase the intrinsic value of the underlying instrument, resulting in greed and phony economies/markets.

Lack of speculation, stable intrinsic and market value, lucrative returns and the comfort that money generated through Islamic investments is being utilised in the real economy and are motivating investors to go for it.

Do you believe Islamic finance is made accessible to both Muslims and non-Muslims?

I don’t believe that Islamic finance is being available to non- Muslims as the majority of the Islamic finance industry lies in the developing nations having Muslims as majority. Pakistan saw tremendous growth in Islamic banking over the past ten years but India, neighboring country having Muslim population more than Pakistan, could not see that growth.

It shows that Islamic banking is still attracting customers on religion basis instead of its own features and simultaneously, it is being offered majorly to Muslims only.

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it will enrich their religious needs. Looking at the non-Muslim point of view they may want to take part in Islamic finance and banking because it offers a different service to those that want advances and depositors. They may also see no big difference with Islamic and conventional banking and decide not to change. These views could bring challenges to Islamic banks especially in a conventional dominated market.

Maged Ezzeldin says why education is an important step when establishing an Islamic bank in an area that is not familiar with Islamic finance. He says that the pioneering institution will have a major job when educating the local individuals and businesses within societies that have no idea or misleading ideas about Islamic banking and finance.

He continues saying “Islamic banks penetrating new markets should start from day one a plan to educate the local society through sponsored seminars, lectures by bank employees or professional speakers, the bank should also extend free introductory training to the local community about the industry and compare and contrast with the conventional one.” Islamic banking could be viewed as the alternative to conventional banking and so, needs to be innovative with their products and services. If Islamic banks consider this, there is an opportunity to sustain the competitive advantage over the conventional banks.

Mage Ezzeldin ends by saying “The last financial institutions meltdown in 2008-2009 should be used as proof that Islamic banking is well positioned and does not gamble like conventional banks.” Islamic finance and banking need to educate their potential

consumers, those that understand Islamic banking and finance have a more positive view. They see the alternative to conventional banking as a fair system that enables depositors to share in the banks profit. The positive side to Islamic banking and conventional competition is that the industries are encouraged to improve customer service which will benefit the consumers. Figure 2 proves that the demand for Islamic finance is growing by showing the development of Islamic financial services.

Situations produce different Leadership Roles and Functions Leadership is essential in any institution, the Islamic banks need structure in order to run smoothly. The importance does not only come from organisational skills but also being able to motivate your staff, the strength to take responsibility, being able to confront people when needed and being able to predict the future goals and offer a strategy to achieve the goals. There are 6 vital points that must be considered to become a very effective boss, they are increasing self awareness, sustain boundaries, criticising skilfully, adapting to different people styles of working, practising empathy and following certain principles. Figure 3 shows the vital points of leadership.

The golden rule principles mentioned in Figure 3 includes different ways of treating your staff. It is important to treat your staff with respect, be fair with everyone and show honesty in what is said and in actions. The person in charge should also adapt to different people and embrace the diversity within the working place. Treating the staff with respect and being fair can bring results such as giving the staff members the confidence to solve work problems using skills such as

creativity, imagination and ingenuity. Putting your staff first does have a positive outcome and takes some of the pressure of satisfying the high demanding customers. There is a long list of traits and skills for an Islamic leader such as being knowledgeable, courageous, keeping promises, humble, honesty, forgiving, flexibility, wisdom, following up on work and recognising achievers. Those are just some of the qualities leaders should have within the Islamic finance industry.

Important points are also mentioned in the Islamic work ethic such as wealth must be earned, transparency, quality of work and generosity. Staff will work if they are committed to the goals of the institution they are working for. The staff will also commit if the job is satisfying and under suitable working conditions.

A common phrase ‘treating others the way you would like to be treated’ should be considered within managerial practice because although it is said regularly it could be overlooked within the working place. The leadership role entitles the person to a level of authority and is based on a formal position within an organisation or institution. The role gives the person the rights to make important decisions, to take action and to distribute or limit resources. Figure 4 shows the model of leadership.

In order for Islamic banks to become successful in areas such as leadership, marketing and promotion, branding and spreading awareness they need to understand the needs, behaviour and choices of their target consumer. Islamic banks also need to be aware of the competition and be innovative and creative if they wish to get the competitive advantage. gif

References and Further Reading: • • • • • • • • •

Haron, S. & Azmi, W, N, W. (May 2005). Marketing Strategy of Islamic banking: A lesson from Malaysia. Retrieved from http://klbs.com.my/Pdf/Marketing%20Strategy.pdf Vong, J. (Nov 2010). Marketing of Financial Services. The leadership Corporation Australia. Retrieved from http://leadershipcorp.com/2010/11/7/ islamic-banking-introduction Pepinsky, T. (Oct 2010). The Demand for Islamic Banking: Piety, Class and Global Identity. Retrieved from http://belfercenter.ksg.harvard.edu/files/ uploads/mei/conference/pepinsky-islamicbanking.pdf Hunt, R. (Oct 2007). Islamic banking: Core Vendors Fill Growing Demand for Shariah-Compliant Banking. Retrieved from http://sukuk.me/library/ education/islamicbankingreport.pdf The BrandFinance Banking 500 2011. Retrieved from http://brandirectory. com/league_tables/table/banking_500_2011 Brandinstinct. Taking a holistic view on customer experience strategy. Retrieved from http://www.brandinstinct.com/blog/category/articles/ CPI Financial. Islamic Banks-Their Strategies and ratings. Retrieved from http://www.cpifinancial.net/v2/FA.aspx?v=0&aid=247&sec=Islamic%20 Finance O’Connel, V. & Kohn, S. (2005) 6 Secrets of Highly Effective Bosses, Career Press, Inc. Ali, A. (2005) Islamic Perspectives and Management and Organization, Edward Elgar Publishing Limited.

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The Banker (2008). How to run a Bank. Financial Times Tahir, M. & Umar, M. (2008). Marketing Strategy for Islamic Banking Sector in Pakistan. Retrieved from http://btu.se/fou/cuppsats.nsf/all/ca69eb7e5 dcfd5b8c12574800082dade/$file/Islamic%20Banking.pdf Islamic Finance Resource. (2009). Branding an Islamic bank: Absa Islamic Banking. Retrieved from: http://ifresource.com/2009/07/28/brandingan-islamic-bank-absa-islamic-banking/ Bank Indonesia. (2008). Grand Strategy of Islamic Banking Market Development. Retrieved from http://storage.jak-stik.ac.id/ProdukHukum/BankIndonesia/GrandStrategyIslamicBankingMarketDevelopment.pdf?token= 698adc9e81c9f6899e4e6fc95eed5b2fc6bdbeb0|1311674336#PDFP Taylor, J. (2004). Understanding and Supporting Islamic Finance: Product Differentiation and International Standards. Retrieved from: http://www. stanford.edu/~johntayl/taylorspeeches/Understanding%20and%20Supporting%20Islamic%20Finance%20(8%20may%2004).doc Embi, S. & Taib, I. & Husain, A. Marketing of Islamic banking products. Financial Sector Talent Enrichment Programme. Retrieved from: http://www. ibbm.org.my/pdf/marketing%20of%20islamic%20banking%20program_ GC.pdf Islamic Capital Market Fact finding report. (2004). Report Of The Islamic Capital Market Task Force Of The International Organization Of Securities Commissions. Retrieved from: http://www.iasplus.com/resource/ioscoislamiccapitalmarkets.pdf

Market Review

Pakistan to Focus Islamic Finance

Islamic banking will help draw the funds of rural customers, a less sophisticated client base who also traditionally shun conventional banks due to concerns over interest which is forbidden under Islam, said Saleem Ullah, director of the Islamic banking department at the State Bank.

“Islamic banking, primarily being a faith-driven industry, has significant potential in Pakistan as the concept directly appeals to the religiously sensitive segment of the society,” Ullah said. “The share of the industry in the banking system has risen to over 7 percent from just 0.5 percent in 2002.”

Pakistan’s plan is to raise that figure to 12 percent from 7 percent currently by 2015.

Islamic finance growth has faced challenges due to the worsening geopolitical and security situation in Pakistan.

in Rural Areas

Source: GlobalIslamicFinanceMagazine.com

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Pakistan is hoping to nearly double Islamic banking in the South Asian state by 2015, focusing on poor, conservative villages to drive growth and has ordered Islamic lenders to open 20 percent of all new branches in rural areas.

The prospect for growth is already attracting interest from both the conventional banks in Pakistan and foreign institutions, primarily out of the Gulf region

pates that 150 new branches will open by the end of the year. Islamic banking currently accounts for 497 billion rupees ($5.74 billion), or 7.3 percent of the country’s overall banking system.

But with a population of around 180 million Muslims, the small South Asian nation is still considered as one of the hottest growth areas for the industry.

“Historically, the poor and oppressed in a society are more inclined to follow the norms of their religion than the affluent,” said Muddassir Siddiqui, an Islamic scholar and partner at law firm SNR Denton in Dubai.

Pakistan has five fully-fledged Shariah-compliant banks and twelve conventional banks with Islamic operations, creating a network of 800 branches in Pakistan. Ullah antici-

The combination of aggressive advertising and more Islamic branches in rural areas should drive the industry, Zahid Mansoor, treasurer at DIB Pakistan, a unit of Dubai

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Islamic Bank, said.m“The new regulatory requirements are a good first step by the government to reaching those in rural areas, where there is little trust for banks and people prefer to keep money under their pillows,” he said.

“If you create awareness in the minds of these people, there is significant potential to take Islamic finance beyond a niche market and make it the main choice for banking.”

DIB Pakistan, which currently has 59 branches throughout the country, should have 80 branches by the end of the year, Mansoor said.

The prospect for growth is already attracting interest from both the conventional banks in Pakistan and foreign institutions, primarily out of the Gulf region.

Both Dubai Islamic Bank and Bahrain’s Al Baraka Bank have subsidiaries in Pakistan and Standard Chartered Saadiq, the Islamic arm of UK-based Standard Chartered, also launched operations in the country.

“We currently have 100 branches in Pakistan and consider it to be a growth area for us,” said Adnan Ahmed Yousif, chief executive of Al Baraka Bank. “At our bank, we are looking to get to 200 branches over time.

The country definitely has a lot of potential within Islamic finance.” gif

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We believe that the World deserves a better future

Welcome to a sustainable and ethical banking Era Islamic Finance Services

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Islamic Finance

HYDROCARBON RESOURCES AND ISLAMIC LAW Author: Nima Mersardi Tabari, PhD Candidate, University of London

Abstract: Islamic law incorporates general principles governing the economic behavior of the Islamic society and specific instruments regulating classic commercial transactions.

Adherence to Islam is the common characteristic of Persian Gulf oil and gas producers and their legal regimes to different extents reflect this common characteristic. This article addresses the Islamic law of natural resources and the legal frameworks of Islamic finance methods used in upstream projects.

Keywords: Islamic Law, Hydrocarbon Resources, Shariah Compliance, Middle East 42 Global Islamic Finance

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Islamic Finance The future of peace and prosperity of our world is heavily reliant on our ability to find suitable answers to the problem of energy and hydrocarbon resources, which remain an integral part of any feasible solution. The Persian Gulf region with its uniquely large hydrocarbon reserves, low production costs, established infrastructure, geographical proximity to major markets, access to the international waterways and experienced local work force is still the most important single geographical region capable of a suitable response to our energy demands.

This creates an exceptional opportunity for the region’s major producers (Saudi Arabia, Iran, Kuwait, Qatar, Iraq and United Arab Emirates) to capitalise on their historical importance in the international hydrocarbon markets. To achieve this goal, they have adopted different policies and solutions to foreign direct investment in their hydrocarbon resources. The Persian Gulf countries nevertheless share a common historical and cultural perspective, which has been shaped by their shared adherence and contribution to Islam and Islamic civilisation.

Today, the legal regimes and business practices of the Middle Eastern hydrocarbon producers reflect this common historical and ideological foundation. Thus, it is of paramount importance to International Hydrocarbon Companies (IHCs) and their lawyers to understand the impact of Islamic law on the investment environment of the region, in general, and its hydrocarbon industry, in particular. Islamic law or Shariah purports to govern all aspects of the private and public life of the believers, dividing all human actions into objectively good and inherently bad. Its all- embracing character is the constant narrative of Islam as a religion and a civilisation.

On the other hand, the courts of non-Muslim countries, to say the least if only to avoid religious controversy, are reluctant to consider Islamic laws in deciding on transnational disputes. Even in the realm of arbitration and alternative dispute resolution, the tribunals in Sheikh Abu Dhabi v Petroleum Development Ltd, Ruler of Qatar v International Marine Oil Company Ltd and Aramco v Government of Saudi Arabia had refused to apply “Islamic law” as they did not consider it to contain a consistent body of legal principles applicable to modern commercial dealings. The common view on applicability of Islamic law however is changing rapidly. The growing appeal of arbitration and other modes of alternative dispute resolution alongside the growing scholarship and modern understanding of Islamic law and the international success of the Islamic finance industry provide new possibilities for application of Islamic law in solving commercial and investment disputes.

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ploration and extraction of gold, silver, iron and copper were: • • • • • • •

Nima Mersadi Tabari is a PhD in Law candidate at the University of London.

He holds an LLM with distinction in International Commercial Law and is a graduate member of the Energy Institute (GradEI). He moved to the United Kingdom after working for 6 years on international commercial law, oil and gas law, international investment law and Islamic finance in Iran.

Hydrocarbon Resources under Islamic Law Ownership In Shariah, ownership or Melk is defined as the right to benefit, dispose and use Mal. Mal or property refers to anything that the concept of ownership extends to. This would include the object (E’in) and its benefit (Naf’e).

Property should have monetary value and its exchange should be customary. If property is in possession and its benefit is permitted then it can be subject of a valid transaction.

However, if it is not in possession, or is nondeterminable, there cannot be a valid transaction.

Hydrocarbon resources before discovery and actual possession cannot be subject to valid transactions. Moreover, minerals in general are “public property” held on trust by the Islamic State for the benefit of the society of Muslims. As such, Shariah is in sync with the internationally predominant system of mineral rights, which rests the ownership in the sovereign.

Exploitation Under Shariah, the Islamic state may grant concessions for exploitation (Iqta al-Isteglal) and concessions for possession (Iqta alTamlik) of minerals and the Prophet himself granted mining concession in the early days of Islam. These concessions granted for ex-

limited geographically to specific boundaries in ownerless or publically owned land, granted exclusive rights, for specific initial time limits, renewable after the conclusion of the initial term, and provided for; cancelation rights if the work obligation was not fulfilled, right to assign, payment of royalties in cash or in kind.

Iqta al-Tamlik is not relevant to scope of this article and the unique nature of oil and gas resources. Iqta al-Isteglal however, is the forefather of Shariah compliant hydrocarbon concessions. Iqta al-Isteglal is an exclusive exploration and extraction license. It offers a right to benefit from the finds and gives permission to conduct all necessary operations in the restricted area. This however, does not offer ownership of the resources found but a proprietary right to the benefits accrued.

In other words Melk in the E’in (the reservoir itself) is not on the table but the Melk in the Naf’e (benefit) is granted. Thus, the holder of such a concession would acquire ownership rights after extraction and at the wellheads to the extracted oil or gas and not what remains under the ground.

Islamic Finance and Oil and Gas Contracts Traditionally the financing of hydrocarbon projects in the region has been a matter for the National Hydrocarbon Companies (NHCs) and major IHCs. Thus, the deep pockets of the parties involved had always been sufficient to acquire funds and put up capital for such projects.

As such, the relevance of Islamic finance is more because of the need for products in the Shariah-compliant investment markets than a need for unconventional methods of provision of credit for hydrocarbon projects.Prohibition of Riba in Islamic finance effectively means that under Shariah, loans are charitable agreements and any loan made in order to make profit is considered to involve Riba and thus is prohibited. Prohibition of Gharar in Islamic finance means that a transaction involving an unacceptable level of uncertainty would not be valid.

As a result of these two general prohibitions Shariah compliant finance would not engage in many of the conventional practices through standard methods. Islamic finance uses an altogether different paradigm of financing, namely asset based financing and profit-loss sharing agreements, and employs the well-defined structure of nominate contracts in Islamic law.

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The financing methods offered by Islamic finance, relying on defined nominate contracts, tend to share risks between partners in development of projects and aspire to encourage entrepreneurship and trade in productive assets. So far the Exploration and Production (E&P) activities worldwide and in the region have predominantly been funded by conventional debt, equity and capital markets financing methods. However, hydrocarbon assets provide an ideal opportunity for Shariah-compliant financing. E&P operations in principle do not run afoul of the rules against prohibited economic activities; they require long-term commitment and are well suited to some degree of investor share in risk and ownership.

Moreover, as the center of gravity of capital markets shift towards east and south and Muslim investors’ financial clout grows, the demand for Shariah-compliant investment opportunities would also increase. Thus, it is expected that the region will experience a rise in Shariah-compliant funding for E&P projects.

an interest may be charged on debts in compliance with Shariah if its value is pegged to the purchase power of the debt at the time of maturity as defined by a commodity index thus in effect applying a “time value for money” principle to Islamic finance. However, according to Shari’ah a seller may charge a purchaser the cost of merchandise plus an added value. The profit accrued from such a Bai contract entered to by the free will of the parties is Halal in absent of Ghish or Gharar.

“Those who devour usury will not stand except as stand one whom the Evil one by his touch Hath driven to madness. That is because they say: “Trade is like usury,” but Allah hath permitted trade and forbidden usury. Those who after receiving direction from their Lord, desist, shall be pardoned for the past; their case is for Allah (to judge); but those who repeat (The offence) are companions of the Fire: They will abide therein (for ever).” Qur’an 2:275

Bai The simplest nominate contract, which is used as a starting point on many other instruments, is Bai (sale). It follows from the general prohibitions on Gharar and Riba, discussed above, that a sale contract to be valid under Shari’ah must be instant and absolute.

Thus, a sale attributed to a future date or a sale conditional on a future event is void.

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The Mabi’y (subject of sale) must be a property of value. For the purpose of Bai this is defined as a tangible asset, which is an onerous definition for the utilisation of Bai in Islamic finance. Thus under the doctrine of Masalaha al-Mursalah the majority of contemporary jurists have ruled that where tangible assets and monetary obligations are combined, for example in sale of a company, if the tangible assets constitute a significant part of the subject matter of the sale then the price is negotiable; if however monetary obligations constitute the significant part then any discounting or pricing of those obligations would result in Riba.

Murabaha Murabaha, is a variation of Bai which is used in international trade as the main part of a hybrid instrument along with a Bai be Thaman Ajil (sale with deferred payment), or simply Bai Mua’jjal (deferred sale), more than any other method of Islamic finance. Arguably more than 80% of the Islamic finance activity is in trade financing and on the basis of Murabaha.

The Mabi’y should be in existence, in the ownership of the seller and in his/her constructive or actual possession at the time of sale. It should not be forbidden in Islamic law, for example: selling or buying pork is not permissible. The Mabi’y must be specifically known and identified to the buyer. The delivery time must be certain and should not depend on a condition or chance. Finally, the Thaman (price) must be certain and determinable. In principle the premise of “time value for money” where conventional loans operate is a no go area for Islamic finance as it would amount to Riba. It can be argued that

In Murabaha, the buyer purchases goods for the price for which it was acquired plus a defined profit. Thus, the distinctive feature of Murabaha is that the seller discloses the actual cost incurred and asks for a set amount of profit, which can be demanded as a lump sum or as a percentage of the cost. For trade finance purposes, the borrower approaches an Islamic lender or investor, instructing it to purchase a certain item at a defined price and offers to buy it back at a marked up price. The lender buys the item and then sells it to the borrower at a marked-up price.

Very rarely, Islamic financial institutions use

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Moreover, as the center of gravity of capital markets shift towards east and south and Muslim investors’ financial clout grows, the demand for Shariah-compliant investment opportunities would also increase. Thus, it is expected that the region will experience a rise in Shariah-compliant funding for E&P projects

a simple Murabaha transaction, as cost plus profit sale, with the price paid by the borrower immediately and in full. In this case no financing is involved and the lender would only act as a Simsar (broker or middle-man).

In Islamic finance Murabaha is usually used for providing trade financing in conjunction with Bai Mua’jjal which as a form of credit sale permitted in Islamic law.

Thus, the borrower would pay the price later and often in fixed instalments and the lender would receive a set margin of profit in return for the initial spot purchase that it had made on the instruction of the borrower. The profit is Halal, as the lender acquires title to assets, even for a very short time, and assumes a risk. The lender thus, is in essence first a buyer in a simple Bai and then a seller under a variation of Bai and in none of the two stages it assumes the role of a conventional creditor.

The profit is usually defined in reference to an interest rate index such as the LIBOR (London Inter-Bank Offered Rate). This method of determining the profit in a Murabaha is a natural outcome of a dual financial system.

The profit obtained is not Riba, as the market value of assets and the interest rate index are indicative of one another. Hence, the similarity of the outcome to the conventional financing method is a predictable result of the two systems operating in the same global market.

Although this form of finance has little direct application in E&P projects, it is nevertheless an attractive option for financing equipment purchases. In practice, the lender would appoint the expert borrower as its agent to get involved in the actual sales process on its behalf. The hydrocarbon company would be responsible for negotiating all of the commercial terms with the seller of equipments, thus avoiding complexities such as the delivery of nonconforming goods.

Ijarah An Ijarah transaction is the Islamic equivalent of a lease and is defined as a bilateral contract allowing for the transfer of the usufruct. Thus, an Ijarah transaction involves the transfer of ownership in Naf’e rather than E’in. To be valid similar conditions to a Bai transaction, albeit with a different terminology, must be satisfied. In an Ijarah agreement: • • • •

the Mujir (lessor) would transfer the usufruct of the property to the Mustajir (lessee), the ownership in the property remains with the lessor, the duration of the lease is determined and certain, the Ujrah (rent) is determined and is

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paid on specific dates, the object should have a use and it cannot be used by the lessee for purposes other than specified in the Ijarah agreement.

As an Islamic finance product, similar to the Murabaha, the lender buys an asset from a third party. But, rather than selling the asset would lease it to the borrower. The borrower in return makes regular rental payments to the lender while the asset is in use. The rent is calculated using a benchmark such as LIBOR. Ijarah can be used for leveraged lease-financing of E&P projects as a substitute for the conventional leverage lease or sale-leaseback products. The Dolphin Gas Project (Qatar/United Arab Emirates) is a prime example of such use of Ijarah in the region.

Salam As discussed above, sale of non-existent objects is forbidden in principle as it would result in Gharar. However, primarily to accommodate agricultural activities the Prophet approved Salam as an exception to the aforementioned general prohibition.

Salam is a sale contract where the purchase price is paid in full against the future delivery of a well-defined object in a specified time. As such, in a Salam contract, the Mabi’y does not have to be in existence at the time of entering into the agreement, and the seller does not need to be in possession. It is most suitable for financing of agriculture or small construction projects.

As an Islamic finance product, Salam can be utilised to provide working capital. The lender pays in full for a defined object in advance for supply on a pre-agreed future date. The lender will receive a discount in return for the advance payment. This is calculated by reference to a benchmark, such as LIBOR. Thus Salam is in effect a Shariah-complaint forward sale, which can be used as a method of providing capital for short-term production increase and/or efficiency improvement projects in operational oil and gas fields.

Istisna Istisna is a sale contract for future delivery of an object, which is going to be manufactured with predetermined specifications and delivered within a specified time frame. By way of analogy, Islamic scholars have reached from the permissibility of Salam to the permissibility of Istisna. Thus, instead of purchasing a nonexistent final product, the buyer is permitted to fund the manufacture, development, assembly, packaging or construction of an object to an agreed specification and in return take delivery on the agreed predetermined completion date.

As an Islamic finance product, the investor pays for the manufacture or construction of the object, often in installments, and in completion will sell or lease it to the manufacturer/borrower. The mark-up constitutes permissible profit under a Bai or Ijarah contract. So far, Istisna has been successfully utilised in financing large downstream projects such as refineries and petrochemical plants. It is however, an attractive financing option for E&P projects and specifically for purchase of deepwater platforms and bespoke drilling equipments.

Musharakah In Shariah, equity participation can take the shape of either Sherkat al-Melk or Sherkat al-Aqd. The former is a partnership based on joint ownership of property and the latter is a partnership based on mutual contract. There are in turn three modes of Sherkat al-Aqd: • • •

Where the partners invest capital into a commercial enterprise. (Sherkat alAmwal) Where the partners jointly undertake to render services and share the fees.

(Sherkat al-Amal) Where the parties share in the profit accrued from spot sale of commodities jointly purchased on deferred prices. (Sherkat al-Wujooh)

Musharakah is a term coined by Islamic finance specialists and is usually referring to a Sherkat al-Amwal or less commonly to a Sherkat al-Amal. It is in essence a partnership between the parties with defined capital contributions to a joint venture. In such a partnership, each party, in addition to providing capital, would have the right to manage the venture. They share in loss, in exact proportion of their capital contribution; and, in profit, according to a predetermined ratio set out in the Musharakah agreement. Musharakah is a loss/ profit sharing arrangement through equity participation between the parties. As such, it can be used as a framework for E&P joint ventures and/or as a method of acquiring top-up capital by IHCs or NHCs from investors.

Mudharabah Mudharabah is a form of partnership where one party (the investor or Rab al-Mal) provides capital and the other (the manager or Mudharib) manages the funds provided.

Profit share is determined according to a ratio specified in the original contract. Unlike Musharakah, where all parties could participate in the management and conduct of business, in Mudharabah the investor cannot interfere in the management. As such, Mudharabah is often referred to as a trust rather than a partnership.

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Ehsan Waquar Ahmad, Shariah Advisor, United Bank Limited, Pakistan What are your thoughts on the future development of Islamic finance products?

Islamic Banking is passing through an evolution phase and it is quite natural that any system evolving undergoes continuous improvement. It is a series of change that follow one after the other. Financial products on the part of institution is not independent, there are factors where the economy, the businesses, the regulator and the norms within the economy play a vital role. If the economy and the regulator stresses on any particular sector, obviously, the banks will develop products to ensure business and compliance with the regulation.

Like in Pakistan, the regulator wants to focus on the agriculture sector. There was development in products that can entertain agriculture business.

Likewise, in the UAE the trends are moving from consumer to SME Banks and now have started developing products to boost SME banking. As far as modes are concern, for agriculture business there are classical products like Salam, Muzaraat, Musaqaat and Mugharasa. But theses classical products will need customisation in order to comply with the regulation and viability for the institutions to do good business.

What are your thoughts on the demand for Shariah compliant investment opportunities?

I think as awareness and confidence are gradually increasing, the general Muslim customers are looking forward towards Shariah compliant opportunities. There is a factor of discomfort for them, regarding Riba. However, the alternatives available are either to nascent in the market and still somewhat controversial. Similarly, for non-Muslim customers, the financial crisis has paved the way for them to do ethical banking but again the nascent market is a barrier.

What Islamic financial instrument do you use the most? In addition, what is it benefits?

Bankers do prefer debt base modes for financing activities. This is something natural. It is human nature that they resist novel products and ways.

However, gradually they have to explore innovation. As stated earlier it is an evolution process that the Islamic product will ride through the product life cycle. Those now commonly used may be cash cows but will gradually turn to dogs and those question marks will move upwards. Trade base products will take off once attractive results are derived. When bankers compare the returns and the risks, they might consider the tradeoff.

What advice would you give to those wanting to invest in Shariah compliant project finance?

I think it is their call to promote these projects.

When there is a public demand, intuition will develop products to entertain their demand. In addition, when these products are frequently used, they undergo improvement that finally leads to maturity and success. In addition, this I suppose is what evolution is.

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Unless the manager somehow fails to implement due diligence in the conduct of his duties; any loss is suffered only by the investor who is the sole provider of all of the capital. However, in event of loss the manager does not receive compensation for his efforts. This, more or less, corresponds with venture capital financing in conventional capital markets as the Rab al-Mal finances a project and the Mudharib only contributes sweat equity by managing the project. Mudharabah can involve multiple investors putting capital in a Mudharabah fund and sharing in the risk and benefit of a number of large projects. As such, it is a desirable method to raise funds for upstream projects from passive investors who do not wish to interfere in the day-to-day operations of an E&P project but would appreciate the possibility of binding the IHC to strict covenants and industry standards of best practice and prudent operation.

A. Sukuk Sukuk are the Shariah-compliant equivalent of conventional bonds.

Sukuk is the plural for sakk. Each sakk or “Islamic bond certificate” represents a proportional ownership in a “subject” which can be tangible assets, a pool of predominantly tangible assets or permissible ventures such as Mudharabah or Musharakah.

The issuer sells the certificates to the investor with a contractual obligation to buy back the certificate at par value at a future date. The investor/holder acquires ownership benefits alongside the risks associated with such ownership. The holder then rents back the subject of the certificate to the issuer in return for predetermined payments on basis of an Ijarah agreement. The ownership of the subject is proportional but undivided and the payments received as rent correspond to the interest payments to bond holders. As such, Sukuk encompass notable characteristics of both shares and bonds. It should however be distinguished from conventional bonds and conventional equities.

It is different from both the former, which represent debt obligations of the issuer, and the latter, which represent ownership interests in the issuer/originator, since: • • • •

a sakk is a certificate of proportional ownership in a specified subject not the issuer itself; the funds raised through the issuance of Sukuk can only be applied to investment in that subject and not for general unspecified purposes; the payments received by the holder of the certificate must be related directly to the subject and the purpose of the investment made; and, the ownership rights are transferred from the issuer to the holder for a fixed period ending with the predetermined maturity date of Sukuk.

As an Islamic finance tool, the overall use of Sukuk is similar to conventional bonds hence the common use of the inadequate term “Islamic bonds”. It is normally combined with other methods of Islamic finance and is in essence a tool to raise money from a wider spectrum of investors rather than an entirely independent method of Shariahcompliant financing. Utilisation of Sukuk is a competitive method of raising funds for E&P projects and has had great success internationally.

Conclusion Adherence to Islam is the common characteristic of the Middle Eastern hydrocarbon producers and their legal regimes and business practices to different extents reflect this common characteristic. As such, painting a reliable picture of the legal regimes governing the exploitation of hydrocarbon resources in the region requires consideration of rules of Shariah with regards to natural resources. Added to this, is the growing role of arbitration and alternative dispute resolution in solving international commercial and investment disputes; which provide the possibility of the utilisation of Shariah as the gov46 Global Islamic Finance

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erning law in E&P related arbitration and alternative dispute resolution proceedings.

Moreover, the accumulation of petrodollars in the hands of the “believers” and the growth of Islamic finance, as a result of the economic resurgence of the Middle East and the rise of political Islam in recent decades, have resulted in the increasing importance of Shariah-compliant methods of project finance. On this basis any investor looking to enter to or grow its presence in the Middle East would be well advised to consider the risks and opportunities created by the resurgence of “Islamic Law”.

In practice however, so far as international investors and IHCs are concerned, Islamic rules deliver remarkably similar outcomes to the conventional and globally accepted business methods and legal regimes. As such, the relatively painless adaptation of Shariah-compliant methods would provide for a lucrative and sustainable presence in this prominent hydrocarbon rich region. gif

References and Further Reading: •

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• • • •

• • • •

• •

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M Ja’fari Langrodi, Maktabhay Hoghoghi dar Hoghogh Islam (Schools of Thought in Islamic Law), (Ganj-e- Danesh , Tehran, 1990)1-12, 202-210.

T Daintith, United Kingdom Oil and Gas Law (Sweet & Maxwell, 1984) 18 A Obied, Ketab al-Amwal (the Book of Property), (Maktab al-Tigariah , Cairo, 1944) 276- 280; and M Bunter, “The Islamic (Sharia) Law and Petroleum Developments in the Countries of North Africa and the Arab World”, (2003) OGEL 1( Ibid and M Ja’fari Langrodi, Maktabhay Hoghoghi dar Hoghogh Islam (Schools of Thought in Islamic Law), (Ganj-e- Danesh , Tehran, 1990)1-12.

See: C Richardson, “Islamic Finance Opportunities in the Oil and Gas Sector: An Introduction to an Emerging Field” (2006) Texas International Law Journal 42, 120-153.

I Warde, Islamic Finance in the Global Economy (Edinburgh University Press, Edinburgh, 2000) 133.

See: T Zaher and M Hasan, ‘A Comparative Literature Survey of Islamic Finance and Banking’ (2001) See: T Zaher and M Hasan, ‘A Comparative Literature Survey of Islamic Finance and Banking’ (2001) Financial Markets, Institutions and Instruments 10 (4) 155-199.

Sahih Bukhari, Volume 3, Book 39, Number 534 Sahih Bukhari, Volume 3, Book 39, Number 537 See: M Usmani, An Introduction to Islamic Finance (BRILL, 2002) 69-83 C Richardson, “Islamic Finance Opportunities in the Oil and Gas Sector: An Introduction to an Emerging Field” (2006) Texas International Law Journal 42, 133 Sahih Bukhari, Volume 3, Book 35, Number 455 Sahih Bukhari, Volume 3, Book 35, Number 44 See: M Usmani, An Introduction to Islamic Finance (BRILL, 2002) 83-93 See: C Richardson, “Islamic Finance Opportunities in the Oil and Gas Sector: An Introduction to an Emerging Field” (2006) Texas International Law Journal 42, 120-153 See: M Usmani, An Introduction to Islamic Finance (Idaratul Ma’arif, Karachi, 1998) 31-92 C Richardson, “Islamic Finance Opportunities in the Oil and Gas Sector: An Introduction to an Emerging Field” (2006) Texas International Law Journal 42, 130 K Hassan and M Lewis, Handbook of Islamic Banking (Edward Elgar Publishing, 2007) 51

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Islamic Finance Norliza Mohammed, Head of Islamic Finance Practice Group/Senior Partner, Abdul Raman Saad & Associates or ‘ARSA Lawyers’, Malaysia

What are your thoughts on the future development of Islamic finance products?

We see that the development of Islamic finance is growing very fast especially in the Asian countries such as Malaysia, Indonesia, Pakistan and Brunei as well as in the Middle East countries. Many Islamic financial institutions have been established by both foreign and local players and expanded their products and services to cover Islamic finance growing market. Islamic finance has gained a significant global exposure and experienced a phenomenal growth in the last three decades.

Despite all those success stories on the development of Islamic finance and its potential growth, we note that the road ahead remains challenging. One main concern is in relation to the development of Islamic financial products. It is no secret that during the 2007 economic crisis, when the Western world was starting to fall apart, the world of Islamic finance, at least at that point in time was not affected. The global financial crisis that has devastated the international banking sector and sent stock markets in turmoil has accelerated the demand for alternative investments like Islamic finance.

Islamic finance products are developed by applying the appropriate Islamic financial contracts to suit the financial needs of the users. Islamic financial institutions have developed a wide range of Islamic financial products using a number of Islamic principles such as profit and loss sharing mechanism, buy and sell arrangement and leasing arrangement.

The range of Islamic financial products has broadened considerably in recent years in responsible to the more diverse and differentiated requirements of participants.

Driven by these market forces, the Islamic financial products have progressed and grown in sophistication, as can be seen from the offering of a wider range of products with various product structures, multiple categories of service providers and a different mix of consumer composition, Islamic finance 48 Global Islamic Finance

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products have evolved from basic consumer or retail product into a full range of product offerings (e.g. retail, corporate, project financing and long term bonds instrument) under various Islamic contracts. The range of Islamic financial products has diversified to include variable rate-based and equitybased mechanisms.

Despite growing demand, the Islamic financial institutions should as far as possible, not to emulate the conventional products or adopting the Islamic dressing to existing conventional products. The industry should move towards creating pure or genuine Islamic financial products which seek to bridge the financial sector with the real sector. The strength as well as the uniqueness of Islamic transactions lies within the profit sharing mechanism, the provisions of the underlying assets in the transactions and commitment to promote the real sector.

Malaysia saw the future of Islamic finance more than three decades ago, whereby the Malaysian Islamic financial system has transformed into a comprehensive Islamic financial landscape. As financial products structured based on Islamic principles is, by nature, different from its conventional counterpart, which requires a dedicated framework, Malaysia has developed a world class legal, regulatory and Shariah framework with strong Government endorsement, the essential financial infrastructure, and an environment which supports conducive product innovation and thought leadership in Islamic finance.

Moving forward, the central bank of Malaysia, Bank Negara Malaysia (“BNM”) is committed towards promoting human capital development. The establishment of the dedicated ancillary institutions such as the Islamic Banking and Finance Institute in Malaysia (IBFIM), the International Centre for Education in Islamic Finance (INCEIF) and the International Shariah Research Academy (ISRA) to focus on the area of training, education and research are aimed to meet this objective. Malaysia would like to see a

higher degree of engagements by the financial institutions in the country to meet the talent needs of the industry. Islamic financial institutions are encouraged to collaborate and engage with educational institutions, with exchange of staff, attachments, and internships. We can see that Islamic finance is clearly going mainstream despite having to face many challenges.

As the outlook for the Islamic financial products is positive, the Islamic financial institutions need to position themselves to escalate the existing growth. A key factor of future growth of the Islamic finance is the availability of new innovative products competitive to conventional products to satisfy the various needs of the investors.

What are your thoughts on the demand for Shariah compliant investment opportunities?

Although Islamic finance is based on financial instruments which do not pay or receive interest, the demand for Shariah compliant investment opportunities is increasing. The global financial crisis may prove to be a blessing in disguise for Shariah compliant investment opportunities, especially in the area of Islamic capital market (“ICM”) as compared to their conventional counterparts due to, in large part, more conservative structuring and the absence of leverage.

ICM refers to market where the financial activities are carried out in ways that do not conflict with the teaching of Islam. In other words, ICM represents an assertion of Islamic law (Shariah) in the capital market transactions where the market should be free from the involvement of prohibited activities such riba (interest), maisir (gambling) and gharar (uncertainty).

Today, ICM is one of the important components in the capital market in Malaysia as it diversifies part of the Islamic banking risks and addresses Islamic investment and liquidity needs. ICM in Malaysia offers a wide range of Shariah compliant investment products and services such as Islamic

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Equity Market, Islamic Structured Products, Shariah compliant derivatives, Islamic bond market and Islamic stock broking. Following the global financial crisis, the interest for Islamic investment products/opportunities from the investors is gaining more popularity than conventional products/investment opportunities as they are perceived to be more ethical and transparent.

contracts are not based on loans concept but are based on sale/purchase (Murabahah), profit/loss sharing (Mudharabah/Musyarakah) or rental/lease (Ijarah) principles.

The class of assets that can be used range from mere tangible properties to include rights and claims or receivables. Most of the underlying assets used are normally in the form of real tangible assets.

the relationship between the Islamic finance institutions and their customers is not the same as the conventional creditor and debtor relationship, but rather one involving the financial risks and rewards. The growing trend and the most common form of Shariah compliant project finance investment opportunity is in the area of Islamic capital market that is the notable Sukuk market.

Since there is a huge market for Islamic investment products, the Islamic financial institutions need to continuously introduce new Islamic investment products to cater for the needs and various risk appetite of the investors. Naturally, the investors are looking for a combination of capital protection with some degree of yield enhancement over a period of time, and risk control features is one of the elements emphasised in the ICM.

For example in Sukuk issuance exercise, in a commercial sense it refers to instruments used in Islamic finance to allow one party to raise capital or funds in the capital market with the issuance of Sukuk papers that list the rights and obligations of all parties involved in a transaction. Sukuk are not bonds in the conventional sense.

The Islamic finance Sukuk structure used in the project finance especially in the Middle East typically is the Ijarah structure. For some like Asian countries, the Musyarakah is also quite common for a project finance transaction.

Islamic bonds (Sukuk) are a popular investment choice, as are shariah compliant money-market funds, but market participants say that the availability of these products continue to fall short of retail demand. Muslim retail investors are facing a real dilemma because there simply are not enough shariah compliant assets to invest.

A wide range of Shariah compliant investment opportunities enable the financial institutions to tap not only conventional investors but also Islamic investors, hence allow diversification of the investors based. With growing appreciation for Shariah compliant investment products, and also the rapid growth of wealth among the Muslim population, the Islamic financial institutions should position themselves to prepare for continued growth in their products innovation.

What Islamic financial instrument do you use the most? In addition, what is its benefit?

What type of Islamic financial instruments to be used in any Islamic financial transactions will all depend on the class of assets that may be used for the purpose of the transaction. As most are aware, the Islamic financial

In the case of Sukuk, what is important is that pursuant to the underlying Sukuk transaction, the holders of the Sukuk derived or gained ownership of the underlying assets to justify the returns which are not fixed but are tied to actual returns generated by the assets. Hence in the case of Sukuk Musyarakah, the issuer and investors participate in an identified business venture at an agreed capital contribution. Returns to the holders are in fact income or profit derived/earned from the business venture in a manner specified in the Sukuk contracts.

Malaysia’s status as the global centre for Sukuk has also made the country a key source of innovative Shariah compliant products producer. In the contact of trading the principles of Murabahah can be appealing as the price of the equipment/goods is fixed upfront the customer is not affected by the price fluctuations, and for project financing, the profit sharing philosophy of Ijarah is more attractive as it has a universal attractiveness.

What advice would you give to those wanting to invest in Shariah-compliant project finance?

First and foremost, the prospective investors need to understand that in any Shariah compliant project finance deal/structure,

The most common issue in relation to the Islamic project finance is the risks associated with the relevant assets. As such, it is important for the investors to understand the risks associated with ownership of the relevant assets for every underlying structure adopted in relation to the Sukuk contracts. It is important for the investors to be aware of what kind of risk control measures taken in structuring the project finance transaction.

As the legal/beneficial owner of the project assets, Islamic financiers have exposure to third-party liabilities including environmental risk. Other obligations imposed on the Islamic financiers as owners of the project assets include responsibilities relating to insurance and major maintenance of the assets.

Other significant aspects in relation to investment in the Shariah compliant project finance which the potential investors should be aware are in terms of price and tenor. For big or mega projects, due to the nature of the financing, pricing and long tenor are always the main factors which the Islamic financiers are not able to commit and compete with the conventional financiers. Most tenor of the Sukuk market is denominated by short term Sukuk tenor whereas conventional lenders are able to commit to longer tenure in the conventional bonds market. gif

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CHOICE OF LAW

AND ISLAMIC FINANCE, PART I Author: Julio C. Col贸n, University of Texas School of Law

Abstract: The past decade has seen the rapid growth of Islamic finance on both international and domestic levels.

Accompanying that growth is a rise in the number of disputes that implicate Islamic law. This remains true even when the primary law of the contract is that of a common law or civil law country. If judges and lawmakers do not understand the reasoning of Islamic finance professionals in incorporating Shariah law, the result could be precedents and codes that hamper the growth of a multi-trillion dollar industry. Choice of Law and Islamic Finance, part 1 compares the reasoning of the English court in Shamil Bank v. Beximco Pharmaceuticals to the practice of forums specialising in Islamic finance dispute resolution. Part 1 of the article also addresses other perceived difficulties in applying Islamic law in common law and civil law courts.

Keywords: Shariah-compliant, Islamic Law, Syariah, Practices, Regulations

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Shariah as a choice of law for common law courts and arbitrators is not peculiar to the current era of Islamic finance. Early cases demonstrate that arbitrators denied that Islamic law was sophisticated enough to utilise in complex commercial disputes. In the case of Petroleum Development (Trucial Coasts) Ltd. v. Sheikh of Abu Dhabi, Lord Asquith acted as an arbitrator in a dispute arising out of a contract executed in Abu Dhabi. He acknowledged that Abu Dhabi’s law, which was based on Islamic law, should be applied a common law country, ranks ninth in the world in holdings of Shariah-compliant assets. In the United States, there are approximately nineteen providers of Islamic financial products, including banks, mortgage providers, and investment brokers.

In common law and civil law countries, the Islamic banking phenomenon experiences growth based on two factors. The first is that the sector is profitable for investors. It represents a viable source of growth with an increasingly positive repu-tation for responsible management. The second factor fueling growth of Shariah-compliant finance is increased demand stimulated by rising numbers of Muslims in common law and civil law countries.

The demand for Shariah-compliant services within a non-Shariah legal system creates potential conflict of law issues. Specifically, a conflict of law arises where the choice of some form of Islamic law is incorporated into the terms of the contract.

Financial experts estimate the current worth of Shariah-compliant assets at almost one trillion U.S. dollars globally. As measured by these assets, the global market for Islamic financial services has grown ten percent per year since the mid-1990s. The potential market for Islamic financial products could be as high as four trillion U.S. dollars.

The bulk of these assets are held by commercial banks, while investment banks, Sukuk, equity funds, and the assets of takaful account for twenty-five percent of Shariahcompliant assets. Strikingly, business activities in the Islamic financial sector are not con-fined to countries whose legal systems are Shariah-based. The United Kingdom,

Ambiguity may lie in the terms used within the contract to describe the various types of Shariah-compliant transactions. European and U.S. courts succeed at varying degrees in interpreting such clauses. Contract language affects performance and expectations for parties to financial transactions.

Judges evaluating cases subject to Shariah may even have to overcome constitutionally imposed limitations on their ability to interpret laws derived from religious sources.

The practices to date of Islamic finance in alternative dispute resolution should serve as a guide for common law and civil law courts in interpreting the method in which Shariah should be applied to the contract alongside national laws. This note seeks to prove that whenever a reference to Islamic law is made within a contract, it is with the intent that Islamic legal principles be applied in the contract’s interpretation when deciding disputes arising from that contract. Choice of law is the element most commonly added to a contract often directly to the arbitration clause.

The inclusion of choice of law clauses that

reference Islamic law and a national system is the industry practice in Islamic finance.

Local choice of law doctrine and policy concerns should not prevent courts or arbitral tribunals from Recognising the validity of a clause that references both Islamic law and a national system.

Shariah as a Choice of Law “A Purely Discretional Form of Justice”: Islamic Law in Western Tribunals Shariah as a choice of law for common law courts and arbitrators is not peculiar to the current era of Islamic finance. Early cases demonstrate that arbitrators denied that Islamic law was sophisticated enough to utilise in complex commercial disputes. In the case of Petroleum Development (Trucial Coasts) Ltd. v. Sheikh of Abu Dhabi, Lord Asquith acted as an arbitrator in a dispute arising out of a contract executed in Abu Dhabi. He acknowledged that Abu Dhabi’s law, which was based on Islamic law, should be applied.

He subsequently refused to apply the law because, according to him, “it would be fanciful to suggest that in this very primitive region there is any settled body of legal principles applica-ble to the construction of modern commercial instruments.”

He described the ruler of Abu Dhabi as an absolute monarch who administers a “purely discretionary form of justice with some assistance from the Koran.” After analysing the choice of law issue, the arbitrator relied instead on principles of English law.

The arbitrator in Ruler of Qatar v. International Marine Oil Co. Ltd. arrived at the same conclusion as Lord Asquith in Trucial Coast.

The arbitrator in Ruler of Qatar made a clear statement as to his belief concerning the inadequacy of Is-lamic law.

After acknowledging that Islamic law was the proper law to apply, he stated that it does not “contain any prin-ciples which would be sufficient to interpret this particular contract.”

The arbitrators’ opinions in both cases do not at-tempt to give any principle through 2011 November Global Islamic Finance

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which they arrive at the decision not to apply Islamic law, other than very general statements about their disdain for it.

whether or not said system be based on Shariah law; or 3) subject to a combined system that pairs a national legal system with Islamic principles.

Had the arbitrators attempted to answer the question before them, they would have found that there was expansive litera-ture on Islamic contract law. Recently, a British court was asked to decide whether Shariah is a legitimate choice of law in the United Kingdom. In Shamil Bank of Bahrain EC v.

Beximco Pharmaceuticals Ltd and others, the Court of Appeals was asked to consider whether a particular contract was invalid under Shariah law.

In that case, Beximco Pharmaceuticals entered into a murabaha agreement with Shamil Bank of Bahrain, a financial institution holding itself out to be a bank that conducts its business within the limits of Shariah law. The agreement was signed by the parties and resulted in the acquisition of nearly forty-seven million dollars in assets. The agreement contained a choice of law clause that read, “subject to the principles of the Glorious Shariah, this agreement shall be governed by and construed in accordance with the laws of England.”

When Beximco failed to make payments under the agreement, Shamil Bank claimed the amount outstanding under the agreement.

Beximco claimed that the agreement was invalid because it contained a hidden form of riba. The Appellate Court acknowledged that if the phrase “subject to the principles of the Glorious Shariah” was a valid choice of law clause, then Beximco would succeed under the agreement.

The appellate court found this statement to be invalid, however, because the 1980 Rome Convention on the Law Applicable to Contractual Obligations (Rome Convention) allows only one system of law to govern a contract and also requires that the chosen law be that of a particular country.

According to the court, if the intention of the parties was to incorpo-rate Shariah law into the contract, then they did not do so effectively; instead, they would have had to identify a foreign law or code and, more specifically, to which part of the contract the clause applied. The appellate court, in strict applica-tion of this principle, stated, “it is plainly insufficient for the defendants to contend that the basic rules of the Shariah applicable in this case are not controversial.

Such ‘basic rules’ are neither referred to nor identified.”

The Need for Combined-Law Contracts Shamil Bank has been positively accepted by commentators in its two main propositions concerning Shariah as a choice of law: 52 Global Islamic Finance

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The third option of a combined system is different than incorporating specific principles of Islamic law into the contract in a manner that specifically identifies to what extent each principle applies. A combined system of a state legal system and general principles of Shariah would be better characterised as cumulative, meaning that the state system of law is subject to Shariah.

Julio C. Colón, holds a Juris Doctorate from the University of Texas School of Law. His research focuses on utilising existing legal frameworks to produce innovative Shariah-compliant financial products for the U.S. market. He has also clerked at the Inter-American Court of Human Rights and advocates for responsible corporate growth based on the model of community partnership.

1) the Rome Convention requires that the law of a contract be that of a country; and 2) there can be only one law which governs a contract.

This conclusion would likely be the same for other common law jurisdictions. European civil law jurisdictions will also probably require that the law governing a contract be that of a state. These propositions are not present in arbitration forums: it is possible to allow one system of law to govern a contract and still subject the same agreement to Shariah. The increase in banking transactions correlates with an increase in disputes arising out of these contracts. The result of Shamil Bank is problematic for contracting parties who would like to “mix” laws, as Beximco purported was its intention. Before explaining this issue, perhaps it will be useful to explain other choice of law clause options that are available to contractors. Theoretically, contracting parties to a Shariah-compliant transaction may choose from three options: that the contract is: 1) subject exclusively to Islamic law; 2) subject solely to a state legal system,

Disputes under the contract may be analysed under the state system, and in cases of conflict, Shariah will prevail. Currently, English law is the most popular choice of law for the governing of disputes arising under agreements purporting to adhere to Islamic principles. Some of these contracts contain no references to Islamic law and may even include a “waiver of Shariah defense,” meaning that in case of a dispute the parties agree to waive any argument that the agreement is invalid under Shariah law.

Such stipulations attempt to rectify what has become known in the industry as the “Shariah risk,” a term associated with the risk that one party will fail under its contact obligations and then state the entire agreement is void for being invalid under Islamic law.

This risk exists despite the fact that multinational law firms have created entire divisions dedicated to Shariah-compliant financial transactions.

“However, the current culture of Islamic finance is liberal, with parties beginning with the assumption that a deal is Shariahcompliant, and contracting parties are not necessarily knowledgeable of Islamic law.

Muhammed Al-Jasser, governor of the Saudi Arabian Monetary Agency states:” We have richness in diversity . . . . Everything is permissible unless it is shown to contravene Islamic tenets. Someone has to tell me if and how it contravenes explicitly. In fact, most conventional financial products are fine . . . . Regulators and supervisors are not religious scholars. They are in charge of financial stability and the safety of the institution is para-mount.

The state of choice-of-law in Shariah-compliant finance may be described in four key principles: 1) a combined-law clause will likely be found to be repugnant to the laws of common law and civil law countries; 2) Shariah or Islamic law as a choice of law

Islamic Finance will likely be held to be of ineffective because it does not represent the law of a nation; 3) the law of England is a popular choice of law for contracts involving Islamic financial services; and 4) all deals are permissible unless shown to contravene Islamic principles.

Almost all of these contracts contain an arbitration clause, particularly those involving parties from different national jurisdictions.

Most arbitration in Islamic finance is done using combined-law, meaning under one nation’s laws subject to Shariah law. Considering the outcome and publicity of the Shamil Bank case, this result seems counterintuitive, and in order to facilitate an understanding of the work of the arbitrators, it will be necessary to enter into some discussion about the role Shariah occupies in today’s legal systems.

Shariah in Modern Legal Systems Shariah is the name for “all the laws of Islam including Islam’s whole religious and liturgical, ethical, and jurisprudential systems.” As put by one Saudi scholar speaking at a U.S. university: Broadly defined, the Shariah consists of “everything written by Muslim jurists throughout the centuries” . . . . Narrowly construed, “the Shariah is confined to the undoubted principles of the Qur’an, what is true and valid of the Sunna, and the consensus of the community represented by its scholars and learned men during a certain period and regarding a par-ticular problem, provided there was such a consensus.”

Shariah decisions arrived through consideration of a group of “legal proofs and evidence that . . . will either lead to certain knowledge of a Shariah ruling or at least to a reasonable assumption concerning the same” made by those qualified to make such rulings. The primary sources of proof used to arrive at these rulings are the Qur’an and the Sunnah. Jurists may use these sources to arrive at verdicts by referring to precedential authority in the opinions of the Companions along with scholarly consensus, analogous reasoning, and poli-cy-related considerations such as public interest, precautionary measures, and custom.

Within Shariah law, some laws are immutable while others are interpreted according to the particularities of the situation, including the relative good that a specific decision may bring to the community. This grey area is the province of al-ijtihad, which is the use of legal reasoning to arrive at a correct opinion when there is no clear text on the issue. In a dis-pute arising from a financial transaction, the status of a specific issue will fall within one of the following categories:

• • • • •

obligatory recommended merely permissible ill-advised unlawful.

For purposes of this discussion, the last category is the most important because it is the source of the “Shariah risk” mentioned. The term “unlawful” may be roughly equated, in the mind of the western lawyer, as being “unconstitutional.” In fact, several Muslimmajority countries adopt Shariah as the primary source of legislation.

For example, Saudi Arabia’s Basic Law of the Government states that “the Kingdom of Saudi Arabia is a sovereign Arab Islamic state with Islam as its reli-gion; God’s Book and the Sunnah of His Prophet, God’s prayers and peace be upon him, are its constitution . . . .” Like-wise, Oman does not have an official constitution, but its Basic Law of the Sultanate proclaims that “the religion of the State is Islam and the Islamic Shariah is the basis of legislation.” Other nations incorporate Shariah into their legal systems to varying degrees.

The United Arab Emirates (UAE), Sudan, Yemen, Syria, Egypt, Kuwait, Iraq, Pakistan, Iran, and Qatar regard Shariah as the primary source of law. For example, in the UAE, the passage of the UAE Law of Civil Transactions of 1985 was regarded by some as a veritable “virtual return to the Shariah.”

In other countries, such as Malaysia, Indonesia, Libya, Algeria, and Morocco, Shariah law is highly influential and remains a source of legislation. For example, the Libyan Civil Code states, “In the absence of an applicable legal provision the judge shall decide in accor-dance with the principles of the Islamic Shariah . . . .” Judging from the various levels of incorporation, in the modern legal system Shariah law acts as: • • •

an immutable source of constitutional law; a precedential source of common actions and defenses; and a source of treatise for the interpretation of civil codes.

To understand this statement, one may consider the Nizam, or supplementary Saudi laws. These regulations are regarded as valid only to the extent that they are consistent with Shariah law, although in practice these laws are rarely challenged or overruled. It is because of this broad level of applicability that a combined-law clause is used explicitly in Islamic finance transactions, as well as in practices by both courts of law in Muslimmajority countries and the arbitral tribunals that specialise in Islamic finance ADR.

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Current Practices in Islamic Finance Dispute Resolution The present environment in the law of Shariah-compliant finance is unprecedented in that non-scholars of Shariah are being called upon to interpret Islamic law. Those versed in business and finance laws draft contracts to agree with Shariah principles to the best of their ability. Of course, the realities of life cannot be drafted out of a contract, and disputes do arise.

All of the major players in the Sukuk market are parties to the New York Convention. This list includes Malaysia, Qatar, UAE, and Bahrain. The rules and practices of arbitration centers in these countries and others demonstrate a consistent practice of combinedlaw arbitration. Islamic banks normally retain a specialised board for approval of financial transactions, and this branch may double as an arbitration body. These panels may judge disputes through a mixture of national law and Shariah principles. For ex-ample, the Philippines Monetary Board created the Al-Amanah Islamic Investment Bank of the Philippines (Islamic Bank) on the April of 28th, 1992.

Although the Philippines are the world’s most populous Catholic nation, its legal system reflects a combination of civil law, common law, and Islamic law. The Monetary Board is an organ of the Bangko Sentral ng Pilipinas, or the Philippines Central Bank, and was created under the Constitution of the Philippines.

There is no religious requirement for membership on the bank’s Monetary Board; however, in creating the rules and regulations for the Islamic Bank, the Monetary Board was required to follow the principles of Shariah law. The charter for the Islamic Bank provided for the creation of a board of arbitration with jurisdiction to settle any disputes arising from conflicts between the Islamic Bank and its investors or shareholders.

This regulation provided that members of the Islamic Bank’s Shariah Advisory Council will also act as the Shariah Arbitration Council and will have authority to adjudicate controversies involving less than $100,000.

The Islamic Bank did not have authority to operate except within the authority granted to it by a primarily non-Muslim body, and the Shariah Arbitration Council was bound to act within national limits of due process; however, the Shariah Arbitration Council’s primary function was still to aid in “maintaining the Islamic Bank’s unique Islamic cultures and operating policies that are Shariahcompliant.” In Indonesia, Islamic banking disputes also are decided through a mix of Shariah and civil law. In fact, conflicts that 2011 November Global Islamic Finance

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Islamic Finance

emerged with the rise of Islamic banking have contributed to that country’s legal development in what it categorises as religious and civic law, as well as to the development of the Indonesian commercial arbitration system. Indonesia main-tains a dual system of courts: one for civil matters and one for Shariah matters.

During the initial growth of Islamic banking in Indonesia, there was confusion as to which court would have competence to hear cases related to Islamic finance. Civic courts were generally not academically qualified to judge financial matters pertaining to Shariah law, but the jurisdiction granted to religious courts was limited to hearing cases relating to marriage, probate, wills, and endowments. Religious scholars took the first step to set up a qualified body to hear such disputes, creating an ad hoc tribunal known as “Basyarnas,” or the National Shariah Arbitration Body. While the creation of an official Shariah arbitral tribunal enjoyed positive favor from the people of Indonesia, the Basyarnas system was characterised by poor accessibility due to lack of full-time personnel and permanent, wide-spread infrastructure.

Despite its known deficiencies, the Basyarnas was able to serve the ends for which it was created in that it used “Islamic law . . . as the basic principle” in settling disputes arising from financial disagreements that also invoked the civic laws.

Eventually, the competence of religious courts was increased to hear “any act or business activity which is undertaken in accordance with Islamic principles which consists of Syariah banks, Syariah micro financing institutions, Syariah insurance, Syariah reinsurance, Syariah portfolio management, Syariah bonds and Mediumterm security, Syariah security market, Syariah finance, Syariah pawn broking, Syariah retired fund institutions and Syariah business.”

This new regulation extended the authority of religious courts to non-Muslims, provided that they were involved in a dispute concerning “Islamic economic matters.” In such disputes the religious courts, like the Basyarnas, must rely on both the “material law” related to Islamic financial transactions and Shariah law. It is standard practice for better-established arbitral tribunals to utilise a combined-law approach to hear cases involving Islamic finance. Indeed, acceptance of a mixed choice of law is written into the rules of many of these specialised bodies.

The Kuala Lumpur Regional Centre for Arbitration (KLRCA) houses a specialised department to arbitrate Islamic financial disputes.

The Asian-African Legal Consultative Organisation (AALCO) established KLRCA in 1978 54 Global Islamic Finance

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to facilitate commerce between its 47 member states. AALCO membership includes preeminent nations in Islamic finance, such as the UAE, Bahrain, Qatar, Saudi Arabia, Malaysia, Brunei Darusalam, and emerging economic power Nigeria.

The KLRCA promulgated the Rules for Islamic Banking and Finance Arbitration (KLRCA Rules), a specialised regulation applicable to any “commercial contract, business arrangement or transaction which is based on Shariah principles.” The KLRCA Rules suggest a model arbitration clause, to which they add: “Parties may wish to consider adding : The law applicable to this agreement/ contract shall be that of . . . .” Rule 38 states that “if the arbitration law of the country where the award is made requires that the award be filed or registered by the arbitral tribunal, the tribunal shall comply with this re-quirement within the period of time required by the law.” It is obvious that, as with any modern arbitral tribunal, the KLRCA allows parties to choose the law which shall govern the arbitration.

As a forum specialised in Islamic finance, the KLRCA also provides in its rules that “[t] he arbitral tribunal shall apply Shariah principles and the law designated by the parties as applicable to the substance of the dispute.” This statement explicitly provides for the application of Shariah law in combination with the chosen law of the parties as necessitated by the terms of the contract and facts surrounding the conflict.

However, the KLRCA presupposes that when a Shariah principle is in dispute the arbitrator will not be competent to judge the matter. In such cases where a Shariah principle is in dispute, Rule 33 provides that the arbitrator shall ad-journ the proceedings and refer the issue to either the Shariah Advisory Council of the Central Bank of Malaysia or a Shariah expert agreed upon by the parties. The United Arab Emirates houses three main arbitration centers that routinely hear disputes regarding Islamic financial matters.

Among its institutions are the Dubai International Arbitration Centre (DIAC), the Abu Dhabi Commercial Con-ciliation and Arbitration Centre (ADCCAC), and the International Islamic Centre for Reconciliation and Commercial Arbitration (IICRCA), the last of which is a specialty forum created by the Islamic Development Bank to cater to the Is-lamic finance industry.

The practices of the ADCCAC are ambiguous; however, its charter does provide for a relaxed requirement of professional experience for one who seeks to apply to the “Conciliator’s Panel” if the applicant is a university graduate of “economics, commerce, law or Islamic law ‘Shariah.”’ This may allude

to the center being a friendly forum for the combined-law approach.

The IICRCA will apply the procedural and substantive laws chosen by the parties, and its rules explicitly state that the center will not apply laws which it judges to be “incompatible with the Shariah.” Said rules define Shariah as “the various Islamic schools of thought and the opinions of Fiqh academies and Shariah boards of Islamic financial institutions.” The DIAC does not purport to specialise in Islamic financial dispute reslution, but it is housed within the Jebel Ali Free Zone, and in the same city as the Dubai International Financial Centre, both Islamic banking hubs and renowned freetrade zones. The Dubai International Arbitration Centre’s Rules and Procedures allow parties to choose the law that governs the arbitration, and the center is staffed with legal scholars widely published in the fields of Shariah and Islamic finance.

These characteristics, combined with the center’s status as the region’s busiest arbitration center, imply that the center would interpret a clause stipulating the arbitration be governed under “the laws of so-and-so nation, subject to the principles of the Shariah” as a statement of intent and binding choice of law. At a more domestic level, the Muslim Arbitral Tribunal (MAT) in the United Kingdom provides yet another example of the principle of choice of law in Islamic dispute resolution. Although most known for family law arbitration, the MAT hears a range of issues, including commercial and debt disputes.

According to its procedural rules, the MAT will “[i]n arriving at its decision . . . take into account the Laws of England and Wales and the recognised Schools of Islamic Sacred Law.” The MAT states that its overriding objective is to ensure that a judgment is secured “in accordance with Qur’anic Injunctions and Prophetic Practice.” True to its goals, the MAT’s rules stipulate that an arbitral tribunal must consist of at least one “scholar of Islamic Sacred Law” and one “solicitor or barrister of England and Wales.”

The MAT has had some success in its approach, as indicated by a 15% increase in the use of the MAT by non-Muslims in 2009.

In fact, although the use of Shariah law in commercial arbitration has a mostly negative history, pre-Shamil Bank cases show that nothing prevents a Western tribunal from using a combined-law approach.

In State of Saudi Arabia v. Arabian American Oil Co., the arbitrator subjected the law of Saudi Arabia to the general principles of jurisprudence as he knew them. In that case, Onassis, a Greek transport company, was given a quasi-monopoly from Saudi Arabia

Islamic Finance to transport oil from out of the country. ARAMCO protested, arguing that under its conces-sion agreement it had the right to choose its own method of transporting oil.

The case went to arbitration in Geneva, and the tribunal recognised the applicability of Saudi Arabian law. Despite the clear mandate, the arbitrator decided that the rights of ARAMCO could not be “secured in an unquestionable manner by the law in force in Saudi Arabia... and that Saudi laws must be interpreted or supplemented by the general principles of law, by the custom and practice in the oil business and by notions of pure jurisprudence.” In Sanghi Polyesters Ltd. (India) v. The International Investor KCFC (Kuwait), the parties came into a dispute concerning an istina’a agreement. The parties agreed to arbitrate the dispute at the ICC, and Mr. Samir Saleh, a qualified attorney and scholar of Shariah, was appointed arbitrator.

The contract contained a choice of law clause stipulating that any dispute should be “governed by the Law of England except to the extent it may conflict with Islamic Shariah, which shall prevail.” The entire dispute in the arbitration proceedings was whether the application of Shariah law would serve to in-validate the contract and prevent the defendant from a return of its investment capital. The losing party challenged the judgment in English court, and the judge recognised that there was no issue regarding the law of England and Wales and that the only issue was whether the contract was “invalidated in the manner claimed . . . under Shariah law.” The judge ruled that there had been no serious irregularity or injustice and that the award would stand.

This shows that before Shamil Bank, even in Western courts there was no supposition that a contract subject to Shariah principles was governed by two complete and distinct bodies of law; there was not a cognitive hurdle to prevent supplementing and interpreting a contract governed by a national law but applying general principles of a different system. In conclusion, there is a resistance by some courts, echoed by European legal scholars, to apply Shariah to contracts which invoke another national law. This judgment is based on the principle that only one law can govern a contract and the Rome Convention’s requirement that the law of a contract be that of a national system.

Scholars also support these conclusions by general precepts of common law and legal reasoning, reflecting what Lord Asquith would have likely called “mere common sense.” In spite of these firm statements from courts and scholars, the practice of arbitral tribunals judging matters of Islamic finance has been to apply the principles of Shariah to fulfill the intent of the parties, who used Islamic financial instruments instead of conventional bank products. But, rather than dispensing with one law or the other, arbitral tribunals judge the dispute to the greatest extent possible in accordance with the chosen national law, and only resort to applying Shariah principles as a gapfiller or when Islamic law sources are the basis of the specific issue being raised. To say the least, the actual practice of Islamic financial dispute arbitration demonstrates that the logical barrier that prevents a judge from subjecting a national law to Shariah principles is not absolute, nor is it an excessively compli-cated process. It is the lex mercatoria of Islamic finance and the adopted procedure of all arbitration centers that are ac-customed to hearing disputes from Islamic finance.

Choice of Law and Islamic Finance part 2 will continue discussing the case Shamil Bank v. Beximco and also look into the U.S. experience covering the topics such as the First Amendment, Islamic law within the United States and Saudi Arabian law. The article also discusses the topic, advice for seeking arbitration in Islamic Financial Disputes. gif

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Jal Othman, Head of Islamic Finance Practice, Shook Lin & Bok, Malaysia

Shariah as a choice of law for common law courts and arbitrators is not peculiar to the current era of Islamic finance. What are your thoughts on this statement?

Shariah as a corpus of law expounds all principles of fairness and equality.

This is not surprising as the Shariah finds its source from the Quran and Hadiths (the sayings of the Prophet). These are sources of the Divine. Given its twin pillars of fairness and equality, it is only natural that the Shariah has been the preferred choice of law from time immemorial.

Do you believe English law is the most popular when dealing with agreements adhering to Islamic principles?

Yes, I do but having said that I believe that this is a result of decades of dominance of western thoughts in trade and commerce rather than by reason of the pure suitability of English Law to Islamic finance. Islamic finance is governed by an entirely different set of rules, principles and concepts.

Whilst the destination in the sense of the ultimate objectives of English Law and the Shariah may be similar, the journey to that destination is and can be very different.

I have always expounded the principle that Islamic finance transactions are and cannot be solely governed by the Shariah. The Shariah is but one (albeit a major one) cog in the same wheel that drives the transaction. The other cog is the laws of the land.

The laws of the land could be the common law or the civil laws. We must recognise the integral interplay between the Shariah and the laws of the land in successfully driving a transaction. One cog without the other will not make the wheel spin and turn.

The trick is to know and identify which cog belongs to what aspects of the transaction. For example, in a typical sale or ‘Bai transaction the question of whether a particular asset qualifies as an underlying asset is a Shariah question.

Once we have determined that question, moving the asset from point A to point B is a question for the laws of the land. Getting one question right without the other will not make the transaction work. In other words, you may end up either getting the wrong asset across or you may end up having the right asset not moving at all.

In conclusion, to impose or insist on English Law in an Islamic finance transaction without recognising the cogs in the wheel theory is like fitting a square peg into a round hole. It will not be a good fit and whilst with some force you can get it pushed in but it will eventually fall off.

What are your thoughts on the future of Shariah or Islamic law?

I certainly think it has a very bright future. The inherent principle of fairness and equality makes it a corpus of law that has universal application.

As a corpus of law, it has been acutely under utilised. This is primarily due to reasons of misconceptions and misperceptions. In a world where perception is seen as being greater than the truth, Shariah and Islamic Laws is currently comatose. It has to be resuscitated and one of the best tools of resuscitation is re branding. We need to re brand Islamic finance and Islamic Laws and the Shariah.

2011 November Global Islamic Finance

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Islamic Finance References and Further Reading

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Soraya Permatasari & Suryani Omar, Shariah-Compliant Hedging Derivatives Start in Malaysia: Islamic Finance, Bloomberg (Dec. 22, 2010), http://www.bloomberg.com/ news/2010-12-21/Shariah-compliant-hedging-derivatives-start-in-malaysia-islamicfinance.html.

Duncan McKenzie, Islamic Finance, Mondovisione (Oct. 29, 2008), http://www.mondovisione.com/media-and-resources/news/ islamic-finance/.

See Nathif J. Adam & Abdulkader Thomas, Islamic Bonds: Your Guide to Structuring, Issuing and Investing in Sukuk 42-64 (2004) Abdi Shayesteh, Islamic Banks in the U.S.: Breaking Through Barriers, New Horizon, Apr.-Jun. 2009, at 1, http://www. kslaw.com/Library/publication/6-09%20 New%C20Horizon%20Shayesteh.pdf.

In re Arbitration Between Petroleum Dev. (Trucial Coast) Ltd. v. Sheikh of Abu Dhabi, 1 Int’l & Comp. L. Q. 247, 250-51 (Sept.

1951).

Arthur J. Gemmell, Commercial Arbitration in the Islamic Middle East, 5 Santa Clara J. Int’l L. 169, 179 (2006).

Faisal Kutty, Shari’a Factor in International Commercial Arbitration, 28 Loy. L.A. Int’l & Comp. L. Rev. 565, 591 (2006).

Shamil Bank of Bahrain EC v. Beximco Pharm. Ltd., [2004] EWCA (Civ) 19, [1], [2004] 1 W.L.R. 1784, 1787 (appeal taken from Eng.).

See Handbook of Islamic Banking xvii, 52 (H. M. Kabir Hassan & Mervyn K. Lewis, eds., 2007) Jason Chuah, Recent Case, Shamil Bank of Bahrain EC v. Beximco, 10 J. Int’l Mar. L. 125, 126 (2004).

Council Regulation 593/2008, Rome I, art. 1 (1), 2008 O.J. (L 177) 6, 10 (EC), available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do? uri=OJ:L:2008:177:0006:0016:E N:PDF. Shaistah Akhtar, Arbitration in the Islamic Middle East: Challenges and the Way Ahead, in The International Comparative Legal Guide to: International Arbitration 2008, at 11 (Global Legal Group, 2008), available at http://www.iclg.co.uk/khadmin/Publications/pdf/2201.pdf; see also Chuah, supra note 33, at 126.

Oliver Agha, Islamic Finance Dispute Resolution, Leading Lawyers 2009, at 29 (Islamic Finance News, 2009), available at http:// www.aghashamsi.com/downloads/Article. pdf.

Andreas Junius, Islamic Finance: Issues Surrounding Islamic Law as a Choice of Law Under German Conflict of Laws Principles, 7 Chi. J. Int’l L. 537, 543 (2007).

Kilian Bälz, Islamic Legal Studies Program, Harvard Law School, Shariah Risk?: How Islamic Finance has Transformed Islamic Contract Law 13 (2008).

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See, e.g., Press Release, White & Case LLP, Law Office of Mohammed Al-Sheikh in Association with White & Case Advises on SAR 7 Billion Sukuk (July 7, 1998) (on file with author) (noting the association of White & Case with a law firm experienced in Islamic finance).

Bälz, supra note 40, at 24; Charles P. Trumbull, Islamic Arbitration: A New Path for Interpreting Islamic Legal Contracts, 59 Vand. L. Rev. 609, 643-44 (2006).

Mushtak Parker, Islamic Finance is Growing at a Phenomenal Pace: Al-Jasser, Arab News, Nov. 30, 2009, http://archive.arabnews.com/? page=6&section=0&article=1 28946.

Muhammed Al-Bashir & Muhammed AlAmine, Istisna’ and Its Application in Islamic Banking, 16 Arab L. Q. 22, 36 (2001).

Taha Jabir Al-Alwani, Source Methodology in Islamic Jurisprudence 69 n.1 (Yusuf Talal DeLorenzo & Anas S. Al-Shaikh-Ali trans., International Institute of Islamic Thought, 3rd ed. 2003).

Ahmed Zaki Yamani, Minister of Petroleum and Mineral Resources, Saudi Arabia, Address at the New York University School of Law (Oct. 24, 1978), in George Sayen, Arbitration, Conciliation, and Islamic Legal Tradition in Saudi Arabia, 9 U. Pa. J. Int’l Bus. L. 211, 239 (1987) (internal citations omitted).

Ibrahim Abdulla Al-Marzouqi, Human Rights in Islamic Law 10, 30-33 (2d ed. 2001).

Faizal Manjoo, Comment to Discussion Board: The Islamic Finance Framework, Opalesque: Islamic Finance Intelligence (Aug. 31, 2009), http:// www.opalesque. com/OIFI119/Discussion_Islamic_Finance_ Framework19.html.

Al-Marzouqi, supra note 51, at 44. Partial Translation Of Sunan Abu-Dawud Book 24, Number 3585, Univ. of S. Cal. Ctr. for MuslimJewish Engagement, (Ahmad Hasan trans.), http:// www.usc.edu/schools/college/crcc/ engagement/resources/texts/muslim/hadith/abudawud/ 024.sat.html (last vi-sited Mar. 12, 2011).

David R. Vishanoff, Kitab al-Waraqat fi usul al-fiqh, A Handbook of Legal Theory, http:// faculty-staff.ou.edu/V/David.R.Vishanoff-1/ Translations/Waraqat.htm (last visited Mar. 12, 2011) (translating original Arabic text of Kitab Al-Waraqat fi usul al-fiqh, written by Imam Al-Haramayn Al-Juwayni in 1450, and noting legal values that are relevant to a dispute over a financial transaction).

See William Ballantyne, Introduction to Islamic Law And Finance 1, 3 (Chilbi Mallat ed., 1988), available at http:// www.soas.ac.uk/ cimel/materials/islamic-law-intro.html This was euphemistically referred to by one Muslim law professor as “what we call the establishment clause.” Mohamed Mattar, Address at the Johns Hopkins School of Ad-

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vanced International Studies Islamic Law Forum: Islamic Law in U.S. Courts: Theory and Practice (Oct. 2, 2005).

Ashley S. Deeks & Matthew D. Burton, Iraq’s Constitution: A Drafting History, 40 Cornell Int’l L.J. 1, 19-21 (2007); Gemmell, supra note 15, at 171; Amir H. Khoury, Ancient and Islamic Sources of Intellectual Property Protection in the Middle East: A Focus on Trademarks, 43 IDEA 151, 201 (2003); Clark Benner Lombari, Islam-ic Law as a Source of Constitutional Law in Egypt: The Constitutionalization of the Shariah in a Modern Arab State, 37 Colum. J. Transnat’l L. 81, 82 n.4 (1998).

Khalil Jarrar, Lex Islamicus: Preventative and Remedial Measures Protecting Sukuk Investment Account Hold-ers, Opalesque: Islamic Finance Intelligence (Aug. 31, 2009), http:// www.opalesque.com/OIFI118/Lex_Remedial_ Measures_Protecting_Sukuk_Investment18.html.

Abdel Aziz Dimapunong, Islamic Banking Research Inst., Islamic Bank Arbitration 6 (2006).

Milagros Santos-Ong, Update: Philippine Legal Research, GlobalLex § 4.1 (June 2009), http://www.nyulawglobal.org/globalex/Philippines1.htm.

Creating a Central Bank for the Philippines, Bangko Sentral ng Pilipinas, http://www. bsp.gov.ph/about/history.asp (last visited Mar. 10, 2011).

See New Central Bank Act (RA 7653), Bangko Sentral ng Pilipinas, http://www.bsp.gov. ph/about/charter_02.asp (last visited Mar. 10, 2011) (no mention of a religious requirement).

See Abdul Rasyid, Settlement of Islamic Banking Disputes in Indonesia: Opportunities and Challenges 1-2 (2008), available at http:// www.apmec.unisa.edu.au/ apmf/2008/papers/25-abdul%20Rasyid. pdf (giving an over-view of the historical role of the settlement of Islamic banking disputes in religious, civic, and arbitral fora).

Id. at 6. As an aside, English-speaking Muslims are still at odds on the best spelling of the word “Shariah.” How-ever, Malayspeakers are more unified in their approach, almost always choosing to use the spelling “Syariah.” Peter Tan, Malay Loan Words Across Different Dialects of English, 14 English Today 44, 49 (1998).

Who We Are, Kuala Lumpur Regional Centre for Arbitration, http:// www.klrca.org.my/Islamic_Banking-@-Arbitration_of_Islamic_Financial_Sector_at_ KLRCA.aspx (last visited Apr. 5, 2011).

About AALCO, Kuala Lumpur Regional Centre for Arbitration, http:// www.klrca.org. my/about_AALCO.aspx (last visited Mar. 10, 2011).

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World Islamic Finance Review

THE PAST AND FUTURE OF ISLAMIC FINANCE IN

NIGERIA

Author: Aluwalu Ado, African Alliance Takaful, Nigeria Tajah Brown, Global Islamic Finance Magazine Editorial Team, United Kingdom

Abstract: Nigeria introduced the licensing of non-interest banks and products later than other countries because of political and religious reasons. This article will walk you through the path of Islamic Finance in Nigeria and the challenges they face. The Government’s Financial System Strategy 2020 ensures that the future of Islamic Finance will improve with the aim of making Nigeria Africa’s financial hub by the year 2020. The article will also give you an insight in to the most influential people in Islamic Finance in Nigeria and a glimpse into the future. Islamic finance can open the doors to a range of products and services, fulfilling the needs of banking in Nigeria.

Keywords: The Central Bank, Lotus Capital, Financial System Strategy 2020, Non-Interest Finance Institutions

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igeria is one of the biggest Muslim communities in the world, with 65 percent of an estimated 150 million people identifying themselves as Muslim. With a thriving Islamic business industry, the country has established itself in the Islamic financial industry with growing consumer and corporate banking sectors.

Unlike Indonesia and Malaysia, Nigeria took on Islamic banking in the 1990s by establishing the Albaraka Bank, part of the Bahrain-based Albaraka Banking Group and is now one of the wealthiest and largest economies in Africa. Since then local banks such as First national and Nedbank, South Africa’s fourth biggest bank are all providing Islamic products. Asset managers such as Sanlam are providing Shariahcompliant equity and pension products.

Jaiz International became Nigeria’s first fully fledged Islamic bank, licensed by the Central Bank of Nigeria. The Nigerian Islamic bank is a major influence to other institutions and contributed to the acceptance of universal banking in Nigeria. Services such as sub-

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World Islamic Finance Review

The Lotus Capital Islamic finance forum states “Recent events in the global financial markets have shown that Islamic Banks and Islamic Mutual Funds have fared better than their conventional counterparts, not necessarily because of superior fund management skills but simply because of the activities and businesses they have avoided”. The forum goes on to say that the destructive effects of interest encourages us to find an alternative that is economically sustainable when matched with conventional finance.

This could produce a higher real economic activity, employment and development.

Approval was also given to a group running a bank called Jaiz, there were problems meeting the requirements. The requirements include a minimum capital of 25 billion naira but the group enquired about lowering the amount to 10 billion naira. If this requirement is accepted then it would have to apply to national and international money banks as well as specialised banks not just the single bank making the requirement about the minimum capital.

Big Challenges Ahead Due to political and religious reasons Nigeria adopted licensing of non-interest banks and products later than other countries. The new regime has given people the option of using an alternative form of financial management. The positive side of adopting this form

The Framework for the Regulation and Supervision of Institutions offering non-interest financial services in Nigeria in the prudential requirements section states “All NIFIs shall maintain a minimum Capital Adequacy Ratio as may be prescribed by the Central Bank of Nigeria from time to time”.

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He continues saying that there is a lack of encouragement for foreign investors in that area particularly the leading IFI from Europe and the Middle East. Ado says that the poor support from the government and double taxation could affect the future successes of IFIs. He adds that “Marketing the products will also be difficult especially to non-muslim prospective customers

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There are no universities or Institutions of higher learning that offer either a Bachelors degree or diploma in Islamic Banking, Finance or Insurance. The only available option for Nigerians is the online Postgraduate Diploma by IIBI London. There are very few professionals available in the country today.” He continues saying “There was no

The Diamond Bank offers innovative solutions to customer issues in banking and has created key points to focus on Nigeria’s banking, including competent staffing, strategic focus, superior technology and a sound financial position. The bank today is one of

Aluwalu Ado gives us an insight into the challenges Nigeria face with in the Islamic finance Industry. He says that “High default rates in Nigerian banks will lead to same or even higher rates in Islamic Financial Institutions (IFIs) unless a Figure 1: Nigeria is 137 of 183 in the economic sound risks management policy is ranking put in place”.

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Regional Executive North at African Alliance Takaful Nigeria, Aluwalu Ado with over ten years experience in the financial industry gives his views on Nigeria embracing Islamic finance later then other countries. He says that “there are not enough experts in the field of Islamic finance in the country.

of financial management is the inclusion of the financial industry and a strong financial system in Nigeria.

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mission states ‘To meet the financial needs of communities across the world by conducting business ethically in accordance with our beliefs, practicing the highest professional standards and sharing the mutual benefits with the customers, staff and shareholders who participate in our business success.’

Diamond Bank started as a private limited liability company and later became a commercial bank that focused on the areas of retail banking, corporate banking, insurance and investment and banking. Their mission states “To create a unique International Bank focused on providing creative solutions to customers’ business problems with an absolute commitment to quality” and their vision is to become a prominent financial institution, making an impact in Nigeria and Africa as well as the main financial centres in the world.

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“Sound regulatory and supervisory guidelines, including that of Shariah advisory of Islamic Financial Institutions have been developed by the Central Bank. This will go a long way to ensure a smooth take off of Islamic finance in the country. The only problem I see in this respect is the lack of Shariah scholars. The Central Bank requires at least three Shariah Scholars for a single financial Institution and must not serve in similar institutions. This means if there are four banks offering Islamic finance there must be at least 12 Shariah scholars

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The Al Baraka Banking Group is referred to as a pioneer in Islamic Banking, the Bahrain-based Islamic bank that offers treasury services in accordance to Shariah principles along with subsidiaries, retail, corporate and investment. The bank has branches in 12 countries such as the Middle East and South East Asia. Al Baraka Banking Group’s

because of the religious attachment”. The Financial Institutions Act opens the doors to non-interest banking and enables the licensing of Islamic banks. The agreement at the time was that the banks could not call themselves Islamic, Christian, northern or southern. There were given an approval in principle, an Islamic bank was established by interested promoters but this didn’t lead to anything.

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The Jaiz International bank’s vision states ‘to be one of the dominant financial institutions not only in the Nigerian market but West Africa as well. Key market sectors to target are: Oil and Gas, Telecoms, Food & Beverages, retail Banking. The Bank will be open to all irrespective of race or religion and it will Inshaallah be firmly established as a national bank with branches in each state capital’.

framework for Islamic Finance until 2005 which is not comprehensive and lacks some details”.

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sidiaries, divisions and units are available.

The establishment of this bank was the result of a high demand for an Islamic Bank in Nigeria, West Africa and also the specific products on offer, other banks in Nigeria at the time were not offering interest free banks.

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Source: Doing Business.org

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World Islamic Finance Review

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the top banks in Nigeria with a reputation gained from a high standard of service and having the most advanced banking in the market.

The Diamond Bank possesses values that focus on the people, community and physical environment and seeks to establish itself as a dominant stake holder and contributor in the national and global wealth process. It also aims to develop a culture consisting of institutions and organisations with similar interests globally. The Diamond Bank prides itself in the contact it has with other known international banks, such as Citibank, Standard Chartered Bank, Nordea Bank Plc and HSBC Bank.

The Central Bank of Nigeria (CBN) has launched the National Shariah Advisory Board, bringing together different groups in order to discuss and advise on issues about the sector. The CBN has furthermore released the outline for Non-Interest Finance Institutions (NIFI’s) and the plans on Shariah Governance, leading to non-interest banking in Nigeria. The Securities and Exchange Commission produced its rules on Islamic fund soon after, this led to the full functions of Islamic Finance.

The CBN has also established the Jaiz International, an Islamic banking license, on the agreement that it will provide full authorisation if it gets the estimated capitalised 25 billion naira. In 2010 the bank announced that it would terminate the issuing of univer-

Aspiratio

Strategy

To Be The Safest & Fastest Growing Financial System amongst Emerging Economies

Strengthen Domestic Financial Markets

Financial Sector as Catalyst & IFC Provide Enabling Environment & Infrastructure

Enhance Integration with External Financial Develop Financial Sector & Engineer Int’l Financial Center

Build International Financial Center

Establish Financial System as Growth Catalyst

Money & Forex

Insurance

Capital Markets

SME Finance

Mortgage

FSS2020 Strategy: Develop Financial Sector & Engineer Nigeria’s Evolution into IFC Credit

To Be among the top 20 economies by 2020

Figure 2: the Government’s Financial System Strategy

Human Capital

ICT Infrastructure

Payment Systems

Legal Reforms

Central Banking

Regulatory Reforms

Source: Government’s Financial System Strategy (FSS) 20:2020

Figure 3: The comparison of the business climate Ease of doing business

Governance indications

Ease of doing business

100

Enforcing contracts

75

Protecting investors

50

hiring/firing workers

Drivers

Enablers

sal banking licences and impose minimum capital requests for lenders with the idea of preventing the past downfalls in 2009. The requests encourage lenders if they want to continue asset management and capital market actions to sell non-core businesses or develop a holding company. The minimum capital demands the lowest capital level of 50 billion naira. Some of the banks affected by the requirements are the United Bank of Africa and the Diamond Bank.

In Section 39 (1) of BOFIA 1991 it states that the term “Islamic” should not be used in institutions offering Islamic finance products and services. On the other hand they are able to use the term “Islamic” in their names and acknowledgements. The legislations bring focus on the other laws such as Nigerian accounting, taxation and contract laws in order to ensure unrestricted operations of Islamic finance.

The regulatory and supervisory framework and guidelines for non-interest Islamic finance states that NIFI’s must include the names of all the members that verify the product or services being presented in its product materials.

NIFI development could create challenges for educational bodies focusing on finance such as the Institute of Chartered Accountants of Nigeria (ICAN) and the Chartered Institute of Stockbrokers (CIS).

The standards will have to be reviewed or expanded to enable the funding for the development of Islamic finance. An answer to this could be several strong working NIFI’s with the right investors and could eventually enable alternative finance to enter the Nigerian Financial structure.

Lotus Capital is the pioneer of Islamic finance in Nigeria. Their mission states ‘We Provide Alternative Ethical Investment Solutions’ A full-service Halal investment management company, Lotus Capital focuses on Shariah compliant asset management, private wealth management and financial consultative services and was founded in 2004 with the goal of meeting the investment wishes of ethical people, businesses and organisations in West Africa.

Lotus Capital state “Lotus Capital is duly registered with the Securities & Exchange Commission (SEC) as Fund Managers, Corporate Investment Advisers and Issuing House”.

25

50

75

Sub-Saharan Africa

100 CECD

Source: Export Finance & Insurance Corporation 60 Global Islamic Finance

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Regulatory quality

Nigeria

25

Rule of law

0

control of competition

Starting a business

0

The Nigerian pioneer is committed to ethical wealth creation and offers a wide range of reason to invest such as pilgrimage or retirement. Lotus Capital abides by the code of ethics and will not agree to earn from interest-bearing debt.

World Islamic Finance Review Harajara Adeola the CEO of Lotus Capital Limited shares her views on Islamic finance in Nigeria with 234next.com. “However, nobody says you are not allowed to make money and that is another fallacy about Islamic finance. A lot of people feel Islamic finance is free finance. It is not. It is just finance around reality; real trade, real service, real added value”.

She continues saying “Yes, it has taken Nigeria 10 years to have a guideline, but we now have a guideline and that’s progress. Nigeria has a real opportunity to put its stamp on the international financial community by establishing a hub for Islamic finance, given our population, given the size of our economy, given the importance of our country in West Africa and even in Africa”.

They will also avoid investing in tobacco, conventional banks, insurance companies, casinos and breweries. Lotus Capital supports the belief that all faiths encourage the respect for people, truthfulness and equality in contacts in business and personal matters.

They say that these are beliefs that everyone would agree with, these are key factors that form the beginnings of all civilised societies.

Lotus Capital mentions their commitment to Islamic finance and state ‘This encourages ownership and profit sharing in the conduct of investing and business to create a fairer and more productive economic system’.

Influential People that Affect Nigeria’s Financial Market These are some of the most influential people within Nigeria’s financial market.

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Lamido Sanusi is the grandson of one of the most powerful traditional rulers in Nigeria and the central bank governor; with this status the strong minded Sanusi has made a big impact in the financial industry such as the bailout of nine commercial banks just weeks after he took on the central bank. His reputation grew because people in the industry said he rescued the second biggest economy in Africa, the sub-Saharan. His achievements include a degree in Economics and Islamic Law at a university in northern Nigeria. He began teaching economics and then entered the area of banking in 1985.

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Arunma Oteh is another person determined to make a difference and after nine months in the office she dismissed the head of the stock exchange and suspended the chairman. Oteh’s previous experience in the industry consisted of the director of treasury and the vice president of the African Development Bank. She also has a MBA from Harvard Business School. Oteh’s prediction of Nigeria’s capital market is that to become the leading market it needs to focus on fixing its infrastructure.

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Amcon Chief Mustapha Chike-Obi is the son of Chike Obi, well known for being a mathematician and opposition politician. Before taking on the chief role he was founder and managing partner of the Madison Park Advisors; he also was a senior at firms such as Bear Stearns, Goldman Sachs and Guggenheim Partners.

They stand by the core values of integrity, professionalism, confidentiality service, excellence and dynamism. Along with other audits, the Lotus Capital goes through a regular review by the Shariah Advisory Board.

The board is made up of Islamic scholars educated in Islamic laws, principles, trade traditions finance and economics.

The regular reviews are to ensure that the funds are not used for prohibited actions and also to direct the progress of new products and services. Lotus Capital says that they have a management team with total experience of over fifty years; they specialise in the areas of investment management and corporate finance field.

Aluwalu Ado, Regional Executive North (Takaful), African Alliance Insurance Plc, Nigeria Aluwalu Ado’s most influential people in Islamic Finance Alhaji Sanusi Lamido Sanusi

The current Central Bank governor under whom a standard framework has been developed and provides all the support needed for prospective Islamic banks in the country.

Dr Basher Aliyu Umar

The Shariah adviser to the Central Bank governor and currently is serving as a member of Shariah Advisory Committee of the newly established International Islamic Liquidity Management Corporation (IILM). He also played a vital role in the development of the Islamic Finance Framework by the Central Bank.

Alhaji Umar Mutallab

A former managing director and chairman of leading banks in the country and currently served as the chairman of Jaiz International Plc.

Alhaji Mustapha Bintube

A former executive director of a leading financial Institution and the pioneer managing director of Jaiz International Plc. He was instrumental to the development of Islamic finance in Nigeria.

Hajia Hajara Adeola

The managing director of Lotus Capital, the first Islamic financial institution in the country. She holds an Msc in Islamic finance from Durham University. The successful emergence of Lotus Capital has proved the fact that Islamic finance is possible in the country.

Ahmed Zakari &CO (chartered accountants)

This firm has Alhaji Ismaila Zakari as its managing partner. They are auditors to Jaiz International Plc and representative of IIBI in Nigeria.

They also specialise in zakat and related matters and played a significant role in promoting Islamic finance in Nigeria. They have organised various trainings on different subjects of Islamic finance.

Malam Umar Sani Fagge

A renowned scholar and a commissioner with Kano State Shariah Commission. He has published books and delivered lectures on areas related to Islamic finance, banking and Insurance. He always advocates the establishment of Islamic financial institutions.

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The Framework Behind Non-interest Islamic Finance January 2011 the CBN produced the regulatory and supervisory framework and guidelines for non-interest Islamic finance.

The framework states “the objective of the framework is to provide minimum standards for the operation of institutions offering noninterest banking and financial services in Nigeria”. The framework lists the licensing requirements a NIFI needs to followed in order to be licenced by the CBN and the NIFIs which have to refer to the Shariah principles and practices in its Memorandum and Articles of Association.

The framework requirements state that the promoters of the NIFI are to produce an agreement, which includes the roles of the two parties. The agreement must accompany the grant of licence applications and 2011 November Global Islamic Finance

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World Islamic Finance Review

exist for no less than three years of the operations of the licenced NIFI. The second requirement states that the CBN will approve a licence if the terms and conditions that give permission for the non-interest financial institution to function on a regional or national level.

Aluwalu Ado from African Alliance Takaful Nigeria shares his views on the regulatory and supervisory guidelines for non interest Islamic finance. He says “Sound regulatory and supervisory guidelines, including that of Shariah advisory of Islamic Financial Institutions have been developed by the Central Bank. This will go a long way to ensure a smooth take off of Islamic Finance in the country.

The only problem I see in this respect is the lack of Shariah Scholars. The Central Bank requires at least three Shariah Scholars for a single financial Institution and must not serve in similar institutions. This means if there are four banks offering Islamic Finance there must be at least 12 Shariah scholars”.

The non-interest banks must meet the conditions of the framework and if the banks have regional banking consent they can continue banking operations. The framework states ‘Banking business operations within a minimum of six and a maximum of twelve contiguous States of the Federation, lying within not more than two Geo-Political Zones, as well as within the Federal Capital Territory.’

The regulatory and supervisory framework declares that the non-interest banks with permission for national banking are eligible to continue banking operations with all Federation states. The frameworks states that the licencing requirement can be accessed in more depth from the Financial Policy and Regulations Department, the CBN. The commissions and fees section of the framework reveals that the financial institutions continuing non-interest banking and services can charge commission or fees with preference to Shariah principles and the guide to bank charges. Sanusi Lamido, Islamic Scholar and contributor to the Nigerian banking sector, outlines the problems the CBN could encounter in the Gulf News.

The first hindrance is the lack of knowledge, skills and ability to operate within the Islamic finance industry.

Other problems include the privation of Shariah-compliant liquidity management instruments and the deficiency of accounting and auditing standards significant to Islamic institutions. The CBN is also faced with the shortage of Shariah scholars educated in the specific areas of law, conventional eco62 Global Islamic Finance

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nomics, accounting, banking and finance.

The final problem is the lack of recognition of Islamic finance and its advantages.

These may be problems that the CBN face but they are taking the time to acknowledge them. For example, the CBN has funded and arranged local and overseas training schemes to solve the official’s lack of knowledge. The CBN’s relations with international bodies and controlling agencies such as Bank Negara Malaysia and Bank of Sudan could help it thrive.

Nigeria’s Oil Income The Punch newspapers says “economists, however, say proper management of oil money is crucial, if Africa wants to build on its success in attracting result-oriented investors into the vibrant frontier economies”.

The newspaper refers to the Business Monitor international saying that it suggests an increase in Nigeria’s oil consumption; it predicts that the country will be using 567,000 bpd by 2020.

The article says that experts advise Nigeria to have good planning and management to be able to cope with the increase in oil and gas production in the future. The National

Bureau of Statistics provides customer requested statistical information, its goes into depth about the oil exports in Nigeria. It says “petroleum (oil) has claimed the top position in Nigeria’s export list, constituting a very fundamental change in the structure of the country’s international trade”.

The exporting of Nigeria’s oil began in 1958 and now stands with up to 11 exporting companies. The statistics declare that Nigeria was creating 1.8 million barrels of oil per day in the 1990s and is the 6th biggest oil resource country in the world. The Nigerian National Oil Corporation (NNOC) was set up in order to look after the actions in the sector and the government’s contribution to oil companies. The Nigerian National Petroleum Corporation (NNPC) began operating after the emergence of the NNOC and the Ministry of Petroleum Resources.

In 1988 the NNPC became a commercial, integrated international oil company according to the National Bureau of Statistics.

The statistics also state that the function of the NNPC is to explore, process and market crude and petroleum, it aims towards efficiency, profitability and financial autonomy in all decisions.

World Islamic Finance Review finance in Nigeria could create a positive future for Nigeria. Nigerian news daily writes about the challenges Nigeria face saying that countries in the regional and sub-regional area are finding it hard to become a hub or pioneer of Islamic finance in the African continent. In the past, Nigeria has found it difficult dealing with high financial debt and the increased oil prices but the Central Bank of Nigeria gained liquidity support in the form of loans, leading to the economy becoming strong over time.

Figure 3 displays the comparison of Nigeria, Sub- Sahara Africa and Organisation for Economic Cooperation and Development (OECD). Figure 3 shows that Nigeria does rank low in rule of law and control of corruption but on the other hand is equal with the OECD when protecting investors.

The Future The Government’s Financial System Strategy 2020 (FSS2020) outlines the progress made to create an environment for Islamic finance. The Strategy consists of developing specific regulations and laws to benefit the new economy; it also outlines the struggle of preventing corruption and lack of educated and experienced manpower.

The FSS2020 suggests that macroeconomic needs to be stable and that the governance regime in the financial system needs to be improved. The FSS2020 aims to make Nigeria Africa’s financial hub and one of the top 20 largest economies in the world by the year of 2020 by creating a plan to improve Nigeria’s financial structure.

FSS2020 is the ingenuity of the Federal Government of Nigeria and its connection with Vision 20-2020 and the Seven-Point Agenda of the Nigerian Federal Government.

Reuters Africa state that Sanusi said “Nigeria was looking at Islamic finance not just for the opportunities it would offer to banks and investors, but also as a way of diversifying the country’s financial system in order to mitigate risk.” The introduction of Islamic

References and Further Reading •

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Looking at the national side the article says the market decision makers, such as banks, are taking time to delve into alternative finance and what it has to offer. The regulators according to the Nigerian Daily news article are preparing for the job they have in regulating and looking over the financial service industry that emergence with the Nigerian economy is inevitable.

•

Auwalu Ado ends by giving his views on the future of the Islamic finance industry in Nigeria, he says “Although it has taken so many years to take off, once it does Islamic finance will succeed and will favourably compete with its conventional counterpart.

There will be more Islamic banks and financial institutions in the country especially in the northern and south western parts. I see a slow growth of the sector in Nigeria at the beginning, but Islamic finance will grow at a fast pace in the next few years”.

•

Non interest banking in Nigeria would help establish a new market and introduce institutions, such as the Islamic Money Market and Takaful (Islamic Insurance) companies.

This type of bank cannot produce treasure bills or other interest bearing securities and so cannot get involved in conventional open market operations, claims The Nigeria Voice.

•

On the other hand, Islamic banking can open the doors to a range of products and services fulfilling the needs of banking. With the range of products and the new market comes competition in banking. The Nigerian Voice also mentions that “Islamic finance, though based on religious law, is not just a religions activity that adherents are the only expected people, who engage in it. It is a business activity open to all segments of the society”. gif

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Central Bank of Nigeria from: http:// www.cenbank.org/intops/FXstructure. asp National Mirror - Deepening Nigeria’s financial markets with Islamic finance from: http://nationalmirroronline.net/ business/8202.html Gulf news.com – Nigeria on track to be Africa’s Islamic finance hub from: http:// gulfnews.com/business/banking/nigeria-on-track-to-be-africa-s-islamic-financehub-1.640710 Diamond Bank from: http://www.diamondbank.com/careers/our-bank.html Australian Government – Export Finance & Insurance Corporation from: http:// www.efic.gov.au/country/countryprofiles/Pages/Nigeria.aspx Nigeria news daily.com – Islamic finance in Nigeria: Issues and Challenges from: http://nigerianewsdaily.com/nigerianews-business/12917-islamic-finance-innigeria-issues-and-challenges.html Punch – Rising revenue: charting a rosy future for Nigeria’s economy from: http://www.punchng.com/Articl.aspx?d atex=02/23/2011&theartic=Art201102 232533564 National bureau of Statistics from: http://www.nigerianstat.gov.ng/index. php/pages/sectorStatistics Reuters – Factbox – Nigeria’s financial market reformers http://www.reuters. com/article/2011/03/28/nigeria-markets-reformers-idUSLDE72O1TZ201103 28?pageNumber=1 Arab news – Nigeria faces challenge in promoting Islamic finance from: http:// archive.arabnews.com/?page=6&secti on=0&article=129940&d=21&m=12& y=2009 Lotus Capital from: http://www.lotuscapitallimited.com/index.php?option=com_c ontent&view=article&id=18&Itemid=2 Reuters Africa – Nigeria eyes role as African Islamic banking hub from: http:// af.reuters.com/article/topNews/idAFJOE 7270I220110308?pageNumber=2&virt ualBrandChannel=0&sp=true Doing Business 2011 – Nigeria from: http://www.doingbusiness.org/~/media/ FPDKM/Doing%20Business/Documents/Profiles/Country/DB11/NGA.pdf Arab News – Nigeria opens market for Islamic finance from: http://archive. arabnews.com/?page=6&section=0&art icle=121487&d=13&m=4&y=2009 Jaiz International PLC from: http://www. jaizinternationalplc.com/about_us.html Next – Nigeria can be a hub for Islamic finance from: http://234next.com/csp/ cms/sites/Next/Money/5677777-147/ story.csp

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RISK MANAGEMENT FRAMEWORK IN ISLAMIC BANKING: Basel II and III, challenges and implications in Islamic Banking Author: Dr Farhad Reyazat, Editor in Chief, Global Islamic Finance Magazine, United Kingdom

Abstract: The time to fix the roof is when the sun is shining; Risk management has not been uppermost on the Islamic banking sector’s agenda in recent years. It is crucial for Islamic Banks (IBs) to have comprehensive risk management framework as there is growing realisation among IBs that sustainable growth critically depends on the development of a comprehensive risk management framework. Islamic banks should be dusting their ladders off now. If Islamic banks are serious about playing a greater role in the financial system, they will need to get to grips with risks which may not currently be well understood or well managed. In this article a frame work for Risk management in Islamic Banks will be discussed firstly, then generic risk associated with banks and unique risks exposed to Islamic Banks will be categorised.

The contractual complexity of Islamic banking transactions which gives rise to awkward operational risks, and the uncertainties associated with Shariah compliance leave them exposed to a few risks including fiduciary and reputational these risks will be briefly reviewed.

Although Basel II standards, does not account for the specific risks related to the nature of Islamic banks’ activities however the fundamental tenet of Islamic finance is that of fairness, and Islamic financial institutions at a most basic level are often structured towards fee-based revenues for services rendered and profit- and risk-sharing structures. Thus, in essence, Islamic financial institutions are closer in spirit to asset management companies than to conventional banking institutions, and the impact of their operations on the balance sheet is unique. These particularities highlight the unique characteristics of Islamic banks and raise serious concerns regarding the applicability of the Basel methodology to Islamic banks. Islamic banks’ activities differ in substance and in form from conventional banks’ operations and they thus face a different risk profile. The article gets to grips with Basel II accord and share challenges on adopting Basel II in Islamic Banks.

Keywords: Basel II, Islamic Financial Institutions, Islamic Banks, Risk 64 Global Islamic Finance

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Risk Management

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lthough Islamic banks and Islamic financial institutions are precluded from getting involved in the kind of complex credit trading that has paralysed their conventional competitor that’s no reason for complacency. The life is not easy for Islamic banks, they have their own blind spots and frailties. Islamic banks tend to have significant concentrations of exposure to local real-estate markets and much of it in the form of equity-like investments.

In one hand Islamic banks are heavily reliant on the loyalty of their depositors and in the other hand they have a preponderance of long-dated assets and a shortage of instruments with which to manage their shortterm liquidity needs.

The contractual complexity of Islamic banking transactions gives rise to awkward operational risks, and the uncertainties associated with Shariah compliance leave them exposed to fiduciary and reputational risk.

In recent years understandably, the focus has been on growth and on the struggle to innovate and compete in this increasingly competitive market. Shariah-compliant assets worldwide are approaching $1.2 Trillion and have been growing at more than 10% per year over the past 10 years. There is still huge untapped potential. Standard & Poor’s

has estimated that the market has a potential size of $4 trillion. The fact is if Islamic banks are serious about playing a greater role in the financial system, they will need to get to grips with risks which may not currently be well understood or well managed.

Risk Management Concept in Islamic Banks It is crucial for IBs to have comprehensive risk management framework as there is growing realisation among IBs that sustainable growth critically depends on the development of a comprehensive risk management framework. The risk management strategy must be integrated with its overall corporate strategies (e.g. Froot and Stein, 1994). In conjunction with the underlying frameworks, basic risk management process that is generally accepted is the practice of identifying, analysing, measuring, and defining the desired risk level through risk control and risk transfer. BCBS defines financial risk management as a sequence of four processes: 1. the identification of events into one or more broad categories of market, credit, operational and other risks into specific sub-categories; 2. the assessment of risks using data and risk model; 3. the monitoring and reporting of the risk assessments on a timely basis; and

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4. the control of these risks by senior management.

BCBS, on risk management processes, require supervisors to be satisfied that the banks and their banking groups have in place a comprehensive risk management process. This would include the board and senior management to identify, evaluate, monitor and control or mitigate all material risks and to assess their overall capital adequacy in relation to their risk profile. In addition, as suggested by Al-Tamimi, in managing risk, commercial banks can follow comprehensive risk management process which includes eight steps: 1.

2.

3.

4.

5.

6.

7.

8.

Exposure identification; Data gathering and risk quantification; Management objectives; Product and control guidelines; Risk management evaluation; Strategy development; Implementation; Performance evaluation

A comprehensive explanation of risk management in Islamic banking are made by Akkizidis and Khandelwal covering the aspect of risk management issues in Islamic financial contracts, Basel II, Basel III and Islamic Financial Services Board (IFSB) for Islamic financial risk, examining the credit, market 2011 November Global Islamic Finance

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and operational risk management for IBs. They also explain the unique mixes or risk for each financial contracts in IBs. Greuning and Iqbal discuss the three major modification of theoretical balance sheet of an Islamic bank that has implications on the overall riskiness of the banking environment. Apart from that, the contractual role of various stakeholders in relation to risk is also highlighted.

IFSB Guidelines on Rrisk Management of Islamic Banks According to IFSB, the primary aim of releasing its risk management standard stems from the recognition that although “certain issues are of equal concern to all financial institutions” some risks are localised to IBs and as such, these principles “serve to complement the BCBS guidelines in order to cater the specificities of IBs”.

In addressing the various forms of risk that IBs are exposed to, the guiding principles set

forth the methodologies required in order to balance concerns between both the internationally agreed standards of the BCBS and Shariah compliance issues that are fundamental to the operation of these specialised institutions. The IFSB guiding principles of risk management as basis for risk management process as in figure 1.

the aspect of risk management process, and some empirical evidence examine the perception and level of risk management practices by IBs.

Conceptual Model There are many conceptual studies that show the important aspects of risk management process that firms need to have in order to practice risk management. Some empirical findings show positive relationships between risk management practices and the various aspects of risk management process, and some findings show the important aspect of risk management practices by various financial institutions. In the context of Islamic banking, studies made on theoretical side of risk and risk management in Islamic banking explain the framework and

1. understanding risk and risk management; 2. risk identification; 3. risk analysis and assessment; 4. risk monitoring.

Figure 1: The IFSB guidelines on risk management Risk

Principle

Guideline

General requirement Credit Risk

Principle 1.0 Principle 2.1 Principle 2.2

IIFS shall have in place a comprehensive risk management and reporting process.

IIFS shall have in place a strategy for financing, recognising the potential credit exposures at various stages of the agreement.

IIFS shall carry out due diligence review.

Principle 2.3

IIFS shall have in place an appropriate methodology for measuring and reporting the credit risk exposures.

Equity Investment Risk

Market Risk Liquidity Risk Rate of Return risk Operational Risk

Principle 2.4

IIFS shall have in place Shariah-compliant credit risk mitigating techniques.

Principle 3.1 Principle 3.2

IIFS shall have in place appropriate strategies, risk management, and reporting processes in respect to the risk characteristics of equity instruments.

IIFS shall ensure that their valuation methodologies are appropriate and consistent.

Principle 3.3

IIFS shall define and establish the exit strategies in respect of their equity investment activities.

Principle 4.1 Principle 5.1

IIFS shall have in place appropriate framework for market risk management.

IIFS shall have in place a liquidity management framework.

Principle 5.2 Principle 6.1 Principle 6.2 Principle 7.1

IIFS shall assume liquidity risk commensurate with their ability to have sufficient recourse to Shariah-compliant funds.

IIFS shall establish a comprehensive risk management and reporting process to assess the potential impact of market factors affecting rate of return on assets.

IIFS shall have in place an appropriate framework for managing displaced commercial risk.

IIFS shall have in place adequate systems and controls.

Principle 7.2 Source: IFSB (2005) 66 Global Islamic Finance

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IIFS shall have in place appropriate mechanisms to safeguard the interests of all fund providers.

There is a relationship between risk management practices and the four aspects of risk management process i.e.

By making reference to the model adopted

by Al-Tamimi and Al-Mazrooei, the function of risk management practices is as follows: RMP= f(URM, RI, RAA, RM) Where: RMP= Risk Management Practices URM= Understanding Risk and risk Management RI= Risk Identification RAA= Risk Analysis and Assessment RM= Risk Monitoring The conceptual framework suggests there is a positive relationship between risk management practices and the aspect of risk management process. Secondly, it suggests the category of risk management processes that influence most of the practice of risk management to be examined.

Risk Identification There are few conceptual studies on risk identification of financial institutions and few empirical studies that include risk identification of banks. Risk identification is the first stage of risk management and a very important step in risk management. The first task of the risk management is to classify the corporate risks according to their different types.

The first step in organising the implementation of the risk management function is to establish the crucial observation areas inside and outside the corporation. Then, the departments and the employees must be assigned with responsibilities to identify specific risks. For instance, interest rate risks or foreign exchange risks are the main domain of the financial department. It is important to ensure that the risk management function is established throughout the whole corporation; i.e. apart from parent company, the subsidiaries too have to identify risks, analyse risks and so on.

In relation to commercial banks’ practice of risk management, Al-Tamimi found that the UAE commercial banks were mainly facing credit risk. The study also found that inspection by branch managers and financial statement analysis are the main methods used

Risk Management in risk identification. The main techniques used in risk management are establishing standards, credit score, credit worthiness analysis, risk rating and collateral. The study

by Al-Tamimi and Al-Mazrooei was conducted on banks’ risk management of UAE national and foreign banks. Their findings reveal that the three most important types of risks encountered by UAE commercial banks are foreign exchange risk, followed by credit risk, then operating risk.

In the case of Islamic banks, studies made especially on risk identification and risk mitigation includes the work of Haron and Hin Hock on market and credit risk, and Archer and Haron specifically on operational risk.

Haron and Hin Hock explain the inherent risk i.e. credit and market risk exposures in IBs. Also, they illustrate the notion of displaced commercial risk that is important in IBs. They conclude that certain risks may be considered as being inherent in the operations of both Islamic and conventional banks.

nancial institutions. Also, the surveys show that the Islamic bankers judge profit sharing mode of financing (i.e. diminishing Musharakah, Musharakah and Mudarabah), and product-deferred sale (i.e. Salam and Istisa’) are riskier than Murabaha and Ijarah.

risks in Islamic finance contracts. However, Noraini indicates that IBs are perceived not to use the latest risk measurement techniques and Shari’ah-compliant risk mitigation techniques due to different Shari’ah interpretation of these techniques.

The results of the survey of risk perception in different modes of financing shows that risk level is considered elevated also shown in figure 3. The high perception of risks may be an indication of the low degree of active risk management due to the absent of risk control through internal processes and control, especially in the case of operational risk. Also, Noraini indicates that credit risk in Islamic banks perceived to be the most important risk.

Also, appropriate measurement of credit and equity risks in various Islamic finance facilities can benefit from systematic data collection efforts, including by establishing credit and equity registry. Jackson-Moore suggests that banks need to start collecting data, and there can be significant advantages in pooling information and using common definitions, standards, and methodologies for operational risk which is argued can lead to significant losses in all financial institutions.

Risk Analysis and Assessment In the context of Islamic banking, few conceptual studies discuss the risk measurement aspects particularly on the unique risk.

Risk Monitoring Effective risk management requires a reporting and review structure to ensure that risks are effectively identified and assessed and that appropriate controls and responses are in place. Risk monitoring can be used to make sure that risk management practices are in line and proper risk monitoring also helps bank management to discover mistakes at an early stage. Monitoring is the last step in the corporate risk management process.

Figure 2: Conceptual Framework

Although the risk exposures of IBs differ and may be complex than conventional financial institution, the principles of credit and market risk management are applicable to both.

In addition, the IFSB’s standards on capital adequacy and risk management guiding principles mark the first steps in an ongoing process of developing prudential standards and filling regulatory gaps in the field of Islamic finance.

Apart from those two risks, Archer and Haron show that IBs are exposed to a number of operational risks that are different from those faced by conventional banks.

They argue that the complexities of a number of their products, as well as there relative novelty in the contemporary financial services market, combined with the fiduciary obligations of Islamic banks when it acts as a Mudarib, imply that for IBs operational risk is very important consideration.

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Risk Monitoring

Risk Analysis and Assessment

Risk Management Practices Risk Identification

Understanding Risk and Risk Management

According to them, control has to be established at different levels. The control by the management board will not be enough to ensure the effective functioning Figure 3: Risk perception: Risks in different modes of of the risk monitoring system, financing (scale 1-5) because the management board members do not have time on Instrument Credit Mark-up Liquidity Operational their hands to exercise extensive risk risk risk risk control. Hence, the management Murabahah 2.56 2.87 2.67 2.93 board will install an independent unit to complete the task of Mudarabah 3.25 3.00 2.46 3.08 internal supervision. This task is Musharakah 3.69 3.40 2.92 3.18 the responsibility of the internal Ijarah 2.64 3.92 3.10 2.90 audit.

Istisna

3.13

3.57

3.00

Bay’ al-Salam

3.20

3.50

3.20

Diminishing Musharakah

3.33

3.40

3.33

Because of that, the IFSB has taken the position while Investment Account Holders (IAHs) may be considered in the absence of misconduct and negligence by the Islamic bank to bear credit and market risks of assets in their funds which have been invested by the bank, the latter must be considered as being exposed to the operational risk arising from its management of those funds.

Empirical studies made by Khan and Ahmad found that IBs face some risks arising from profit-sharing investment deposits. Here, the bankers considered these unique risks more serious than conventional risks faced by fi-

Source: Khan and Ahmed (2001)

A comprehensive risk measurement and mitigation methods for various risk arising from Islamic financing activities and from the nature of Profit and Loss Sharing (PLS) in the source of funds especially Investment Account Holders (IAHs) are explained by Sundararajan. He concludes that the application of modern approaches to risk measurement, particularly for credit and overall banking risks is important for IBs. Also, he suggests that the need to adopt new measurement approaches is particularly critical for IBs because of the role IAHs play, the unique mix of

3.29

Also, the supervisory board is obliged to control the risk management process. The supervi3.40 sory board is supported by the auditor. If the auditor discovers a defect, he will have to inform the supervisory board and the management board. Finally, the shareholders of the corporation can use their rights to demand information in order to judge the efficiency of the risk management system.

The director’s report enables the shareholders to assess the status of the corporation knowledgeably and thoroughly.

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Distinct Features of Risk Management in Islamic Banking We will explain Basel accord regarding Islamic banks later in this article. Besides the usual capital adequacy ratios proposed un2011 November Global Islamic Finance

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Risk Management

Figure 4: Risk profile of conventional vs. Islamic banks Conventional bank

Islamic Bank

1. Credit risk

1. Credit Risk

2. Market risk: Equity risk Commodity risk Interest rate risk Foreign exchange risk Equity risk Commodity risk Rate of return risk Foreign exchange risk

2. Market risk:

3. Operational risk

3. Operational risk 4. Price risk 5. Fiduciary risk 6. Displaced commercial risk

Figure 5: The generic risks for banks could be categorised Types of risks

Definition

Credit risk

The potential that a counterparty fails to meet its obligations in accordance with agreed terms and conditions of credit-related contract

Market risk

The potential impact of adverse price movements such as benchmark rates, foreign exchange rates, equity prices on the economic value of an asset

Liquidity risk

The potential loss arising from the bank’s inability either to meet its obligations or to fund increases in assets as they fall due without incurring unacceptable costs or losses

Operational risk

The potential loss resulting from inadequate or failed internal processes, people and system or external events

Source: Khan and Ahmed (2001)

Unique risks for Islamic banks Figure 6: Islamic banks are exposed to some unique risks Types of risks

Definition

Shariah noncompliance risk

Risk arises from the failure to comply with the Shariah rules and principles

Rate of return risk

The potential impact on the returns are caused by unexpected change in the rate of returns

Displaced Commercial Risk

The risk that the bank may confront commercial pressure to pay returns that exceed the rate which has been earned on its assets financed by investment account holders. The bank foregoes part or its entire share of profit in order to retain its fund providers and dissuade them from withdrawing their funds.

Equity Investment risk

The risk arising from entering into a partnership for the purpose of undertaking or participating in a particular financing or general business activity as described in the contract, and in which the provider of finance shares in the business risk. This risk is relevant under Mudharabah and Musharakah contracts.

68 Global Islamic Finance

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der Basel, followed both by conventional and Islamic banks, there are some distinct features of risk management under Islamic Banking. These distinct characteristics of risk management in Islamic banks are discussed.

Islamic banks provide financing which is backed by assets and cannot deal in documents. All financing provided by Islamic banks results in the creation of assets i.e. capital formation. Islamic financing due to the asset backed nature results in productive economic activities; hence, it does not result in inflation. Furthermore, the underlying asset collateralises the loan transaction provided by Islamic banks.

Islamic banks need to comply with conventional regulatory standards as well as Shariah standards. Shariah compliance is strictly followed under Islamic banks. This dual check covers the legal risk as there is a double check on money laundering and other fraudulent activities. Shariah compliance is ensured by the Shariah Supervisory Board, which comprises of influential scholars.

The referent power of these scholars is utilised for further endorsing the system in the eyes of the general public and increasing acceptance of Islamic banking among masses. Shariah compliance also ensures Corporate Social Responsibility (CSR) and ethical compliance. Islamic banks do not conduct business with tobacco, alcohol and other harmful toxic producing companies. This mechanism has given Islamic banking the name of ‘ethical banking’ in Europe.

Clean borrowing is not allowed in Islamic banking. Islamic banks provide financing only to create assets. Therefore, Islamic banks do not offer credit cards, personal loans and running finance/ overdraft.

On the downside, Islamic banks by restricting themselves to assetbacked financing cannot provide need-based loans, short-term financing for overhead expenses or financing for debt swap.

Risk Specificities of Islamic Financial Institutions Islamic banks’ activities differ in substance and in form from conventional banks’ operations and face a different risk profile. Basel II identified three types of risk exposures for conventional banks: credit risk, market risk and operational risk. Figure 4 draws a comparative risk profile for conventional and Islamic banks.

Credit risk is the default payment risk and risk weights are assigned based on the counterparty risk. Market risk results from the risk of losses in on- and off-balance sheet positions arising from movements in market prices. It applies to the portfolio of financial instruments held by the bank and is composed of four elements: interest rate risk (further divided into specific and general market risk), equity position risk, foreign exchange risk and commodity risk.

Finally, operational risk represents the risk of loss resulting from inadequate internal processes. Early attempts by scholars to cater to the specificities and characteristics of Shariah-compliant products and services identified at least four different types of risks that are not accounted for under Basel II. We categorise here the generic risk associated with banks operation in general and unique risk Islamic Banks should be dealt with.

As credit risk, market risk and operational risk are among the most important and common risks which Islamic Banks, conventional banks also face them. Some policy guidelines to mitigate them are briefly reviewed in figures 8 to 11.

Capital Adequacy and Basel II The Basel Committee on Banking Supervision first drafted the Basel Capital Accord in 1988. The accord focused primarily on creating a framework for measuring credit risk, and setting minimum capital standards in order to safeguard banks against a loss or default.

Risk Management

Basel II Basel II marks a move away from formulaic regulatory capital calculations to a more risk- and principles-based three-pillared approach to capital management.

• •

• •

The first pillar of minimum capital levels includes operational Risk, along with more familiar credit and other financial risks (e.g. liquidity risk).

The second pillar is a supervisory review process that seeks to encourage improvements in risk management by linking regulatory capital requirements to the firm’s Internal Capital Adequacy Assessment (ICAA) and the soundness of its internal control structures.

This is augmented Basel III

The Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced a substantial strengthening of existing capital requirements and fully endorsed the agreements it reached on the 26th of July 2010.

These capital reforms, together with the introduction of a global liquidity standard, deliver on the core of the global financial reform agenda and were presented to the Seoul G20 Leaders summit in November 2010.

The Committee’s package of reforms will increase the minimum common equity requirement from 2% to 4.5%. In addition, banks will be required to hold a capital conservation buffer of 2.5% to withstand future periods of stress bringing the total common equity requirements to 7%. This reinforces the stronger definition of capital agreed

by Governors and Heads of Supervision in July and the higher capital requirements for trading, derivative, and securitisation activities to be introduced at the end of 2011.

Islamic banks are among the best capitalised banks in the world, and historically comply with inflexible standards of capitalisation, Islamic Banks for capital requirements means that local banks already exceed norms set by the Bank for International Settlements (BIS) as part of the Basel III accord.

Islamic banks already have stricter capital requirements than what are proposed in Basel III. With the Islamic banks being amongst the best capitalised on a global scale, they are on the safe side compared to their European or US counterparts, Tier 1 and total capital requirements currently stand at 8% and 12%, respectively, which are already higher than the target 2019 ratios set by Basel III. The second of the Basel accords - the Basel II - was introduced in June 2004, in order to create an international standard for banking regulators to use when creating regulations on the amount of capital needed to be put aside by banks to guard against the types of financial and operational risks commonly faced by these institutions. Advocates of Basel II believe that such an international standard can

Unique

However, one thing which it did not foresee was the increasing globalisation of Islamic finance, which in 1988 was largely confined to a handful of Middle Eastern countries. Although the Islamic finance industry still represents only a small percentage of total banking assets, it is growing at a rate of more than 15% per year, and Islamic banks have established themselves as forerunners in such major financial hubs such as London, Malaysia and Singapore.

Figure 7 Shariah non-compliance Risk

Displaced Commercial Risk Equity Investment Risk

Rate of Return Risk Islamic Bank

Generic

The committee’s overarching ambition was to encourage the convergence of national banking regulators globally towards “common approaches and standards”. With later revisions of the accord, the Basel Committee anticipated the risk issues faced by large global banks.

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Operational Risk

Credit Risk

Market Risk

Liquidity Risk

Figure 8: Credit Risk Policy

Guidelines

Credit Risk Policy - The policy addresses the broad credit management framework that covers the objective, strategy, structure and credit processes in order to establish the best practices in the management of credit risk that are in line with the regulatory requirements.

1. Pricing Matrix Guidelines 2. Acceptance Letter Offer Guideline 3. Negative List Guideline 4. Valuation Guideline 5. Discretionary Power Guideline 6. Sovereign Risk Guideline 7. Consumer Grading Guideline 8. Sectoral Guideline 9. Watchlist Guideline 10. Financing Process Guideline 11. Credit Recovery Guideline 12. Guidelines on Risk Adjusted Pricing for

Figure 9: Market risk Policy

Guidelines

Market Risk Policy – Describes the Risk Policy and Analytics, Asset and Liability Management (ALM) and Middle Office functions of the Market Risk Department

1. Market risk limit guideline

Trading Book Policy Addresses market risk factors which include but not limited to profit rate or rate of return, foreign exchange, equity and commodity risks inherent in the Bank’s trading and banking books

2. Hedging Guideline 3. Mark-to-Market Guideline 4. Rate Reasonability Check Guideline 5. Value-at-Risk (VaR) Guideline 6. Asset and Liability Management Guideline 7. Market Risk Manual & Procedures

2011 November Global Islamic Finance

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Risk Management

help to protect the international financial system from the types of problems which might arise should a major bank or a series of banks collapse.

Basel II attempted to accomplish this with the theory that setting up risk and capital management requirements should be designed to ensure that a bank holds capital reserves appropriate to the risks the bank exposes itself to, through its lending and investment practices. Generally speaking, these rules mean that the greater risk to which the bank is exposed, the greater the amount of capital the bank needs to hold, in order to safeguard its solvency and overall economic stability.

Basel III was fully endorsed on the 26th of July 2010. These capital reforms, together with the introduction of a global liquidity standard, speak to the core of the global financial reform agenda, and were presented to the Seoul G20 Leaders summit in November.

Figure 14 shows the build up of common equity and conservation following the Basel III system, and exhibits potential growth by the year 2020.

Figure 15 shows how the system implements the capital ratio over the risk-weighted assets when enhancing risk coverage of security products, trading and counterparty credit risk. Islamic banks have scope to further collaborate with the system to improve transparency and capital liquidity. These are two sectors of the Islamic finance industry which need to be improved in order to further progress in the competitive market.

“The majority of Islamic banks in Malaysia already maintain capital levels well above the current regulatory minimum, BNM says, and the Liquidity Coverage Ratio (LCR) under Basel III is conceptually similar to the liquidity framework adopted by Malaysian Islamic banks. However, the board says, the LCR will require Islamic banks to hold more liquid assets for wholesale funding than they are required to under the existing liquidity framework”. gif

Figure 10: Operational risk Policy

Guidelines

Operational Risk Policy – The policy provides the effective and efficient operational risk management through out the bank through its strategies in terms of organisation structure, process, risk tolerance, risk measurement and analytic model management information system

1. Operational risk management guideline 2. Management Awareness and Self 3. Assessment (MASA) Reporting Guideline 4. Fraud Handling and Reporting Guideline 5. Takaful/Insurance Guideline 6. Key Risk Indicators (KRIs) Guideline 7. Outsourcing Guideline 8. Operational Risk Management Process for Information Security Management System 9. Customer Complaint Guideline 10. BRCP

Figure 11: Shariah compliance risk Policy

Guidelines

Shariah Compliance Risk Management Policy – The policy provides the Shariah requirements applicable throughout the bank in its activities, products and services in compliance with the Shariah principles, provisions of the Islamic Banking Act 1983 and Bank Negara Malaysia’s rules and regulations.

1. Wadieah contract guideline 2. Ijarah and Ijarah Muntahiah Bit Tamlik Guideline 3. Murabahah and MPO Contract Guideline 4. Mudharabah (financing) Contract Guideline 5. Musharakah (financing) Contract Guideline 6. Handling and Reporting of Shariah Non Compliances Guideline 7. Mudharabah (Deposit) Contract Guideline 8. Musharakah Mutanaqisah Contract Guideline 9. Dhamanah/ Kafalah Contract Guideline 10. Wakalah Contract Guideline 11. Tawarruq Contract Guideline

Figure 12:

FINANCIAL STABILITY Pillar I Minimum Capital Requirements Capital requirements for ...

Credit risk -- Standardised Approach -- foundation IRB Approach -- Advanced IRB Approach Market risk -- Standardised Approach -- Internal VaR Models Operational risk -- Basic Indicator Approach -- (Alternative) Standardised Approach -- Advanced measurement Approaches

70 Global Islamic Finance

November 2011

Pillar II Supervisory Review Process Regulatory framework for banks -- Internal Capital Adequency Assessment Process (ICAAP) -- Risk managment Supervisory Framework -----

Evaluation of internal Systems of banks Assessment of risk profile Review of complaince wit all regulations -- supervisory measures

Pillar III Market Discipline Disclosure requirements of banks -- Transparency for market participants concerning the bank` s risk position (scope of application. risk management, detailed information on own funds, etc.)

-- Enhanced comperability of banks

Risk Management Figure 13: The Basel System

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References and Further Reading

Basel I- Introduced in 1988

•

Akkizidis, I. and Khandelwal, S. K. 2008, “Financial Risk Management for Islamic Banking and Finance”, Palgrave

Basel II-Introduced in 2004

Macmillan, First Ed. •

Al-Tamimi, H. 2002, “Risk Management Practices: An Empirical Analysis of the UAE Commercial Banks”, Finance India,

Basel III-Introduced in 2010

Vol. XVI, No. 3, pp. 1045-1057.

•

Al-Tamimi, H. and Al-Mazrooei M., 2007, “Banks’ risk management: a comparison study of UAE national and foreign banks”, The Journal of Risk Finance, Vol. 8 No.4, pp. 394409.

Figure 14:

•

Basel - III, % of RWAs

of Islamic Banks”, in Archer, S. and Karim, R. A. A. 2007, “Islamic Finance: The Regulatory Challenge”, John Wiley & Son

Build up of common equity and conservation buffer over time

(Asia) Pte Ltd. •

14.00

10.50 % 7.00 4.50 3.50

5.50

6.00

4.00

4.50

4.50

0.63 4.50

1.25

1.88

ternational Settlements.

•

4.50

4.50

Boston Consulting Group 2001, “From Risk Taker to Risk Manager: Ten Principles for Establishing a Comprehensive

4.50

Risk Management Systems for Banks”.

2020

2019

2018

2017

2016

2015

2013

year(1st jan) Capital Conservartion Buffer

Min Common Equity

BCBS 2001, Consultative Document: Principles for the Management and Supervision of Interest Rate Risk, Bank for In-

2.50

2.00 2012

2.00

5.00

4.00

2014

4.00

2011

0.00

6.00

PTR, Financial Times.

•

6.00

Barton, T. L., Shenkir, W.G. and Walker, P. L. 2002, “Making Enterprise Risk Management Pay Off”, USA, Prentice Hall

6.00 6.00

Min Existing Common equity

Baldoni, R. J. 1998, “A Best Practices Approach to Risk Management”, TMA Journal, Jan/Feb, pp. 30-34.

•

Min Existing Tier 1 Plus Common Equity 3.50

Archer, S. and Haron, A. 2007, “Operational Risk Exposures

Tier 1 Equity

•

Drzik, J. 1995, “CFO Survey: Moving Towards Comprehensive Risk Management”, Bank Management, Vol. 71, pp.40.

•

Freeland, C. and Friedman, S. 2007, “Risk and the Need for Capital” in Archer, S. and Karim, R. A. A. 2007, “Islamic Finance: The Regulatory Challenge”, John Wiley & Son (Asia)

Source: Basel Risk Management Information

Pte Ltd. •

Fuser, K., Gleiner, W. and Meier, G. 1999, “Risikomanagement (KonTraG) – Erfahrungen aus der Praxis”, Der Betrieb, Vol. 52, No. 15, pp. 753-758.

Figure 15:

•

New capital ratios • Common equity • Tier 1 • Total capital • Capital conservation buffer capital ratio =

Raising the quality of capital • Focus on common equity • Stricter criteria for tier 1 • Harmonised deductions from capital

capital Risk-weighted assets

Enhancing risk coverage • securitisation products • Trading book • Counterparty credit risk

Greuning, H. and Iqbal, Z. 2007, “Banking and Risk Environment” in Archer, S. and Karim, R. A. A. 2007, “Islamic Fi-

The Basel III reform of bank capital regulation

nance: The Regulatory Challenge”, John Wiley & Son (Asia)

Macroprudential overlay Leverage ratio Mitigating procyclicality • countercyclical buffer Mitigating systemic risk (work in progress) • Systemic capital surchage for SIFIs • Contingent capital • Ball-in debt • OTC derivatives

Pte Ltd. •

Harrington, S.E. and Niehaus, G. R. 1999, “Risk Management”, Irwin/McGraw-Hill, New York.

•

IFSB 2005, “Guiding Principles of Risk Management for Institutions (Other than Insurance Institutions) Offering only Islamic Financial Services”, Islamic Financial Services Board.

•

Iqbal, Z. and Mirakhor, A. 2007, “An Introduction to Islamic Finance: Theory and Practice” John Wiley & Son (Asia) Pte Ltd.

•

Jackson-Moore, E. 2007, “Measuring Operational Risk” in Archer, Simon and Karim, R. A. A. 2007, “Islamic Finance: The Regulatory Challenge”, John Wiley & Son (Asia) Pte Ltd.

•

Khan, T., and Ahmed, H. 2001, “Risk Management: An Analysis of Issues in Islamic Financial Industry” IRTI/IDB Occasional Paper, No. 5.

2011 November Global Islamic Finance

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Market Review

Value of Global Sukuk Rises to $47 billion Source: GlobalIslamicFinanceMagazine.com

Sukuk (Islamic bonds) issuance last July worldwide amounted to about $5 billion, down 37 percent from the previous month, Kuwait Finance House (KFH) said Saudi riyal formed about 15 percent of those Sukuk, it noted.

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The Islamic finance industry is estimated to be worth $1 trillion and is expected to double over the coming years. Egypt was planning to issue its first Islamic debt guidelines in 2011 to catch up with the Gulf and Southeast Asia and help spur sales

The report said the sovereign Sukuk topped issuances in July, including three versions of Sukuk for Saudi and Qatari companies. In the Middle East and North Africa region, only a few countries have issued Sukuk so far and these are 5 of the GCC states and including Sudan.

It added that the Sukuk market for companies in the GCC countries continued to expand this year through the issuance of two local versions from Saudi Arabia and an international Sukuk from Qatar.

Despite the decline, the main Sukuk market continued its annual increment by 133 percent in July, raising the value of annual releases to $52.1 billion. The Islamic finance industry is estimated to be 72 Global Islamic Finance

November 2011

worth $1 trillion and is expected to double over the coming years. Egypt was planning to issue its first Islamic debt guidelines in 2011 to catch up with the Gulf and Southeast Asia and help spur sales. However, the recent developments could delay such plans till further notice. In Algeria, Ismail Noureddine, the president of Commission of supervision of stock exchange operations (COSOB), declared that the introduction of new financial products as Sukuk is under consideration.

Turkey has made major steps in developing Islamic finance and facilitating issuance of Sukuk. The Turkish National Assembly in Ankara passed the Finance Bill 2011 in February which includes tax neutrality measures for Sukuk Al-Ijara (leasing certificates), paving the way for a spate of corporate Sukuk issuances in the country. KFH has said earlier that the

value of Sukuk issued in the first half of this year has amounted to some $47 billion, exceeding the record high reached last year of $45 billion. The issuance of global Sukuk jumped in the first half of 2011 by 34.7 percent, KFH said, noting that Sukuk markets saw a seesaw movement in June after Malaysian government issued Sukuk amounting to $2 billion.

Separately, global Sukuk issuance rose by 18 percent in Q2 2011 on year-ago levels to $16 billion, Zawya’s Sukuk Quarterly Bulletin said recently. Across H1 2011, some $43.8 billion was raised globally, setting a new record. Government issuance dominated in Q2 2011, totalling $11.651 billion.

Malaysia has made unprecedented achievements in the Islamic finance sector and it currently dominates domestic Sukuk, with 72 percent by value, Sudan leads short-term issuance (maturity one year or less). gif

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Market Review

KUWAIT TO DEVELOP COOPERATION in Islamic Finance Sector in Luxembourg Source: GlobalIslamicFinanceMagazine.com

He noted that Luxembourg is the second largest investment fund centre in the world after the United States, and the premier private banking centre in the Eurozone.

The financial sector is the largest contributor to the Luxembourg economy 143 banks and 108 insurance companies are based in Luxembourg and 84,000 people are employed in the financial sector. The largest Chinese bank ICBC has chosen Luxembourg as its European headquarters.

Grulms explained that political and social stability, a transparent legal framework, high standard of regulation and Luxembourg’s openness to the world are the reasons behind the attraction of international banks and insurance companies. On her part, Elenaor de Rosmorduc, an expert on Islamic banking at the Luxembourg financial centre briefed the Kuwaiti MPs in the situation of the Islamic finance sector in Luxembourg. She noted that on the global level Islamic finance was worth one trillion US Dollars and there were 614 Shariah complaint institutions in 47 countries.

Islamic finance was growing by 25 percent annually, she noted. Rosmurduc said that government support, a stable system, tax diversity and a talented workforce are among the factors that are attracting Islamic finance 74 Global Islamic Finance

November 2011

Kuwait into an important financial and trade hub in the world.

“We learnt today a lot about the financial institutions in Luxemburg and also about Islamic financial institution. Our visit here was very useful and we call on the financial and investment bodies in Kuwait to explore these special capabilities and to benefit from them,” he said.

„

A four-member delegation from the Kuwaiti parliament visited the Luxembourg financial centre, called Luxembourg for Finance in order to get first-hand information on the way the banking and finance sector functions in the small European country.The head of the centre, Fernand Grulms, welcomed the Kuwaiti parliamentarians and briefed them on the activities of the Luxembourg financial centre which is a publicprivate partnership between the Luxembourg government and the Luxembourg financial industry federation.

W e must organise networking between business people from Kuwait and Luxembourg so that we start to know each other much better and that will also enhance business development in the future to Luxembourg. There are 39 Shariah-complaint institutions based in Luxembourg but there is no Islamic bank here as yet. Later, speaking to the Kuwait news agency, KUNA, MP Khalid Sultan Bin Eissa said this is the first day of the visit of the Kuwaiti parliamentary delegation to Luxembourg.

“There are a lot of similarities between Kuwait and Luxembourg which is a small country with a population of 500,000 only.

We discovered here today that Luxembourg holds the second largest position in the financial sector in the world after the US,” he said.Bin Eissa said the lesson to draw for us in Kuwait is that the size and population of a country is not any hindrance in developing

He noted that even the American finance sector is making use of these capabilities offered

by Luxembourg. On his part, Fernand Grulms told KUNA that “Luxembourg and Kuwait can do much more in the future and what we can do is to enact our double-tax treaty because that will lead to improvement in our business.” “We must organise networking between business people from Kuwait and Luxembourg so that we start to know each other much better and that will also enhance business development in the future,” he said.

Grulms said that today Luxembourg is very well positioned in terms of Islamic finance in Europe and we can certainly provide our tools and our expertise for those who would like to launch Islamic financial products.” We hope to do more business in the future,” he added.

The Kuwaiti parliamentary delegation includes Dr.Dhaifalla Abu Ramia, Saad al-Azemi and al-Saifi al-Ajmi. Head of the Kuwaiti parliamentary delegation Mubarak Al-Kherainej who is the president of the KuwaitLuxembourg inter-parliamentary friendship group and chairman of the foreign affairs committee in the Kuwaiti parliament is expected to arrive in Luxembourg. gif

Market Review

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Qatar’s Islamic Banking Sector Performance Improves Source: GlobalIslamicFinanceMagazine.com

Qatar is a predominant Islamic finance hub whose Islamic banking sector substantially improved its financial performance in the first half (H1) of this year mainly due to robust core earnings, which is reflective of the buoyancy of the fastest growing country’s economy.

International Islamic (16%) and Masraf Al Rayan (15%). In the case of net fee and commission income, QNB could register a 5% rise, Commercial Bank (6%), Ahli Bank (25%), Masraf Al Rayan (433%) and Al Khaliji (20%); while Doha Bank’s fell 18% and Qatar Islamic Bank (39%).

The cumulative net profit of the eight Qatar Exchange-listed banks registered 25% growth during the January to June period this year against a 10% rise in the corresponding period of the previous year, according to the data collected from the Qatar Exchange.

The cumulative assets of the banks stood at QR542.89bn, of which loan portfolio’s share was 55% or QR300.73bn at the end of the 30th of June 2011.

The banking regulator had capped lending to expatriates at QR400,000 and limited the borrowing for nationals at QR2mn.

It has also capped personal loan rates at 6.5%, which according to bank officials, has thinned the net margins.

QNB, the country’s largest lender by assets, reported a 31% growth in their net profit in H1 2011 (against a 30% growth in the yearago period), Commercial Bank 17% (-13%), Doha Bank 14% (-5%), Qatar Islamic Bank 17% (-%), Ahli Bank 28% (8%), International Islamic 18% (7%), Masraf Al Rayan 14% (56%) and Al Khaliji 122% (3%).

The lenders’ cumulative operating income surged 25% with interest/finance earnings growing by a similar proportion whereas fee and commission income grew slower at 6% during January to June this year. Both Ahli

„

The banks’ cumulative net profit stood at QR7.38bn and total assets at QR543bn during the first six months of this year. The surge in profitability came despite the Qatar Central Bank restrictions on personal borrowings by both nationals and expatriates.

I n the Islamic financing segment of the conventional lenders, net income from the Shariah-principled route was still on the rise in the case of a majority of the banks but largely on account of the fall in ‘unrestricted investment account holders’ share in the profit

Bank and Masraf Al Rayan gave total operating income; while others gave net operating earnings. QNB has reported a 30% jump in its operating income, Commercial Bank (14%), Doha Bank (16%), Qatar Islamic Bank (14%), Ahli Bank (20%), International Islamic (14%), Masraf Al Rayan (41%) and Al Khaliji (56%).

Within the operational parameters, QNB reported a 35% growth in interest income, Commercial Bank (8%), Doha Bank (28%), Ahli Bank (19%) and Al Khaliji 58%. In the case of Shariah-principled lenders, Qatar Islamic Bank’s finance income was up 23%;

QNB’s total assets were valued at QR263.60bn, of which loans comprised 57.11% or QR150.53bn; Commercial Bank QR67.72bn (59% or QR39.79bn); Doha Bank QR49.53bn (56% or QR27.71bn); Qatar Islamic Bank QR50.14bn (49% or QR24.73bn); Ahli Bank QR17.36bn (64% or QR11.06bn); International Islamic QR22.17bn (46% or QR10.12bn); Rayan QR48.93bn (58% or QR28.33bn) and Al Khaliji QR23.44bn (36% or QR8.46bn).

In the Islamic financing segment of the conventional lenders, net income from the Shariah-principled route was still on the rise in the case of a majority of the banks but largely on account of the fall in ‘unrestricted investment account holders’ share in the profit’.

QNB’s financial statement gave a consolidated figure for both conventional and Islamic financing. The net impairment on loans and advances registered increases in the case of QNB, Commercial Bank, International Islamic and Al Khaliji, while that of Qatar Islamic Bank fell. Doha Bank and Ahli Bank showed lower provisions for impairment on loans and advances. gif

2011 November Global Islamic Finance

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Event Review

The International Summit on Islamic Corporate Finance bring together Corporate Borrowers and Islamic Bankers Author: Tajah Brown, Global Islamic Finance Magazine Editorial Team, United Kingdom

The Leading Islamic bankers and corporate borrowers held discussions about the development of Islamic corporate finance at the International Summit on Islamic Corporate Finance (ICFS 2011). The two day Summit held on the 10th and 11th of October in Abu Dhabi was in partnership with Noor Islamic bank.

The Summit focused on exploring the role of Islamic syndicated loans, trade finance and project finance in diversifying the corporate funding mix and increasing deal flow. The keynote address was given by the senior vicepresident and head of treasury at MAF Holdings, Daniele Vecchi.

Islamic finance has become the financial solution for number expanding businesses both regionally and all over the world. Those that attend the summit will be aiming to understand and capitalise on the rise of demand for Islamic finance from the corporate business sector. The ICFS 2011 is the perfect opportunity to bring together all key components of the deal-making value chain. The corporate banking leaders and corporate end users of these services came together in

order to develop long-term business relationships. Managing director of the International Summit on Islamic Corporate Finance, David McLean gives his views saying “with market preferences increasingly shifting towards Shariah-complaint banking and finance, more and more businesses are looking to include Islamic finance as a key component of their funding mix. Though Islamic retail banking, Takaful and Sukuk have traditionally been the main industry growth drivers, analysts are becoming more convinced that Islamic corporate finance, which includes syndicated lending, trade finance and project finance could be poised to be a powerful new growth driver for the global Islamic finance industry and meet the pent up demand of corporate borrowers for expanding the role of Islamic finance in their funding mix.”

He also says “There is no doubt that Islamic finance is maturing into a global phenomenon as highlighted by the increasing appetite for Islamic instruments and deal structure across international capital markets, corporate loans and asset finance.”

Event Review Daniele Vecchi discussed the corporate borrowers’ expectations of Islamic corporate finance and also highlighted how Islamic finance can play a more vital role in the corporate funding mix. The event focused on how to capitalise the need for Islamic finance from the business side becoming part of the corporate funding mix.

Opportunities for Islamic Corporate Finance’ session. Moinuddin Malim expresses his views saying, “Islamic finance is quickly become an integral part of the global Islamic finance industry and has taken its roots in almost all of the Muslim countries but has also been under discussion and penetration in selective Western and Far Eastern jurisdictions.

Discussing the partnership with ICFS 2011, Hussain AlQemzi, CEO of Noor Islamic Bank and Group CEO of Noor Investment Group says “Islamic finance has been emerging as a viable corporate finance alternative, highlighting by several recent landmark transactions both regionally and globally. However, the Shariah-compliant corporate finance market has not yet realised its full potential as its value proposition has not been fully communicated to its corporate client base.”

The ICFS 2011 also featured a special keynote session with professionals in the industry such as Kazim Ali, Corporate Unit Head, Noor Islamic Bank. The session focused on the corporate borrower’s expectations of Islamic corporate finance and the role of Islamic finance in diversifying the corporate funding mix. Associate Sponsor, Mashreq Al Islami announced its role at the Summit held in Le Royal Meridien, Abu Dhabi. The CEO of Mashreq Al Islami, Moinuddin Malim was a panelist at the ‘Assessing Key Market

Islamic products and services are available for every segment of the industry so long as it has acceptability under Shariah. Retail, wholesale, investment, capital markets, asset management and treasury products and solutions are available across broad spectrum to meet the requirement of customers who prefers Shariah-compliant alternative.

Over the last 10 years we have witnessed an increasing appetite for Islamic products & services. Even post financial crises, the growth of Islamic finance outpaces that of conventional finance in our markets. Mashreq Al Islami is known for its range of financial services to accommodate the market needs.

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He added, “We are delighted to be a strategic partner of the International Summit on Islamic Corporate Finance and see this event as a unique platform to engage the corporate borrowers in critical discussions that will seek to increase the ratio of Islamic finance in their overall corporate funding mix.”

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There is no doubt that Islamic finance is maturing into a global phenomenon as highlighted by the increasing appetite for Islamic instruments and deal structure across international capital markets, corporate loans and asset finance

Conferences such as the international Summit on Islamic Corporate finance are critical in facilitating such dialogues and we are delighted to be a part of it”. Takaful and Sukuk have been the main driving force within the Islamic finance industry. Islamic corporate finance could also become a new driving force for the industry globally, according to industry analysts. The new driving force could contribute to meeting the demands of corporate borrowers for expanding the Islamic finance sector in the funding mix. gif

Islamic Finance Ltd. Islamic Finance Ltd offers a comprehensive range of Islamic finance solutions to help expedite your international business, trade and risk mitigation.

Islamic Finance Ltd is committed to providing its business customers with a range of innovative Islamic banking solutions. We do our best to arrange a wide range of financing that you can be certain your finance is structured in full accordance with Shariah requirements.

Visit our website for more information: www. ukislamicfinance.co.uk

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How to Run an Islamic Bank

Islamic Asset Management: An Asset Class on Its Own?

by Dr. Natalie Schoon

Part 1: Putting corporate strategy in places, values, regulations Part of Article Collection, individual article/ £4.99

Edinburgh University Press/ £23.74

When considering the aspects involved in running an Islamic bank it is vital to channel resources such as knowledge and relationships in the right direction in order to strike a balance between innovation and control. Strategy is the art of creating value and providing frameworks, models and governing ideas. It could be compared to software, which needs to be updated as people expand their knowledge and gain experience.

How to run an Islamic bank will explore the different strategies involved in the running of an Islamic bank such as risk positioning and financial fundamentals.

Islamic asset management has been growing at a similar rate as the Islamic financial industry as a whole and at the time of writing close to 700 funds are incorporated in the major databases with an estimated funds under management of around $70 billion. This book reviews the Islamic asset management industry in detail, including the types of funds offered and their operational procedures.

Islamic banking is a rapidly growing industry with the establishment of many new institutions embracing Shariah compliant banking. The UK has combined assets of US$300 million and overall the Islamic finance industry is worth an estimated one trillion US dollars globally.

It shows that although there are differences between conventional and Islamic asset management, these do not appear to have a significant impact on how the funds perform. Shariah compliant funds are therefore an attractive alternative for Muslim and non-Muslim investors alike.

Order Number: 2011g086

ISBN-10: 0748639969 ISBN-13: 978-0748639960

Throw it all and see what sticks: The Current State of Islamic Asset Management and a Prescription for Change Part of Article Collection, individual article/ £4.99

Nearly all activities labelled today as “Islamic asset management” or “Islamic wealth management” are not at all related to their conventional cousins. They consist of simply creating products with fatwa, throwing them into the market, and seeing what sticks. It is random, undisciplined, and has nothing to do with the professional practice that we call asset management.

We like to call this the “throw it all and see what sticks” theory of asset management. In other words, the theory assumes that investors are not seeking to improve their chances of achieving long-term savings objectives through disciplined investment.

Order Number: 2011g061

Takaful (Islamic Insurance): Concept, Challenges, and Opportunities

Part of Article Collection, individual article/ £4.99

Through desktop research, one can get a plethora of materials and papers on Takaful, but most tend to focus either on the fundamentals of Takaful or on Takaful models. Takaful is structured on the principles of sharing and pooling mortality/morbidity risk with other participants, It is seen as the Islamic counterpart of conventional mutual Insurance.

Part 1 of this article will explore the key issues and challenges facing the world of Takaful and suggested areas where work is required to find solutions. Therefore this article is intended to provide useful reference material for practioners by summarising key aspects such as an overview of Takaful and the intricacies of the models.

Order Number: 2011g089 78 Global Islamic Finance

November 2011

Risk Sharing in Finance: The Islamic Finance Alternative

by Zamir Iqbal, Abbas Mirakhor, Hossein Askari, Noureddine Krichene John Wiley & Sons/ £48.41 The recent U.S. financial debacle has affected the entire world and led to major reviews of risk management in financial institutions. Perhaps a simpler alternative is just to adopt the systems used for centuries in Islamic finance. Risk Sharing in Finance expounds upon this novel idea, suggesting that the Islamic financial system can be developed for use around the world by providing a helpful paradigm for crafting global financial reforms.

Demonstrating how Islamic finance can successfully expand its array of risk sharing instruments, for example issuing government shares to finance development projects and placing limits on short sales and leveraging, the book makes a compelling case for thinking outside the box to redevelop a vibrant stock market.

• • •

Provides analysis of the comparative historical, theoretical, and empirical investigation of risk management in both the conventional and the Islamic–type financial systems Explores the benefits and the implications of introducing Islamic finance around the world and explains how wider reliance on risk sharing can be implemented Establishes a connection between the flawed contemporary Western system of capitalist finance and the ancient, traditional forms of risk–sharing prevalent in Islamic finance

ISBN-10: 0470829664 ISBN-13: 978-0470829660

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Event

Event Calendar December

November Islamic Finance news Roadshow 3rd November 2011, Turkey Organised by RedMoney Group

Islamic Finance news roadshow 8th November 2011, Canada Organised by RedMoney Group

Islamic Finance news roadshow 10th November 2011, US Organised by RedMoney Group

The 9th Middle East Forex & Investment Summit 2011 15th – 16th November 2011 Abu Dhabi, United Arab Emirates Organised by Arabcomgroup

18th Annual World Islamic Banking Conference (WIBC 2011) 20th & 22nd November 2011 Republic of Bahrain Organised by MegaEvents

The Kingdom Investors Summit 21st – 22nd November 2011 Riyadh , Saudi Arabia Organised by Naseba

7th Operational Excellence in Banking OPEX 2011 21st- 22nd November 2011 Dubai, United Arab Emirates Organised by Fleming Gulf

Russian Power: Finance and Investment 22nd – 24th November 2011 Moscow, Russia Organised by Adam Smith Conference

Russian Banking Forum

22nd November- 1st Dec 2011 Moscow Russia Organised by Adam Smith Conference

Risk Management in Oil & Gas

22nd – 23rd November 2011, Doha, Qatar Organised by Fleming Gulf

Commodities Week Middle East 5th – 7th December 2011 Dubai, United Arab Emirates Organised by Terrainn

Global Islamic Finance Awards & Conference 10th December, United Arab Emirates Organised by Global Islamic Finance Magazine

1st Annual Islamic Project Finance & Trade Finance Conference

10th – 11th December 2011 United Arab Emirates Organised by Global Islamic Finance Magazine

International Conference on Islamization in Modern Science and Scientification of Islamic Studies 19th – 21st December 2011 Selangor, Malaysia Organised by Association of Malaysian Muslim Intellectual (PIMM)

January Academy of International Business MENA Chapter Conference 13th – 15th January 2011 Dubai, United Arab Emirates Organised by AIB-MENA

For more information and full events details, please visit www.globalislamicfinancemagazine.com/events

Glossary Business Directory

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Business Directory Banks European Islamic Investment Bank

Arab Banking Corporation

Bank of London and Middle East

Contact person/ department: Keith McLeod Address: European Office 131 Finsbury Pavement London EC2A 1NT England Telephone: +44 20 78479900 Fax: +44 20 78479901 E-mail: reception@eiib.co.uk Website: www.eiib.co.uk

Contact person/ department: Nadia Mehdid Address: Station House, Station Court, Rawtenstall Rossendale BB4 6AJ, UK Telephone: +44 1706237900 Fax: +44 1706237909 E-mail: nadia.mehdid@arabbanking.com Website: www.arabbanking.co

Contact person/ department: Michelle Arnold Address: Sherborne House 119 Cannon Street London, EC4N 5AT United Kingdom Telephone: +44 20 7618 0000 Fax: +44 20 7618 0001 E-mail: Michelle.Arnold@blme.com Website: www.blme.com

Description: EIIB seeks to service a market for Sharia’a compliant investment banking services in Europe, the Middle East and Asia that it believes has been under-exploited by conventional and Islamic banks, and by non-banking institutions. EIIB intends to become a major participant in the market for Islamic securities, treasury and investment products, which is currently experiencing rapid growth.

Description: Arab Banking Corporation, popularly known as ABC, is an international Universal bank headquartered in Manama, Kingdom of Bahrain.

Our network spreads over 21 countries in the MENA and GCC, Europe, the Americas and Asia. ABC is a leading regional bank in Trade Finance & Forfaiting, Treasury, Project & Structured Finance, Syndications, Corporate & Institutional Banking as well as Islamic Banking. We also provide Retail Banking services in the MENA region

Description: Bank of London and The Middle East plc (BLME) is a fully Sharia’a compliant wholesale bank in the heart of the City of London. BLME is managed by a quality team bringing together a combination of highly experienced international financiers and leading experts in Islamic finance. The majority of our Corporate Banking client base is located mainly in the UK, US and Europe.

ABN AMRO Bank N.V.

Dubai Islamic Bank PSJ

Al Baraka Islamic Investment Bank

(ABN AMRO Bank N.V. is an authorised agent of The Royal Bank of Scotland plc.)

Contact person: Abbas Yousafzai - Head of Islamic Banking Address: Khalid Bin Waleed Road, PO Box 2567, Dubai, UAE Telephone: +971 4 506 2260 Fax: +971 4 506 2028 E-mail: Abbas.Yousafzai@rbs.com Website: www.rbsbank.ae

Address: P.O.Box 1080 Dubai United Arab Emirates Telephone: + 9714 2953000 Fax: +971 4 295 411 E-mail: contactus@alislami.co.ae Website: www.alislami.ae/en/

Al Baraka Tower , P.O. Box 1882 Manama , Bahrain Telephone: + 973 250 363 Fax: + 973 274 364 E-mail: baraka@batelco.com.bh Website: www.albaraka.com

Description: RBS within its Retail Banking Unit offers its clients competitive Islamic Banking Solutions. They have one of the largest options for Islamic Wealth Management Products and are also a distributor of the Takaful Product developed by Aman (Dubai Islamic Insurance & Re-Insurance Company). They are presently engaged in launching a full Retail Banking proposition with a Shariah Based Credit Card and Liability Accounts in 2010.

Description: Dubai Islamic Bank has the unique distinction of being the world’s first fully-fledged Islamic bank, a pioneering institution that has combined the best of traditional Islamic values with the technology and innovation that characterise the best of modern banking. Since its formation in 1975, Dubai Islamic Bank has established itself as the undisputed leader in its field, setting the standards for others to follow as the trend towards Islamic banking gathers momentum in the Arab world and internationally.

Description: Al Baraka Banking Group offers retail, corporate and investment banking and treasury services strictly in accordance with the principles of the Shari’a. The authorized capital of ABG is US$1.5 billion, while the total equity amounts to about US$1.52 billion. The Group has a wide geographical presence in the form of banking Units and representative offices in twelve countries, which in turn provide their services through 300 branches.

Accountancy firms Abbas Accounting

Baker Tilly MKM

HLB HAMT Chartered Accountants

Address: ABBAS ACCOUNTING P.O.Box : 78142 Dubai, U.A.E Telephone: +971 4 2820300 Fax: +971 4 2820322 E-mail: info@abbasaccounting.com Website: www.abbasaccounting.com

Address: Epico “Safar” Building Liwa Street Abu Dhabi United Arab Emirates Telephone: +97 1506226719 Fax: +971 26226088 E-mail: sumchart@eim.ae Website: www.bakertillymkm.com

Address: 106, Al Nayali Building Abuhail Road, P.O. Box: 32665 Dubai - United Arab Emirates Telephone: +97142627147 Fax: +971 4 2627148 E-mail: dubai@hlbhamt.com Website: www.hlbhamt.com/

Description: sad Abbas & Co is an audit and accounting consultancy firm in Dubai, United Arab Emirates. Services rendered by the firm include statutory, external and internal audit, accounting and financial management consultancy, accounting and finance outsourcing, project evaluation, feasibility studies and allied services. The firm is led by a team of qualified and widely experienced professionals dedicated to practice of the profession in the highest standards and committed to providing the best services to the clients.

Morison Menon

BDO International

Address: 204 Tower- A, Gulf Towers, Oud Metha, P. O. Box 55535, Dubai, UAE Telephone: +971 4 33 66 990 Fax: +971 4 33 66 992 E-mail: dubai@morisonmenon.com Website: www.morisonmenon.com/

Address: BDO - London 55 Baker Street London W1U 7EU Telephone: +44 207 486 5888 Fax: +44 0207 487 3686 E-mail: j.polin@bdo.co.uk Website: www.bdo.uk.com/

Description: Morison Menon Group is a group of firms offering professional advisory services in Financial Audit, Compliance and Accounting, Consulting (Business Plan, Company setup and business incorporation, Financial Consulting, Property Consulting, HR Solutions, BPO, IT and Web Solutions) since the year 1994. Headquartered in Dubai,UAE armed with a license to operate in DIFC, Dubai. The group has offices in Abu Dhabi, Jebel Ali, Sharjah and Ras Al Khaimah apart from overseas operations in Oman, Qatar, Bahrain, Iran and India. Morison Menon currently is a team of over 150 Professionals.

82 Global Islamic Finance

Description: We offer a wide range of service including auditing, accounting, consultancy, financial-management, profit-enhancement, feasibility studies, company-secretarial, offshore-company registration, and trademark-registration.

You will receive a prompt response to every question or request. We serve our clients as a partner in order to help them make the best possible decisions for their business.

November 2011

Description: BDO is an award-winning, UK Member Firm of BDO International, the world’s fifth largest accountancy network with more than 1,000 offices in over 100 countries, including affiliates. We specialise in helping businesses, whether start-ups or multinationals, to achieve their goals. Through our own professional expertise and by working directly with organisations, we’ve developed a robust understanding of the factors that govern business growth.

Our objective is to use this to help our clients maximise their potential.

Description: We have a full range of accounts and audit services to meet your business needs. A professional firm with regional focus and having global representation, HLB Hamt, Chartered Public Accountants spectrum of services cover all aspects of doing business in the UAE and the GCC countries. While based in the UAE, we offer comprehensive services for doing business in the Middle East including all the Free Trade Zones, right from company formation.

Barber Harrison and Platt Address: 2 Rutland Park Sheffield S10 2PD Telephone: +44 114 266 7171 Fax: +44 114 2669846 E-mail: info@bhp.co.uk Website: www.bhp.co.uk Description: Barber Harrison & Platt is committed to building professional relationships founded on the personal responsibility of a partner for a client’s affairs. As a Top 60 firm and the largest independent firm of chartered accountants in South Yorkshire and Derbyshire our continued success owes much to our dynamic approach and ability to fulfil client demands. This requires the highest level of commitment and performance. Barber Harrison & Platt provide advice to plc’s, private companies, partnerships, sole traders, individuals and trusts. The close working relationship we enjoy with clients provides a deep insight into a far wider range of business situations and problems than are traditionally associated with accountancy.

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Law firms Norton Rose (Middle East) LLP Contact person/department: Neil D. Miller, Partner Address: 4th Floor, Gate Precinct Building 3, Dubai International Financial Centre, Dubai, UAE PO Box 103747 Telephone: +971 (0)4 369 6300 Fax: +971 (0)4 369 6350 Email: neil.d.miller@nortonrose.com Website: www.nortonrose.com Description: We offer a full business law service and work in teams that cut across national and jurisdictional boundaries. In everything we work on, we provide expert advice, innovation and a commercial outlook. Our practice areas cover banking and Islamic finance, construction, corporate finance, dispute resolution, PPP, project finance, real estate

Allen & Overy Contact person/ department: Michael Duncan Address: Bishops Square Allen & Overy LLP One Bishops Square London E1 6AD United Kingdom Telephone: +44 20 3088 4197 E-mail: michael.duncan@allenovery.com Website: www.allenovery.com Description: Allen & Overy is one of a small group of truly international and integrated law firms with approximately 5,000 staff, including over 450 partners, working in 31 major centres worldwide. Allen & Overy also operates in regions where we do not have an office via our network of International Desks.

Lawrence Graham LLP (LG) Contact person/ department: James Foster, head of LG’s Dubai office Address: PO Box 33090 8th Floor Convention Tower Zabeel Road Dubai, UAE Telephone: +971 4 329 2420 Fax: +971 4 329 2430 E-mail: dubaioffice@lg-legal.com Website: www.lg-legal.com Description: LG is a firm of business lawyers, advising clients around the world. The opening of the firm’s Dubai office at the end of 2007 and the Moscow office earlier this year cemented its global growth and focus on clients internationally.

King and Spalding

Clifford Chance Contact person/ department: Anna Ward Address: 10 Upper Bank Street Canary Wharf London E14 5JJ Telephone: +44 20 7006 1000 E-mail: info@cliffordchance.com Website: www.cliffordchance.com Description: Clifford Chance is one of the world’s leading law firms, helping clients achieve their goals by combining the highest global standards with local expertise. The firm has unrivalled scale and depth of legal resources across the three key markets of the Americas, Asia and Europe and focuses on the core areas of commercial activity. Clifford Chance lawyers advise internationally and domestically.

Trowers & Hamlins

Contact person/ department: Jawad l Ali Address: 125 Old Broad Street London EN EC2N 1AR Telephone: +44 2075517500 Fax: +44 2075517575 E-mail: jali@kslaw.com Website: www.kslaw.com

Contact person/ department: Nicholas Edmondes Address: Sceptre Court 40 Tower Hill London EC3N 4DX Telephone: +44 20 7423 8000 Fax: +44 20 7423 8000 E-mail: nedmondes@trowers.com Website: www.trowers.com

Description: King & Spalding has provided the highest quality legal services to its clients for over a century. Today, with more than 800 lawyers and offices in Abu Dhabi, Atlanta, Austin, Charlotte, Dubai, Frankfurt, Houston, London, New York, Paris, Riyadh (affiliated office), San Francisco, Silicon Valley and Washington, D.C.

Description: We believe lawyers exist to serve their clients - not vice versa. We also believe that every task we undertake on your behalf is unique.We expect to be judged on results, on the added value we provide, the quality of our service, and our cost-effectiveness. These attributes have led to us being voted Law Firm of the Year 2007 by the Lawyer.

Advisory and Consultancy firms AR Business Consultants Chartered Certified Accountants Tel: + 44 (0) 208 776 9500 Fax: + 44(0) 208 778 8966 Regent House Business Centre Suite No: 209 291 Kirkdale London SE26 4QD U.K. Web: www.arconsultants.co.uk Description: Saving tax & building business. We providing a personalised service to business owners and individuals. For help with any of your accountancy and tax needs, please give us a call. All initial consultations are free of charge.

Dubai International Financial Centre (DIFC) Address: The Gate, Level 14 P.O. Box 74777, Dubai, UAE Telephone: +971 4 362 2222 Fax: +971 4 362 2333 E-mail: info@difc.ae Website: www.difc.ae Description: DIFC Authority establishes and develops a suitable Quality Management System that is the foundation of the ‚Service Excellence’ strategic theme, focusing on DIFC’s journey towards achieving its vision ‚To shape tomorrow’s financial map as a global gateway for capital and investment.DIFC Authority is committed to meeting and exceeding customer’s expectations in providing consistent and competitive high quality services, through continuously improving the effectiveness of the Quality Managements System as per ISO 9001. This is carried out in compliance with DIFC Law and applicable statutory and regulatory requirements.

Chahine Capital Group Contact person/ department: Andrew Pell Address: 43, Avenue Monterey Luxembourg, L-2163 Telephone: +44 20 7 1270001 +352 260 955 Fax: +44 20 7127 4611 E-mail: Andrew.pell@chahinecapital.com Website: www.chahinecapital.com Description: Specialists in quantitative equity investment strategies. Digital Stars Europe (Bloomberg: BILDSCELX) available as Chahine Islamic Stars Europe, with Fatwa from Sharia board headed by Dr Elgari. Bespoke investment strategies under mandate and client branded funds also available.

Qatar Financial Centre Address: P.O. Box : 23245, Doha Telephone: +974 496 7777 Fax: +974 496 7676 E-mail: info@qfc.com.qa Website: www.qfc.com.qa Description: Qatar is one of the world’s fastest growing economies, and the wealthiest country in the world measured by GDP per capita. The Qatar Financial Centre (QFC) lies at the heart of this small but dynamic country’s ambitious investment and development strategy.By attracting many of the world’s leading financial institutions to establish operations in Qatar, the QFC is supporting both the development of Qatar’s economy. The QFC Authority is committed to maintaining the highest international standards in its operations and activities.

We welcome firms who will contribute to the development and success of Qatar’s financial sector and we will support them in achieving success.

Overseas Trade Finance Ltd Address: Bilton Tower London W1h 7LE Telephone: + 207 859 8201 Fax: +44 845 862 1220 E-mail: info@otfonline.co.uk Website: www.otfonline.co.uk Description: Specialises in sourcing trade finance, and arrange funding for export transactions on behalf of exporters, and international trade finance professionals world wide. Company arrange the finance for Trade related business and forfeiting. Specialise also in arranging non-recourse discounting of domestic and export receivables, based on the purchase of Bills of Exchange, Promissory Notes and invoices. Overseas Trade Finance is dealing with Trade Finance related business and Forfeiting

Malaysia International Islamic Financial Centre (MIFC) Address: MIFC Secretariat Bank Negara Malaysia Jalan Dato’ Onn 50480 Kuala Lumpur Malaysia Telephone: +603 2692 3481 Fax: +603 2692 6024 E-mail: mifc@bnm.gov.my Website: www.mifc.com/ Description: In August 2006, the Malaysia International Islamic Financial Centre (MIFC) initiative was launched to promote Malaysia as a major hub for international Islamic finance. The MIFC initiative comprises a community network of financial and market regulatory bodies, Government ministries and agencies, financial institutions, human capital development institutions and professional services companies that are participating in the field of Islamic finance. Malaysia has also the distinction of being the world’s first country to have a full-fledged Islamic financial system operating in parallel to the conventional banking system.

If you would like to list your company in Financial Directory, please send your order to marketing@gifmagazine.co.uk. Claim your 25% discount by giving the following discount code: X10G01. Please note that only limited space is available in the directory.

2011 November Global Islamic Finance

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Prosperitus Capital Partners Contact person/department: Kamran H. Khan Co-Managing Partner Address: Berkeley Square House London W1J 6BD Telephone: +44 207 193 5755 Mobile: +44 7943 866 552 E-mail: kamran.khan@prosperituspartners.com They are the first of their kind to launch a private equity fund. Their ideal drive and focus is centred on Sharia complaint funding and connecting the markets in the west to the markets in the Middle East. They are doing this by translating the message of Islamic Finance. Prospertious business approach is connected to both innovation and management of the individual asset classes. They intend to foster operations in the Middle East, North Africa. Porsperitus, also have a parallel conventional platform.

Commander Fund Asset Management Ltd Contact person/department: Mark Randall Address: 4 Creed Court 5 Ludgate Hill London EC4M 7AA Telephone: +44 (0) 20 7246 9940 Fax: +44 (0) 20 7246 9944 E-mail: mark.randall@commanderfund.co.uk Website: www.commanderfund.co.uk Commander fund is primarily a conventional based asset management and operations corporation. Yet, in recent years they have been working on pioneering the closes thing to a Sharia compliant Hedge fund. They are also promoting the Middle East and developing a strong client base and market presence there.

Capitala Contact Person. Department : Patricia Assaad Address: Al Moroor Street PO Box 30398 Email: patricia.assaad@capitala.ae Telephone: +971 2 412 1111 Fax: +971 2 412 1222 Description: Capitala are the masterminds behind some of the most beautiful and nubile real estate development in the Middle East. They are focused on striking the balance between community cohesion and good business decision making. There main project Arzanah, is a US$6 billion development on Abu Dhabi island.

Located in the Zayed Grand Mosque District

Islamic Finance Glossary B Bai

Stands for “sale” or contract of sale. It is often used as a prefix in referring to different sales-based modes of Islamic finance, such as Murabaha, Istisna’a, and Salam.

Bai al Inhah

Buying an object for cash then selling it to the same party for a higher price whose payment is deferred so that the purchase and sale of the object serves as a ruse for lending on interest. It equates to a double sale by which the borrower and the lender sell and then resell an object between them, once for cash and once for a higher price on credit, with the net result of a loan with interest. Used by some Islamic banks, it refers to selling of an asset to the customer through deferred payments. At a later date, the bank will repurchase the asset and pay the client in cash terms. Thus, Bai al Inah comprises two agreements; in the first agreement, the bank sells an identified asset to the customer at an agreed price and the customer can complete the purchase of bank’s asset by payment in instalments over an agreed period; in the second agreement, the bank re-purchases the same asset from the customer at a lower price and on completion of the second transaction, the bank will pay the lump sum amount in immediate cash at the price agreed between them. The difference in the price is the bank’s profit, which is determined in advance. This arrangement is prohibited by the majority of Shari’ah scholars as it also equates to a sale and buy-back arrangement. Also known as Bay-al Inah or Inah. Similar to tawarruq however, intawwaruq a third party is involved as an intermediary.

Bai’ al Mutlaq

Conclude a sale without any option to rescind.

Bai’ al Muqayaza

Exchange of goods with goods is called barter.

Bai Bithaman Ajil (BBA)

This contract refers to the sale of goods on a deferred payment basis; a deferred payment sale. Islamic banks use it as a mode of financing for purchase and sale or deferred payment of consumer goods. Technically, this financing facility is based on the activities of buying and selling. There is no interest charged. Equipment or goods required by the customer are purchased by the bank which subsequently sells the goods to the customer at an agreed higher price; payment is deferred and the customer is allowed to settle payment either by installments or in a lump sum within a pre-agreed period. The deferred payment price which is the bank’s sale price includes a profit mark-up for the bank agreed by both parties. Similar to a Murabaha contract, but with payment on a deferred basis known as Murabaha Muajjal.

Bai Mu’ajjal

Lit.: a credit sale or deferred payment contract. Technically, a financing technique adopted by Islamic banks, It is a contract in which the seller allows the buyer to pay the price of a commodity at a future date in a lump sum or in installments. The price fixed for the commodity in such a transaction can be the same as the spot price or higher or lower than the spot price. The concept is the same as Bai Bithaman Ajil (BBA).

Bai wafa

Buy-back, sale and repurchase, a contract with the condition that when the seller pays back the price of goods sold, the buyer returns the goods to the seller.

Bay’al ayan

Sale of tangible objects such as goods (as opposed to sale of services or rights).

Bay al-dayn

Sale of debt. According to a large majority offuqaha’, debt cannot be sold for money, except at its face value, but can be sold for goods and services.

Bayu al-Gharar

Trading in risk, where the Arabic word ghararis taken to mean “risk”. See Gharar.

Bay-al Inah

Also termed as Bai ah Inah. Buying an object for cash then selling it to the same party for a higher price whose payment is deferred so that the purchase and sale of the object serves as a ruse for lending on interest. At a later date, the bank will repurchase the asset and pay the client in cash terms. Similar to tawarruq however intawarruq a third party is involved as an intermediary.

Bay al-kali bil kali

A sale in which both the delivery of the object of sale and the payment of its price are delayed. It is similar to a modern forward sale contract.

Bay al-mudaf

A sales contract in which delivery of both the commodity and the payment is deferred - for example forward sales in modern times. Such contracts are not permitted by the Shari’ah.

Bay muzayadah

Sales by auction.

Bayt-al-Mal

Public Treasury in the Islamic State.

Batil

Null and void. Invalid sale or contract. One that does not fulfil the conditions relating to offer and acceptance, subject matter or the consideration and possession or delivery of the subject matter or involves some contravention of the Shari’ah, such as the involvements of riba, gharar or qimar. Also termed as Aqd Batil and Bai Baatel. Opp.Sahih.

84 Global Islamic Finance

November 2011

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50 Most Influential People in the Islamic finance Industry Global Islamic Finance magazine reveals the 50 most influential people in the Islamic finance industry. The Islamic financial industry may be seen as small compared to the global financial system but the industry is growing rapidly. Islamic finance is playing a significant role within the financial system and the influential people make this happen. There have been particular development in product innovation, financial institutions and the spreading of awareness not just in Muslim dominated countries. The key factors researched in order to decide on the 50 most influential people in Islamic finance are the person’s position and role in the industry, the qualifications gained, awards won or nominated for, exposure in the media, number of appearances and the impact made on the industry. The influential people selected have made an impact all around the world in countries such as the UAE, Bahrain, Malaysia, Saudi Arabia and the United Kingdom.

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Islamic Financial Product Innovation Assessing MBA Programs in Islamic banking and finance Risk Management part 2 Qatar World Cup 2022 spurring Islamic Investment opportunities

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KESHAVARZI

The Agriculture Bank of I.R. Iran

Vision and mission: Agriculture & Rural Development Human Resource Development (HRD) Modern Financial Services and E-banking Pioneer in Islamic Banking First-Class Banking Services Gold Partner in Middle East Improving Agriculture to Improve People’s Lives Investing in Islamic Finance Products

www.agri-bank.com

icd@agri-bank.com