Global Islamic Finance Magazine December 2010 by Business Media Group (UK)

G LO B A L

Islamic Finance December 2010

www.globalislamicfinancemagazine.com

Ba e

nc al hic ina Et & F ing nk

ISLAMIC

Wealth Management

Report 2010: An Innovative Progression in

Islamic Finance

UK:ÂŁ8.00

Bridging the Gap: Islamic Banking and Halal Industry P. 23

Europe Sukuk Country Review: Embracing Sukuk in the United Kingdom, France and Germany P. 48

Creating Effective Strategy for Islamic Banking P. 52

We believe that World deserves better future

Welcome to more sustainable and ethical banking Era Islamic Finance Services

Contents;QWERTYUIIOPDFHJ Wealth Management

World Islamic Finance Review Three Decades of Islamic Banking in Bangladesh

Islamic Wealth Management Report 2010: An Innovative Progression in Islamic Finance

Global Islamic Finance Magazine will guide you through the Islamic finance industry’s progression and developments in the successful sectors of Sukuk, Takaful and other areas of Islamic wealth management. There have been many highs and lows over the years; however, the industry has steadfastly soared ahead of its conventional banking peers. ….

News 7 Islamic Finance News Islamic Finance 18 Do We Really Need Standardization in Islamic Finance?

If one reviews the landscape of Islamic finance, there are essentially five major areas in Islamic finance that could be the subject of standardization. In this article, author will review the real potential for standardization in these areas; what can be standardized; and which organization should be leading the efforts to standardize in each particular area…

Halal Industry 23 Bridging the Gap: Islamic Banking and Halal Industry

Now seven full-fledged Islamic banks, and twelve Islamic banking wings/ branches incorporated into conventional banks, are operating within the country. These Islamic banks have made considerable progress over the years, as can be seen by their share in the total amount of money deposited, as well as investments within the entire banking system...

Islamic Banking 28 Channelling Shariah- Compliant Investment in Real Estate

Real estate is an asset class which attracts prime interest from both conventional and Islamic investors. The last decade marked significant investment challenges, as investors are mobilising funds from the US market to alternative regions, and are trying to cope with ongoing global recession.

Sukuk Country Review 48 Europe Sukuk Country Review: Embracing Sukuk in the United Kingdom, France and Germany

The Sukuk industry is an emerging sector in Europe, and is set to grow, with major legal developments being in order to accommodate the Sukuk industry within the mainstream European systems...

Sukuk 32 Common Structures of Sukuk, part I

Article discuss the essence of Sukuk is the provision of Shariah-compliant instruments for investment which do not involve either interest, or excessive risk or uncertainty (Gharar). The Sukuk market has been a primary area of growth, providing an avenue for the short and medium-term placement of funds by investors.

Interview 38 ‘Key strengths of Islamic Finance in the UK is the supportive regulatory framework’’ – interview with Humphrey Percy

Leadership 52 Creating Effective Strategy for Islamic Banking

Any bank or financial investment wishing to maintain a successful future will find it essential to devise a business strategy. Islamic Financial Institutions limit the scope of their business to comply with a set of ethical and moral guidelines derived from the teachings of Islam - but in many ways, Islamic banks are similar to any conventional bank. To achieve success, they must have a prudent, well thought out strategy in place. Any successful financial institution needs to utilize competent and skilled people in order to construct a successful business strategy.

Career 56 Mapping Your Job Path: A Career in Islamic Accounting

There are several courses tailored towards those who are considering Islamic accounting as a vocation. The UK-based University of Dundee says that its MSc in Islamic Accounting & Finance is not only suitable for those wishing to attain an academic knowledge of the sector,

World Islamic Finance Review 60 Islamic Banking in Eastern Europe: Mission (Not) Impossible

The introduction of Islamic banking into Eastern European countries such as Poland, where about 90 percent of the citizens self-identify as Roman Catholic, may sound problematic...

Islamic Finance Instruments 68 Islamic Finance: Debt versus Equity Financing in the Light of Maqasid al-Shari’ah, part I

To obtain various scholars’ point of view pertaining the advantage of equity financing over debt financing in the modern and current application of Islamic Banking & Finance for achieving justice and equality enshrined in the objective of Shari’ah.

Financial Authority Guideline 74 Islamic Finance in the UK: Islamic finance in retail markets

After a slow start in the 1990s and early 2000s, the retail market has witnessed growth and some significant milestones in the last five years. Even so, establishing the market has not been as fast as some commentators predicted...

Market Review 63 Islamic Finance Taps Into Women scholars 65 Islamic Banks Need Strong Liquidity Management To Withstand ‘Shocks’ 66 Regulation in Islamic Finance To Attract Investors 72 Promoting Islamic Finance and Banking

76 Event Review 78 Book Review 80 Event Listing 81 Events Calendar 82 Business Directory 84 Glossary 86 In the Next Issue

Published by: Business Media Group Ltd. Marble Arch Tower London W1H 7AA United Kingdom Tel: +44 207 859 8201 Fax: +44 207 183 4004

Website: www.globalislamicfinancemagazine.com

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, International Islamic Law & Finance Centre, United Kingdom 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 at the School of Economic Sciences in Tehran, Iran Dr Alberto Brunoni, Founder and Director of AASAIF, Italy Dr Mughees Shaukat, PHD researcher and Assistant Researcher in INCEIF & ISRA, Malaysia 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 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

Contributors Dr Farhad Reyazat Dr Mughees Shaukat Dr Sayd Z Farook Dr Abu Umar Faruq Ahmad Rubayat Jesmin Beata Paxford Asim Anwar Kamal Ezry Fahmy Bin Eddy Yusof

Jhordy Kashoogie Humphrey Percy Tasnim Nazeer Perween Richards Autumn Louise St. John Michael Ainley Ali Mashayekhi Robert Hicks Arshadur Rahman

Ali Ravalia Wan Rizaidy Liaquat Ali Rahail Ali Muhammad Faseeh Ullah Khan Ahmad Mukarrami Ab Mumin Muhammad Shahid Siddiqu David Smith Colette Sensier

Editing and Proofreading Colette Sensier

Executive staff Agnes Gradzewicz David Smith Gareth Platt Simon Hartshorne Amy Thompson Nelly Ahmedova

Ritika Banerjee Ajay Surti Beata Jagorow Sharaz Fayyaz Ching Chun Chen Diana Harasin

Worldwide Advertising Enquiry – Business Media Group, Tel. 0044 2078598201 Dubai Representative –7dimensions Media, Tel. 0097 165579579 Saudi Arabia Representative – Creact Communications, Tel. 0096 622907237 Malaysia Representative – Fusion Brand, Tel. 0006 037954 2075 Iran Representative – Sabin Finance, Tel. 0098 21 882073368 Illustrator– Rasha Mahdi Global Newsstand Distribution – Native Publisher Services Ltd Find out more about Global Islamic Finance Global Newsstand Sale at www.globalislamicfinancemagazine.com/global-sale Annual Subscriptions: from £106.99 €129.99 $169.99 Contact us on +44 2078598201 or email on subscribe@globalislamicfinancemagazine.com Reprints are available for sale, please contact our sales office for individual quotation. Contact us on +44 2078598201 or email on marketing@gifmagazine.com Networking Sites: join our groups on Facebook & Linked In Advertising and Sponsorship: Global Islamic Finance Magazine provides long-term brand and product placement opportunities as well as initial responses. Continuous monitoring and updating of our database ensures that each copy of Global Islamic Finance Magazine is precision-targeted with no wastage. Our magazine is distributed around the world and helps to establish a tighter community that can interact and work together. Please contact us on +44 207 859 8201 or email to marketing@gifmagazine.com. Copyright 2007 by Business Media Group Ltd. The views expressed in contents are the authors’ and not necessarily those of Business Media Group Ltd. No part of this publication may be reproduced or used in any form of advertising without prior permission in writing from Business Media Group Ltd. While every care has been taken in the publication on this magazine, Business Media Group Ltd will not be responsible for accuracy of the information or for any consequence arising from it.

gif

Editor letter

Asset management, which has been at a virtual standstill in the US$1 trillion Islamic finance industry, is set to break out of its rut, as demand rises for Shariah-compliant investment products. Recently, consultants Ernst & Young have estimated that between US$360bn and US$480bn of individual and institutional savings are available to the Islamic fund industry, making its growth potential hard to ignore for asset managers.

Wealth management is an investment advisory discipline incorporating financial planning, investment portfolio management and a number of aggregated financial services. High Net Worth Individuals (HNWIs), small business owners, and families who are looking for the assistance of a financial advisory specialist with high credentials, ask wealth managers to coordinate retail banking, estate planning, legal resources, tax professionals and investment management. 2008’s disastrous financial markets have led investors to address any concerns they may be having with their portfolios. “The past 18 months have challenged traditional thinking about investing and asset allocation, diversification, and correlation. For individual investors, risk tolerances have been tested, investment assumptions have been overturned, and fundamental truisms have been questioned.” “CFA Institute Private Wealth Management report, August 2009.) Asset management, which has been at a virtual standstill in the US$1 trillion Islamic finance industry, is set to break out of its rut, as demand rises for Shariah-compliant investment products. Recently, consultants Ernst & Young have estimated that between US$360bn and US$480bn of individual and institutional savings are available to the Islamic fund industry, making its growth potential hard to ignore for asset managers. The global Islamic funds industry still only has about US$50bn worth of assets under management (AUM). When this figure is compared with conventional global mutual funds holding assets of US$22 trillion, the potential still left to develop within the industry is seen. Some might argue that the wealth management business is going to grow faster than overall Islamic finance growth. Signs are becoming apparent that investment managers are slowly moving to tap demand for Islamic products. Last week, Qatar First Investment Bank and Gulfmena Alternative Investments unveiled plans for a Shariah-compliant asset management firm. So far, the funds industry has largely focused on institutional investors rather than the increasingly affluent Muslim population in the region. According to consultancy Deloitte, US$600bn of the US$1 6 Global Islamic Finance

December 2010

trillion Islamic finance industry comes from the Gulf Cooperation Council (GCC) region, which has more potential for retail growth because of its affluence. Islamic investment products are commonly perceived as under-performing compared to conventional asset classes, due to Shariah restrictions on investment avenues, and the overall conservatism required from Islamic portfolios. However, the MSCI World Islamic Index has managed to outperform the conventional MSCI World Index over the last 13 quarters, due to its focus on low-debt companies and non-financial stocks. And hefty management fees of up to five percent —often charged to cover special costs such as Shariah boards and compliance audits — have also dropped sharply to about 1.15 percent, a figure more in line with conventional fees. Still, Islamic funds have struggled to make a mark in asset management. Fund sizes are negligible, with 70 percent of Islamic funds holding less than US$100m in assets in the first quarter of 2010, according to Ernst & Young. According to Ernst & Young, Islamic funds require US$80m to US$100m in order to break even, based on average management fees. In 2009, many funds were unable to meet that break-even mark, creating a period of consolidation for the industry. 29funds launched last year, but that growth was offset by 27 liquidations. However, consolidation may have done the industry a favour by weeding out poor performers and upstart funds, leaving the playing field wide open for remaining funds, which can add innovation to the traditional equity investments. We might even see 20 percent growth Ii Islamic wealth management over the next three to five years; but to reach that target, the industry has to offer more diverse products and asset classes. It must also overcome the common misperceptions that Islamic funds are plagued by poor returns and exorbitant fees. Farhad Reyazat PhD in Risk Management Editor in Chief

News

gif

Islamic finance news Persian Gulf Sukuk-Sale Rebound Hinges on Property Prices Investor concern that Persian Gulf property prices will extend declines is denting confidence in a rebound of the region’s Islamic bond market. Dubai will need another 20 months to absorb an oversupply of homes and offices, Mohamed Alabbar, the chairman of Emaar Properties PJSC, the United Arab Emirates’ biggest developer, said Nov. 5. Aldar Properties PJSC, Abu Dhabi’s largest real- estate company, posted its biggest loss on record in the third quarter and said two days ago it’s working with the emirate’s government to help cover cash requirements. Real-estate prices have tumbled more than 50 percent since their 2008 peak in Dubai and 30 percent in neighboring Abu Dhabi as banks tightened mortgage lending and speculators fled the market. Property is used as collateral for Shariah-compliant bonds, which are backed by assets and pay a share of profit instead of interest. “This asset class is less attractive than it used to be and has made Sukuk issuers struggle to gather the right type of underlying assets that would attract investors,” Ashar Nazim, Manama-based executive director and head of Islamic financial services for Ernst & Young LLP, Bahrain said in a Nov. 9. The yield on Aldar’s 5.767 percent convertible Sukuk due in November 2011 gained 88 basis points, or 0.88 percentage point, this quarter to 8.79 percent yesterday, according to data compiled by Bloomberg. It reached this year’s high of 11.37 percent on Aug. 11. The company will need 9.8 billion dirhams ($2.7 billion) by 2011 to “survive,” Bank of America Merrill Lynch said in a report dated Nov. 2. The average yield on Sukuk sold by GCC issuers raised six basis points yesterday to 5.37 percent, paring its decline this quarter to 72 points, according to the HSBC/ NASDAQ Dubai GCC US Dollar Sukuk Index. The difference between the average yield for emerging-market Sukuk and the London interbank offered rate widened one basis point to 337 yesterday and has narrowed 35

points since Sept. 30, the HSBC/NASDAQ Dubai US Dollar Sukuk Index showed. The yield on Dubai’s 6.396 percent Sukuk maturing in November 2014 raised seven basis points yesterday to 6.25 percent yesterday, paring its decline this quarter to 21 points, data compiled by Bloomberg show. The extra yield investors demand to hold Dubai’s government Sukuk rather than Malaysia’s narrowed six basis points yesterday to 367. The yield on Malaysia’s 3.928 percent Islamic note due in June 2015 fell one basis point to 2.47 percent yesterday, according to prices provided by Royal Bank of Scotland Plc.

Kuwait Finance House To Expand Residential Investments Kuwait Finance House the country’s biggest Islamic lender, is looking for real estate investments in southern China and Europe to expand its assets under management, a senior official said on Wednesday. Kuwait Finance House has $1.5 billion in assets under management (AUM), with investments primarily in key U.S. cities, Malaysia, Shenzhen in China, and the Middle East, Ali Al-Ghannam, international real estate department anager. The real estate arm, which started operations in the 1990s, has previously invested in property in the United States and Europe, including Britain, with AUM totaling $4-4.5 billion, but it liquidated those assets in 2005 and 2006. “Back in 2005 and 2006, we could see that prices were very expensive, and if you are in the industry you get very worried because of where they are heading,” Al-Ghannam said in an interview on the sidelines of a conference in Hong Kong.”We reached a decision in the middle of 2005; we decided to liquidate everything because of the overheated real estate prices. ”Now, it is back in the business of expanding. Kuwait Finance House was now focusing on expanding its real estate portfolio globally to reach around $4 billion in coming years, AlGhannam said, declining to provide a timeframe. The Kuwaiti lender will be looking for opportunities in Guangzhou, after a successful residential investment in Senzhen.

Both cities are in southern China. Kuwait Finance House, which invests according to Islamic law, also put money into residential property in U.S. cities such as New York, San Francisco and Los Angeles. In Malaysia, which has an active Islamic finance market, Kuwait Finance House is involved in a mixed-use project used across from Singapore that has shopping malls, offices and residential units. The company will also invest in Singapore, Hong Kong if prices are right, Al-Ghannam said.”We looked at Hong Kong and Singapore, but those two are very expensive.”

Bahrain Named ‘Best Financial Centre’ Bahrain has been named ‘Best Financial Centre’ by Global Investor magazine, a flagship publication of Euromoney Institutional Investor, said a Central Bank of Bahrain (CBB) statement. The award, announced at the magazine’s ‘Future of the Capital Markets in the Middle East Summit’, was conferred on Bahrain in recognition for its long standing status as a jurisdiction of excellence for financial services, it added. The citation also recognized the work of the CBB, which is widely acknowledged as an even-handed, transparent and innovative regulator of the Kingdom’s financial services industry. The award was received on behalf of the CBB by Shaikha Nayla Ali Al Khalifa, head of External Communications, at the CBB. “The CBB is delighted with this commendation for Bahrain as a sound and safe jurisdiction for financial services,” said Rasheed Mohammed Al Maraj, governor of the CBB, the only single regulator in the Middle East. ‘The recognition of Bahrain’s leadership in financial services is particularly timely, as it comes during a time of continued weakness in the global economy, following an unprecedented financial crisis,’ Al Maraj remarked. In Bahrain, the CBB has worked closely with the industry to steer through these difficult times. Such co-operation, which is a cornerstone of the way the CBB regulates its licensees, has helped minimize the repercussions 2010 December Global Islamic Finance

gif

News

of the global crisis on Bahrain’s banks and other financial firms.” ‘Maintaining a regulatory environment that is, at once, businessfriendly and adheres to international best practice is also a key element of Bahrain’s success as an international financial centre,’ said Al Maraj. ‘It is no surprise then that over the past three decades, Bahrain has built up the Middle East region’s largest concentration of financial services firms, with over 400 firms at present, representing a good mix of international, regional and local players offering a very wide variety of services,’ he added. The award from Global Investor is the latest for the Gulf’s most well established and mature financial centre which is also a global centre of excellence in Islamic finance. In July this year, the CBB was voted Best Financial Centre at the International Takaful Summit; it was the third year in a row that the CBB had taken the top award.

Dubai Islamic Bank mortgages go to Tamweel Dubai Islamic Bank (DIB) says it will transfer most of its mortgage activity to Tamweel after taking a majority stake in the Islamic home finance company. The move comes as the mortgage company resumes lending for the first time in two years.”They are channelling most of their mortgage business to Tamweel as a subsidiary,” said Sheikh Khaled bin Zayed Al Nehayan, the departing Tamweel chairman, in an interview in Dubai. Sheikh Khaled is stepping down from his position as the chairman of the company. He also sits on the board of DIB, a position he does not plan to relinquish, and is the chairman of Salama, an Islamic insurance company, and the Bin Zayed Group, a family conglomerate, along with several other positions.”It’s a subsidiary, so now you need people from the management [of DIB on the board] to make sure there is efficiency to add value and utilize the IT and the back office of DIB,” Sheikh Khaled said. Tamweel, the UAE’s second-largest Islamic mortgage company, froze lending two years ago after Dubai’s property bubble burst and its funding model cracked under the stress of the financial crisis. The company’s fate has been closely watched as an indicator of Dubai’s emergence from the crisis following the agreement last month between Dubai World and its creditors to restructure US$24.9 billion (Dh91.45bn) of debt. Tamweel started doing business again shortly after DIB, which helped found the company in 2004, raised 8 Global Islamic Finance

December 2010

its stake to 57.3 per cent in September and began pumping in money.DIB is putting Dh100 million into Tamweel every month to finance home purchases through vehicles thatcomply with Islamic law’s prohibition on charging interest, Sheikh Khaled said. Analysts and mortgage brokers have said they do not expect the resumption of lending at Tamweel to provide a significant boost to Dubai’s property market, although any extra financing capacity would be welcome in a market where prices have halved, on average, since the peak in 2008. Tamweel was providing between Dh500m and Dh700m of financing every month during Dubai’s property boom in 2008, Wasim Saifi, the Tamweel chief executive, told Bloomberg earlier this week. “If we do Dh100m a month now, it would be a respectable number in the current market,” Mr Saifi said. A new board for Tamweel would inject new life into the company and position it to reduce costs and return to growth, Sheikh Khaled said. “We’d like to see more profitability and that can only be achieved by reducing some of the costs and getting more business,” he said.Shares in Tamweel, which is listed on the Dubai Financial Market (DFM), have been suspended since November 2008, when a government-led panel began to contemplate a merger with Amlak Finance, the country’s other major Islamic home financier. Despite numerous attempts at a resolution, that plan fell apart when DIB raised its stake in Tamweel by buying 339.3 million shares from Istithmar World, Dubai Capital Group and the DFM.Trading in Tamweel shares should start again soon, Sheikh Khaled said, but the timing would be up to the company’s new board of directors. That new board would help integrate DIB’s mortgage division with Tamweel’s, effectively making Tamweel an Islamic mortgagefinancing arm of DIB, he said.”You need people who are going to be working on how to streamline the business with DIB,” he said. Tamweel’s board is set to meet tomorrow to discuss the appointment of new members and approve financial statements for 2008 and last year.

CIMB Islamic Signs First Ever Largest Term facility with MNC CIMB Islamic Bank Bhd yesterday formalised the largest-ever term financing facility to date with a multinational company when the bank, a unit of CIMB Group Holdings Bhd, signed a 12-year US$100mil facility based on the syriah concept of Bai’ Al ‘Innah with Hewlett-Packard (HP) Multimedia

Sdn Bhd, a subsidiary of Hewlett-Packard Malaysia Sdn Bhd. The bank was represented by CIMB Group chief executive Datuk Seri Nazir Razak, who signed on behalf of CIMB Islamic, while HP was represented by its enterprise services senior vice-president for Asia Pacific and Japan, Kevin Jones. The Multimedia Development Corp (MDeC) chief executive officer Datuk Badlisham Ghazali witnessed the signing of the agreement. The facility would be used to finance the first phase of HP’s 32-acre “next generation data centre” in Cyberjaya, which formed part of the company’s 28.3ha integrated campus. Nazir said the facility, at US$100mil, was a significant boost for the local Islamic finance industry as well as to the country’s ambition’s of becoming a leading global Islamic financial centre. “It is the largest facility ever by CIMB Islamic because this is a direct funding compared with Sukuk fundraising which is the usual route taken by foreign companies when taking up Islamic financing,” he said at a briefing following the signing ceremony between CIMB Islamic and HP. Nazir said there was an option to extend the facility to finance subsequent phases but this would be discussed in due course. He urged both domestic and foreign businesses as well as retail borrowers, when looking at their financing needs, to explore every funding option. Nazir said there was a misperception that Islamic financing was more expensive and cumbersome to fund. He said this was not true because the industry had grown to become a major presence in the world as businesses and individuals now found it to be economical for their financing needs especially since funding in the developed markets was more expensive. Meanwhile, Jones said the investment in the data centre represented part of the US$1bil the company would be investing to transform the enterprise services business globally. Upon completion in 2016, the HP campus would be one of four global network centers alongside others in India, Mexico and Costa Rica. Badlisham said HP’s investment was part of several in the pipeline for Cyberjaya. “Last month we announced that we’ve RM2bil worth of commitments year-to-date,” he said. Badlisham added that MDeC was eyeing more investments from the oil and gas, pharmaceutical, financial and animation industries as this formed part of the strategy of attracting investment which could help develop talent in the country.

gif

News

Malaysian Rating Corp Launches Unique Islamic Financial Services Malaysian Rating Corp Bhd (MARC), which recently launched Malaysia’s first Islamic Financial Institution Governance Rating service, is open to the idea of extending this service to international Islamic financial institutions intending to boost the level of corporate governance. Malaysian Rating Corp Bhd (MARC) chief executive officer Mohd Razlan Mohamed said this was because the service was universal and was applicable to any syariah-compliant Islamic financial institutions worldwide. “At the moment, we will rate the Malaysian Islamic financial institutions but this does not stop us from rating international players if they want us to do so. “The methodology used in this service helps these institutions to have good corporate governance and improve transparency, operational efficiency, easier access to capital markets, lower cost of capital as well as raise their reputation and standing in the industry and financial community,” he said after the launching of this service. Razlan added that it was currently talking to some local Islamic financial institution and those locally incorporated foreign players.The governance rating service, he noted, was voluntary and not mandatory. At the event, MARC signed a memorandum of understanding (MOU) with Kuwait Finance House Malaysia Bhd for its first rating mandate for this new service which it would offer to the latter. He said at the moment the rating agency did not have a similar rating service for conventional financial institutions as a higher standard was required for Islamic institutions.This meant that the level of transparency was not so apparent compared with conventional financial institutions coupled with lower disclosure levels for Islamic institutions. Asked on this service’s contribution to the rating agency’s revenue, he said the primary aim was to raise the level of transparency and corporate governance of Islamic institutions rather than only aiming for revenue generation. On plans to further enhance the rating service, Razlan said that it would be finetuned as and when the agency grows in terms of customers going forward, adding that it would start with Islamic banks and later move on to cover takaful and Islamic 10 Global Islamic Finance

December 2010

fund management. The ratings basically would depend on the information MARC received, and it may take three to five weeks upon receiving the information to conclude the rating report. Similar to credit ratings, Islamic financial institutions would be rated from GR-1 to GR-5, the former being the for very good corporate governance and the latter being very weak ones.

Persian Gulf banks go for a rebound of $1.5 billion Sukuk bonds There is a sudden spread in the Islamic debt market in the Persian Gulf countries within the last few months. The investors sold the Sukuk bonds with lower debt ratings in order to raise funds for new issuance of Sukuk bonds that are state-backed. The Islamic finance has spread widely and due to the huge returns from investing in Islamic bonds or Sukuk, more and more people are investing and utilizing the proceeds in paying off debt relief services. The sale of Islamic bonds by the banks of the Persian Gulf countries may rise up to $1.5 billion in the month of October, 2010, that will be highest in record. This positive statistic is luring investors to invest in the Persian Gulf banks that are supporting the Islamic finance. It has been reported that a multilateral Jeddah-based bank in the Persian Gulf has sold $500 million Sukuk bonds with maturity of 5 year and they have yielded 40 points and has again set new standards for Islamic finance investment. Abu Dhabi Islamic bank and the UAE, which the second-largest among Islamic banks are also expected to put up for sale $1 billion of Islamic debt. Such offerings would fetch $2.5 billion of issuance this year from the financial institutions . After the two years of provisioning and write downs, most banks in the Persian Gulf are going ahead as they are the ones who are always in need of cash flow. The sale of Islamic bonds from the 6 countries that constitutes the GCC (Gulf Cooperation Council) is increasing after the Agreement of the Dubai World. It was agreed in this meeting that 99% of the credit or will amend the terms and conditions on the borrowings worth $24.9 billion and reduce the hazard that the company can default and thus strengthen then appetite of the investor for debt in that particular region. With such finan-

cial changes, economic growth will step up to 4.1% in the year 2010, from a 2% in the previous year in the Middle East and North Africa. The sale of the Shariahcompliant bonds by the Gulf financial institutions and banks have also escalated 15.5% in the year 2010. Islamic notes that were sold by the issuers have returned to 12.2% within this same period. The Islamic debt in the developing financial markets has increased by 15.8%. The average yield in the Islamic bonds has maintained a consistent rate and this is attracting most investors to invest in the Islamic financial market. Especially, those who are mired in debt can easily eliminate their debt burden by utilizing the proceeds of Islamic bond investment in paying off debt relief services.

Islamic Finance Gaining Popularity in Western Countries Islamic financing is gaining popularity in many non-Muslim countries such as Britain, Australia, New Zealand, South Korea and Singapore in recent years, Gatehouse Bank PLC chief executive officer Richard Thomas said. “We are seeing greater interest in Islamic financing, especially by corporations in non-Muslim countries,” he said at the World Congress of Accountants yesterday. Thomas was one of the guest speakers at the second plenary session of the congress titled Islamic Finance: strengthening the Global Market. He said Islamic financing, which currently is operating under banking and non-banking institutions, were growing at different rates depending on the region. “For example, Islamic financing in the banking sector in Britain is now growing at 15% to 20% annually, while in certain places in the Gulf it can be as high as 50% per annum,” he noted. According to an International Monetary Fund report, Islamic financing was growing at about 8% globally. However, Thomas said there were a host of factors impeding the growth of Islamic financing. “Islamic financing can grow faster but the current taxation laws and conventional accounting practices have not kept pace with the global expansion of Islamic financing,” he noted. gif

Global Islamic Finance Magazine is celebrating One Year in Print

We are proud on reaching this crucial milestone. We are sure we will use learnings of the organisation during this period to reach even greater heights.

We would like to thank to all our Clients and Friends for their continuing support. We hope we will work together even more in 2011.

gif

Wealth Management

Islamic Wealth Management Report 2010: An Innovative Progression in Islamic Finance Author: Farhar Reyazat, PhD in Risk Management, Editor in Chief of Global Islamic Finance Magazine, United Kingdom Tasnim Nazeer, Global Islamic Finance Magazine Editorial Team, United Kingdom

Abstract: Global Islamic Finance Magazine will guide you through the Islamic finance industryâ&#x20AC;&#x2122;s progression and developments in the successful sectors of Sukuk, Takaful and other areas of Islamic wealth management. There have been many highs and lows over the years; however, the industry has steadfastly soared ahead of its conventional banking peers. The Islamic financial industry continues to be a rapidly advancing means of managing wealth and is set to grow further, in attracting investors from all around the world. In this Islamic Wealth Management Report 2010, we will take a look at the many milestones and developments of the sector contributing to its progression within a highly competitive financial industry. Global Islamic Finance Magazine will also look at the rapid advancements in recent years which have marked the emergence of Islamic finance as a successful financial sector. Keywords: Islamic Wealth Management, Shariah Compliant Equities, Sukuk, Wealth Management in GCC

12 Global Islamic Finance

December 2010

Wealth Management The Emergence of Islamic Wealth Management

The Islamic financial industry has provided an ethical alternative to conventional banking, catering for the demands of both Muslims and non-Muslims who wish to utilise Shariah-compliant methods of wealth management. There have been many developments in the Islamic financial sector over recent years - since its inception the industry has continually developed and progressed. Many countries around the world have tapped into this lucrative and highly practical sector, the worth of which is set to soar to over US$ 2 trillion by 2012. Global Islamic Finance Magazine will guide you through the Islamic finance industry’s progression and developments in the successful sectors of Sukuk, Takaful and other areas of Islamic wealth management. There have been many highs and lows over the years; however, the industry has steadfastly soared ahead of its conventional banking peers. The Islamic financial industry continues to be a rapidly advancing means of managing wealth and is set to grow further, in attracting investors from all around the world. In this Islamic Wealth Management Report 2010, we will take a look at the many milestones and developments of the sector contributing to its progression within a highly competitive financial industry. Global Islamic Finance Magazine will also look at the rapid advancements in recent years which have marked the emergence of Islamic finance as a successful financial sector. Islamic wealth management is a sector of Islamic finance which has evolved significantly, offering opportunities for innovation and global growth. Several providers have now diversified their offerings beyond equities and real estate. A wide choice of structured products - multimanager funds, takaful and alternative investments - is now available from major international, regional and national financial institutions. Following the global financial crisis of 2008, financial institutions around the world fell heavily into debt. The Islamic financial industry inevitably avoided the brunt of the hard hitting financial crisis - due to the ethical Shariah principles prohibiting the charging of interest, which was one main factor in the unmanageable debt of conventional banks. Recently Islamic financial institutions have introduced services for wealth management, but for a long time previously there were no dedicated Islamic wealth management services. Investors therefore had to look to alternative wealth management services, which may not have fully complied with Shariah principles. The effects of the global financial crisis attracted interest on the Islamic finance industry, catapulting it into the mainstream as more and more investors looked for alternative ways of managing their wealth, rather than using the conventional system. The Islamic wealth management industry will face challenges; how-

ever, there is much scope for opportunities in the sector. Many Islamic financial institutions are tapping into Islamic wealth management. Abu Dhabi Islamic Bank (ADIB) is one significant example, having launched its specialised wealth management services in September 2010. Launching ADIB Wealth Management, Tirad Mahmoud, CEO of ADIB, said: “ADIB’s growth will be charted with the introduction of new services, and wealth management is assigned to be a key service that will enrich clients’ portfolios. Wealth management is central to our future plans, and we have allocated sufficient resources to let it spread its wings not only in the UAE but also globally. It is a step towards making the bank a globally preferred Islamic finance solutions provider.” ADIB Wealth Management will be led by Malik Sarwar, an investment banking veteran with over 25 years of experience in US, Asia and Middle East. He has worked with firms such as Citigroup, Merrill Lynch and the Permal Group. “As risk aversion levels have increased postcrisis,” said Sarwar, “the debate on conventional versus Islamic investment has taken centre stage in the region. ADIB Wealth Management has been launched at the right time, when investors have learnt the lessons of prudence, preservation, diversification and stability. Pervasive distrust in big corporations, and the need to have a trusted advisor providing trusted advice, is important for large investors and that is precisely what we offer. We believe that ADIB Wealth Management is a born winner.” ADIB Wealth management offers an innovative range of investment solutions such as Sukuks, Equities, Treasury Markets, Commodities, Mutual Funds, Real Estate Advisory, Trust, Private Equity and other Shariah Compliant opportunities worldwide. These cater to different risk and return levels and are based on financial objectives, risk tolerance and investment time horizons desired by clients (AME Info).

Islamic Wealth Management: A Matter of Faith

According to Islamic principles, all wealth that an individual acquires belongs to Allah, and the individual is responsible for his or her wealth. Specifically, Islamic estate planning takes into consideration the concept and meaning of wealth in Islam; the religious requirements of making a will; and the rules of inheritance. Social responsibility and accountability are deeply embedded in this concept. Wealth management, therefore, has three phases: first, the proper acquisition of wealth; second, the preservation of wealth; and third, the correct expenditure and distribution of wealth. Estate planning predominantly manages its preservation and distribution. To quote the Prophet, “A Muslim should prepare himself for the next world as if

gif

he is going to die tomorrow, but at the same time work hard to improve all his worldly comforts as if he is going to live forever.” (A quote from the Prophet narrated by Al-Dailami) (IWR 2010). Islamic wealth management therefore requires forward planning and Muslims must carry out Islamic financial transactions in accordance with Shariah principles. Muslims may follow Shariah principles in leaving their wealth to charity or to family members after death – however, they must acknowledge that the sole owner of the wealth is Allah the creator. Islamic estate planning has two major instruments: • An irrevocable gift during a lifetime. This can be personal or in the form of Waqf, (endowment of a public or private cause). • A will, allowing for a maximum of one third of the estate to be passed on to any designated charitable entity or person. Estate planning may be complex if the estate is domiciled in various countries and thereby subject to different estate and tax laws, resulting in delays to transfers and possibly forced deviation from the will. Information from Islamic Wealth Management Report 2010

In many cases, a family business can provide the main source of wealth, and therefore many Muslims may want to think about wealth preservation. The key features identified in research studies for Islamic family wealth preservation are described below:

• A family needs to understand its purpose. While it can be argued that the purpose of a family is to enhance the pursuit of happiness in the worldly life and in the hereafter for its individual members, and thereby preserve its human, intellectual and financial capital, each family must determine and define its own philosophy. The first goal of a mission statement is defining the family’s philosophy behind its purpose.

• A family must have a common vision. It must look ahead to the future and form a consensus around a shared goal. A family should ask itself how it plans to achieve its current goals, while looking ahead 25, 50 and 100 years.

• A family shares certain values. These are the values that foster that family’s uniqueness.

• A family needs to acknowledge its “secrets”. Every family has open secrets. Not addressing these “secrets” creates an atmosphere in which every member thinks the family is connected to each other, but in reality the family is falling apart because no one is willing to discuss buried issues. Such a situation will drain not only the family’s wealth but its human and intellectual capital.

• A family needs to recount its history. The preparation of a family mission statement allows an opportunity to tell family stories.

2010 December Global Islamic Finance

gif

Wealth Management

Information from Sarasin Islamic Wealth Management Report 2010

A family can preserve its wealth according to the principles set out by the Shariah, and in accordance with Islamic jurisprudence. Methods for doing so are outlined below: • A family must choose a form of governance. The family mission statement should indicate the form of governance selected by the family and how it will assist in long-term wealth preservation. • Each person needs to understand his or her role in the family. A family mission statement affords each individual family member the opportunity to consider his or her mission as a member of the family and as an individual. •The family need to create a mission statement which can ensure that the wealth is given justly and fairly and in agreement with all parties.

Information from Sarasin Islamic Wealth Management Report 2010

Embracing Shariah Compliant Equities

Many investors wish to deal with equities, as this form of wealth investment has recognised scope for significant returns and profits. Predominant demand has been for indices displayed through Dow Jones Indexes, the FTSE Group, Morgan Stanley Capital International (MSCI) and Standard & Poors (S&P), who all offer services for equities. The Global Dow Jones Index’s have satisfied Shariah-compliant equity investing, as long as the investment is Halal and abides by the appropriate Shariah framework for investments, i.e., not participating in any Haram activities. In the Middle East and North Africa (MENA) region in general, and the GCC in particular, private equity has built on the robust growth of 2006 and 2007, in the area of fundraising as well as fund sizes. It goes without saying that liquidity created by the oil price surge is the prime motivator. Governmental initiatives via privatisations, together with the promotion of private equity financing by fund managers and investment firms, were no less important. The liquidity flush has been responsible for the rehabilitation or total “makeover” of their economies. In the first six months of this year, total fund sizes touched the US$9 billion mark, compared to US$14 billion for the whole of 2006; the amount was merely US$78 million five years ago. Not only has the number of funds increased, but also the funds’ size: four funds exceeded US$1 billion last year, with a combined size of US$4 billion, whereas at June this year, three funds exceeding US$1 billion mark totalled US$5.5 billion.The private equity industry in the MENA region does not exclusively seek investment opportunities within that region. Private equity managers have also been trac14 Global Islamic Finance

December 2010

ing absolute returns worldwide, motivated by the maturity of the US and UK markets, and by the ample opportunities in Asia, particularly China and India. It is also important to mention that private equity in the MENA region is a relatively new phenomenon compared with the US and Europe; hence the reluctance of family-owned business to sell interest in their companies is still widespread. It is only recently that individuals have come to grips with the concept of floating their equities in the market – or “going public” – and the advantages which this can bring. Egypt has been the focus of private equity managers domiciled in MENA, accounting for 61.6% of total deals in 2006-2007. The rest went to UAE (15.3%), Saudi Arabia (10.3%), Bahrain (4.3%), Kuwait (2.1%), Jordan (1.3%) and others. If successful, the high returns from private equity investments will compensate investors for the time they spend without access to their money – a lifespan of five to seven years is common international practice in private equity investment. Popular exit strategies for private equity managers are IPOs, which divest the stakes to other asset managers or individuals, and through mergers and acquisitions. In the MENA region, very few private equity transactions have been exited: the 2006 annual report by GVCA and KPMG on MENA private equity indicates that only 5% (US$300 million) of deals made since 1998 have been realised on exit. After a major drop in 2008, Islamic equity markets began to inch upwards this year, evidenced by the uptrend in the Dow Jones Islamic Index (DJIM). In line with the rise in equity markets around the world, the improvement was considered by many as a sign that the world recession may be ending with the recovery in crude oil prices. The DJIM World registered a positive return of 9.35% year-to-date as of the 26th June 2009, followed by DJIM US (+4.64%) and DJIM Europe (4.11%). The DJIM Asia Pacific emerged as the star performer, however, with a 22.62% increase year-to-date. However, the higher costs of establishing and financing a Shariah board, and expensive screening processes - in addition to the relatively small size of many funds - are posing challenges to Islamic equity funds entering the market. In Malaysia, Shariah-compliant stocks are traded in the three sub-markets of Bursa Malaysia —Main Board, Second Board and MESDAQ (Malaysian Exchange of Securities Dealing and Automated Quotation). The Shariah Advisory Committee (SAC) of the Securities Commission Malaysia (SC) has laid down general requirements which the stocks must fulfil in order to be classified as Shariah compliant. In addition to the justifications for such benchmarks, the SAC has provided the basis for their establishment. The SC and Bursa Ma-

laysia recently launched a new framework for listings and equity fund-raisings, in one of the most comprehensive reforms to the country’s capital market (Islamic Asia News). With a large number of private equities approaching maturity, private equity managers will be looking for the highest feasible returns on their investments. In the MENA region, returns realised from exited investments have so far been encouraging - underpinned by the vibrant IPO market, where demand for new offerings by local and regional investors continues to outstrip supply, and all IPOs have been oversubscribed by several times (Eureka Hedge). During the economic crisis, the market for equity exhibited many highs and lows, and in 2009 successful equity had risen GCC countries, clearly showing the development of the emerging market. The Islamic equity market in 2010 looks promising, and the market is expected to grow in strength, as more countries have joined the Dow Jones Islamic Market Index. Michael Petronella, President of Dow Jones Indexes, called the expansion “a reaction to market demand, which also reflects the growing importance of these countries for Islamic investors” (Sarasin Islamic Wealth Report 2010). Investors wishing to utilise the Islamic Index Market have the options of placing their wealth on indices, which may give them significant returns, or choosing to assign a portfolio manager who will select investments from the growing market.

Real Estate Paving the Way for Islamic Wealth Management There is an abundance of real estate investments and funds on offer, run from many Islamic financial institutions worldwide. According to Islamic Finance Information Service (IFIS) there are 43 Islamic funds focused on real estate; almost seven percent of current assets are totally Shariah-compliant. Islamic real estate funds have been researched by IFIS since August 2002, and just over five funds on average have been launched annually over the past seven years. While the number of new funds has been increasing, launches have dried up since the financial crisis began and some funds no longer exist. The relatively modest $US 80 million Inovest Real Estate Investment Trust is the only fund to have been launched since August 2008 (Sarasin Islamic Wealth Report 2010). Malaysia has taken unprecedented steps towards the development of Islamic finance, and has issued guidelines regarding the Islamic real estate investment sector. In 2005 the Commission issued the world’s first set of guidelines for Islamic REITs. In summary, these guidelines state that: (table on the next page)

Wealth Management Information from Sarasin Islamic Wealth Management Report 2010

• Rental income must be derived from permissible business activities. Rental income from non-permissible activities cannot exceed 20% of the total turnover of the Islamic REIT.

In the future, Islamic real estate finance and investment opportunities will be confined to specialized markets offering well-defined opportunities. While these markets exist in traditional financial hotspots such as the US and the UK, there are increasing signs of geographic diversification to newer markets in China, Malaysia, Australia and Singapore.

• Islamic REITs cannot own properties in which tenants conduct non-permissible activities. • Islamic REITs cannot accept new tenants whose activities are fully non-permissible. • Only 20% of the floor area of a property can be utilised for non-permissible activities.

• All forms of investment, including deposit and fiIn August 2009, Kuwait Finance House (KFH) nancing instruments, must be Shariah compliant. signed a $US450m joint venture agreement • Property insurance must be based on Takaful exwith UDR Inc., a leading US-based real estate cept where Takaful schemes do not operate. investment company, to acquire various high value residential portfolios in selected US • Each Islamic REIT must have a Shariah Board responsible for ensuring that the Islamic REIT complies metropolitan areas. Ali Al-Ghannam, Head with Shariah principles. of International Real Estate Department at KFH, has been spearheading KFH’s forays into the US - and into other markets, includHistoric issurance of corporate sukuk and ing Shenzen in China (where KFH has also corporate conventional bonds (US$ Billion) launched a $500m Real Estate Fund with a local partner), Russia and Australia. 18 16.95

According to Al-Ghannam the joint venture will target “Class A” property portfolios with high-income producing assets, which must be less than seven years old and with a minimum value of $120m. His target is an internal rate of return (IRR) of 12 - 14 percent per year. Real estate, according to Gatehouse Bank, offers a physical asset with an inherent value backed by secure contractual cash flows. Returns can be enhanced through financial structuring; it allows for diversification of risk and a hedge against inflation; and real estate is less volatile and has a higher yield than other asset classes (Global Arab Network). The Islamic real estate sector continues to look promising, and there is room for significant expansion and growth with leading investments in this lucrative sector.

Sukuk: A Thriving Sector in Islamic Wealth Management

16 14 12 10 8 6 4 2 0

14.47 12.86 11.13

11.20

5.13 5.12

0.96 0.98

2003-04

1.45

4.34

2.30

2004-05 2005-06 2006-07

Conventional bonds

2007-08

Sukuk

Source: Zawya

Market Share of Islamic Banking

2008-09

gif

is estimated to be over $70bn and that figure is expected to rise rapidly to $100bn. We are also increasingly seeing interest for Islamic products, not just from Muslim investors, but also from a broad range of conventional investors. I believe that continuing developments across the industry will ensure that Islamic finance becomes a sustainable part of the global financial markets, sitting comfortably alongside conventional finance” (AME Info). The Left graph shows the historic issuance of corporate Sukuk up till 2009. The Sukuk industry is likely to see a rapid improvement and growth in investments in 2010. For instance, Malaysia, a prominent Islamic financial hub, has already spearheaded the Sukuk industry and is remaining steadfast in Islamic financial transactions and investments. These initiatives pave the way for the development of the highly ethical industry. Many investors read popular Sukuk market pages, such as Zawya, which has a comprehensive statistical analysis of the Sukuk market in countries around the world, particularly the Middle East. “As sentiment toward emerging markets improves globally and default risks wane, Islamic debt will stand to benefit,” said Usman Ahmed, a senior fund manager in Dubai at Emirates NBD Asset Management, which manages US$300 million of bonds at the unit of the United Arab Emirates’ biggest lender. “The Sukuk market is benefitting from the increased demand, and delivering improved earnings for some of the biggest issuers.

Others 29%

”(Bloomberg). The Sukuk market is yet another sector of the Islamic financial industry which is likely to grow, and eventually to emerge into a lucrative and successful method of investment in bonds.

Bahrain 14%

Iran 4%

Islamic Funds: A ShariahCompliant Alternative

Kuwait 7% USA 6%

Islamic funds are expected to increase by up to 10-15 percent per year, according to the Asian Islamic Development Bank. In 2009 new Islamic funds were brought to market, despite the crisis, in order to capitalize on the growing interest in Shariah-compliant funds.

One of the main successes of the Islamic finance industry is the thriving Sukuk (Islamic bonds) sector. Islamic bonds are an excellent UAE 7% Malaysia 16% place to invest wealth when aiming for significant profits and returns. UK 9% The Sukuk sector saw a significant Pakistan 4% Saudi Arabia 4% increase in demand in the years Funds are being launched at an 2007-2008, and following the ecounprecedented rate, with some Source: Islamic Investor.com nomic crisis the Sukuk industry coming from non-Islamic finance picked up well. Dubai company houses such as NBK (National Nakheel, however, was hit hard by Bank of Kuwait), which launched and becoming a growing sector. John Weguethe crisis, and their investment of its first Islamic KD Ijara Fund in June. The lin, Managing Director of European Islamic $3.52 billion Sukuk plummeted. Dubai is recently recovering from the Nakheel incident, Investment Bank PLC, said: “Islamic finance second Islamic KD Ijara Fund II, launched in which left many global investors reluctant to is continuing to attract considerable interest August, was fully subscribed in one day. Reinvest in Sukuk in the GCC countries. Despite and the indicators of future growth are very sponding to investor demand, NBK launched this incident, the Sukuk industry is picking up positive. Global Sukuk issuance, for example, the KD Ijara Fund III a month later, offering 2010 December Global Islamic Finance

gif

Wealth Management

investors the equivalent of 6% per annum throughout the life of the fund. Minimum investment in the Kuwait Dinar-denominated fund is US$100,000 (Sarasin Islamic Wealth Report 2010). The above pie chart shows the market share of Islamic funds held by Islamic banks in various countries. In order to further analyse the various forms of funds available through Islamic finance, which can help in aiding with Shariah compliant wealth management, it is important to look at the funds as described in the table below:

further increase success in the future of Islamic wealth management.

A Positive Outlook for Islamic Wealth Management

The Islamic financial sector has experienced both successes and challenges, following the global economic crisis which catapulted the Islamic finance industry into the spotlight. However, the industry has remained strong and excelled in many areas: Sukuk (Islamic Bonds), private equities, real estate amongst many other lucrative sectors which have seen a massive growth in recent years.

This table shows the various Islamic banking methods and funds and their uses - particu- Despite the recession of 2008-2009, the Islarly in Malaysia, which is the centre for Is- lamic finance industry has overcome obstalamic finance and increased growth in Islamic cles and proven that its highly ethical prinfunds. The importance of Islamic funds is ciples taken from the Shariah can provide expected to grow. Ernst & Young’s statement the backdrop for effective investments and regarding Islamic finance 2009 seemed prescient: “Despite this setback, the fundamentals of the IsIslamic Banking Normal Banking Description Terms Terms lamic fund industry remain strong. With almost US$50 billion in fund assets under management, and a large, expanding and untapped Muslim population, there are likely to be considerable opportunities in the future. This is a time when strategic choices have to be made and market participants have to adapt to survive” (Sarasin Islamic Wealth Management Report 2010). Islamic funds are attracting rapid growth. However, at this date no Islamic hedge fund is in existence, and this is an element which needs to be implemented in order to

transactions. 2010 is set to be a better year, with a rise in sound investments, and overall Islamic markets will do well. In order to further diversify Islamic wealth management, banks in economies with surplus capital and visible exports, such as Japan, Germany and Switzerland must finance deficit countries like the US, the UK and Spain, and their real estate bubbles. When the value of their assets declined, and funding sources dried up on the liabilities side, hundreds of banks had no choice but to apply for government bailouts and guarantees. John Sandwick, Independent Islamic Wealth and Asset Management Consultant, stated that “One totally untapped market is Islamic wealth management, where literally no bank offers anything but the most basic services. It’s a huge opportunity for the industry,” Sandwick concluded.

Al - Wadiah

Custodianship

Saving and Deposits.

Al - Mudharadah

Profit sharing

Bank provides capital to entrepreneur to run business. profit is shared according to predetermind ratios. Loss is 100% borne by Bank.

Al - Musyarakah

Joint Venture

Similar to Al - Mudharabah, however by both parties according to basis of their equity participation.

Al - Murabahah

Cost Plus Profit

Refers to sales of a good at a price, margin as agreed by both parties.

Al - Bai` Bithamin Ajil

Deferred Sale Payment

In Malaysia, commonly used for Housing Loan.

Al - Ijarah Thumma Al Hire & Purchase Bai`

Purchasing Cars.

Sukuk

Bonds

Borrowing and Lending.

Hibah

Gif

Ribah

Interest

He is highly critical of the widespread reliance on real estate and private equity as cornerstones of Islamic wealth and asset management, because it creates a wide deviation from what would normally be considered prudent asset allocation. “Money that should have gone to Shariah-compliant mutual funds and Sukuk funds went to private equity. The market for Sukuk funds is $75 billion, but today the actual amount is about $120 million,” he said, referring to recent IFSL data. gif

References and further reading: Books • R. Boerner, M. Gassner and P. MacNamara, Sarasin Alpen Islamic Wealth Management Report 2010 • El-Ashker, Ahmed and Wilson, Rodney, Islamic Economics: A short History, Brill Academic publisher, 2006. • El-Gamal, Mahmoud A, Islamic Finance: Law, Economic and Practice, Cambridge University Press, 2006. • Igbal, munawar and Molyneux, Philip, Thirty Years of Islamic Banking: History, Performance and Practice, Palgrave Macmillan, 2004. • Vogel, Frank and Hayes, Samuel, Islamic Law and Finance, Kluwer LAW International, 1998. • Warde, Ibrahim, Islamic Finance in the global Economy, Edinburgh University Press, 2000. Readers and edited volumes • Hassan, M. Kabir and Lewis, Mervyn K., Handbook of Islamic banking, Edward Elgar, Cheltenham, England and Northampton, Massachusetts, 2007. • Iqbal, Munawar and Llewellyn, David, Islamic Banking and Finance: New Perspectives on Profit Sharing and Risk, Edward Elgar, 2002.

16 Global Islamic Finance

December 2010

•

Iqbal, Munawar and Wilson, Rodney, Islamic Perspectives on Wealth Creation, Edinburgh University Press and Columbia University Press, New York, 2005.

Professional Publications • Jaffar, Sohail, (ed.) Islamic Insurance: Trends, Opportunities and the Future of Takaful, Euromoney Books, London, 2007. • Jaffar, Sohail, (ed.) Islamic Retail Banking and Finance: Global Challenges and Opportunities, Euromoney Books, London, 2005. Online Resources • Super Investor.com Pie Chart on Islamic Funds Retrieved from: http:// www.superinvestor.com.au/articles/islamic-finance-as-an-alternativeinvestment-76.html • Meshio.com Table Retrieved from: http://www.meshio.com/2006/06/ islamic-banking-commonly-used-terms/ • Reuters.com Article Retrieved from: http://www.reuters.com/article/ idUSTRE61H2LY20100218

gif

Islamic Finance

Do We Really Need Standardization in Islamic Finance?

Islamic Commercial Banking and Takaful

Islamic commercial banking has been around for a very long time (approximately 35 years) compared to the rest of the Islamic finance industry. As a result, standardization efforts — primarily led by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), which has issued a combination of more than 80 Shariah, accounting, auditing and governance standards — means that much of the work in this space has already been done.

Author: Dr Sayd Z Farook, Global Head of Islamic Capital Markets at Thomson Reuters, Bahrain

Abstract: If one reviews the landscape of Islamic finance, there are essentially five major areas in Islamic finance that could be the subject of standardization. In this article, author will review the real potential for standardization in these areas; what can be standardized; and which organization should be leading the efforts to standardize in each particular area. Keywords: Standardization, Sukuk Capital Markets, Islamic Funds and Asset Management, Shariah-compliant Hedging

If one word has been unnecessarily bandied around by Islamic bankers and financiers over the past couple of years, it is “standardization.” It seems to have become market practice for industry professionals and conference brochures to claim that standardization is the urgent order of the day, without any of them explaining what exactly requires standardization in Islamic finance and whether it is really a desirable outcome. For instance, standardizing products in asset management could lead to a lack of innovation in the differentiated features of funds that make them the unique value proposition. 18 Global Islamic Finance

December 2010

Issues relating to Islamic retail, corporate and trade finance products have been somewhat clarified, since the majority of core Islamic banking relies on a fundamental set of contracts which has been the subject of several standards. In addition, the AAOIFI has issued standards on specialist commercial banking issues such as credit and charge cards, currency trading and documentary credits. Nevertheless, for the industry to grow in an orderly and uniform manner, while retaining transparency and avoiding regulatory capture, further efforts need to be expended in order to standardize key documents and to provide specific measures of investor protection. The AAOIFI has the potential to play a crucial role in standardizing the pro-forma documentation, layout and disclosures required for the most commonly utilized contracts such as property finance, auto finance, personal finance, investment accounts, credit and charge cards and current accounts - since most of these have evolved to a level where there is not much differentiation in the core product itself, but only in the features offered by each bank; mere add-ons to the core product. Requiring member banks to follow standardized contracts, and to provide standardized disclosures to potential customers, will allow the Islamic banking industry to gain a uniform advantage over conventional banks. This is particularly true where such transparency or protections is not offered within the local jurisdiction. The same level of standardization can be applied to Takaful products to ensure that Takaful members receive a uniform level of disclosures, and sign the same type of contract (with minimal

Islamic Finance differences) for the most commonly utilized retail Takaful products: such as motor Takaful, home and contents Takaful and family Takaful.

Sukuk Capital Markets

One might assume that the area of Sukuk is already standardized, considering that the AAOIFI and the Islamic Financial Services Board (IFSB) have both issued a number of standards for this area. However, none of these existing standards cater to investor protection or risk-based requirements per se. The AAOIFI standard (Shariah Standard No 17 Investment Sukuk) merely provides a broader conceptual definition of the types of contracts that can be utilized for Sukuk, and the tradability status of each contract under a Sukuk structure.

gif

pricing of Sukuk. Rather than the myriad contract structures detailed in the AAOIFI standards, three broad classifications of Sukuk, developed out of market methodology, have become evident over the past few years. One cannot assess the risks associated with each issue merely by studying a structure such as Mudaraba, Musharaka or Ijarah, since the legal structure behind the “type of issue,” and the actual risk characteristics of the issue, can vary significantly with each structure.

Asset-backed versus Project-backed versus Asset-based

It is in this context that of Sukuk ‘s securitization characteristics become vital to the risk assessment process. An asset-backed The views expressed in this article Sukuk implies that the ownership rights exrepresent the personal opinion of tend to the actual underlying assets - such as the author. They do not necessarMany assume that Sukuk issuances can be physical real estate - or rights/usufruct from ily represent the views of Thomson standardized along the lines of these contract particular intangible but valuable assets. This Reuters. structures. However, this is far from accurate, is usually evidenced by an independent legal since risks associated with Sukuk issuopinion, stating that the rights to the Table 1: Types of Sukuk by asset recourse ance do not merely depend on contract underlying assets have been perfected or on a structure, but on the particular through a “true sale” transfer to the isProject-backed Recourse of the investor is to the assets/proceeds assets and credit backing of the Susuing special purpose vehicle (SPV) – of the project and sometimes to the creditworthikuk. The IFSB standard goes one step and that thereafter, the originator has ness of the ultimate obligor by means of a credit enhancement feature such as a guarantee. These further in terms of risk identification, limited, or no access, to such assets as Sukuk rely on the Value of the future cash flows but its priority in doing so is prudential part of its assets pool. arising out of project completion and production/ capital adequacy, rather than investor sale, the assets of the issuing vehicle and the credit protection. A project backed SPV, on the other of the obligor. hand, relies on project performance; Asset-backed Recourse of the investor is the investor is to the asThe Central Bank of Bahrain (CBB), and since the returns are backed by the sets of the issuing vehicle and the Sukuk investors bear any losses in case of the impainment of the Bank Negara Malaysia (BNM) and Duoutcome of the project, the risks can be Sukuk. bai Financial Services Authority (DFSA) directly assessed by understanding the Credit-backed/ The recourse of the investore is to the creditworhave already set in place regulations for project itself. A good example of this asset-based thiness of the ultimate obligor. These are also somethe offering of securities - and in some was the “Villamar Sukuk Company” times called asset-based Sukuk. instances, specifically for Islamic secuTrust Certificates issued in December rities. Even so, a large number are still 2008. In many respects, project-backed issued by offshore entities for and on and asset-backed securities are simiTable 2: Typical Risks associated with different behalf of Gulf based issuers, such as lar, since both rely on the actual pertype of Sukuk classifications those from Saudi Arabia and Kuwait. formance of the assets. These assets may perform as a result of the ultimate Risk Type Project Asset Credit Backed/ Backed Backed Asset Based However, there are no universal standobligor’s credit quality (of which there ards for Sukuk investor protection, nor may be many). Shariah Compliance p p p a proper identification of risk requirements catering to the unique structures For instance, in the case of a mortgage Credit p p p of Sukuk issuances. Unlike convenportfolio Sukuk, the “obligors” consist tional bonds, Sukuk issuances cannot of several hundred customers. To unAsset be judged by their cover or “contract” p p derstand the risk of default, one must type. A Sukuk may be based on Ijarah assess the general economic indicabut may only afford minimal protection tors, along with the quality of the portProject p to investors, since the ultimate obligors folio manager’s credit risk process and may be corporations with an opaque systems.Similarly, with a real estate credit history. Alternatively, a Sukuk development project like the Villamar Rate of Return p p p may invest in an equity style MusharSukuk, one must assess the potential aka contract, but afford greater protecfor repayments by the end users/obliServicer p p tion due to the quality of the underlying gors, which will require only an assessinvestment assets. Given that invesment of the credit quality of the end tors are not necessarily provided with users, not the manager’s credit quality. Liquidity p p p the same degree of protection across In contrast, an asset-based Sukuk will Cash flow p p different Sukuk structures and jurisonly provide artificial ownership rights diction, a Sukuk standard laying out a to the “usufruct” of certain physical unLegal p p p uniform set of requirements around the derlying assets, instead relying on the standard risk-based Sukuk structures Prepayment Risk obligor’s credit quality to ensure that p p p would lead to heightened investor conthe Sukuk performs. It is for this reason Reinvestment risk p p p fidence, and enhance the liquidity and that these are merely credit-backed se2010 December Global Islamic Finance

gif

Islamic Finance

curities with no real recourse to physical assets. The actual sale contract providing the Sukuk holders with rights to the “usufruct” may not be the subject of a legal, “true” sale, and therefore investors may only be left with the strength of a purchase undertaking from the originator or an associated party, with which to redeem the Sukuk and pay returns. For instance, an Ijarah Sukuk may be asset-based or asset-backed, yielding a wholly different risk profile to each in the event of default and liquidation.

Similarly, within Musharaka Sukuk, there can be variations between asset-based, projectbacked and asset-backed Sukuk. The originator may co-invest with the Sukuk holders’ trustee special purpose vehicle (SPV) in certain assets that are ring-fenced into a separate SPV, which will hold the assets for the purpose of the Musharaka. This would be classified as an asset-backed structure. In contrast, in an asset-based Musharaka, an originator as a Musharaka partner may only notionally provide its own assets or management labour as contribution, without appropriately ring-fencing any Figure 1: Total Sukuk issues and Concentrations particular Sukuk assets. In the by Country event of default, this places the investors at the end of the line, with 50000 other unsecured equity holders. 45000

The Role of Standard Setters

40000 35000 30000 25000 20000 15000 10000 5000 0

2006

2005

2007

2008

2009YTD

Bahrain

Brunei

Kuwait

Indonesia

Malaysia

Pakistan

Qatar

Saudi Arabia

UAE

Other

Note: Figures are in million US$. YTD is the 30th September 2009 or Q3 2009. Other comprises US in 2006 (US$ 167 million), Sudan in 2007 (US$ 130 million), Singapore in 2009 (US$ 67 million)

In this context in particular, regulators and standard setters such as the International Islamic Financial Market (IIFM) can contribute significantly, both to reducing the costs for issuers and to reducing the perceived risks for the investors. This could lead to a Malaysianstyle active, liquid and deep capital market for Sukuk. The creation a standard set of documentation for Sukuk issuances, with a compulsory minimum required for information — while documenting rigid and standardized structures for the most frequently issued structures —could do a lot to enhance the liquidity and primary market issuances of Sukuk. The standard for Sukuk issuance might include as a minimum:

Figure 3: The range of Shariah compliant derivative equivalents Sharia compliant derivatives equivalents

Islamic profit rate swaps(IPRS)

Currency derivatives

Structured exotics

Credit default derivatives

Commodity/ equity options

Multiple Murabaha IPRS

We`d/Murabaha currency option

Murabaha deposit

Takaful Credit default protaction

Arboun sale(embadded option)

We`d IPRS

We`d currency option

Total return swap

Sukuk Credit default swap

We`d/Murabaha option

Multiple Murabaha IPRS

double legged murabaha currency swap

We`d Total return swap

We`d currency swap

20 Global Islamic Finance

December 2010

• •

•

The acceptable structures of Sukuk issuance approved by a broad consensus of Shariah scholars. Key disclosure requirements to be addressed for each type of Sukuk: assetbased/credit-backed, asset-backed or project-backed. Requirements for the contents of the offering circular (OC), in addition to the requirements above, which could include: structure; structure explanation; fatwa of the Shariah supervisory board and scope and rationale for Sukuk approval; key risk factors; credit enhancement features; payment waterfall; seniority status and legal opinion of asset transfer; and independent valuation report.

Islamic Funds and Asset Management

The establishment of several Islamic investment banks and companies in the Middle East has propelled an associated proliferation of listed equity, private equity, real estate and, more recently, hedge funds and structured products into the market. As with Sukuk issuance, the market is undergoing regulatory consolidation. However, the effect of the regulatory consolidation is stronger in the asset management industry. Active supervision of all investment funds in jurisdictions such as Bahrain (Central Bank of Bahrain) and Malaysia (Securities Commission Malaysia) has been in place for several years, but more recently, the establishment of the Capital Markets Authority in Saudi Arabia, the Dubai Financial Services Authority at the Dubai International Financial Centre and the Qatar Financial Centre Regulatory Authority has meant that future issuances to the majority of investors in the Middle East will be regulated and supervised. To this extent, Islamic funds issued out of these jurisdictions pose fewer standardization requirements, since private placement memorandums and offering memorandums for listed securities are required to fulfil certain criteria. These criteria generally follow the recommendations of the International Organization for Securities Commissions (IOSCO) and therefore provide a sufficient level of standardization. That said, regulators in the region would do well to better regulate and supervise closed-end private equity and real estate funds, since many of these have deceptive structures designed to build in significant profits for the fund manager, while providing lower than average returns for the associated risk.

Structured Products and Shariah Compliant Derivative Equivalents

With assets in Islamic finance estimated to grow to nearly US$1.6 trillion by 2013, it isn’t surprising that banks are increasingly focus-

Islamic Finance ing on the provision of Shariah-compliant derivative equivalent (SCDE) hedging and investment products. In the last half-decade or so, a mechanism to replicate such derivative financial instruments of the mainstream financial system has emerged as the new frontier of Shariah-compliant “innovation.”

Standardization of Documentation for Shariah-compliant Hedging

The IIFM’s efforts to promote the standardization of Islamic capital markets documents will be crucial to the continued growth of Islamic capital markets.

Discussed at both academic and practitioner conferences, and around water coolers in investment/wholesale banks, the profit rate swap has well-deservedly attracted the majority of attention.

The Master Murabaha Agreement for Treasury Placement (MATP) has already gained critical mass in terms of usage, with several Islamic banks adopting it as their standard document for interbank Murabaha transactions.

Multinational financial institutions such as HSBC Amanah, BNP Paribas, Standard Chartered, JPMorgan and Calyon have all prioritized the roll-out of Shariah-compliant profit rate swaps over the last couple of years.

The use of this agreement will substantially ease the time and cost of executing treasury placements between financial institutions on a Murabaha basis. The Tahawwut Master Agreement (TMA) has been under develop-

ment over several years, in conjunction with the International Swaps and Derivatives Association (ISDA). It has finally been approved by most of the IIFM members, and by the Shariah Supervisory Board, and it is likely that the agreement will be increasingly utilized in the future. While the TMA was originally intended for the Islamic Profit Rate Swap, its use could naturally extend to other Islamic currency options and swaps, since the agreement only requires minor adjustments to accommodate the cross-currency clauses. By introducing the TMA, market players will be able to speed up the time and cost incurred to execute a swap agreement; currently a long and arduous process.

Figure 1: Illustration of a typical project-backed musharakah structure 1. Trust certificates (Sukuk al-Musharakah) issued to investors.

Investors

proceedes of Sukuk issue

2. Sukuk proceeds received by the issuer. 3. The independent issuer enters into a Musharakah partnerships agreement with the originator wherein independent issuer contributes the proceeds on behalf of the investors as Musharakah capital while the originator contributes land, rights to usufruct or in intangibles assets as its share of Musharakah capital into a ring-fenced SPV that is isolated from both issuer and originator. Musharakah appoints the originator as investment manager.

Sukuk

Independent Issuer SPV

Definition? (Contribution and true sale’ transfer of Masharakah assets)

Originator

’

6 Distribution of profit aharea

Musharakah Bankrupcy Remote SPV

returns from sale and lease

Distribution of profit aharea

Assets

Cash flow

4. The Musharakah invest into the project assets, which are then on-sold or leased to third parties or the originator. 5. The profit and cash flows from the investment (either sale of project assets or lease incomes) are distributed to the Musharakah SVP. 6. The Musharakah SPV distributes the profit from the sale and lease to the Musharakah partners , which, based on projection that provide sufficient cash flows, redeems the capital and profit requirements.

Project assets

Figure 2: Illustration of a typical asset-based Shariah structure

1. Trust certificate (Sukuk al-Shariah) issued to investors.

Orginator (Head Lessor) (Sub Lessor)

Advance rent

Head leasor agreement

6 Sub-leasor agreement

Independent Issuer SPV As (where appropriate) issuer, head leasor and sub-leasor Proceeds of Sukuk issue

Rent payment (periodic distribution)

5 Exercise price

3. Advanced rental payment made by the issuer as head lessor (single payment on the closing date) to the head lessor.

5. Five-year sub lessor of land parcel granted by the issuer as sub lessor to the sub lessor. 6. Semi-annual rental payments made by the sub lesser to the issuer as sub lessor, squall to periodic distribution amounts. 7. Termination payment to redeem the Sukuk in full made by the sub lessor to the issuer as sub lessor on maturity / dissolution.

Sukuk

Cash

Investors

2. Sukuk proceeds received by the issuer

4. Head lessor of land parcel granted by the head lessor to the issuer as head lessor.

Shariah complient assets

gif

Lawyers have to redraft ISDA master agreements to comply with the Shariah and transaction particulars each and every time a deal is made, with significant variations in the terms and clauses for each deal. This process usually takes at least a month, if not more, to execute - and quite a significant amount in lawyers’ fees for both parties.

Opportunities for Standardization

Further

While the IIFM-ISDA TMA heralds the introduction of the first consensus-based standard “derivative equivalent” document in Islamic finance, there is much left to be done; and the IIFM has a much more significant role to play than it is playing now. The industry has already seen a consolidation of the types of SCDE on offer in the market (see Figure 8). It would be valuable for the IIFM to prepare standard requirements for each type, in terms of structures, documentation (master agreement, product supplement and confirmations templates) and Shariah-compliant transaction processes. While the Islamic finance industry appreciates diversity in the asset management business, particularly when driven towards the promotion innovation, it is more important for risk management and treasury that the volume based contracts - such as Islamic currency swaps, forwards and options and Islamic profit rate swaps - are fully standardized. gif

2010 December Global Islamic Finance

Addressing tomorrowâ&#x20AC;&#x2122;s business needs today

Global Global Risk Risk Management Management Group Group provides provides Banks, Banks, Investment Investment companies, companies, Insurance Insurance Companies, Companies, Brokerage Brokerage Houses, Houses, Leasing, Leasing, investment investment banks banks and and other other major major companies, companies, across across all all industry industry sectors, sectors, with with assistance assistance and and support support on on aa broad broad range range of of risk risk management management services services and and practical practical issues issues affecting affecting an an employeeâ&#x20AC;&#x2122;s employeeâ&#x20AC;&#x2122;s ability ability to to perform perform their their best best at at work. work.

www.grmg.co.uk www.grmg.co.uk

Halal Industry

gif

BRIDGING THE GAP:

ISLAMIC BANKING AND HALAL INDUSTRY Author: Sara Hasan, Global Islamic Finance Magazine Editorial Team, United Kingdom

Abstract: The current decade is seeing an exponential upsurge in market demand for Halal products and services. This demand covered a market worth about USD 640 million in 2009, and international media has forecast an expected growth of roughly USD 2.3 trillion. The articles discuss development and Islamic investment in Halal industry. Keywords: Halal, Halal Products, Islamic Investment, Islamic Finance

2010 December Global Islamic Finance

Halal Industry

Because of its ideological essence, Halal industry is often thought to be closely interrelated with Islamic finance. The reality is very different; and gives rise to questions about the extent of the parallel growth of the two sectors. There is an obvious need for synergy, but how far is this synergy justified in light of the benefits of parallel growth?

A trillion dollar market in the marketing

The current decade is seeing an exponential upsurge in market demand for Halal products and services. This demand covered a market worth about USD 640 million in 2009, and international media has forecast an expected growth of roughly USD 2.3 trillion. Halal product demand derives primarily from the food and beverages sector, but emerging trends have highlighted huge potential demand for healthcare and lifestyle products. The World Halal Forum, 2009, estimated the market share for Halal food at around 15.8 percent of the global food market share. The regional breakdown seen in Figure A clearly displays the widespread Halal market potential. It can be seen that 63% of market demand is derived from Asian markets; this is a very encouraging statistic, as Asian markets, on the whole, are showing a steeper growth trajectory in the current economic conditions. The global shift in demand for Halal products is on the rise, and several market players have drafted proactive strategies, in order to make the most of the early-bird advantage. Some of the major global food producers acknowledging the shift have included Nestle, Unilever and many major supermarkets. Fast food chains such as McDonald’s, KFC and Burger King, and major meat producers in Muslim minority regions such as Australia, New Zealand, India, Brazil, Argentina, France, the USA and the UK, are also developing proactive initiatives in order to capitalize on the potential of the Halal market. The upsurge in potential demand for Halal products, of course, directly correlates with the exponential increase in Muslim population worldwide. It is expected that by 2025 Islam will be the most widely practiced reli24 Global Islamic Finance

December 2010

gion and its followers would be 30% of the world population as depicted by Figure B. A comprehensive demographic study conducted by Pew Forum (2009) reiterates that Islam is spreading at a rapid pace, with statistics depicting that in 2009, 23 percent of the estimated world population (6.8 billion) is Muslim.

growth prospects. It’s worth noting that the spreading of Islam is not the only driver of Halal industry growth and prosperity. Halal product appeal extends beyond the religious connotation attached to it, as it is synonymous with health, hygiene and quality. Together, these factors contribute to the astronomical global potential for Halal industry.

Under the assumption that Muslim populations have higher preference for Halal products - especially food products - one can safely state that demand for Halal products is highest in areas with high Muslim populations. The largest market for Halal products lies in Asia, as over 60 percent of the global Muslim population resides there, followed by the Middle East and North Africa where about 20% of the global Muslim population reside.

However, despite these enormous growth opportunities, there still remains a range of significant challenges for the Halal sector. The most obvious change is the fragmented nature of the market. This includes a broad range of diverse aspects, ranging from difference in opinion over the context of Halal product integrity, Halal certifications, income level, area of location and overall awareness level. Market players are faced with the major question: how can these challenges most effectively be handled in order to make the most of this trillion dollar market in the making?

Muslim

Christian 2025

Year

The ‘Halal’ concept, matching its literal Arabic meaning, is a unique selling proposition due to be constructively capitalized by financial market players across the globe. Working at the forefront of global finance, the applications of the Halal philosophy transcend both its religious connotation and its traditional product range. It’s relevant to a far broader spectrum of values, all of which are driven towards the creation of healthy, hygienic and high quality product ranges.

gif

2000 1980 1900

0/0

10.0

20.0

30.0

40.0

Worldwide Population (%) Source: http://muslim-canada.org/muslimstats.html (Accessed on October 20 2010)

The Middle Eastern-North African region has significant potential to become a hub for Halal products, as this region has the highest percentage of Muslim-majority countries. More than half of the 20 countries and territories in this region have Muslim population of at least 95 percent. The estimated growth in Muslim population is at a rate of about 1.8 percent per annum, and this growth contributes towards enhancing both Halal purchasing power, and awareness of the benefits of Halal products. The increase in disposable income, and consumer demand for healthy products, in primary ‘Halal’ markets has enhanced the industry’s

The missing link

Halal industry and Islamic finance are economically and ideologically interdependent. In theory, the term “Halal” implies that Islamic principles and standards are abided by at each and every stage of manufacturing value chain; including procurement, production, processing, logistics, marketing and finance. Ironically, the reality is rather different. The two sectors have a lot in common, and Halal industry can promote its growth by learning from the relatively advanced growth trajectory of Islamic banking. Within both sectors, the majority of the product life cycle is at growth stage, and their growth is fuelled by similar factors. They share the aim of attaining sustainable growth and innovation, while working under the predefined parameters of Islam’s Shariah principles. Globally, the growth of the Halal industry is congruent with the growth of the Islamic finance market, especially in emerging Asian markets. The primary hub for Islamic finance is in countries GCC countries (Saudi Arabia, UAE, Qatar, Kuwait, Bahrain, Oman), and other Muslim-majority countries such as Malaysia. According to the latest GCC Islamic Financial report, within the past few years the Islamic finance industry has grown to become 15 percent of the total banking system in the GCC countries. Estimates suggest that it will reach about 50 percent in the next few years. The annual report of Bank Negara Malaysia shows that Islamic finance constitutes 11.3 percent of its total banking system. These figures indicate that the primary hub for Halal industry will also lie in the Asian markets, and the correlation holds up. As discussed above, 60 percent of Halal food industry demand is in fact derived from

Halal Industry Estimation of Global Food Expenditure (2009)

Estimation of Global Hala Food Expenditure (2009) Oceana Countries 0.2%

Oceana Countries 1% Europe 30%

Asia 35%

gif

Europe 10%

Africa 24% Asia 63% Africa 7%

America 3%

America 27%

Global food Market size= USD3992.2 bln

Asian markets; both sectors are flourishing under Asian regional dynamics. While on one hand, religious divides have brought a negative connotation to Islam, on the other hand they have contributed to enhanced awareness about the Islamic way of life. Both the Islamic finance and Halal food industries are currently experiencing a wave of significant awareness, which has highlighted many commercially viable aspects of each. These prevailing market dynamics have enhanced the commercial viability of Halal products and Islamic finance. Both markets have high growth potential at the forefront of both the retail and commercial sectors. The potential market size for both markets could make up a consumer base of over 2 billion. Significant interest for these products is coming from producers and suppliers globally. This interest exists not just for religious reasons, but also due to the appealing features of the products. The appeal of Halal products is derived from their high value chain, which is aligned with the enhanced ethical awareness of consumers: specifically within in the food market. It aligns with current ethical concerns over the consumption of environmentally friendly, healthy and high quality products, manufactured in a way which takes animal rights into account by focussing on humane animal treatment. Islamic finance, on the other hand, has proved its mettle in the recessionary era. The sector is governed by high concern with transparency and equity in the transaction, and mitigates transaction risks by sharing risk and reward in investment.Halal manufacturers should be one of the primary niches for Islamic finance markets, but the recent reports focussing on Middle-East markets seem to depict a glaringly divergence, as they show that only five to ten percent of

Halal food Market size= USD634.5 bln

Halal businesses opt for Shariah-compliant Islamic finance. The prevailing belief is that this gap is due to Islamic banksâ&#x20AC;&#x2122; limited understanding of the overall business model or the financing needs of the Halal value chain. Traditionally, the primary niche of Islamic banks, specifically in GCC, provided financing services to real estate industry, as they better understood the business model and relevant risks associated with real estate. Halal industry has been overlooked by Islamic Finance, and so most Halal financing is derived from conventional banking or from personal contacts. Another perceived short-fall in the Islamic banking sector is its operational dynamics, which can lead to failures in identifying its niche, and in enhancing accessibility in order to promote industrial growth. Although its foundations are based on interest-free non-conventional banking, its operational norms are inherited from conventional banking. Its primary business model is not based on promoting Shariah-compliant trade and production; instead, it is directed towards financial gain. The sector is threatened by the conventional financial model, and so is limited in its ability to align its business model with the promotion of Shariah-compliant trade and production. The evolving demand for Islamic finance, and for Halal products, brings with it the challenges of standardization and certification respectively. In the Islamic finance sector, the standardization challenge has been catered for by the introduction of a range of standards, such as the generally accepted accountancy guidelines (AAOIFI); prudential regulations (IFSB); ratings (IIRA); and hedging (IIFM). The Halal industry, on the other hand, is at a rather nascent stage. Several certification bodies exist - such as Jakim in Malaysia, and Brunei Halal in Brunei - but their credibility tends to be limited or re-

stricted to the country of origin. Because of this limitation, efforts need to be channelled towards the establishment of universally acceptable certification standards. Currently no specific Halal exchange or Shariah-compliant food sector index exists. S&P (as of March 30 2010) has about 15 GCC based and 123 global Shariah-compliant food companies based in countries such as China, Taiwan, Japan, Korea, Mexico and the USA. With regard to Halal exchanges, one can safely assume that the prevalent public listed food companies in GCC countries are Halal as the majority of the populations follow Islam. Provided that universal certification is attained, these Halal Indexes could serve as the potential underlying for investment in exchange-traded Halal funds. The dilemma at hand is that these two sectors - Halal Industry and Islamic banking - have similar objectives but unconsolidated efforts. Focus within both sectors is on trade according to the Islamic principles, and therefore Islamic banks are hoping for the creation of a Shariah-compliant Index, and Halal industry for the creation of a Halal index. In the process, unfortunately, the interrelated demand for a Shariah-compliant Halal Index is often ignored.

Call for synergy of halal industry and Islamic Finance

A consolidated effort coming from both Halal industry players, and from the Islamic banking sector, will lead to the enhancement of efficiency and expertise for both sectors. So far, each has independently worked towards the incorporation Islamic ideology in their business model, and each has served the same market. Itâ&#x20AC;&#x2122;s high time that these two interrelated sectors propel their joint growth by opting for an effective synergized approach. 2010 December Global Islamic Finance

Halal Industry

To bridge the gap, both sectors need to identify the upcoming challenges, and to proactively implement the optimal approach. Both sectors are calling for transparent standards. The standards of Islamic finance are at a slightly more advanced stage, as they are reviewed by the Islamic Financial Services Board and other consultative bodies with the aim of developing a synchronized set of global standards for Islamic banking. To initiate the process of consolidation, Halal market players need to take the initiative by strengthening their foundations to ensure sustainable growth. The weakest link in the Halal value chain is the lack of universally accepted benchmarks in terms of standards, certifications and audits.

sharing the Halal industry’s inherent operational procedures, potential rewards and associated risks. Islamic banks, on the other hand, need to incorporate and to implement a differentiated business model, one based on trade and production promotion. They should realize the potential of promoting Shariah-compliant trade, and the value of opportunities to invest in a range of Halal products. The trillion dollar Halal industry is an expanding market, and investing in it

gif

products. Islamic finance instruments, such as corporate Sukuk (Ijara), can be offered to asset-backed expansion-related transactions within Halal industry, as a substitute to conventional leasing. Research carried out by IdealRatings in partnership with Reuters, in April 2010, compared a sample set of 246 publicly listed ‘Halal’ companies (market value equals $99 Billion) from 15 Muslim countries with the Dow Jones Titans Food 30 Index. Results showed that Halal food companies performed 3.5 percent better than the DJ Food Index.

Currently no specific Halal exchange or Shariah-compliant food sector index exists. S&P (as of March 30 2010) has about 15 GCC based and 123 global Shariah-compliant food companies based in countries such as China, Taiwan, Japan, Korea, Mexico and the USA. With regard to Halal exchanges, one can safely assume that the prevalent public listed food companies in GCC countries are Halal as the majority of the populations follow Islam. Provided that universal certification is attained, these Halal Indexes could serve as the potential underlying for investment in exchange-traded Halal funds

This shows the strong position of Halal indexes, and Islamic financing principles can be applied to innovative Halal assets in class-based investable products such as unit trusts and mutual funds.

Market players can capitalize the opportunity for higher efficiency by inteIn the Halal industry, small and medium grating the certification requirements, enterprise (SME) expansion is hindered and then channelling expansions and by limited financing. Islamic banks can investments towards Shariah-complicontribute towards the development ant financing. Although the standards of the sector by promoting innovation defined should be compliant with Isvia Shariah-compliant venture capital lamic law, it is key that they should also funding. Venture capitalists would fund be moderately aligned with practical green-field and innovative projects by market insights. This implies that marsharing the risk borne by the entrepreket research and should be conducted neur. Entrepreneurs contribute their to understand the consumer demand, innovative ideas and efforts, while venthe implications of the market, and ture capitalists arrange for the funding the pragmatic implementation ability as partners. of corporations. Doing so would lead to If the business prosBridging the gap - Islamic Finance and Halal Industry a win-win situation for pers, everybody both consumers and wins, and if it fails Common Grounds Missing Links corporations. then the entrepreneur risk is minimal, Ideological Interdependence of Islamic Finance Limited understanding of Halal Value Chain Halal industry needs as the investment and Halal Industry to emphasise its trildoes not have to Lack of Shariah compliant Investment funds for lion dollar worth to be repaid. The unHigh Commercial Viability Halal Industry the Islamic banking derlying principle is Lack of universally accepted regulations and Halal Consumer base of over 2 million sector. Universally aligned with the Iscertification accepted Halal cerlamic finance model, Fragmentation of Halal markets High Product Apeal tification would be a and so can be repmajor stepping stone licated in order to towards the highlightintroduce innovative ing of the expanding Islamic financing market niche. would be sure to diversify the portfolio, and methods, which can invest in and promote enhance the overall client base, of Islamic Halal SMEs. Islamic banks should take the Major regional hubs could collaborate at banks or funds. Furthermore, in the current lead in developing such Shariah-compliant both governmental and organizational level recession-driven market, the importance of investment models. They need to realize in order to devise a universal certification, the Halal value chain has increased. A major that there is more to Islamic banking than and the process of devising such a certifi- chunk of Halal industry is based on the food an interest-free version of conventional cation should be done in collaboration with sector, which has sustainable and stable banking. multilateral organizations such as World demand, and so the industry contains many Trade Organizations, the World Bank, the opportunities for worthwhile investment On the whole, the integration of Islamic Global Food Safety Initiative (GFSI), and oth- with sustainable growth prospects. Islamic banking and Halal industry could play a maer regional bodies. finance has proved its mettle in the financial jor role in promoting industry and trade. The meltdown, coming out relatively unaffected effect of such synergy would act as a cataDevelopment must cater to the Islamic compared to conventional banks. A range lyst for sustainable economic development banking sector’s relative ignorance of the of regional and multinational food compa- by creating genuine increase in wealth, jobs business model of the Halal industry. The nies are increasing their investment in Halal and industry prospects. gif best means of doing this is to create aware- products. This wave of expansion is primaness by networking and by transparently rily lead by the increased demand for Halal

26 Global Islamic Finance

December 2010

gif

Islamic Banking

CHANNELLING

SHARIAH-COMPLIANT INVESTMENT IN REAL ESTATE Auther: Sara Hasan, Global Islamic Finance Magazine editorial team, United Kingdom

Abstract: Real estate is an asset class which attracts prime interest from both conventional and Islamic investors. The last decade marked significant investment challenges, as investors are mobilising funds from the US market to alternative regions, and are trying to cope with ongoing global recession. Asian countries such as Malaysia and Singapore were quick to realise the transition, and are aiming to re-channel the trillion dollar Islamic investor funds through the introduction of Shariah-compliant real estate investment instruments such as Ijara financing and Islamic Real Estate Investment Trust (REIT). This article discusses the current moves by Asian market players, and future potential for European players, with regard to Shariah-compliant real estate investments. Keywords: Investment, Real Estate, Islamic Finance, Islamic Investor, Vendor, REIT,

The limited availability of Shariah-compliant products in all sectors is widely seen as a main obstacle for the trillion dollar Islamic finance industry. Shariah-compliant real estate investment is one of the emerging investment vehicles in the Asian and European markets best suited to cater to the needs of Islamic investors.

A popular investment vehicles

Investment in real estate investing involves the trading of real estate for profit. Conventional investment in real estate focuses on the generation of steady cash flows and capital gains, created by renting properties, selling upgraded or refurbished properties, or dealing in wholesale properties. Properties are often purchased with the aim of reselling for capital gain. Real estate investment is often preferred over other classes of asset investment, due to the following key advantages as28 Global Islamic Finance

December 2010

sociated with it. A Tangible Asset: As property is a tangible and physical asset, real estate is one of the preferred asset classes among conventional, as well as Muslim, investors and institutions Inflation Resistant: The supply for real estate is inelastic. This means that due to limited supply, the price of the asset increases at a rate faster than that of its demand. Therefore, in areas where demand for property is high, the value of this investment is positively correlated with inflation. Entrepreneurial Venture: A stake in the real estate sector is a good substitute for the ownership and control of your own business venture. Especially in commercial real estate investments, investors can be actively involved in finding a profitable opportunity, arranging funds, and investment â&#x20AC;&#x201C; and eventually trade in â&#x20AC;&#x201C; the property. Financial Leverage: Leverage is the ability to borrow based on the value of an investment, and leveraging real estate

is far easier than leveraging an investment in any other asset class. Investors aim to optimise leverage, usually devising a specific strategy to identify investment opportunities. They apply acquisition strategies which minimise the cash investment, and divestiture strategies where there are profitable cash exits. Investment in many assets requires investment to the full value of that asset. However, because real estate investment financing is so popular - and easily available - investors can have a stake merely by providing the down payment. The reason behind this is that the secondary market in real estate is far more active than in many other investment areas; for instance, specialised industrial equipment. Operating Leverage: Real estate investors benefit from high operating leverage, as it results in a very large proportion of fixed costs relative to total costs. Invest-

Islamic Banking ments in real estate are necessarily of a sizable amount - and so are the rewards. Steady Cash-flow and Wealth Creation: Investment in real estate yields compounding, long-term cash flows. The risks associated with real estate investment are limited, and can be mitigated even further by investment in commercially viable properties which have a high future potential. Generally, investors in real estate are rewarded in the form of long-term wealth creation. Investor Expertise: The complex investor expertise required for this asset class is considerably less than that required for other asset classes. Someone investing in real estate in his local region can capitalise on existing basic know-how about the future potential of the city, town and neighbourhood. A less experienced investor can reduce overall personal risk by acting as an agent, searching for attractive deals on behalf of a more experienced investor. This helps the new investor to attain hands-on experience in the sector.

- i.e. that the site does not allow activities prohibited by Islam - and that the investment structure is Shariah-compliant. The essence of Islamic real estate investment lies in the intricate connectivity between Shariah-compliant investment structure and Shariah-compliant financing. The most commonly used investment structures for Islamic real estate investment can be broadly classified as: direct investment by use of Islamic finance; or investment through the Islamic Real Estate Investment Trust (REIT). A key principle governing both these transactions is that investments should be made only in Shariah-compliant property. In other words, real estate investments should not be in made in property which is used for non-Shariah-compliant activities such as: financial services involving riba (interest); conventional insurance; gambling and other entertainment activities forbidden by Shariah law; the manufacture or sale of tobaccobased or other haram products; or the trading of non-Shariah-compliant stocks. Direct Investments: Investment in real estate should be made through Shariah-compliant Islamic financing methods, such as cash purchase,

gif

an Ijara (lease) structure, Mudaraba or Musharaka structures. One of the most common financing modes used for Islamic real estate investment is Ijara; the Ijara investment structure for real estate is similar to a conventional lease transaction. Under the Ijara structure, an Islamic bank grants its contractual partner the right to use the property for a specified period of time. Usually, the property can be used immediately once the Ijara contract is concluded; however, if the parties desire they can also opt for a future commencement date. The investor pays a pre-agreed fee for the specified time. The agreement usually has an inbuilt option allowing the lessee to purchase the asset at a nominal price at the termination of the lease period.

A sample Ijara structure is illustrated in Figure A. The Shariah-compliant Ijara investment structure is formed by the introduction a special purpose funding vehicle, known as the Funding Company. Both the project company - that is, the investment company - and the bank which issues the interest-bearing loan, deal with this funding company. The funding Tax Advantage: Real estate investment is subcompany is established in order to make the ject to depreciation. Depreciation is a noninvestment Shariah-compliant, and is used to cash expense which reduces the value of the acquire the property, and to asset over time, and offsets REIT Ivestment hold the title deeds. This fundrevenue that would otherwise Shariah Compliant? Rental Income ing company uses the Sharibe tax deductible. Therefore, Shariah Compliant? ah investment, together with the investor can benefit from Unit holders the conventional bank loan, tax savings over the life of to acquire the property from the real estate investment. Investment Distributions Ma nag the vendor, and it then enters However, itâ&#x20AC;&#x2122;s important to alg h Manager Trustee e e ser me n b ers n vic s o old into an Ijara agreement with note that although land is not es t Act nit h Ma nag of U the Project Company (lessee). subject to depreciation, ass em e ent e fe fee ste Under this structure, the rent sets such as buildings, office, s Tru Shariah REIT payable is similar to the debt and furniture are. Another adAdviser service on the bank loan, and vantage associated with conOwnership of Net Property M so it is used to pay the debt ventional real estate investma ainte Properties Income n n age an Property Tenant ent me ce a service. The principle outments is that interest costs m y nts n Manager l Pa erv d nta ice standing amount is paid by can be fully tax deductible. Re Ma s ma inten nt Ijara. Islamic Real Estate InThis means that the cost of nag anc Re em e a Properties ent nd vestment Trust (REIT): A REIT funds is reduced by marginal fee s is a company which owns and tax rate. manages real estate on beSource: IBFM half of shareholders. This real Shariah-compliant real estate can comestate Figure A: Ijara Structure prise commercial structuring and/or residential Islamic real esproperty. The REIT tate investment Charitable Vendor Islamic Fund provides investors Trust is an emerging with the means to area of interest Purchase price comprising Sale of Property Rent payable under Ijara 100% share access property bank facility and premium for investors in from Vendor to Lease (being equivalent to inownership paid by Project Company assets without Funding Company terest & amortisation payable the UK, the USA, for grand of Ijara Lease under bank facility). directly buying France, Scandinaproperty. Islamic via, Germany and Project Loan Funding Bank REIT is based Company Eastern Europe as Company Balance of all monies on Shariah law, Ijara Lease remaining after paywell as in Islamic Interest $50K pa Ijara Lease granted but on the whole ment of rent under by Funding Company countries. People Ijara Lease representOccupation End user Lease REIT and Islamic to Project Company ing return on equity seeking for investtenant rent for premium Paid by REIT have similar investment ment opportuniProject Company to structure. Both Funding Company ties in Islamic real Occupational representing equity conventional and estate invest unintransaction tenant Islamic REIT have der the assumpsimilar modes of tions that the asSource: Hamid Yunus,Shariah Compliant Real Estate Structuring, Taylor Wessing Presentation valuation; they set class is halal 2010 December Global Islamic Finance

gif

Islamic Banking

each gain profit from rental income and capital appreciation; and each have many similar features, including trustees, property managers, and management companies. The structure of Islamic REIT is illustrated in Figure C below.

try, and has introduced the first Islamic real estate investment trusts (REITs). The Asian region provides new investment opportunities for investors aspiring to invest in Shariahcompliant real-estate-based capital market instruments.

Islamic REIT guidelines and framework have been identified in Malaysia. These are quite simple, requiring participants in the real estate market to appoint a scholarly Shariah adviser to review and approve investments by Islamic REITs.

The Securities Commission of Malaysia gained a reputation for setting the global benchmark, by becoming the first company to release Guidelines for Islamic Real Estate Trusts, in November 2005.

To ensure effective risk management, the advisory board monitors activities including Takaful schemes, forward trades, the rental of real estate for business purposes, investment, deposit and financing. Renting real estate is permissible, with the exception of areas where property is used for non- Shariah-compliant activities, as discussed above.

These guidelines are designed to make things easier for investors in real estate, and to provide fund managers with ample opportunities to create a diversified set of investment portfolios. Currently Bursa Malaysia offers investment opportunity in thirteen REIT, out of which three are Shariah-compliant: namely Al-Aqar, Al-Hadharah, and Axis REIT. Each of these specialises in a different asset subclass. Al-

Aqar KPJ REIT was the first Islamic REIT established in the world. It was established by KPJ Healthcare, by the process of identifying seven hospitals within the group as its main asset class. Al-Hadharah Boustead REIT was listed on Bursa Malaysia in February 2007, and was the first Islamic plantation REIT established in the world. It specialises in oil palm plantations. The third Islamic REIT in Malaysia was formed by the conversion of conventional REIT Axis to Islamic REIT. It specialises in office buildings and industrial properties. The Malaysian Islamic REITs have performed quite steadily in terms of income, generated from both rental income and from capital gains on its portfolio assets. Key to the operation of the Malaysian REITs is an arrangement of “sell and lease back,” made between the owners of the real estate assets and the Islamic REIT. This arrangement is commonly used by Al Aqar and Al Hadharah.

The benchmark for these non-permissible activities is set at 20% of the total turnover of the Islamic REIT. Malay- Figure C: Returns and Distribution of Income for REITs sia provides tax incentives for foreign REIT investors. If REIT distribREIT Islamic REIT utes at least 90 percent of income Return from properties • Rental income Shariah-compliant: to investors, it is fully exempted • Capital appreciation • Rental income • Capital appreciation from paying income tax on taxable income. Withholding tax on dividends received has also been reduced from 20 percent to 10 percent. In 2008, the Malaysian government increased the ownership cap on equity ownership of foreign investors in a REIT management company from 49 percent up to 70 percent. On the whole, Islamic REIT is a highly attractive investment vehicle, which has low risk compared to conventional REIT and delivers high returns. Islamic REIT is an emerging means of investing in Islamic real estate. The diversification of real estate assets provided by the limited range of Islamic REIT has created an investor-friendly environment, where retail investors have the option to invest in a wider range of industry-related assets, using a Shariah-compliant and fundamentally sound approach. Malaysia has been the pioneer in the development of innovative Islamic capital market products, tailored to gain a competitive advantage within an ever-changing international real estate environment. The country is the financial hub for the Islamic finance indus30 Global Islamic Finance

Return for the investor

• •

Dividend Capital gain

Shariah-compliant: • Dividend • Capital gain

Distribution of income

Distribution of income should only be made from realised gains or realised income

Distribution of income should only be made from realised gains or realised income, and must derive from Shariah-compliant activities or from activities within the 20 percent benchmark

Benefits of Islamic REITs •

Diversify the risk profile by participating in a range of real estate and real estate-related assets

•

High dividend distribution to unit holders

•

Income distributed by a REIT to its unit holders will not be subject to tax at the REIT level

•

Stable returns Holding tangible, physical assets, a REIT is able to generate stable, sustainable income through rental income and capital appreciation, which can be used to continually pay regular dividends

•

Affordability

•

REITs allow investors to participate in the real estate market with a smaller capital outlay, rather than the outright purchase of real estate

•

Inflation hedge

•

The value of real estate (underlying) is expected to generally increase in tandem with inflation rate

Source: http://www.bursamalaysia.com Dividend distribution to unit holders (on sen) iREITs

2008

2007

2006

2005

Al-Aqar

8.10

7.32

2.72*

n/a

Al-Hadharah

3.69*

7.22

n/a

Axis

15.27

13.63

12.95

4.7*

Source: Faizah C. Din, Malaysia Report, Islamic Finance, July 2009

December 2010

Under this arrangement, the owner sells an asset to the REIT for a consideration, and simultaneously enters into a back-to-back asset lease arrangement for an agreed amount of rental. This is an effective risk mitigation tool, as it allows the Islamic REIT to secure its income, and avoids the issue of finding a long term tenant and buyer for the property when the lease comes to an end. Al-Aqar and Al-Hadharah REIT are preferred by investors as they rank amongst the top three Malaysian REITs in terms of dividend yield. All the REITs were fully subscribed when they were launched, due to an attractive dividend distribution policy. The investment viability of this instrument is significant, as it has an inherent risk mitigation feature, and manages to earn annual rate of returns similar to the more risky conventional investment instruments. On the whole, the Malaysian REIT industry, and especially the Islamic REITs on the market, provides significant investment opportunities. The market has high potential, due to the involvement of foreign investors who have provided injections of capital, innovative business methods, and the general sharing of their knowledge and expertise. According to a recent article from Business Times, BURSA Malaysia BHD is expecting the Gulf Cooperation Council (GCC) to list an Islamic

Islamic Banking REIT on the exchange next year. The issuer has not yet been identified, but according to market speculation, the GCC counterpart is Qatar-listed property group Ezdan. At the Global Islamic Finance Forum (October 2010), Raja Teh Maimunah Raja Abdul Aziz BURSA, global head of Islamic markets, revealed that Qatar lost out on the listing of the Islamic REIT primarily because, unlike Malaysia, it does not have an Islamic REIT framework. This further propagates the increase in market potential for Shariah-compliant real estate investment. Saudi Arabia, Bahrain and Singapore are also working towards establishing their Islamic real estate sector. Several Islamic REITs are in the pipeline, especially in Asia. According to IIR, the organiser of Cityscape, Saudi Arabia is estimated to have a high potential for the development of Islamic REITs, with about $260bn worth of real estate projects. In 2008, a partnership was started when Geneva-based wealth manager Encore Management SA, and the Sumou Holding from Al- Khobar, KSA, decided to launch the first Islamic REIT in the Saudi Kingdom and the GCC. In 2009, Bahraini asset management company Inovest initiated fundraising to buy at least $79.5 million of property, with the aim of establishing an Islamic REIT. The Central Bank of Bahrain (CBB) has already authorised and approved the IREIT. Inovest is raising money by negotiating with pension funds, insurance companies and other financial institutions within Europe and the United States. The Islamic REIT focused on investment in residential, commercial and industrial real estate across the GCC. It is estimated that the Islamic REIT will earn an annual return of 8.5 percent by following the “buy and lease back” approach. Inovest aims to list the Islamic REIT in Kuwait and Saudi Arabia after Bahrain. Singapore is the next emerging market for Islamic REIT. ARA Asset Management and Qatar’s Regency Group plan to launch a hotel and serviced residences property trust, which will be the first Islamic REIT in Singapore, later this year. Emirates Tarian, a joint venture in 2006 made between UAE-based Emirates Investments Group - and Singapore investors, as reported by Reuters, has plans to list an Islamic REIT in Singapore in 2011. It aims to invest in assets of at least US$355.4 million, and to attract Arab investors who are interested in Shariahcompliant investments. The listing will be named Sababa, and will be one of the largest Shariah-compliant REITs. It will be managed by United Overseas Bank

and HSBC. Sabana is in the process of acquiring warehouses and factory buildings in Singapore. On the whole, the Asian market has successfully initiated the innovation Shariahcompliant investment vehicles based on the highly demanded asset class that is real estate. Significant projects are in the pipeline, and now is the right time for Islamic investors to gain a first mover advantage.

European market

European markets, especially France and the UK, have high potential to attract Islamic real estate investors. The UK especially is the largest Islamic finance market in Europe; according to Bloomberg, it holds about US$19 billion worth of Islamic financial assets. The French economic politicians and businessmen are making every effort to promote Islamic finance investments. The Ministry of the Economy appointed an Islamic finance specialist, Thierry Dissaux, last year, who’s been tasked with promoting Shariah-compliant Islamic investment vehicles. The UK ranks eighth among Islamic financial markets in the world (the top markets are Iran, Saudi Arabia and Malaysia.) London has been a key substitute market in attracting revenue from the oil rich Gulf region, as Arab investors have increasingly sought alternative markets after the events of September 11th 2001. According to an International Financial Services report released this year, the Islamic mortgage market in the U.K. is worth only £500 million (US$797 million), or about 0.3% of the country’s total home loans. In the UK, REIT is treated as a resident company, and benefits from tax advantages: UK REIT is exempt from tax deduction on rental income as well as on capital gains. In short, it replicates the tax treatment on direct property investment. It is popular because of the many benefits associated with it, including regular income returns; diversity of investment across various real estate assets; easier access to property investment; and last but not least, the tax advantage. On the whole, the European region - especially France, the UK and Germany - has high potential for the introduction of Islamic REIT, and for receiving capital injected from teh Gulf investors.

Future potential of Islamic rent

The current performance of Islamic REITs show that investors are highly interested in investments in this asset class. Islamic REITs are particularly attractive as they provide a viable alternative for investors for whom stable dividend yields are a priority. Islamic REIT se-

gif

cures its rental income via a “sale and lease back” agreement, and also through long term tenancy agreements. Companies with high goodwill and valuable assets can consider the utilisation of the Islamic REITs as a fundraising tool. In the current era of recession, when funds are scarce, this type of fundraising often seems more viable compared to the conventional financing by banks. Islamic REIT is also preferred because it allows fundraising without collateral. This mode of financing has significant future potential, which Asian and European markets are aiming to tap. gif

References and further reading: BOOKS • Faizah Che Din,2009, iREITs: The Real Deal, Islamic Finance Asia,http://www.islamicfinanceasia.com/6_spo%20bursa.php [Accessed: November 7, 2010] • Bursa Malaysia, http://www.bursamalaysia. com, [Accessed: November 7, 2010] • Hamid Yunus,Shariah Compliant Real Estate Structuring, Taylor Wessing Presentation [Accessed: November 7, 2010] • Alex Delmar-Morgan, 2009, MENA>s first Islamic REIT could list by Sept – CEO, http://www. arabianbusiness.com/mena-s-first-islamic-reitcould-list-by-sept-ceo-16637.html [Accessed: November 7, 2010] • Azmi and Associates, 2008, Lifting the Veil: Islamic Real Estate Investment Trusts Online Resources • Andrew Macdonald, 2010, Islamic real estate again in vogue: S&P, Reuters,http://www.reuters.com/article/idUSTRE61G3J120100217 [Accessed: November 7 2010] • Saudi Arabia sees launch of Islamic real estate, 2008, http://www.ameinfo.com/173010. html[Accessed: November 7 2010] • Islamic Capital Market, Securities Commission Malaysia, Islamic REITs: Growth and Opportunities, http://www.mifmonthly.com/article9.php [Accessed: November 7 2010] • Finding a Home for Islamic Finance in France, 2010 http://knowledge.wharton.upenn.edu/ arabic/article.cfm?articleid=2557 [Accessed: November 7 2010] • Martin Chandra, 8 Specific Advantages to Investing in Real Estate, http://ezinearticles. com/?8-Specific-Advantages-to-Investing-in-Real-Estate&id=1057714 [Accessed: November 7 2010] • EDY SARIF, 2010, Why REITs should be the choice of investment, http://biz.thestar. com.my/news/story.asp?file=/2010/7/19/ business/6690651&sec=business [Accessed: November 7 2010] • Muhammad Siddique, The Advantages and Disadvantages of Real Estate Investing,http:// www.trcb.com/real-estate/real-estate-investing/the-advantages-and-disadvantages-of-realestate-investing-376.htm [Accessed: November 7 2010] • What You Should Know About Real Estate Property Taxes, http://www.allbusiness.com/ personal-finance/real-estate/2471-1.html [Accessed: November 7 2010]

2010 December Global Islamic Finance

gif

Sukuk

Common

Structures of Sukuk, part 1

Author: Mughees Shaukat, PhD researcher and assistant in INCEIF & ISRA, Malaysia

Abstract: Article discuss the essence of Sukuk is the provision of Shariah-compliant instruments for investment which do not involve either interest, or excessive risk or uncertainty (Gharar). The Sukuk market has been a primary area of growth, providing an avenue for the short and medium-term placement of funds by investors. This development has been fuelled not only by the desire of institutions to raise funds in a Shariah-compliant manner, but also by investor demand for such products. Sukuk issuances consist of entitlement to certain rights relating to assets, including some degree of asset ownership. These Sukuk are more commonly based on the principles of Ijarah, Salam, Mudaraba, Musharaka, and Murabaha; the Istisna mode of finance Keywords: Islamic finance, Sukuk, Islamic Securities, Islamic Capital Market, Sukuk Funds, Ijarah Sukuk, Musharaka Sukuk,

32 Global Islamic Finance

December 2010

Sukuk

ecent innovations have changed the dynamics of the Islamic finance industry, especially in the area of bonds and securities; the use of Sukuk (Islamic securities) has become increasingly popular over the last few years. Sukuk can be used both as a means of raising government finance through sovereign issues, and as a way for companies to obtain funding through the offer of corporate Sukuk. Sukuk has developed into one of the most significant mechanisms for raising finance in the international capital markets through structures acceptable under Islamic principles. Multinational corporations, sovereign bodies, state corporations and financial institutions all use international Sukuk issuance as an alternative to syndicated financing. In the first part of this article, author will discuss the various uses of Sukuk funds and structures, and give an explanation of the most popular Sukuk practices. The essence of Sukuk is the provision of Shariah-compliant instruments for investment which do not involve either interest, or excessive risk or uncertainty (Gharar). The Sukuk market has been a primary area of growth, providing an avenue for the short and medium-term placement of funds by investors. This development has been fuelled not only by the desire of institutions to raise funds in a Shariah-compliant manner, but also by investor demand for such products. Sukuk issuances consist of entitlement to certain rights relating to assets, including some degree of asset ownership. These Sukuk are more commonly based on the principles of Ijarah, Salam, Mudaraba, Musharaka, and Murabaha; the Istisna mode of finance; and the common starting point of pooled portfolios. Sukuk offers the global financial arena many opportunities for managing the capital needs of emerging Islamic economies worldwide in a manner consistent with Islamic values. The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) - which issues standards on accounting, auditing, and governance Shariah standards according to ethical and Shariah principles - has laid down 14 different types of Sukuk. This article will outline seven of the most commonly practiced types of Sukuk structures favoured by the market, explaining each structure and set up in detail. In November 2002, the AOIFI released an exposure draft of its Shariah standards concerning Sukuk. According to the exposure draft, “Investment Sukuks are certificates of equal value; representing, after closing subscription, the receipt of the value of the certificates and the putting it to use as planned; common title to shares and rights in tangible assets, usufructs, and services; or equity of a given project or equity of a special investment activity.” (Exposure Draft of AAOIFI Shariah Standard No. 18, p.4.)

Expanded List of Sukuk

The salient features of the different types of investment Sukuk identified in the exposure draft are summarized in the tables below. Firstly, there are certificates of ownership in leased assets. Types of Investment Sukuk

Description of Investment Sukuk

Shariah rulings & requirements

1. Certificates of ownership in leased assets

These are certificates carrying equal value, and are issued either by the owner of a leased asset or an asset to be leased by promise, by his financial agent. The aim of these certificates is to sell the asset and recover its value from subscription, in which case the holders of the certificates become owners of the assets.

Issuer: sells a leased asset or an asset to be leased on promise. Subscribers are: buyers of the asset. Mobilized Funds: are the purchase price of the asset. Certificate Holders: become the owners of the assets, jointly with its benefits and risks.

gif

The draft also discusses the viability of certificates of ownership in usufructs: 2. Certificates of ownership of usufructs

These certificates have various types, including the following:

2A. Certificates of ownership of usufructs of existing assets.

These are documents of equal value, issued either by the owner of usufruct of an existing asset or by a financial intermediary acting on the owner’s behalf. These certificates are produced with the aim of leasing or subleasing this asset, or receiving rental from the revenue of subscription. In this case, the holders of the certificates become owners of the usufruct of the asset.

Issuer: sells usufruct of an existing asset. Subscribers are: buyers of the usufructs. Mobilized Funds: are the purchase price of the usufructs. Certificate Holders: become the owners of the usufructs jointly with its benefits and risks.

2B. Certificates of ownership of usufructs to be made available in the future as per pre-arranged description.

These are documents of equal value, issued for the sake of leasing assets that the lessor is liable to provide in the future, whereby the rental is recovered from the subscription income. In this case, the holders of the certificates become owners of the usufruct of these future assets.

Issuer: sells usufruct of an asset to be made available in the future as per specification. Subscribers are: buyers of the usufructs. Mobilized Funds: are the purchase prices of the usufructs from subscription. Certificate Holders: become the owners of the usufructs, jointly with its benefits and risks.

The information below outlines the applicability of ownership certificates for the services of a specified supplier, or for services to be made available in the future. 3. Ownership certificates for the services of a specified supplier.

These are documents of equal value, issued in order to provide or sell services through a specified supplier (such as educational programmes in a nominated university), and obtain the value in the form of subscription income. In this case, the holders of the certificates become owners of the services.

4. Certificates of ownership of services to be made available in the future as per description.

These are documents of equal value, issued in order to provide or sell services through a nonexistent supplier, including a description of the subject matter (such as educational programs of a specific quality, schedule, duration etcetera, without mentioning the educational institution) and obtain the value in the form of subscription income. In this case, the holders of the certificates become owners of the services.

Issuer: sells services. Subscribers are: buyers of the services. Mobilized Funds: are the purchase price of the services. Certificate Holders: are entitled to sell all types of usufructs in addition to the funds of reselling such usufructs.

The AAOIFI draft goes on to outline the specifics pertaining to certificates on Salam, Istisna and Murabaha contracts, before discussing the applicability of various certificates to participation contracts.

2010 December Global Islamic Finance

gif

Sukuk 5. Salam certificates.

These are documents of equal value, issued with the aim of mobilizing Salam capital. The items to be delivered on a Salam basis are owned by the certificate holders.

Issuer: sells Salam commodity. Subscribers are: buyers of that commodity. Mobilized Funds: are the purchase price of the commodity: the Salam capital. Certificate Holders: are entitled to the Salam commodity, the selling price or the price of selling them on a parallel Salam basis, if any.

6. Istisna certificates.

These are documents of equal value, issued with the aim of mobilizing the funds required for producing a certain item. The items to be produced on an Istisna basis are owned by the certificate holders.

Issuer: is the manufacturer (supplier). Subscribers are: the buyers of the item to be produced. Mobilized Funds: are the cost of the item. Certificate Holders: are entitled to the item or the selling price of the manufactured item.

7. Murabaha certificates.

These are documents of equal value, issued for the purpose of financing the Murabaha commodity. The certificate holders become the owners of the Murabaha commodity.

Issuer sells: Murabaha commodity. Subscribers are: the buyers of that commodity Mobilized Funds: are the purchasing cost of the commodity Certificate Holders: owns the Murabaha commodity or the price of selling it.

8. Participation certificates.

These are documents of equal value, issued with the aim of using mobilized funds for the establishment of a new project, the development of an existing one, or the financing a business activity on the basis of one of the forms of partnership contract. The certificate holders become the owners of the project or the assets of the activity, as per their respective shares. The participation certificates may be managed on the basis of Musharaka or Mudaraba, or through an investment agent.

8A. Participation certificates managed on the basis of a Musharaka contract.

These are documents representing projects or activities managed on the basis of Musharaka, by appointing either one of the participating parties, or any other party, to manage the operation.

Issuer: invites participants into partnership in a specific project or activity. Subscribers are: the partners in the Musharaka contract Mobilized Funds: are the share contributions of the subscribers in the Musharaka capital Certificate Holders: own the assets of partnership and are entitled to any profit.

8B. Participation certificates managed on the basis of a Mudaraba contract.

These are documents that represent projects or activities managed on the basis of Mudaraba, by appointing Mudarib for management.

Issuer: is the Mudarib. Subscribers are: the capital owners. Mobilized Funds: are the Mudaraba capitals. Certificate Holders: own the assets of Mudaraba operation and profit share as per agreement. The certificate holders, being the capital providers, bear any loss.

8C. Participation certificates managed on the basis of investment agency.

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

Issuer: is an investment agent. Subscribers are: the principals. Mobilized Funds: are the subject matter of investment. Certificate Holders: own the assets represented by the certificates with its risks.

34 Global Islamic Finance

December 2010

Finally, the draft outlines the features of different agricultural-oriented certificates, as well as concession certificates. 9. Muzaraâ&#x20AC;&#x2122;a (sharecropping) certificates.

These are documents of equal value, issued with the aim of using the mobilized funds in financing a Muzaraâ&#x20AC;&#x2122;a contract. The certificate holders are entitled to a share in the crop as per agreement.

Issuer: is the landlord. Subscribers are: farmers who invest on the basis of the Muzaraâ&#x20AC;&#x2122;a contract. Mobilized Funds: are the cultivation costs. Certificate Holders: are entitled to a share of the produce of the land as per agreement.

10. Musaqa (irrigation) certificates.

These are documents of equal value, issued on the basis of a Musaqa contract with the aim of using the mobilized funds for irrigating fruit-producing trees and meeting other expenses relating to maintenance of the trees. The certificate holders become entitled to a share in the crop as per agreement.

Issuer: is the owner of the land on which the trees are planted. Subscribers are: those who assume the irrigation process on the basis of the Musaqa contract. Mobilized Funds: stand to maintain the costs of the trees. Certificate Holders: are entitled to a share in the produce of the trees, as per agreement.

11. Mugarasa (agricultural) certifica tes.

These are documents of equal value, issued on the basis of a Mugarasa contract with the aim of using the mobilized funds for planting trees, and meeting other expenses of the work. The certificate holders become entitled to a share in the land and in the plantation.

Issuer: is the owner of land that is suitable for planting trees. Subscribers are: those who assume the agricultural or horticultural process on the basis of Mugarasa contract. Mobilized Funds: are the cost of maintaining the plantation. Certificate Holders: are entitled to a share in both the land and trees as per agreement.

12. Concession certificates.

These are documents of equal value, issued with the aim of using the mobilized funds to finance execution of a concession offer. In this case, the certificate holders become entitled to rights associated with the concession.

Uses of Sukuk Funds

The most common uses of Sukuk are commonly known as: projectspecific, asset-specific, and balance-sheet-specific.

Project-specific Sukuk

With this kind of Sukuk, money is raised through Sukuk for a specific project. For example, the Qatar Global Sukuk was issued by the Government of Qatar in 2003, in order to mobilize resources for the construction of Hamad Medical City (HMC) in Doha. In this case, a joint venture special-purpose-vehicle (SPV), the Qatar Global Sukuk QSC, was incorporated in Qatar with limited liability. This SPV acquired the ownership of a land parcel registered in the name of HMC. The land parcel was placed in trust and Ijarahbased Trust Certificates (TCs) worth US$700 million were issued, due by October 2010. The annual floating rate of return was set at LIBOR plus 0.45 percent.

Asset-specific Sukuk

Under this arrangement, the resources are mobilized by selling the beneficiary right of the assets to the investors. For example, the Government of Malaysia raised US$600 million through Ijara Sukuk Trust Certificates (TCs) in 2002. The beneficiary right of the land parcels has been sold by the government of Malaysia to an SPV, which was then resold to investors for a period of five years.

Sukuk

gif

The SPV retained the beneficiary rights of the properties in trust, and issued floating rate Sukuk to investors. Another example of asset-specific Sukuk is the US$250 million five-year Ijarah Sukuk issued in order to fund an extension of the airport in Bahrain. In this case, the underlying asset was the airport land, sold to an SPV.

parties at the time of the contract. If both of these are known, Ijarah can be contracted on an asset or a building yet to be constructed, as long as such building is fully described in the contract. This allowance applies so long as the lessor should normally be able to acquire, construct or buy the asset being leased by the time set for its delivery to the lessee (AAOIFI, 2003: 140-157). The lessor has the right to sell the leased asset, provided that the sale does not hinder the lesseeâ&#x20AC;&#x2122;s ability Balance-sheet-specific Sukuk to benefit from the asset. In the case of a sale by the lessor, An example of the balance-sheet-specific use of Sukuk funds the new owner would be entitled to receive the rentals. is the Islamic Development Bank (IDB) Sukuk issued in August 2003. The IDB mobilized these funds in order to finance various 2. Rental in Ijarah must be stipulated in clear terms for the first term of lease. For future renewable terms, it may be constant, projects being carried out within the member countries. The IDB increasing or decreasing, the scale of which change is set by made its debut resource mobilization from the international capirecognizable benchmarks or by the relation of rental cost to tal market by issuing a US$ 400 million five-year Sukuk, due maany well-known variable. ture in 2008. 3. As per Shariah rules, expenses related to the corpus or basic characteristics of the assets are the responsibility of the Most Commonly Practiced Sukuk Structures: owner, while maintenance expenses related to its operation Sukuk can come in many forms, depending on the type of Islamic are to be borne by the lessee. financial models and trades used in its structuring. However, the most important and common of those forms are Ijarah, Mudara- 4. Proper procedure for issuance of Ijarah Sukuk involves the creation of an SPV in order to purchase the asset(s). The SPV ba, Musharaka, Murabaha, BBA, Salam, Istisna - and hybrid verissues Sukuk to the investor, enabling him or her to make sions of these. We will now examine, one by one, the dynamics of payment for purchaseach of these forms ing the asset. The asof Sukuk, examining sukuk al-Ijara transaction structure set is then leased to each structure to gain a third party for that a clear idea of how partyâ&#x20AC;&#x2122;s use. The lesthey work. Sukuk holders see makes periodic rental payments to Ijarah Sukuk 4b. Periodic rentals 2a. Sukuk proceeds the SPV, which in turn & capital amount These are Sukuk 4a. Periodic distributions distributes those payrentals & capital which represent 1.Title to assets amount payments ments to the Sukuk Obligator leases ownership of equal Obligator as holders. back asset as SPV shares in a rented seller 2b. Sukuk proceeds 3. Lease agreement 5. Ijarah Sukuk are lessee real estate property, completely negotiable or the usufruct of the and can be traded in real estate. These Suthe secondary markuk give their owners kets. the right to own the Same entity 6. Ijarah Sukuk offer real estate, receive a high degree of flexthe rent, and dispose Steps involved in the structure ibility from the point of their Sukuk in a 1 - The obligator sells certain assets to the SPV at an agreed pre-determined purchase of view of their issumanner that does not price. ance management affect the right of the and marketability. The 2a The SPV raises financing by issuing Sukuk certificates worth an amount equal to the lessee, i.e. they are purchase price. central government, tradable. The holders 2b - this is passed on to the obligator (as seller). municipalities, awqaf of such Sukuk bear all 3 - A lease agreement is signed between the SPV and the obligator for a fixed period of time. or any other asset In this agreement, the obligator leases back the assets as lessee. costs of maintenance 4a - SPV receives periodic rentals from the obligator; users, private or pubof or damage to the 4b - these are distributed among the investors i.e. the Sukuk holders. lic, can issue these real estate. (AAOIFI) 5 - At maturity, or in the event of dissolution, the SPV sells the assets back to the original Sukuk. They can also seller, at a predetermined price. That price should be equal to any amounts still owed under be issued by financial the original terms of the Sukuk. Ijarah Sukuk are seintermediaries or dicurities representing rectly by users of the the ownership of wellleased assets. defined existing and known assets tied up to a lease contract, rental of which is the return payable to Sukuk holders. Payment of Ijarah rentals need not be related to the period in which the lease takes usufruct; it can be made before the commencement of the lease period, during that period, or after it. The parties decide when it will be paid in advance and mutually. This flexibility can be used to evolve different forms of contract and of Sukuk, which is able to serve the different purposes of issuers and holders.

Features of Ijarah Sukuk

1. For an Ijarah contract, the nature of the assets being leased and the amount of rent must both be clearly known to the

Examples of Ijarah Sukuk in Practice

The US$150 million Islamic Lease Sukuk is part of a US$395 million Serial Islamic Sukuk issuance which Bank Islam (Labuan) Limited has been mandated to arrange by Kumpulan Guthrie Berhad (Guthrie). In December 2000, Kumpulan Guthrie Berhad (Guthrie) was granted a RM1.5 billion (US$400 million) Al-Ijarah Al-Muntahiyah Bit-Tamik by a consortium of banks. The original funds were raised in order to continue the financing of Guthrieâ&#x20AC;&#x2122;s acquisition of a palm oil plantation in the Republic of Indonesia. The consortium was then invited to participate as the underwriter/ primary subscriber of the Sukuk Transaction. 2010 December Global Islamic Finance

gif

Sukuk The Kingdom of Bahrain, acting through the Ministry of Finance and National Economy, (in such capacity, the Sub-Lessee), leased by way of a sub-lease, the land parcel from the Issuer, on the terms set out in the Al-Ijarah Sub-Lease Agreement. This lease lasted for a period of five years, commencing on the Closing Date and terminating on the Periodic Distribution Date falling in June 2009. The sub-lease would have been subject to earlier termination in the event of an early dissolution of the trust. Sarawak Economic Development Corporation (SEDC) obtained financing amounting to US$350 million, by issuance of series of trust certificates issued on the principle of Sukuk al-Ijarah. For the purposes of the proposed Sukuk, SCSI was incorporated on 23 November 2004 as a special purpose company, under the Offshore Companies Act (OCA), 1990, in Labuan.

4. In return, the agent (i.e. the corporation) receives a fixed agency fee, and in addition, a variable incentive fee may be payable. 5. The profits are distributed to the Sukuk holders. 6. The corporation takes on the irrevocable undertaking of buying, at a pre-agreed price, the SPV’s Musharaka shares of the SPV – usually on a biannual basis. At the end of the fixed period the SPV should no longer have any shares in the Musharaka.

Examples of Musharaka Sukuk in Practice

A seven year deal involving a US$550 million Sukuk transaction for Emirates, Dubai’s national airline, was structured on a Musharaka contract. The Musharaka, or joint venture, was established in order to develop a new engineering centre and a new headquarThe certificates were issued with a maturity of five years. Under ters building. These will stand on land situated near Dubai airport the proposed structure, the proceeds will be used by the issuer which will ultimately be leased to Emirates. Profit, in the form of to purchase certain assets lease return, generated from from First Silicon (Malaysia) the Musharaka, will be used Sdn Bhd. Thereafter, the issukuk al-Musharaka transaction structure to pay the periodic distribution suer leased assets procured on the trust certificates. Sitara from First Silicon to SEDC for Chemical Industries Ltd, a puban agreed rental price for an lic limited company, made a Corporate agreed lease period of five public issue of profit-and-loss years. The rental payable by sharing based term finance 4. Penriodic profit+ 1. Physical Asset 6. Undertakes to buy SEDC was supported by the certificates (TFCs). These were Incentive fee contribution Musharaka Shares of State Government of Sarawak, worth RS360 million, and were the SPV on a periodic basis via a letter of support. subscribed on 19 and 20 June Musharaka Investors 2002.

Musharaka Sukuk

These are investment Sukuk 3. Periodic profit 2b.Issue proceeds which represent ownership of Musharaka equity. They are in every way similar to the SPV Mudaraba Sukuk, except in the organization of the relationship between the respective parties. Under Musharaka Sukuk, the party issuing Sukuk forms a committee made up from the holders of the Sukuk, who may be consulted when making investment decisions (AAOIFI). Musharaka Sukuk are used to mobilize funds needed for the establishment of a new project, the development of an existing one, or the financing of a business activity on the basis of one of the forms of partnership contract. Certificate holders become the owners of the project, or the assets of the activity, to a degree proportional to their respective shares. These Musharaka certificates can be treated as negotiable instruments, and can be bought and sold in the secondary market.

Steps involved in the structure:

The corporation and the SPV enter into a Musharaka Arrangement for a fixed period, sharing the profits according to an agreed ratio. The corporation also undertakes to buy further Musharaka shares from the SPV on a periodic basis. 1. The corporation (as Musharik) contributes land or other physical assets to the Musharaka. 2. The SPV (as Musharik) contributes cash to the Musharaka, i.e. the proceeds received from the investors. 3. The Musharaka appoints the corporation as an agent, with the task of developing the land (or other physical assets) with the cash injected into the Musharaka. The corporation will also sell/lease the developed assets on behalf of the Musharaka. 36 Global Islamic Finance

December 2010

The TFCs had a fixed life of five years, and profit and loss sharing was linked to the operating profit or loss of the Chemical 2a. Sukuk proceeds Division of the company. The 5. Issues sukuk- Al Musharaka contract stipulated musharaka+periodic semi-annual profit distribuprofit tion on provisional account payment, on the basis of projections, irrespective of profit and loss. The final profit payment was to be determined using the annual audited accounts of the company, and adjustments to be made accordingly. Kuwait Finance House (KFH), Liquidity Management Centre B.S.C. (LMC) and Al Muthanna Investment Company (MIC), all mandated lead arrangers, launched the $125 million Lagoon City Musharaka Sukuk in support of the Lagoon City residential and commercial real estate development. This development is part of the Kheiran Pearl City project. The 2-year Musharaka Sukuk, which is structured as a reducing Musharaka, will offer a return of 200 basis points over 6 months US$ LIBOR, payable semi-annually, and has an average maturity of 1.25 years. In the next issue of Global Islamic Finance Magazine, author will give details of the Mudaraba Sukuk, Murabaha Sukuk, Salam Sukuk, Sukuk al-Istisna and Hybrid Sukuk. gif

References & further reading: • •

Blair, William (2005), “Legal Issues in the Islamic Financial Services Industry” paper presented in a Seminar on Legal Issues in the Islamic Financial Services Industry, Kuwait City. Billah, Mohd. Ma’sum. (2006). Shar’iah Standard of Business Contract. Kuala Lumpur, Malaysia: A.S. Noordeen.

International Investment Co (IIC)

Success is not for the timid. It is for those who seek guidance, make decisions, and take decisive action.

www.iiconline.co.uk

gif

Interview

‘‘Key strengths of Islamic Finance in the UK is the supportive regulatory framework’’

Interview with

Humphrey Percy

Percy Humphrey joined BLME in August 2006 as Chief Executive Officer. He has more than 30 years of banking experience focusing on treasury and global markets and during his career to date has worked at J. Henry Schroder Wagg, Barclays Merchant Bank, Barclays de Zoete Wedd and West LB where he held positions including CEO, Managing Director, General Manager, and Head of Global Financial Markets. Humphrey is experienced in building new functions and product areas, and has managed start up businesses within both BZW and West LB as well as founding his own business in 2002. He tells Global Islamic Finance Magazine about his involvement in Islamic finance industry and current trends in the market… 38 Global Islamic Finance

December 2010

Can you tell us about the history of your organisation? Bank of London and The Middle East plc (BLME) was incorporated in London on 7th August 2006 under the name House of London and The Middle East. BLME received authorisation from the FSA in July 2007 with a full set of permissions and European passporting. Since receiving authorisation BLME has gone from strength to strength, the Regulatory Business Plan has been met with private placements being completed in February 2007 and January 2008 bringing the total capital base to £250million. In January 2009, in line with the original Regulatory Business Plan, BLME launched the Asset Management and Private Banking divisions.

How has your organisation contributed to the development of Islamic finance? We have diversified the products that are offered to investors, we recently launched a fully Sharia’a complaint online FX trading platform – BLMEFX. BLME has also ensured that the products we have innovated compete not only in the Islamic but the conventional market place. What can be done to increase the number of Islamic finance institutions in Europe? The UK remains at the forefront of Islamic Banking in Europe. The Alternative Finance arrangement which have been introduced into the Finance Act over the past few years have been helpful to achieve a level playing field for Islamic Financial Institutions.

Interview What are the strengths and weaknesses of the Islamic finance industry in your country? One of the key the strengths of Islamic Finance in the UK is the supportive regulatory framework. In addition London is a global finance centre in particular for commodity and foreign exchange trading and Investment Banking. BLME believes that the future of Islamic finance depends on its ability to innovate and evolve. The UK and in particular the City of London provides direct access to a highly skilled and experienced workforce. A UK Sovereign Sukuk issuance would be an additional and significant strength for the Islamic finance industry. How important is innovation to Islamic finance? Vital. However innovation is vital for all areas of finance. The lessons learnt from the economic crisis have shown that all financial institutions need to innovate products that are more transparent and fair. This is where Islamic financial institutions have a head start – the principles of Sharia’a demand that all products are transparent and fair. What is unique about your organisation’s Islamic finance products and services? The depth of our product and service offering, BLME has five business areas: Asset Management, Corporate Advisory, Corporate Banking, Private Banking and Treasury.

Why haven’t Sovereign sukuk been issued in the UK yet? There has recently been a Sukuk issuance in the UK on quite a small scale. There are many reasons why a UK Sovereign Sukuk issuance has not taken place. However we remain hopeful that with change of government and the new parliamentary committee that has been set up to review Islamic Finance, steps are being taken in the right direction. What is your opinion of the current controversy surrounding sukuk? In 2008/2009 there was some controversy surrounding a small number of Sukuk which has been reported and discussed in detail since then. Islamic Finance is moving forward and leaving these controversies behind, Sukuk are still being successfully issued and are a popular investment class.

Which current trends in Islamic finance are you most interested in? Islamic Capital Markets, the development of this market is critical to growth of global Islamic banking. Massoud Janekeh oversees Islamic Capital Markets business development for BLME, focussing on the origination of fixed income Islamic instruments such as Ijara-based sukuk and syndicated murabaha in order to provide other Islamic financial institutions with access to international issuers that are regularly present in the London market. This will allow Islamic financial institutions in key Islamic markets such as the Middle East and Malaysia to diversify their investment portfolios by taking exposure to Sharia’a compliant investment grade assets in US Dollars, Euros or sterling. What are the challenges facing Islamic finance and what must the industry do to overcome them? The challenges faced by BLME specifically are similar to those faced by the whole Islamic finance industry: • •

The requirement for more Islamic hedging and liquidity instruments and products The slow evolution of the syndication and secondary markets in the Islamic space

gif

•

The most significant challenge is the lack of a UK Sovereign Sukuk. Islamic Finance is a relatively new industry and it needs to be recognised that time is needed to create global recognition and regulation, to fully develop sophisticated products and to penetrate some markets such as Insurance and Wealth Management. How important is it for Islamic finance to become more standardised as an industry? Within the current growth the industry is experiencing across different regions standardisation, on a national and international level between both institutions and regulators will increase efficiency and cooperation. What is your opinion on Islamic hedge funds? BLME does not trade or invest in Islamic Hedge Funds. BLME is focused on managing its successful Sharia’a complaint $ Income Fund and in creating equity and tracker funds. What steps should someone take in order to get into Islamic finance? We would recommend that anyone looking to start a career in Islamic Finance looks to gain a solid understanding of the principles of Sharia’a and some experience of working within a financial institution. This experience does not necessarily have to be within the Islamic finance sector. The CSIS Islamic Finance Qualification is useful. What is the value of Islamic finance qualifications? They provide theoretical background knowledge and a good foundation for practical experience. How can the shortage of Sharia’a scholars be resolved? There is a misconception that there is a shortage of Sharia’a Scholars. This is mainly due to the demand for the more prominent scholars by the many Islamic Financial Institutions. To what extent is there “fatwa shopping” within Islamic finance? From our experience this does not occur. BLME has a Sharia’a Supervisory Board who have worked with the bank since before we received our FSA authorisation. Our SSB is independent and work with BLME to create innovative, compliant and fair Islamic finance products. What are the plans for your organisation next year? To consolidate our business areas, innovate more products and continue to promote Islamic Finance as a viable alternative to conventional finance. gif 2010 December Global Islamic Finance

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

Trade Finance services

www.otfonline.co.uk

gif

World Islamic Finance Review

Three Decades of Islamic Banking

in Bangladesh

Author: Rubayat Jesmin, PhD Student, Institute of Business Administration, University of Dhaka, Bangladesh Abstract: Banks working under the principles of Islamic Sharia originated in Bangladeshâ&#x20AC;&#x2122;s financial market, with the establishment of the Islamic Bank Bangladesh Limited in 1983. Now seven full-fledged Islamic banks, and twelve Islamic banking wings/ branches incorporated into conventional banks, are operating within the country. These Islamic banks have made considerable progress over the years, as can be seen by their share in the total amount of money deposited, as well as investments within the entire banking system. Nevertheless, these banks face both external and internal problems when attempting to operate without interest. With further prospects on the horizon, the Islamic banking sector within Bangladesh needs to focus on developing skilled human resources side-by-side with diversified and innovative financial instruments. They will also need to enhance transparency in financial reporting, auditing and accounting, backed by a stronger regulatory framework. Keywords: Islamic Banking, Islamic Finance, Bangladesh, Islamic Bank

42 Global Islamic Finance

December 2010

World Islamic Finance Review All over the world, banks are the most popular kind of institutions involved in financial intermediation. Banks can be categorised by the ideology which they follow: the conventional or traditional banking system and the Islamic banking system. The basic principle of Islamic banking is the prohibition of Riba (interest), which is the main difference I practice between it and the conventional system. In addition, Islam prohibits dealing in liquor, pork, gambling, pornography and anything else which the Shariah law deems Haram (unlawful). The Islamic financial system also works on the basis of participation in the enterprise, taking on risk involved in the funds on a profit-and-loss-sharing basis.

Bank, 2009). Islamic Banks working under the principles of Islamic Shariah originated in Bangladesh’s financial market with the establishment of the Islamic Bank Bangladesh Limited in 1983. In August 1974, Bangladesh signed the Charter of Islamic Development in Banking, and the government committed itself to reorganise its economic and financial system under the principles of Shariah. In November 1982, a delegation of the Islamic Development Bank (IDB) visited Bangladesh, and showed keen interest in participating in the establishment of a joint venture Islamic bank in the private sector. The idea of establishing an Islamic bank in Bangladesh became a reality, and the IBBL

Islamic banks appeared on the world scene as active players over two decades ago, but the basic practices and principles of the Islamic banking date back to the early part of the seventh century [Islamic Finance: A Euromoney Publication, 1997]. In 1978, the “Organisation of Islamic Conference (OIC)” gave the following definition of Islamic banking: “Islamic Banking is a financial institution whose statutes, rules and procedures expressly state its commitment to the principle of Islamic Shariah, and to the banning of the receipt and payment of riba (interest) on any of its operations.”

Table 1: Differences Between The Conventional Banking And The Islamic Banking

In today’s global banking industry, Islamic banking is considered one of the fastest growing segments, managing billions of dollars worth of assets. Currently, Islamic banking is estimated to be managing funds work anything between US$ 800 billion and US$ 1.0 trillion [Zaker, 2010]. Its clientele are not only confined to Muslim countries, but are also found in non-Muslim countries within Europe, the USA and the Far East. Unlike conventional banks, the Islamic banks are structured to retain a clearly differentiated status between shareholders’ capital and clients’ deposits, in order to ensure exact profit-and-loss-sharing, as this is required in Islamic Law. Some of the major differences between the conventional banking and the Islamic banking, highlighted by Ahmad and Hassan (2006), are shown in Table 1. Hassan (2005) also argued that Islamic banking varies significantly from conventional banking - in contract, transactions, treatment, but most significantly, in its underlying ethics and ideology.

Islamic Banking in Bangladesh

The concept of Islamic banking is not new in Bangladesh’s financial market. Islamic banking has experienced phenomenal growth and expansion in Bangladesh, which can be viewed in the context of strong public demand and support for the system within the country, and within the concept of gradually increasing global popularity. (Bangladesh

gif

was established in March 1983. The IBBL comprises nineteen Bangladeshi nationals, four Bangladeshi institutions and eleven banks, financial institutions and government bodies of the Middle East and Europe (including the IDB), and two eminent personalities of the Kingdom of Saudi Arabia, joining hands to form a new financial system. At present, out of the total forty-eight banks in Bangladesh, there are seven fully-fledged Islamic banks – all local private commercial banks (PCBs). Besides the IBBL, banks operating under Shariah law are the Al-Arafah Islamic Bank Ltd (AIBL), the ICB Islamic Bank Ltd (ICBL), the Export Import Bank of Bang-

Conventional bank

Islamic bank

Basic principle

The functions and operating modes of a conventional bank are based on man-made principles.

The functions and operating modes of Islamic bank are based on the principles of Islamic Shariah, set down by the Prophet in the seventh century.

Basic functions

Lending money and getting it back with interest is the fundamental function of a conventional bank. Therefore the relation of a conventional bank to its clients is that of creditor and debtors.

The fundamental function of an Islamic bank is participation in a business partnership is. That is, the relation of an Islamic bank to its clients is that of a partner, investor and trader.

A conventional bank is obligated to guarantee all its deposits.

Strictly speaking, an Islamic bank cannot guarantee any of its deposits.

Since income from the advances is fixed, a conventional bank sometimes gives little importance to developing expertise through project appraisal and evaluations.

Since it shares profit and loss, an Islamic bank pays greater attention to developing project appraisal and evaluations.

A conventional bank gives greater emphasis on the client’s credit history and suitability for credit.

An Islamic bank gives greater emphasis on the viability of the individual project.

Often the bank’s own interest becomes prominent. It makes no effort to ensure growth with equity.

It gives due importance to the public interest. Its ultimate aim is to ensure growth with equity.

The investor is assured of a predetermined rate of interest.

An Islamic bank promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur).

A conventional bank can charge additional money (compound rate of interest) in case of defaulted payments.

An Islamic bank has no provision to charge any extra money from clients who default payments.

Maximisation of profits

It aims at maximising profit without any restriction.

It also aims at maximising profit, but is subject to Shariah restrictions.

Dealing with «Zakaht»

A conventional bank usually does not deal with Zakaht.

It has become one of the service-oriented functions of an Islamic bank to collect and distribute Zakaht.

Access to money market

For an interest-based commercial bank, borrowing on the financial market is relatively easy.

For an Islamic bank, it is comparatively difficult to borrow money on the financial market.

Rate of interest charged

Table 2: Operating Profit of the Islamic Banks

(in million Taka)

Name of the bank

Jan’10- Jun’10

Jan’09- Jun’09

Name of the bank

Jan’10- Jun’10

Jan’09- Jun’09

Islamic Bank (Bangladesh) Ltd (IBBL)

5,070 [9.51%]

4,440 [13.66%]

AL-Arafah Bank Ltd (AIBL)

1,400 [2.63%]

800 [2.46%]

Exim Bank Ltd (EXIM)

2,100 [3.94%]

1,080 [3.32%]

Shahjalal Bank Ltd (SHIB)

1,600 [3%]

820 [2.52%]

First Security Islamic Bank Ltd (FSIL)

500 [0.94%]

50 [0.15%]

Social Islamic Bank Ltd (SIBL)

1,050 [1.97%]

700 [2.15%]

Note: The Bangladesh Bank, 2010 2010 December Global Islamic Finance

gif

World Islamic Finance Review

ladesh Ltd (EXIM), the Social Islamic Bank Ltd (SIBL), the Shahjalal Islamic Bank Ltd (SHIB) and the First Security Islamic Bank Ltd (FSIL). Earlier on, foreign banks such as the Shamil Bank of Bahrain EC, the Faysal Islamic Bank of Bahrain EC and Bank AlFalah Limited of Pakistan had Islamic banking operations in Bangladesh. Even ICBL was jointly owned by foreign investors for a brief period. In addition, nine PCBs and two foreign commercial banks (FCBs) have separate Islamic banking wings working side-by-side with their conventional banking operations – and Agrani Bank Limited has also became the country’s first state-owned commercial bank (SCB) to introduce Islamic banking services. Appendix-1 provides a list of the banks offering Islamic banking products and services in Bangladesh. Recenlty, the Islamic banks of Bangladesh have come under fire for two reasons: firstly, mismanagement causing deterioration of the banks’ financial health; and second, the alleged degree of involvement of top-level staff with those suspect transactions. These incidents indicate a gap between the ideals and the actual practice of Islamic banks in Bangladesh [Ahmad and Hassan, 2006].

Regulatory Framework of Islamic Banking in Bangladesh

The performance of Islamic banks in the country is progressing gradually. The Bank of Bangladesh, as the pre-eminent bank of the country, supervises these Islamic banks as it does conventional banks. Nevertheless, the role of the Bangladesh Bank in monitoring, guiding and supervising the Islamic banking in accordance with Islamic Shariah is very minimal. The Bank of Bangladesh relies on reports prepared by the individual Shariah Council controlled by each bank. Each Islamic bank has one of these, consisting of Fuqaha (Jurists, or experts on Islamic jurisprudence), economists specialising in Islamic finance, and a lawyer. The activities of these Shariah Councils are conducted and governed by the Shariah by-laws, or rules and regulations, of the respective banks. Bangladeshi Islamic banking is also montored and examined by a Central Shariah Supervisory Board. Nineteen commercial Bangladeshi banks, including the seven full-fledged Islamic banks, are members of Central Shariah Board for Islamic Banks of Bangladesh. In a bid to facilitate and to streamline the country’s flourishing Islamic banking industry, the Bank of Bangladesh issued comprehensive guidelines for Shariah-based banks in 2006. The guidelines are applicable to 44 Global Islamic Finance

December 2010

the opening of new Islamic banks, the establishment of Islamic banking subsidiaries by conventional banks, the introduction of separate Islamic bank branches, and the conversion of conventional banks to Islamic ones. Under the new guidelines, any new Islamic bank must take the form of a public limited company, with public shares accounting for a minimum of 50 percent of the company’s stake. The minimum paid-up capital requirement for Islamic banks is Tk. 2.00 billion, and a new Islamic bank will have to maintain minimum required capital adequacy ratio, as prescribed by the central bank. The Bank of Bangladesh has also issued instructions on risk factors within the Islamic forms of investment, aiming to bring the country’s Islamic banking under the Basel-II framework. Accordingly the Islamic banks - along with the traditional banks with Islamic branches or wings - will have to calculate their riskweighted assets and capital adequacy requirement, in order to implement of the Basel-II framework. In May 2010, the central bank increased the statutory liquidity ratio (SLR) for Islamic banks to 10.50 percent from their total demand and time liabilities, which can be compared to the previous SLR of 10 percent for Islamic banks, and the existing 18.50 percent for conventional banks. Islamic banks cannot purchase treasury bills and bonds involving receipt of interest, as the Shariah rules ban payment or receipt of interest by any individual or institution. In the guidelines, the Bank of Bangladesh has set a minimum and maximum ceiling for a sponsor’s shareholder of the Islamic bank; these stand respectively at Tk. 0.5 million, and 10 percent of the proposed bank’s total share of the capital. The shares are non-transferable without prior approval of the central bank, for three years dating from the inception of the business,. A maximum of 49 percent of subsidiary’s shares are eligible to be offered to the public, while at least 51 percent of the total paid-up capital must be paid by the sponsors of the bank company or by the bank. The sponsors’ shares are also subject to a three year lock-in. The subsidiary will also be treated as a registered Islamic commercial bank, and so its minimum paid-up capital and required capital adequacy ratio will be as those required for a new Islamic bank. The banks will have to separate the funds held by Islamic banking branches, and maintain a separate accounting system which must be approved by the Shariah Supervisory Board of each bank.

Performance of the Bangladeshi Islamic Banks

Bangladesh is the first country in South or South-East Asia to have successfully established an Islamic bank. Though the history of Bangladeshi Shariah-based banking is no more than two decades old, it now controls 25 percent of the total banking industry. The annual business growth rate of Islamic banks in Bangladesh stands at over 30 percent. In December 2009, 506 bank branches, out of the country’s total of 7187, are part of Islamic banks – and in addition, the twelve conventional banks in the country have twenty-nine wings to deal with Islamic banking activities. This is a huge progress since 1997, when Islamic banks controlled only 2 percent of the bank branches. Like the conventional banks in Bangladesh, Islamic banks have their greatest presence in the capital, Dhaka, and stronger focus in the country’s urban areas generally. In 1997, Islamic banks – of which there were then only five - covered five percent of the total deposit within the country. But on the 31st December 2009, Islamic banks and Islamic banking wings together held approximately 25 percent of total deposit accounts and deposit amount in the country’s banking system. Islamic banks covered 4 percent of the total investments (loans and advances in the conventional sense) within the entire banking system in 1997, but current figures show that Islamic banks, and the Islamic banking wings of other conventional banks, cover about 27 percent of the total investments working within the country’s banking system. The statistics indicate that the loan portfolio of Islamic banks is heavily biased towards short-term trade financing. With this consideration, their loans are low risk, and only contribute modestly to the bank profits. These banks tend to extend lendings to the large and medium industries over the small and cottage industries. It’s only recently that IBBL, AIBL and SHIB have offered loan facilities especially designed for the country’s small and medium enterprises (SMEs). Rashid and Nishat (2009) found the performance of the Islamic banking sector to be poor overall, particularly in the areas of profit maximisation, investor management and operating inefficiency. However, at an individual level the financial performance of Bangladeshi Islamic banks, has been mixed, and this is reflected by their performances in the capital market (Appendix-2). At one end of the spectrum, there is IBBL, a sound banking institution with continuous growth and at the other end of the spectrum, ICBL, which has a history of all kinds of financial

World Islamic Finance Review irregularities. For many years in a row the IBBL has held the top position among the PCBs in earning a higher operating profit. Table 2 depicts the operating profit earned by six Islamic banks (excluding ICBL), while contribution of the same to the total operating profit of all the PCBs is shown in parentheses. For years, the IBBL has been one of the top ten gainers, continuously performing better and better in DSE-20 – the Dhaka Stock Exchange (DSE) Blue Chips Index. The bank is at the top of the list of PCBs receiving inward remittances from Bangladeshis working abroad, handlings about 25% of the country’s remittances. But for remittances going in the opposite direction, EXIM has started operation of its wholly owned subsidiary “EXIM Exchange Company (UK) Ltd’ from June 2009 in London in order to facilitate remittance services to the non-resident Bangladeshis (NRBs) living and working in the United Kingdom.. It is the first exchange house owned by a Bangladeshi PCB. The IBBL is one of the leading PCBs when it comes to spending on corporate social responsibility (CSR). The bank secured the second-place position, spending Tk.116.2 million - mainly on education and disaster relief - out of a total Tk.553.8 million spent under CSR by the country’s PCBs in 2009. Out of a total 48 scheduled banks in Bangladesh, 46 were involved in CSR activities in 2009. Local conglomerate Summit Group has recently bought a majority stake in ICBL, from the Malaysian-owned, Swiss-based, ICB Financial Group Holdings AG. The ailing bank was formerly known as Oriental Bank Limited (OBL) before, with mountaining debts, it was declared bankrupt with . In June 2006, the Bank of Bangladesh dissolved OBL’s board of directors after detecting massive corruption. To safeguard the interest of the depositors, the central bank then took over management of the OBL, appointing one of its executive directors as administrator. In August 2007, the Bank of Bangladesh floated a tender to sell the bank’s majority shares, and it was sold to the ICB Financial Group Holdings AG in December 2007. The bank is still under the central bank’s red book, as it continued to bleed after starting operations under the new management in May 2008. The OBL started operations in May 1987, under the name of the Al Baraka Bank Bangladesh Limited (ABBL). The bank was identified as a problem bank in 1994. Meanwhile, another Bangladeshi bank, ABBL, has always been known to be corrupt, changing ownership three times in its lifetime. The

level of corruption continued to grow until June 2006, when the central bank took over management. Rana (2006) argued that the financial products and services currently available with Islamic banks in Bangladesh are mainly concentrated in Murabaha financing (i.e. Islamic trade financing). These banks also offer Ijara (lease) and Istisnaa (similar to progressive financing), for the purposes of machinery procurement and construction works respectively. However, the essence of Islamic financing, i.e. profit and loss sharing manifested through Musharakah investment (similar to equity investment), is yet to emerge as a major mode of financing in Bangladesh. Nor are Islamic banks very visible in areas such as Islamic insurance (known as Takaful), Islamic bonds (known as Sukuk) or Islamic fund management. The IBBL has issued the first corporate bond: the Mudaraba Perpetual Bond, worth Tk. 3 billion. Some bankers believe that the dearth of service variety in the Islamic financial sector is due to lack of awareness among customers.

Problems Faced by the Islamic Banks in Bangladesh

The Islamic banking system in Bangladesh has always faced challenges. Even though Islamic banking can now claim to have successfully launched within the country, some reservations remain regarding the possibility of these banks’ expansion, which will be necessary to make each bank a viable institution in the long run. These banks face both external and internal problems rising from their attempts to operate without charging interest (Appendix-3). External problems arise from their relationship with the financial world outside the Islamic system, and internal problems are embodied within the industry. One of the major external issues is the inability of Islamic banks to participate in the call money market, or in the auctions of repurchase and reverse repurchase agreement (repo and reverse repo), in times of need. Such participation is prohibited under the Islamic system as they involve dealing with interest. This also poses challenges for regulators, such as the Bank of Bangladesh which areas entrusted with the supervision of both Islamic and conventional banks. Regulation becomes even more daunting when one bank uses both systems, one with interest and another (Islamic) option without interest. Islamic banks also have to face some inherent internal problems. For instance, in Islamic banking, in addition to the usual problems of banking (e.g. adverse selection and moral hazard), rules are not always clear, especially those regarding payment for loans, and delayed payment of loans.

gif

Prospects for Islamic Banking in Bangladesh

Although the concept of Shariah-based banking is expanding in Bangladesh, the system is still in its nascent stage. Experts opine that in a country with 83% Muslim population where religious feeling is strong, the introduction of interest-free financial transactions would attract customers on a large scale for savings and investment. For greater efficiency, these Islamic banks should find more standardized financial instruments and innovations, working in accordance with Shariah principles, which will enable them to deal with interest-based conventional banks. In a bid to infuse dynamism, these banks may then consider the formation of an Islamic money market and the establishment of consortiums/syndication amongst themselves for financing on a larger scale. If they wish to achieve a true competition with their conventional counterparts, Islamic banks might y also try to develop a secondary financial market for Islamic financial products. Recently, the South Asia Enterprise Development Facility (SEDF) has begun to train Islamic bank officials in the development of loan products which comply with Shariah principles. The products will cater to small businesses which do not own immovable property to provide as collateral, but which require non-microfinance loans worth Tk1 million (equivalent to US$ 14,300). The product is likely to appeal to at least 100,000 small businesses in the first three years, provided that the banks promote and market it well. The Bank of Bangladesh’s latest review on scheduled banks (2010) revealed that banking activities in the urban areas - especially in the capital, Dhaka - have been increasing, despite a negative trend in the rural areas, thus demonstrating that the main focus of the bankers is confined tocity-dwellers. The Islamic banks can narrow gap by increasing their presence in the country’s rural areas, where most of the population live. This would not only improve the banks’ market share, but also would further strengthen financial intermediation. In 2004, a state-owned bond, the “Bangladesh Government Islamic Investment Bond” (BGIIB) has been issued by the central bank in accordance with the rules of Shariah. Islamic banks, or Islamic branches of conventional banks, may invest excess liquidity in the BGIIB. The 2009 guidelines set out by the Bank of Bangladesh also suggest that an Islamic bank or branch having sufficient investments in the BGIIB, and subsequently facing a liquidity crisis, may overcome the crisis by use of investment facilities from Islamic Bond Fund against their over pur2010 December Global Islamic Finance

gif

World Islamic Finance Review

Performance Indicators of Seven Islamic Banks Enlisted with the DSE – Appendix 3 A. Some Basic Information on the Islamic Banks Listed with the DSE Structure of Ownership (in %) Year of listing with DSE

Category (DSE)

Islamic Bank Bangladesh Ltd (IBBL)

1985

39.46

Al-Arafah Islamic Bank Ltd (AIBL)

1998

Social Islamic Bank Ltd (SIBL)

2000

ICB Islamic Bank Ltd (ICBL)

Sponsor/ Director

Govt

Institution

Foreign

Public

0.01

60.53

49.33

16.00

34.67

28.19

18.17

53.64

1990

61.48

26.07

12.45

Exim Bank Ltd (EXIM)

2004

46.79

21.23

5.81

26.17

First Security Islamic Bank Ltd (FSIL)

2008

50.00

Shahjalal Islamic Bank Ltd (SHIB)

2007

46.98

53.02

B. Earnings Per Share [equal to the net profit divided by the number of shares] 2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

IBBL

353.47

616.63

931.92

195.52

439.95

487.57

485.94

37.55

56.29

55.10

AIBL

172.14

101.43

312.42

251.20

263.67

387.80

550.24

30.12

48.29

47.75

SIBL

147.00

555.00

782.77

744.90

143.35

24.00

98.52

17.60

17.20

18.40

ICBL

291.44

380.94

(1843.70)

(757.82)

(481.21)

(1103.31)

(8299.6)

(156.64)

(310.25)

EXIM

70.25

79.14

81.18

60.82

63.19

43.48

43.45

41.00

FSIL

17.45

31.72

1.65

(13.02)

3.06

7.35

SHIB

1.76

22.55

(204.91)

33.63

49.50

34.57

36.41

39.07

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

3499.45

3871.94

2485.45

2909.56

3080.17

2971.55

2995.61

311.48

295.89

325.46

AIBL

1288.81

1263.78

1207.17

1618.27

1785.88

2059.82

232.63

196.69

195.53

198.20

SIBL

1122.72

1873.25

2678.54

4696.76

1564.96

1577.89

259.02

165.75

142.56

132.00

ICBL

1231.55

1307.74

(4368.90)

(2442.21)

(2923.42)

(7224.05)

(15524.2)

(15966.4)

(440.79)

(667.86)

EXIM

181.00

217.81

238.40

223.02

217.61

181.57

213.70

186.32

FSIL

134.28

165.94

136.82

111.52

113.43

110.37

SHIB

101.10

123.65

109.91

57.50

79.26

128.75

168.95

160.53

179.80

C. Price Earning Ratio [equal to the market price of the company’s shares by the earnings per share] 2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

IBBL

8.35

6.28

2.78

20.99

9.86

9.32

7.59

22.08

14.03

12.87

AIBL

7.21

14.09

5.31

7.55

11.61

5.76

4.88

14.62

11.96

14.61

SIBL

3.82

3.10

3.77

13.62

64.94

18.09

28.79

12.49

16.74

ICBL

5.61

2.85

EXIM

6.25

8.08

7.74

9.00

9.95

FSIL

23.74

SHIB

10.58

10.43

12.24

D. Net Profit After Tax (in million Taka) 2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

IBBL

226.22

394.64

596.43

375.41

1013.65

1125.82

1400.59

1427.36

2674.80

3403.55 858.99

AIBL

43.55

25.66

79.04

127.06

154.76

262.90

470.02

347.3

668.24

SIBL

38.16

144.39

203.52

193.68

83.86

13.94

57.63

150.0

202.07

431.52

ICBL

57.39

98.87

(478.58)

(393.39)

(249.8)

(572.73)

(4308.3)

(610.9)

(776.7)

(2062.21)

EXIM

158.06

201.42

254.79

381.80

555.34

650.29

930.84

1096.63

FSIL

55.85

101.49

9.89

-117.22

30.63

104.28

SHIB

2.26

46.22

-472.57

255.59

463.22

646.99

817.71

1070.57

Source: The Dhaka Stock Exchange 46 Global Islamic Finance

December 2010

Nevertheless, Islamic banks are obliged to follow the accounting and auditing standards prescribed by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). There are 70 standards on accounting, auditing and governance along with the code of ethics and Shariah Standards of AAOIFI. Last but not least, the Islamic banks are facing a shortage of skilled manpower with proper Islamic banking knowledge. This shortage is due to the absence of an adequate institution offering training in Islamic finance.. Islamic banks have no option but to recruit personnel from traditional commercial banks, and as a result they often cannot fully function, as they should, following the Shariah principles. Sometimes non-compliance with the Shariah principles results from the personnel’s lack of knowledge about Islamic banking, finance and economics. IBBL has a good training institution, and more like this, together with more initiatives like the SEDF, would help to develop a pool of people skilled in the field of Islamic finance and economics.

Conclusion

B. Net Asset Value Per Share [equal to the current share price divided by the net asset value per share, or the market capitalisation of the company divided by its total net assets]

IBBL

chased Islamic Bonds. A repossession system for the Islamic Bonds may also be introduced. Bangladesh has the potential to become one of the international centres for Islamic banking, given right kind of support from the authorities concerned. Experts have argued in favour of having an independent Islamic Banking Act, as is in place in Malaysia, Turkey, Jordan and Kuwait, to provide the necessary legal support when various problems arise from interest-free banking transactions introduced within the present traditional Bangladeshi regulatory system.

The last two decades have witnessed huge growth in Islamic Shariah-based finance and banking, both in Muslim countries and around the rest of the world. This growth has been influenced by myriad factors: structural reforms in the financial sector; the liberalisation of capital movement; privatisation; the global integration of financial markets; and the introduction of innovative and new Islamic products. While the ongoing global economic crisis has affected financial institutions all over the world, those claiming to conduct business the Islamic way seem to have remained relatively unscathed. It can be argued that Islamic banking is especially important in the economy of a country which is, like Bangladesh, characterised by unemployment, poverty, and vastly disparate distribution of income and wealth. [Ahmad, 2002]. However, studies reveal that the loan portfolio of Islamic banks in Bangladesh is heavily biased towards short-term trade financing. This contributes to the banks’ profit, rather than serving the broader philosophy of fairness supposed to be the basis of the Islamic financial system. Although the future of Islamic banking in Bangladesh is looking bright, the market players need to do more design, develop and implement innovative products, as well as marketing those products. Islamic banks will have to boost the skills of their professional staff so that they can deal with Shariah-compliant financial products, and diversify the banks’ financial activities. On the other hand, The government and other authorities can assist in the provision of necessary impetus for advancement of this sector, by bringing a comprehensive Islamic banking law into force while strengthening the regulatory framework. gif

World Islamic Finance Review

gif

List of Islamic Banks in Bangladesh A. Fully-fledged Islamic Banks Operating in Bangladesh

B. Conventional Banks With Islamic Banking Wings

Appendix 1

Appendix 2

Name of the bank

The Islamic Bank Bangladesh Limited - IBBL The ICB Islamic Bank Limited – ICBL (formerly known as OBL and before that ABBL) Al-Arafah Islamic Bank Ltd

Commenced operation

Type of bank

Number of branches

1983

PCB

232

1987

1995

PCB

Social Islamic Bank Ltd – SIBL

1995

PCB

Shahjalal Islamic Bank Limited - SHIB

2001

PCB

Exim Bank Limited – EXIM

First Security Islamic Bank Ltd - FSIL

1999 (Since July 2004, EXIM has shifted all of its conventional banking operations into Shariah- based Islamic banking) 1999

Problems Faced by Islamic Banks in Bangladesh A. Major External Problems Faced by the Islamic Banks 1. Liquidity and capital (Islamic banks require higher liquidity and capital as they follow the «profit-loss-sharing» principle) (www.islamibankbd.com) 2. Valuation of bank assets (www.islamibankbd.com) 3. Financial instability arising from lack of synchronicity between the decisions of commercial banks and the central bank (www.islamibankbd.com) 4. The ownership of banks 5. Lack of interest-free financial instruments 6. Lack of secondary market to deal with the Islamic financial instruments 7. Insufficient legal protection (especially from the central bank) 8. Controlling and supervision by the central bank on the basis of Islamic Shariah 9. Defaulting culture of the borrowers, and the absence of proper recourse for that 10. Lack of unified Shariah rulings 11. Absence of Islamic inter-bank money market 12. Accounting principles and procedures not completely coherent with the Shariah 13. Lack of co-operation among the Islamic banks 14. Lack of familiarity with Islamic products and pro-

PCB

Name of the bank

Commenced Islamic banking

Type of bank

Number of branches with Islamic banking

AB Bank Limited

2004

PCB

Agrani Bank Limited

2010

SCB

Bank Asia Limited

2006

PCB

Dhaka Bank Limited

2003

PCB

Jamuna Bank Limited

2003

PCB

Premier Bank Limited

2003

PCB

Prime Bank Limited

1995

PCB

Pubali Bank Limited

2010

PCB

Southeast Bank Limited

2003

PCB

Standard Chartered Bank

2004

FCB

The City Bank Limited

2004

PCB

The Hong Kong & Shanghai Banking Corporation

2004

FCB

cedures on the part of international financial and nonfinancial sectors Severe competition within the financial sector (especially from the conventional banks) 15. Economics slowdown and political situation of the country 16. Inadequate track record of Islamic banking 17. Absence of infrastructure for international Islamic trade financing 18. Shortage of supportive and link institutions 19. Shortage of skilled and trained human resources in Islamic Shariah banking 20. Short-term asset concentration in the Islamic banks 21. Lack of uniform operational procedure of Islamic banking 22. Lack of specialised Islamic banks and Islamic nonbank financial institutions 23. Lack of consortium or syndication of the Islamic banks 24. Lack of harmony between Islamic financial practices 25. Lack of academic support on Islamic Economics, Banking and Finance at the educational institutions 26. Lack of inter-country study on the practical operations of Islamic banking 27. Lack of coordinated research work on Islamic Economics, Banking and Finance 28. Lack of apex training institute for the Islamic banks 29. Lack of establishment of links with other training institutes and Shariah supervisory bodies

B. Major Internal Problems Faced by the Islamic Banks 1. Increased cost of information 2. Control over cost of funds 3. Mark-up financing and corrupted mark-up 4. Excessive use of the Murabaha mode of financing 5. Use of interest rate when fixing the profit margin in Bai-modes 6. Financing social concerns 7. Lack of positive response to the requirement of Government financing 8. Failure of Islamic banks to finance high-return projects 9. Lack of efficiency allocation of funds 10. Loss of distributive efficiency 11. Depression of profit 12. Lack of full-fledged Shariah audit 13. Fraud-forgery or corruption in Islamic banks 14. Minimum budget for research and development 15. Working environment 16. Issuance of Letter of Guarantee (L/G) 17. Islamic investment risk analysis and measurement methodology 18. Non-exemption of stamp duty for purchasing property by Islamic banks 19. Lack of management intention to adhere strictly to Shariah guidelines.

References & Further Reading • •

• •

• • • • •

Ahmad, A. U. F. (2002), Islamic Banking in Bangladesh, A thesis paper submitted to University of Western Sydney Ahmad, A. U. F. (2006) and Hassan, M. K. (2006), Regulation and performance of Islamic Banking in Bangladesh, A keynote paper presented at a seminar organised by the Institute of Hazrat Mohammad (SAW), Dhaka Alam, A. N. (1999), Islamic Banking in Bangladesh: A Case Study of IBBL, International Journal of Islamic Financial Services, Vol. 1, No. 4 Ali, S. S. (2005), Islamic Capital Market Products: Developments and Challenges, Islamic Research and Training Institute, Islamic Development Bank Group, Occasional Paper No. 9 Bangladesh Bank (various issues), Financial Sector Review, Dhaka Bangladesh Bank (2009), Guidelines for Conducting Islamic Banking, Dhaka Bangladesh Bank (2010), Review of CSR Initiatives in Banks 2008-2009, Dhaka Bangladesh Bank (various issues), Schedule Banks Statistics, Dhaka Chowdhury, H. Z. (1994), Islamic Banking Takes on

• • •

• •

•

the Conventional Sector in Bangladesh, New Horizon, No. 25 Derwish S. A. El (1984), Islamic Banking In The Muslim World, Journal of Islamic Banking and Finance, Volume 1, Issue 2 Hassan, M. K. and Basir, M. A. H. (2004), Determinants of Islamic Banking Profitability, http://www.erf. org.eg/ Kayed, N. R. and Hassan, K. (2010), The Role Of Islamic Financing In Entrepreneurship Development, The Financial Express, http://www.thefinancialexpress-bd.com/search_index.php?page=detail_ news&news_id=90282 Khandker, E. (2006), Islamic Banking: An Analysis, An article published in The Financial Express, Dhaka Rahman, M. M. (2008), Business Between Islamic And Conventional Banks, The Financial Express, http://www.thefinancialexpress-bd. com/2008/06/17/36864.html Rahman, M. M. (2008), Potential of <Sukuk> in Islamic financial market, The Financial Express, http://www. thefinancialexpress-bd.com/2008/06/07/35869. html Rahman, S. (2010), Banking Business Under Islamic

• •

• • •

•

Shariah Framework, The Financial Express,http:// www.thefinancialexpress-bd.com/search_index. php?page=detail_news&news_id=91124 Rana, F.H. (2006), Growing Business Prospect Of Islamic Banking, The Daily Star, Vol. 28 Rashid, M. and Nishat, A. (2009), Disparity of Performance Indicators of Islamic Banks: Study on Bangladesh, International Journal of Business and Management, Vol.4, No.8 Sarker, A. A. (2000), Regulation of Islamic Banking in Bangladesh: Role of Bangladesh Bank, International Journal of Islamic Financial Services, Vol. 2, No.1 Sarker, A. A. (1999), Islamic Banking in Bangladesh: Performance, Problems and Prospects, International Journal of Islamic Financial Services, Vol. 1, No. 3 Sarker, A. A. (1999), Islamic Business Contracts, Agency Problem and the Theory of the Islamic Firm, International Journal of Islamic Financial Services, Vol. 1, No.2 Sarker, A. A. (1999), Islamic Banking in Bangladesh: Growth, Structure and Performance, Published in the Proceedings of the Third Harvard University Forum on «Islamic Finance: Local Challenges, Global Opportunities», Massachusetts

2010 December Global Islamic Finance

gif

Sukuk Country Review

Europe Sukuk Country Review:

Embracing Sukuk in the United Kingdom, France and Germany Author: Tasnim Nazeer, Global Islamic Finance Magazine Editorial Team, United Kingdom Abstract: The Sukuk industry is an emerging sector in Europe, and is set to grow, with major legal developments being in order to accommodate the Sukuk industry within the mainstream European systems. Islamic finance has moved from a niche to a mainstream sector in Europe, with western banks and institutions increasingly recognising Islamic methods as viable finance options. Keywords: Sukuk, Islamic Securities, Islamic Capital Market, United Kingdom, Germany, France

he UK and France have emerged as centres for Islamic finance, within a global market conservatively estimated to be worth more than half a trillion dollars. Islam is Europe’s fastest growing religion, with many countries having a predominant rise in Muslim populations - and in some countries, such as the UK and Germany, demand for Islamic structured financial products has increased. European interest in Islamic asset classes is not confined to Muslims. There was, for example, a massive jump in the issuance of Sukuks (a form of Islamic financial securitization similar to bond) in the first half of 2007, as a growing number of conventional European banks and institutions began to invest. The Sukuk market in Europe grew by a massive 75 percent to US$85 billion, in total outstanding issues, in the first half of 2007. The US$24.5 billion raised in the first half of the year almost surpassed the total amount of new issuance in 2006 (US$26.8 billion,) 48 Global Islamic Finance

December 2010

according to the Islamic Finance Information Service. The ‘Bank of London and the Middle East,’ London’s second biggest wholesale Islamic bank, and one of the new Islamic financial houses participating in the Zurich forum, claims that the growth of the Sukuk market is a result of a greater understanding of Islamic finance, and readier European acceptance of Sukuk as an investment vehicle.

the back of big oil earnings and huge infrastructure developments. “The Sukuk market has grown dramatically since the inauguration of the first International Islamic Finance Forum, in Dubai in early 2002,” said conference manager Swati Taneja, of forum organisers IIR Middle East. “The value of new issuance at that time stood at less than US$500 million compared with a projected total of about US$50 billion in 2007.”

It has been reported that Western investors make up about 70-80 percent of the buyers of Sukuks issued in the Middle East, against 20-40 percent last year. This trend was dramatically highlighted by two of the biggest Sukuk issues of the year: a US$1.5 billion issue from Dubai Ports World, which allocated 60 per cent of its paper to Western buyers; and a US$2.53 billion deal from Aldar Properties, the Abu Dhabi developer, in which Western institutions purchased 80 percent of the paper. The Sukuk market has attracted strong and continuing interest from European banks, insurance and pension funds. These firms believe that the strength of the Arabian Gulf economies, where many Sukuks are issued, provides good returns on

“Most analysts believe that, medium term, the Sukuk market will continue to grow even in a more volatile credit environment,” Taneja added. “Unlike conventional bonds, a Sukuk confers a proportional ownership of the underlying asset - as well as the income that it generates.” Global Islamic Finance Magazine will take you through the European Sukuk review, covering major emerging European Sukuk markets such as the UK, Germany and France.

UK Takes the Sukuk Industry by Storm

The UK has made major developments in Sukuk issuances, and is fast becoming the lead Islamic financial hub in Europe. In August 2010, a small British manufacturer be-

Sukuk Country Review

“They (IIT) found an investor which could only invest in a Shariah-compliant way, hence the structure. This is important. Many Islamic investors are looking at potential investments, particularly in the high-tech sector,” she adds. Britain is viewed as the most advanced Islamic centre, having changed its legislative and tax frameworks to accommodate the tenets of Islamic law. It has hosted Sukuk listings for foreign issuers, but up till now, neither European a government nor a European company has sought to tap the potential of Islamic investors. The first half of 2010 saw worldwide Sukuk issuance top $13.7 billion; nearly double the amount recorded in the first half of 2009, according to Standard & Poor’s. Sukuk are generally certificates of ownership of either an asset or a project, or as in the IIT case, a business venture (Arabian Business.com). Following the Sukuk issuance by Gateshead ITT in August 2010, more potential Sukuk issuances followed suit in the UK. It has been reported that a major GCC-based Sukuk arranger recently made a statement confirming its work on a corporate Sukuk issuance, for a UK healthcare company, over the last year. The company hopes to launch the issuance next month. A London-based Islamic bank is also working on a Sukuk issuance for a UK client, which has almost been finalized. While the IIT 4-Year Musharaka Sukuk is modest by market standards - with a total issue size of $10 million - Tom Wilkinson, chairman of IIT, has confidence in the potential of other UK companies’ access to Islamic finance, including Sukuk, as an alternative source of funding. Mr Wilkinson’s statement read: “Historically venture capital (VC) and private equity (PE) funds have

“IIT,’ he continued, “has developed innovative, patented powder milling technology, which can produce very fine powders at very low energy levels – plus, uniquely, recycling waste products for reuse. For instance, glass-reinforced plastic scrap, instead of going into land fill, is grounded into a fine powder and recycled. Additionally, IIT is developing technologies which will significantly reduce waste streams from coal fired power stations.” Charity

Special Purpose Vehicle (SPV) Sell building

Pay price

Owner

Issue sukuk Periodic Payments representing SPV`s profits

Investors Pay issue price Pay rent periodically

“There is absolutely no reason (why other corporations and government entities cannot follow suit,” says Farmida Bi, the Norton Rose partner who worked on the transaction.

looked for certain board rights and controls, which were challenging to incorporate into a Shariah-complaint investment structure. The investment into IIT via a Musharaka structure is a framework by which small, medium and large UK companies can pursue Islamic funding sources, in order to meet balance sheet, working capital, research and development (R&D) and expansion capital requirements.”

Lease

came the first company to issue corporate Sukuk, and raised funds from the Sukuk in order to start off a business in the UK. International Innovative Technologies - a maker of industrial milling machines in north-east England - had raised $10 million through a private-equity-style Sukuk to help develop new products. Dubai-based Millennium Private Equity Ltd was the sole investor in the Sukuk, which will be listed on the Cayman Islands Stock Exchange. The Sukuk will pay 10 percent a year, and will expire in 2014. The Sukuk used a Musharaka structure which is also known as profit and loss sharing, allowing Millennium the option of taking a stake in IIT.

Source: Islamic Finance Spot

“We had concerns about the overall functionality of the Islamic financing,” he added, “but we were most efficiently helped by the Millennium Private Equity Ltd. transaction team, led by Vally Khamisani and including Nikhil Goel, who helped us understand the principles and ensured that all queries were answered. We believe that Islamic financing provides various suggestions on debt levels, type of business to get into, etcetera, which actually is beneficial for the success of the business,” he explained. Although the IIT issuance is modest in terms of volume, it does have the first-mover advantage, and will give an important psychological boost to potential issuers in the UK and European Union. The UK government has been the most proactive European supporter and facilitator of Islamic finance as a niche component of a generally competitive financial services sector, and has promoted London as an international hub for Islamic finance, trade and investment. (Arab News). In early 2010, the UK House of Commons decided to adopt the Financial Services and Markets Act 2000 Order 2010, which aims

gif

to remove both barriers and uncertainty in the regulation of alternative finance investment bonds (including Sukuk). The Treasury stresses that the Order will reduce compliance and legal costs for these instruments, and facilitate the issuance of corporate Sukuk in the UK. The new coalition government has been supportive of developments in Islamic finance; Mark Hoban MP, Financial Secretary to the Treasury, has confirmed the Conservative Party’s support for previous government’s steps towards the creation of a level playing field for Islamic finance. He confirmed that the coalition government will continue in that approach. In addition, he recognized the concerns raised by the audience over the need for clearer criteria, which would to enable the industry to address any government concerns around a UK government Sukuk (Arab News). The current UK legislation regarding Sukuk requires one or more people to pay money to a bond issuer, based on the idea that the bond issuer will acquire assets expected to generate income or gains. A fixed period of time must be given to determine when the arrangements will end, so a perpetual Sukuk doesn’t qualify. As part of the legal agreements, the issuer must undertake to dispose of any bond assets that are left at the end of the Sukuk. The issuer will also make payments called “additional payments” to the investors. In Diagram One, the additional payments come from the rent, and in Diagram Two from the business profits. This diagram shows the current UK process of Sukuk issuance in terms of Special Purpose Vehicles (SVP, and its connection with charity, investors and the owner. The diagram demonstrates how a Sukuk can be issued from the UK; it is important to note that it is listed on a fully recognised stock exchange, within the Income Tax Act 2007 definition, in order to avoid paying withholding tax. If a Sukuk is listed on a fully recognised stock exchange, then the 2007 legislation means that for tax purposes it is treated as if it were a debt instrument - and the exemption for listed Eurobonds should apply. Interest on listed Eurobonds can be paid without withholding tax. If a UK-based Sukuk is created and listed on a stock exchange which is only recognised for the purpose of the AFIB rules, and not recognised for any other purposes, then the Eurobond exemption would not apply. The Eurobond exemption looks specifically at stock exchange designations under Income Tax 2007, and not the extension for Sukuk. Finally, there is an accounting test. If the issuer were to prepare accounts under International Financial Reporting Standards 2010 December Global Islamic Finance

Sukuk Country Review

(IFRS), then the Sukuk would be treated as a financial liability. Diagram Two shows the UK Sukuk issuances in terms a trading business’ profit from Sukuk under current legislation. The use of Sukuk in the UK looks promising. Changes in legislation have made it possible for companies and investors to utilise Sukuk investments in the UK, and have paved the way for an emerging sector set to thrive by 2012.

France Making Headway in the Sukuk Industry

The Euronext Paris soon followed, creating its own Sukuk-listing segment. This does not only guarantee the reliability and security of Euronext’s market, but also supports issuers with experienced listing teams. In early 2009, France introduced tax status adjustments for Islamic finance contracts on Murabaha (a type of money market instrument) and Sukuk transactions. Recently, Paris Europlace signed an agreement with AAOIFI, paving the way for greater co-operation on the drive to develop.

Investors Periodic Payments Limited to 6%

$ 500m

Trust Rab al-maal 99%

Mudarabah Agreement

Charity

to m ts 00 sse $5 y a bu

France has been actively trying to tap into the Islamic finance industry, including the lucrative Sukuk sector. In 2007, Christine Lagarde, Minister of Economy, asked the Parliament and Treasury to assess and develop France’s infrastructure in order to attract Islamic financial business. In 2007, Paris Euro PLACE, an organization which promotes the French capital’s financial district, formed an Islamic finance committee aimed at the putting forward of propositions addressing the legal, fiscal, and regulatory hindrances to the industry. Two years later, in 2009, a Sukuk working group, with the participation of lawyers, tax specialists, Shariah advisors and many French banks, was created to develop a Sukuk structure under French law. France’s main objectives regarding Islamic finance in 2009 were: to issue a Sukuk in Paris under French law; to translate the AAOIFI Shariah standards into French; and to issue the country’s first license for an Islamic financial institution which would comply with both national and European law.

This demand, coupled with a local national market of over five million Muslims, and access to global Muslim investors representing a very high net worth, provides a healthy environment for the growth of Islamic finance in France. A number of reforms have been adopted in order to advance this growth. In mid-2007, the French Financial Market Authority (AMF) issued a recommendation for Shariah-compliant funds, and a year later, in 2008, it published a statement approving the listing of Sukuk in France.

Sukuk Certificates

gif

Mudarib 1%

$ 50,000 share capital

XYZ Sukuk LTD

XYZ Trading Company

Islamic finance within France.

This year, Qatar Islamic Bank signed a memorandum of understanding (MoU) with Banque Populaire Caisse d’Epargne, France’s second largest banking group, in order to gain access to the French retail banking and small-to-medium-size business markets. This MoU was designed to promote co-operation between the two French banks, in an effort to build a lasting partnership. An independent report projected that France could potentially attract ten percent of the trilliondollar Islamic finance industry. France is the fountainhead of innovation and achievement in the global financial community, and the country’s historical and political links with the Middle East give France the opportunity to hold a unique position within the Islamic finance industry. In 2009 France planned a one-billion-Euro Sukuk. This has not yet materialized, but France hopes to issue it in the near future. The future for Islamic finance in France is, therefore promising, with developments working to establish the security of Sukuk industry within the country. The diagram below shows the global Ijarah structure for the Sukuk, which France aims to adopt for the one-billion-Euro Sukuk.

Germany Paves the Way for Sukuk in Europe Germany was the first country to issue Sukuk in Europe; in September 2004, SaxonyAnhalt became the first German - and the first European - local authority to issue a sub-sovereign bond under Islamic principles. The €100 million bond does not offer interest payments to its investors, and Germany abided by Shariah principles when issuing the Sukuk.

It is imperative for France to create a regulatory environment friendly to Sukuk issuance; Purchased Assets used in this would allow France to provide ShariahShareholders XYZ Trading Company`s business compliant investment and commercial banking products, denominated in foreign currenSource: Islamic Finance Spot cies, for the benefit of investors throughout The three sovereign Sukuk that have been Europe. France’s aspirations are realistic, launched to date have all been arranged by considering the country’s unparalleled aceither Citigroup or HSBC, cess to a broad inboth companies who are vestor base, and the building up considerable strong political influexpertise in structuring Ijara Sukuk Structure ence shared by all playSukuk loans and manBuy back of asset at maturity Rental payments/coupons ers across the French aging the accountancy financial community. and administration on The quality and liquidsuch transactions. The Sale of asset ity of the French asset Ministry of Finance of management market Cash Saxony-Anhalt has been are key advantages to working on this issue for Issuer SPV Islamic investors successful Sukuk isthree years, following a Certificate suance in the country of participation visit to Bahrain in 2001 and in addition, major where officials met Lease agreement French banks have reboth conventional and sponded to a growing Islamic bankers. Gulf Reimbursement of Rental payments demand by expanding issue price on maturity investors had already their Islamic finance ofparticipated in one or Source: R. Witson, Durham University, 2006 ferings internationally. two conventional bond 50 Global Islamic Finance

December 2010

Sukuk Country Review issues floated by Germany, and Germany’s latest program calls for the issuance of fixedrate bonds to the value of one billion Euros. Saxony-Anhalt’s Ministry of Finance initially intended to issue the Sukuk in 2003. However, in a post 9/11 environment, there was initially some political opposition to the Islamic bond, although the Sukuk structure itself posed no problem from a legal and regulatory point of view. The German state is now keen to broaden its investor base; to reduce its finance cost; and to attract foreign direct investment into Germany. Saxony-Anhalt’s benchmark Islamic Eurobond puts a strong spotlight on the Islamic Development Bank (IDB) member countries. Out of the 55 or so IDB member countries, only Malaysia, Qatar and Bahrain have actually issued global sovereign Sukuk: the $600 million Malaysia Global Sukuk in June 2002; the $700 million Qatar Global Sukuk in September 2003; and the $250 million Bahrain Global Leasing Sukuk in February 2004. In addition, the IDB itself issued a $400 million IDB Sukuk Bond. (Archive Arab News). Germany has much scope for Sukuk issuance, with a Muslim population of just under five million, including three million Turks. This is more than double the UK’s Muslim population of just over two million. According to Dr. Patrik Pohl, General Manager of Bankamiz - the special banking brand aimed at Turkish clients of Deutsche Bank in Germany German development of Islamic finance is a question of market education. Most Muslims in Germany do not “embrace Islamic finance,” he says, nor have much idea of what it entails. Despite this, Bankamiz is available in 55 Deutsche bank branches in Germany, and plans to increase this number to 80 by the end of 2009. The service has attracted 60,000 clients, and this was projected to have grown to over 100,000 by end 2009. German banks such as Deutsche Bank, Commerzbank and Dresdner Bank are already well involved in the sector, albeit in overseas markets. Deutsche Bank, for instance, has co-lead MTN issuances for the Jeddah-based Islamic Development Bank, and pioneered Islamic Equity Certificates with the National Commercial Bank of Saudi Arabia: a product which, the promoters claim, was the first Islamic retail product with universal marketing application and capability. Commerzbank, on the other hand, structured the Al-Sukoor European Equity Fund on behalf of Al-Tawfeek Company for Investments - part of the Jeddah-based Dallah Albaraka Group which was largely aimed at Turkish expatriates on Germany and the Benelux countries - and later marketed to retail investors in Turkey as well. However, for a number of reasons, the Fund closed after four years.

In 2006, Abu Dhabi Investment House launched the 600 million euro Gulf German Residences Fund, an Islamic real estate fund which invested in a portfolio of 100 buildings located throughout Germany. Also in 2006, CCH Europe Gm BH, the German subsidiary of UK trade finance group CCH International, arranged the first Islamic trade finance facility for a Russian Bank - a $20 million Murabaha for the Globex bank of Moscow - using funds provided by a GCC Islamic bank. Similarly, in 2007 Arab Investment Ltd launched its debut German AIL Fund 1, with an investment of 400 million Euros. The Fund invested in a portfolio of commercial properties and shopping complexes in Berlin, Karlsruhe and Dresden. According to Lars-Oliver Breuer of Savills (Germany), the property investment adviser to the Fund, there is increasing demand from Islamic investors for selected opportunities within the larger economies in Europe, such as Germany.

Europe Exhibits Potential for Development of Sukuk

Overall, the main issuers of European Sukuk in UK, France and Germany exhibit potential to further develop the Sukuk industry, and allow scope for more issuances to pave the way for the development of Islamic finance as a major European financial sector. NonMuslims and Muslims alike have embraced the Sukuk industry in Europe, and are keen to further encourage the development and implementation of laws which accommodate investors wishing to utilise Sukuk issuances. Many people find Sukuk a highly ethical alternative to conventional bonds, and some Muslims want to utilise the principles of the Shariah in dealing with only Halal Sukuk bonds. Many other countries in Europe are also tapping into the Sukuk market; such as Turkey, which recently launched its first Sukuk issuance with the firm Norton Rose. Norton Rose represented Kuveyt Türk Katılım Bankası (Kuveyt Türk), a Turkish subsidiary of Kuwait Finance House (KFH), on its $100m (£64.5m) Sukuk, while Hogan Lovells acted for Citigroup Global Markets and Liquidity Management House. The Hogan Lovells team was led by global Islamic finance head Rahail Ali. The team also included senior associate Roger Frankhauser, and associates Sema Kandemir and Mark Brighouse. “Structuring the Sukuk was challenging - the parties had to reconcile requirements under Turkish civil law, English common law and Shariah principles,” said Ali. “Turkey has always been a favoured destination for Islamic financial institutions. This Sukuk promises to open up a whole new market.” The Norton Rose team was

gif

led by Rizwan Kanji, with support from Lidia Kamleh and global Islamic finance head Neil Miller. “This is a key transaction for two reasons,” said Kanji. “First, it sets a benchmark for future Sukuk issuances from Turkey - it’s hoped this will generate interest within the wider Turkish corporate community to consider raising finance through Sukuk issuances in the international markets. Second, it highlights the fact that Turkish legislation is conducive to certain, but very limited, Islamic finance structures and can facilitate the issuance of Sukuk by Turkish entities.” Dubai-based Islamic finance head Nadim Khan took a lead role on the deal, with support from London-based partner Thiha Tun. Khan said: “This is an important transaction, not only because it leads the way for other United Kingdom corporations to consider tapping the Islamic capital markets, but also because of the flexibility offered by the structure enabling the Sukuk to be used as a private equity investment tool. We look forward to seeing a number of similar such transactions in the United Kingdom, given the successful launch of this one.” (GIF). Europe has passed prominent milestones in the issuance of Sukuk, by changing and accommodating legislation to further the implementation of Sukuk issuances by major companies from around the world. The Sukuk industry can further develop and flourish, with the European Union’s support, to take advantage of the emerging Islamic financial sector. gif

References and Further Reading: Articles • Dinar Standard (2007) Islamic Finance in Europe Moves from Niche to Mainstream Retrieved from: http://www.dinarstandard.com/ finance/IF_Europe092007.htm • Islamic Finance BlogSpot (2008) New Tax Law on Sukuk Retrieved from http://islamicfinancespot.blogspot.com/2008/09/new-uk-tax-lawon-sukuk.html• Reuters (2010) UK firm to launch first European Sukuk Retrieved from: http://www.arabianbusiness.com/595042-uk-firm-to-launch-first-european-corporate-sukuk • M. Parker (2010) IIT debut Sukuk in UK may lead to spate of new issuances Retrieved from: http://arabnews.com/economy/islamicfinance/ article119042.ece • Dr M Alchaar (2010) Islamic finance takes root in France Retrieved from: http://www.saudigazette.com. sa/index.cfm?method=home. regcon&contentID=2010082782065 Reports • Global Islamic Finance Magazine (2010) Top Spot in Islamic Finance Wanted By France Retrieved from http://www.globalislamicfinancemagazine.com/index.php?com=news_ list&nid=980 • C Valente, (2009) French Financial Plans 1 Billion Sukuk Retrieved from: http://www.reuters. com/article/idUSTRE53F2XA20090416 Online • The Banker (2004) Germany Launches Europe’s First Sukuk Retrieved from http://www.thebanker.com/news/fullstory.php/aid/1910/Germany_launches_Europe_92s_first_Sukuk.html

2010 December Global Islamic Finance

gif

Leadership

Creating Effective Strategy for

Islamic Banking

Author: Perween Richards, Global Islamic Finance Magazine Editorial Team, United Kingdom Colette Sensier, Global Islamic Finance Magazine Editorial Team, United Kingdom Abstract: Devising a strategy for a business is essential to maintain the success and future of any financial bank or investment institution. In many ways, Islamic banks are similar to a conventional bank. They must have a prudent, well thought out strategy in order to gain success. Any successful financial institution needs competent and skilled people to construct a successful outcome. Keywords: Strategy, Islamic Bank of Britain, Marketing, Business planning, Strategy Implementation, Islamic Banking Strategy

ny bank or financial investment wishing to maintain a successful future will find it essential to devise a business strategy. Islamic Financial Institutions limit the scope of their business to comply with a set of ethical and moral guidelines derived from the teachings of Islam - but in many ways, Islamic banks are similar to any conventional bank. To achieve success, they must have a prudent, well thought out strategy in place. Any successful financial institution needs to utilize competent and skilled people in order to construct a successful business strategy.

52 Global Islamic Finance

December 2010

Laying out a bank’s strategy

The creation of an effective financial strategy within an Islamic bank uses the same ideas as those behind traditional banking strategy. Both types of business need to use sound strategies in order to engage in business with highly skilled financial professionals. Business heads should start by addressing their long-term and short-term goals, and then by identifying any obstacles standing in the way of achieving said goals. Banks should begin strategy planning with a “discovery phase,” which involves making a list of preliminary concerns and priorities. Following this, finance professionals should examine the relevant questions, and assess

the debts, income and current assets of the business, in order to clearly visualise the institution’s financial situation. Strategy Implementation There is one recurrent question regarding Islamic banking strategy: do the strategies adopted by Islamic banks deliver the same long-term efficiency as those used by other global financial institutions? The efficacy of any given strategy can only be assessed in relation to well-defined goals; an effective Islamic banking strategy is one which allows the bank to expand business while maintaining a consistently good financial performance. Such a strategy should make the bank’s credit ratings stand out against those of other, traditional banks.

Leadership The various strategies used in Islamic banking - even Islamic banks operating in different countries, at different stages of development - have many common characteristics. All Islamic banks should be working to determine their investment goals for the future, and to incorporate those goals into a comprehensive strategy which anticipates future contingencies. Banks will then have to implement specific components of planned strategy, and to continuously monitor progress under changing circumstances, by refining and adjusting planned strategies under the pressure of shifts in goals and objectives. Business planning Strategy implementation is important: strategic planning needs to be transformed into operational strategies, and that transformation requires the development of a solid business plan. A good business plan comprises both business strategy planning and corporate strategy planning: further details should also be included, such as investment plans, sales plans innovation plans and budgeting for the company’s financial objectives. A strategy plan should be detailed and specific enough to guide the bank’s overall strategy. It should have a firm direction and orientation, while remaining flexible enough to work well at the operational level.

both conventional and Shariah-compliant Islamic banks. The main provider of global credit ratings, Moody’s Corporation, uses a very specific process when assigning ratings to banks. First, each bank’s intrinsic safety and soundness are evaluated, resulting in a Bank Financial Strength Rating (BFSR). Moody’s then factors in the potential support of relevant providers, in order to work out the bank’s ratings for deposits and debt. This standard analytical framework is used when assessing all types of banks, so that the ratings of Islamic banks are directly compared to those of conventional global banks – and it might be thought that this means that the comparison is unfair. However, there is nothing to stop any conventional bank from operating on the same ethically-driven model as an Islamic bank. If a traditional bank decides to become Shariah-compliant, although its ethics and operations may change, it will not be labelled as such if it is not headed by Islamic financiers. This would lead to a situation where two very different banks might use a similar strategy and business model – and therefore I would argue that the sophisticated rating used for broader and more universal institutions is equally applicable and valuable for Islamic banking, and does not need to be adjusted. When assessing a bank’s financial strength, Moody’s considers multiple factors. These include, but are not limited to: franchise value; risk positioning; regulatory environment; operating environment; and financial fundamentals. Among these factors, only regulatory and operating environments are outside a bank’s control; bank strategies can decisively affect the other factors in the long term.

At the next level, the operational plan should take into account the targets of the strategy plan. The operational plan should include details of production plans; purchasing plans; resource planning; distribution planning; and administration plans. These different types of plans should interlink in such a way that ad hoc operational measures can be logically deducted from the strategic directives in place. Figure 1. Based on Islamic Perspectives on The impact of strategy performance and implementation Efficient strategy can only be ensured by efficient implementation and control. The processes of strategy formulation, strategy implementation, and the control of operations are all interlinked and interdependent. After all, theoretical planning without operational control is futile; and control without quality planning is impossible. Consequently, a process including control of strategic targets, strategic assumptions, strategy implementation and strategy success must be conceived as an ongoing task, alongside the process of strategic management.

Ratings

Banks’ global ratings are not qualified by each institution’s form or nature; the same rules are used to assess

Management, Communication and Incentives

It is of vital importance for Islamic banks to solve the most fundamental incentive problems, so that strategies involving risk taking (forbidden under the Shariah finance principles) are discouraged. The actions of employees, particularly finance professionals, are often based on bonuses and incentives; and so poorly devised performance metrics and compensation systems inevitably lead to a weak corporate culture, and to problems which undermine an institution’s long term prospects. It is impossible to lay out one best strategy for all institutions, but Moody’s has stated that those strategies aiming to improve franchise value, risk positioning and financial fundamentals will benefit an Islamic bank’s global financial strength rating. Various strategies can be adopted by Islamic banks in order to achieve profitable growth and to gain a competitive edge, but the resultant risks and benefits - immediate and long-term – differ widely. It’s worth pointing out that while asset growth is important, appropriate systems and infrastructures working to address risk issues are necessary to support sustainable growth. Strategic focus needs to be timed carefully: risk management should be implemented first, followed by growth. Islamic banks do best to use a strategy which aims to achieve a stronger position, in a few selective markets, rather than one resulting in marginal positions within many competitive markets.

Strategies to improve risk positioning

The strategies best placed to improve risk positioning are those which improve corporate governance, controls and risk management, financial reporting transparency, credit risk concentration and liquidity management. Strategies which set a conservative market risk appetite are also looked upon favourably.

Management and Organization Chairman Board of Directors

Executive Committee

Internal Audit Committee General Manager

Pre. & Sys. Committee

Assistant General

Credit Committee PA Committee

EDP Dept.

Customer Services Dept.

Credit & Int. Relation Dept.

Oiperations & Branch Dept.

Admin. Affairs Dept.

Human Resources Dept.

Financial Affairs Dept.

Legal Dept.

gif

Audit Dept.

In order to globalise the practice of Islamic banking beyond local geographical boundaries, the efforts of Islamic banks must be unified, and directed towards work within the phenomenon of integrated financial globalisation. In an effort to further understand the possibilities of a base strategy for Islamic banking, we asked for a few thoughts from Ghezala Sultan at the Islamic Bank of Britain (the IBB). Sultan is the ideal person to speak on Islamic marketing strategy: IBB’s strategy planning has resulted in the Bank extending

2010 December Global Islamic Finance

gif

Leadership

its reach to nearly 50, 000 customers. IBB is the UK and Europe’s first and only standalone Shariah-compliant bank. “As a result,” Sultan says, “IBB holds a unique position in the British Islamic finance landscape. Many of its products are “firsts” to the market and still unique, offering its customers a completely new way of managing their money which is still in line with their faith.

“IBB has also played a strong role in the British Muslim community, providing services to local mosques and charities. This work has been complemented by a small but strong local branch network located across the UK in areas with large Muslim populations, which ensures that customers receive a strong personal service from IBB.

Business Processes

“The bank has applied strict Shariah compliance to its product development strategy, yet has still managed to deliver the UK’s widest range of innovative Halal banking services for its customers; including home finance, business banking, current accounts, savings accounts, personal finance and Premier Banking services. In addition, the bank has remained abreast of technological innovation and offers customers the full range of Smart-Banking facilities: i.e., telephone and internet banking.

“Most importantly,” Sultan says, “IBB has followed a robust business strategy which has seen it acquire more deposits, assets and customers every year since its launch in September 2004. Furthermore, the Bank successfully weathered the storm of the financial crisis in 2008 and, more recently, received a capital injection of £20 million from its majority shareholder, International Islamic Bank (QIIB, HYPERLINK “http://www.qiib.com.qa” www.qiib.com. qa), which will facilitate its continued growth and enable it to maintain its position as the pioneer of Shariah-compliant banking.” When asked about the differences between Islamic and conventional banking strategy, Sultan commented that “good business and marketing strategy is fundamental for all banks, regardless of the sector in which they operate.” He recognised, however, that

Islamic banks’ compliance with Shariah law is a very important difference. He pointed out the “educational element” of Islamic marketing strategy. “Islamic banks in a nonIslamic country,” he said, have to educate not only customers, but “intermediaries, suppliers and potential staff” on the rules and benefits of Shariah finance. Sultan hastened to say that despite these “fundamental” differences, “Islamic banks face similar issues to conventional banks, i.e. regulatory compliance, profitability, customers’ satisfaction, sales, market share etc.” “These factors,” he added, “mean that Islamic banks face similar considerations to their conventional counterparts when it comes to developing business and marketing strategy.”

porate-lending margins, benefiting Islamic and conventional banks alike. • Business model and strategy As with conventional institutions, Islamic banks focussing on retail customers perform better, on average, than those which target only corporate banking. Al Rajhi and the Kuwait Finance House both concentrate mainly on retail and small-business customers, a strategy which partly accounts for their above-average return on assets.

• Demand for Islamic banking Consumers in different markets vary in their demand for Islamic banking products, and in their preferred source (pure play or hybrid). Tolerance for higher prices, lower performance, or poorer service as trade-offs for Shariah-compliant products, also vary. In Saudi Arabia, for example, about threeEnterprise Role based View fourths of consumer deposits and half of all bank deposits are in non-interestbearing accounts, giving Saudi banks a Marketing Sales Services Customer view view view view cost advantage over their counterparts in other countries. By contrast, in the United Arab Emirates, non-interestCustomer Acquisition bearing accounts do not exceed 25 percent of total deposits. Opportunity to cash We can learn a lot from the study of different Islamic banking strategies. EsCustomer Service sentially, Islamic financial institutions should always be aware that they are competing on a global level. Islamic Knowledge Management financial institutions operating in, or expanding into, minority-Islamic counEffective strategies are necessary for a bank tries should be aware that they may need which is, like the IBB, working in a minority- to adjust to move with the shifts in dynamic Islamic country. In some countries Islamic and demand within those countries. As the banks do better than their local traditional ri- principles of Islamic banking – compliance vals, but in others they perform much worse. with Shariah principles – cannot be altered, Three factors in particular have an impact Islamic financial institutions need to develop on the performance of Islamic banks, and effective marketing and operational stratethey are listed below. gies. • Market profile Customer characteristics, including average national wealth and demand for specific products (savings accounts and loans, for instance), as well as labour costs and local competition, all affect profitability. In Qatar, for example, the high demand for - and limited supply of - loans for corporations and infrastructure projects have led to high cor-

Long-term strategies are necessary and important in developing a strong business, but a successful market player also needs to be flexible in order to transform good strategy into good business. Ghezala Sultan’s words on the IBB, given here, should stand as an example of a positive view on long-term strategy success. gif

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

World Commission on Environment and Development (WCED) 1987. Our Common Future (Oxford University Press, Oxford). Schmidheiny, Stephan 1992. Changing Course (MIT Press, Cambridge, MA). Welford, R. 1995. Environmental Strategy and Sustainable Development: The Corporate Challenge for the Twenty-First Century (Routledge, London). Welford, R. and Gouldson, A. 1993. Environmental Management and Business Strategy (Pitman Publishing, London). Porter, M. E. and van der Linde, C. 1995. Green and competitive. Ending the stalemate. Harvard Business Review 73(5): 120-34. Hunt, C.B. and Auster, E.R. 1990. Proactive Environmental Management: Avoiding the Toxic Trap. Sloan Management Review, Winter 18(7). Hart, S. 1995. A Natural-Resource-Based View of the Firm, Academy of Management Review, 20(4): 986-1014. Cairncross, F. 1991. Costing the Earth: The Challenges for Governments, the Opportunities for Business (Harvard Business School Press, Boston MA). Roome, N. 1992. Developing Environmental Management Systems, Business Strategy and the Environment, 1(1): 11-24. Walley, N. and Whitehead, B., 1994. It’s Not Easy Being Green, Harvard Business Review, 72(3): 46-52.A growth model for Islamic banking OCTOBER 2005 For good expositions of the strategic implementations process Welge and Allaham (1999), p.523-617

54 Global Islamic Finance

December 2010

gif

Career

Mapping Your Job Path:

A Career in Islamic Accounting Author: Autumn St. John, Global Islamic Finance Magazine Editorial Team, United Kingdom Keywords: Career, Accountancy, Islamic Finance, Islamic Banking, Courses, Training

As the world grows smaller and Islamic finance grows bigger, there will be a proliferation of opportunities to work within the Islamic accounting sector in any number of countries practising Islamic banking. These doors will be open to accountants with a conventional background as well as to new graduates who desire their first job to be in Islamic accounting

56 Global Islamic Finance

December 2010

Career In this part we will take a more in-depth look at Islamic Accounting qualifications, as well as at the current job market for Islamic accountants. There are several courses tailored towards those who are considering Islamic accounting as a vocation. The UK-based University of Dundee says that its MSc in Islamic Accounting & Finance is not only suitable for those wishing to attain an academic knowledge of the sector, but also for those wishing to pursue a career. Furthermore, it is claimed that the programme will enhance students’ understanding of Islamic accounting and finance in the context of general accounting and finance, which would no doubt be useful for those, already with a background in conventional accounting, looking to build upon and transfer their skills to Islamic accounting. Another UK academic institution is Bangor University, which offers an optional module on Islamic Accounting and Financial Reporting as part of its Islamic Banking and Finance MSc. Given that the prerequisite for entry to the course can either be an academic degree in a relevant subject or a professional qualification, it would appear that the course is equally as suited to professionals seeking to transfer to Islamic finance and accounting as it is to academics.

Courses and Qualifications Guide

Professional qualifications in Islamic accounting also exist. The primary one is the Chartered Institute of Management Accountants (CIMA) certificate in Islamic finance; the first qualification offered by a professional chartered accounting body to focus on the fast growing sector of Islamic finance. According to CIMA, the qualification is not only suitable for newcomers to Islamic finance, but also for “finance professionals seeking accreditation in this field”. Meanwhile, The Association of International Accountants explicitly states that its diploma in Islamic Accounting and Compliance, jointly developed and certified by the Bahrain Institute of Banking and Finance (BIBF), “is aimed at professionals looking to expand their knowledge on Islamic Accounting and Governance Reporting requirements, and the convergence between Islamic Accounting Standards and International Financial Reporting Standards (IFRS). Aston Business School offers a module entitled “Islamic Accounting and Reporting”. The school says that the course “seeks to provide students with basic knowledge and skills needed for careers in Islamic financial institutions”.

CIMA is not the only channel through which to study Islamic accounting remotely. Specifically developed online eCourses exist for those exploring the distance learning option. The Academy for International Modern Studies (AIMS) offers online certifications and an MBA in Islamic Banking and Finance, covering Islamic accounting as part of the syllabus. As discussed in Part I, Brunei is currently a growth area for Islamic accounting. For those looking to break into this market, it may be worth considering University Brunei Darussalam’s Islamic Accounting and Auditing courses. There are five such courses: • • • • •

Introduction to Islamic Accounting Intermediary to Islamic Accounting Accounting for Murabaha and Mudaraba Accounting for Musharaka, Salam and Parallel Salam Accounting for Ijara and Ijara Muntahia Bittamleek

gif

Similarly, University Malaysia Sabah (UMS) is another institution offering an Islamic accounting course right in the heart of a country that has taken Islamic accounting to its heart; again we saw this in Part I. Another Malaysian university is International Islamic University Malaysia; its Institute of Islamic Banking and Finance offers the opportunity to learn about Islamic accounting in all four courses on offer. It would, unsurprisingly, appear there is quite a selection of such courses and modules in Asia and the Middle East. The Faculty of Economics at University Islam Indonesia has a course entitled ‘Accounting for Islamic Banking’, whilst University College of Bahrain offers an MBA Program that includes a module on Islamic Accounting. Below is a comparative table, summing up some of the main courses available; their objectives; and their features:

Institution

Course/Module

Features

Chartered Institute of Management Accountants

‘Accounting for Islamic Financial institutions’ is one of the four modules of the Certificate in Islamic finance.

The module covers financial reporting; financial statements; investment accounts; accounting and reporting of mudaraba, musharaka, ijara, salam, istisna & murabaha financing; corporate governance; Sharia’a governance; and auditing.

The Association of International Accountants

Diploma in Islamic Accounting and Compliance.

The four modules are auditing; ethics & corporate governance; Islamic banking practice; and Islamic commercial law. Each module is tested by a written, closed-book, three-hour exam.

Aston Business School

‘Islamic Accounting and Reporting’ is a module of the MSc in Islamic Finance.

Over nine weeks, the module covers AAOIFI framework and standards; accounting for Zakah; investments and Islamic mutual funds; Islamic banking windows & segment reporting; sustainability reporting; corporate governance; and auditing.

Academy for International Modern Studies (AIMS)

Online Certificate in Islamic Banking and Finance Training offers modules that cover different aspects of Islamic accounting, auditing and financial reporting.

Module 3, entitled Islamic Commercial and Investment Banking, covers accounting for Islamic banks and Islamic banking products. It also deals with Zakat accounting and factors affecting Islamic financial reporting. Module 5 covers Sharia’a audit & governance for Islamic finance.

Universiti Brunei Darussalam

The curriculum includes an Islamic Accounting and Auditing Section.

Each of the five courses available in the section lasts for three days. Course 1: Introduction to Islamic Accounting covers the philosophy behind the practice; principles & conventions; basic technical areas; procedures & systems; and the concept of financial accounting for Islamic Banking & Financial Institutions. Course 2: Intermediary to Islamic Accounting covers financial accounting for Islamic Banking & Financial Institutions; Financial accounting statements; Financial Accounting Standards; and general presentation and disclosure in financial statements of Islamic banking and financial institutions. Course 3: Accounting for murabaha and mudaraba includes financial accounting standards for murabaha contracts & mudaraba financing, and financial accounting standards disclosure of basis for profit allocation between equity and investment account holders. Course 4: Accounting for musharaka, salam and parallel salam covers financial accounting standards for musharaka contracts and salam & parallel salam contracts, and financial accounting standards disclosure of basis for profit allocation between equity and investment account holders. Course 5: Accounting for ijara and ijara muntahia bittamleek covers financial accounting standards for ijara contracts & ijara muntahia bittamleek contracts, and financial accounting standards disclosure of basis for profit allocation between equity and investment account holders.

Universiti Malaysia Sabah

Bachelor of Islamic Finance with Honours.

One of the many areas covered by the degree is the Islamic accounting system.

IIUM Institute of Islamic Banking and Finance

The four qualifications offered by the institute-Post Graduate Diploma; Master of Science; PhD in Islamic Banking & Finance; and Certificate in Islamic Banking & Finance-all include courses on Islamic accounting.

The Certificate in Islamic Banking & Finance includes the courses ‘Financial Accounting for Islamic Financial Institutions’, and ‘Zakat and Zakat Accounting’. The PhD features ‘Accounting for Islamic banking and finance’. The Master of Science covers ‘Accounting for Islamic Financial Institutions. The Post Graduate Diploma offers the same course as the Master of Science.

Universitas Islam Indonesia

Faculty of Economics International Program-Accounting for Islamic Banking.

Over 12 weeks, the course covers the differences between Islamic and conventional banks; accounting concepts applied within Islamic banks & financial institutions; various transactions used in the operation of various Islamic banks & IFIs; and the preparation of financial statements.

University College of Bahrain

MBA in Islamic Finance includes a module on Islamic Accounting & Islamic Financial Systems.

The module consists of two courses: Islamic Accounting and Islamic Financial Systems.

University of Dundee-School of Islamic Accounting & Finance

MSc in Islamic Accounting and Finance.

The degree introduces students to important theoretical and practical accounting and finance issues associated with Islamic banking & IFIs. The course consists of two taught modules in semesters 1 and 2 and then a dissertation.

Bangor University

Islamic Accounting and Financial Reporting is an optional module in the Islamic Banking and Finance MSc.

The module develops a critical awareness of theoretical and practical approaches to Islamic accounting and financial reporting. Islamic accounting standards are compared with IFRS, and the content and impact of academic research in this area is examined.

2010 December Global Islamic Finance

gif

Career

Finding a Job in Islamic Accounting

Once you are qualified to work in the market, the next logical task is of course to find a vacant position. There are no limits as to what type of Islamic organisation you should look into, as all banks, financial institutions and even commercial businesses require some level of accounting and auditing. Many large, successful businesses nowadays require an in-house accountant and Islamic businesses are no exception. It’s even worth offering your accounting & bookkeeping services to a Sharia’a court, or Sharia’a -compliant factory. Government departments, public accounting firms, and self-employed certified public accountants are also worth applying to. There is not only a wide variety of potential workplaces, but also a selection of different specialities within accounting. These include bookkeeping; accounts receivable; accounts payable; tax accounting; cost accounting; and payroll & timekeeping (Singh, 2010). Several traditionally conventional global giants in financial reporting have begun to tap into Islamic finance, opening up doors of opportunity for those looking for Islamic finance reporting careers. One of the most visible examples of this is Deloitte’s Bahrainbased Islamic Finance Knowledge Centre. The institution is a symbol of brand’s relatively new dedication to Islamic finance, a dedication that promises to create a myriad of jobs within Islamic financial reporting & auditing services. Bahrain is not the only Middle Eastern jurisdiction where such career opportunities are becoming available. “In places like Dubai, Abu Dhabi, jobs in the accounting field are opening faster than they can find people to fill them” (Singh). Also, the Saudi-based Islamic Development Bank Group (IDB), at the time of writing, has several accounting-related vacancies in Jeddah. One such position, Accounting Technician, focuses on traditional accounting duties such as information provision and preparation of financial reports. Interestingly, although knowledge of IDB’s products, services and business environment is a prerequisite for the job, the company states that the necessary academic qualification is a Bachelor’s degree in Accounting, Commerce, Business or a similar subject. It does not specify that the degree has to cover the Islamic forms of these subject areas, suggesting that finance professionals with a background hitherto exclusively in conventional accounting and financial 58 Global Islamic Finance

December 2010

reporting are welcome to apply for the role. Given Malaysia’s prominence as an Islamic finance hub and its support of Islamic accounting, it is not surprising that it is a country that holds opportunities for the Islamic finance professional. Malaysia Debt Ventures recently had a vacancy for an internal audit executive with an understanding of Islamic Banking, whilst RHB Banking Group was looking for a Shariah Audit Team Leader capable of planning and executing Sharia’a audit assignments. If you are in a country where the Islamic accounting jobs are less visible, a possible place to seek job hunting advice and contacts is your local Masjid. These Islamic centres, especially in the Western world, are often centrifugal points for the surrounding Muslim communities are therefore potentially treasure troves of information regarding career networks and professional contacts. Once you get some relevant work experience under your belt, there’s even the option of becoming your own boss, setting up your own Sharia’a -compliant accountancy firm, and passing on the opportunity for a whole new generation of accountants to find jobs within halal accounting.

The Future for Islamic Accounting and You As the world grows smaller and Islamic finance grows bigger, there will be a proliferation of opportunities to work within the Islamic accounting sector in any number of countries practising Islamic banking. These doors will be open to accountants with a conventional background as well as to new graduates who desire their first job to be in Islamic accounting. How can we be sure that Islamic accounting will continue to grow as an industry?

The evidence is in its survival of the financial crisis and its rapid rise even before that. As early as 2006, Atif Raza, FD of the European Islamic Investment Bank, told Accountancy Age, “There is around $700 (£369) to $800bn invested in the Islamic accounting arena. That’s not a lot in terms of conventional accounting, but it has grown from not even half that five years ago”. If investments in this sector continue to multiply at such a rate, it should maintain the pattern of fast expansion. Also, as the Islamic finance industry in general gets bigger, the need for Islamic accounting and auditing will become more apparent. Indeed, it has already begun to draw attention from some quarters. An article from The Malaysian Reserve points out that IIUM’s Dr. Abdul Rahim Abdul Rahman considers the

thorough audit of Sharia’a legal contracts, documentations and operations is currently lacking. In the same article, Daud Vicary Abdullah, Managing Director of DVA Consulting, predicts that “in the future, at some point in time, the professional services firms will be expected to conduct a review from the outside, to validate what’s happening [at Islamic banks]”. Although this particular job market seems small and restricted to the Middle East and Asia at the moment, its probably growth should be prepared for by those finance professionals looking to enter it. In fact, one article claims that, in the Middle East, “accounting jobs are expected to grow faster than the average for all occupations” (Singh). Where jobs are lacking, there are numerous qualifications that can help the would-be Islamic accountant, auditor or compliance officer become equipped for their future career. Although it is possible to obtain good, solid qualifications from the comfort of your own computer, it is worth considering courses further a field, in areas such as SouthEast Asia, as the increasing worldwide trend for a cosmopolitan and geographically fluid labour market could one day demand that you become a mover and shaker of Islamic accounting in such Islamic finance hotbeds. gif

References and further reading: Books • Hanudin Amin et al (2009), What makes undergraduate students enroll (sic) into an elective course?: The case of Islamic accounting, International Journal of Islamic and Middle Eastern Finance and Management, Vol. 2 Issue 4 pp. 289304 • Davinder Singh (2010), Accounting jobs in Gulf Middle-East Countries-Dubai-UAE, Doha-Qatar. Muscat-OMAN, Riyadh-SAUDI ARABIA, KUWAIT, Islamic Banking and Finance Resource Articles • Habhajan Singh (2009), Absence of Shariah audit a ‘serious loophole’, The Malaysian Reserve, cited by Islamic Finance Asia • Alex Hawkes (2006)|, Profile: Atif Raza, FD of the European Islamic Investment Bank, Accountancy Age • Accounting Web Reporter (2006), Islamic Accounting: Challenges, Opportunities and Terror, Accounting Web

The Cleveland is a brand new apart-hotel located in the most sought after residential area in W2. Close to Queensway, Paddington and Bayswater Stations, near Hyde Park, this hotel is in a quiet square in a beautiful period building. The studio apartments feature a Victorian period decor and are well-furnished with modern amenities. All 30 units include a fl at screen television, complimentary wifi access, full kitchenette. Corporate Rates from ÂŁ140 per room (including continental breakfast and VAT).

Contact: 39-40 Cleveland Square, London W2 6DA Tel: (020) 7535 0860 Fax: (020) 7535 0861 Email: olivier@thecleveland-hotel.com www.thecleveland-hotel.com

hotel a5.indd 1

22/11/2010 11:13:39

gif

World Islamic Finance Review

Islamic Banking in Eastern Europe: Mission (Not) Impossible Author: Beata Paxford, PhD candidate at the Chair of Banking Law at Warsaw University, Poland

Abstract: The article summaries Islamic finance and banking in Easter Europe. Author is discussing regulatory challenges and available banking products available in that part of the world. Keywords: Islamic Finance, Islamic Banking, Poland, Eastern Europe

he introduction of Islamic banking into Eastern European countries such as Poland, where about 90 percent of the citizens self-identify as Roman Catholic, may sound problematic. However, at the present epoch of economic growth, and fast development of global business relations, even countries of different cultures and religions are open to the idea. The situation of Islamic banking in the area will be laid out here with reference to the example of Poland, a country which became part of the European Union in 2004.

Regulatory challenge

The notion of Islamic banking is unknown in Poland, and only the conventional banks operate there. Furthermore, these conventional banks do not have the “Islamic windows” common in other countries, which offer a limited range of banking products for Muslim clients. However, although the idea of Islamic banking in Poland is yet to be introduced, the Shariah principles governing the basic rules of Islamic banking may appeal to the Polish. The lack of riba, profit and loss sharing, the existence of amanah and ‘informational symmetry’ of the parties in respect of a contract, as well as the prohibition of gambling and the general principles of ethical investment have the potential to become in vogue in Poland. Nevertheless, as usual, there will be problems to be tackled by anyone wishing to establish an Islamic bank in Poland. The first crucial area to tackle will be regulatory issues. Polish banks operate under the Polish Banking Act of 29th August 1997 (hereafter referred to as the Act). Pursuant to the Act, banks are legal entities operating on the basis of given permission to perform financial activities (article 2 of the Act). The banks exist mainly as joint-stock companies. The minimum required initial capital is 500.000 Euro (article 32 of the Act). A bank can be created upon 60 Global Islamic Finance

December 2010

permission given by the Polish Financial Services Authority (the PFSA). The permission will stipulate, inter alia, the name of the bank; its initial capital; the activities which that bank is permitted to perform; and the conditions which must be fulfilled by the bank in order to commence its work. If those conditions are fulfilled, the bank receives a permission from the said Authority to operate (article 34, point 1, of the Act). However, bearing in mind the specifics of Islamic banking, one must take into account the potential situation arising if the provisions of Polish law are unable to accommodate the banking products offered by an Islamic bank. According to article 37 of the Act, the PFSA can refuse permission for creation of a bank if: • • •

the obligatory conditions related to the creation of a bank have not been observed the intended activity of a bank would infringe the provisions of law, the interests of the clients, or would not guarantee the safety of the means deposited therein the binding provisions in the country of origin of the bank or in the country of origin of its founder could make the supervision of the bank by the PFSA effectively impossible

Such problems may appear in the case of riba. Polish banks do charge interest on credits, loans and they also charge for the accounts of the client. To rub salt in the wound, one of the former finance ministers, Marek Belka, has introduced a 20 percent tax on capital gains, which - in my opinion - can be considered riba. The tax is imposed on the gains from investments, thus it is the money levied on the money. As the banking culture in Poland is definitely interest-oriented, the interest-free banking products would have to be thoroughly analyzed by the PFSA to verify that the rules governing Islamic banking

World Islamic Finance Review

gif

Islamic values in banking, could be the way to introduce Islamic banking in Poland and in other EEC.

Banking products

If the right permission is issued, the bank should start thinking about banking products suitable for the Polish market. Islamic banks worldwide focus on concepts such as Ijarah and Murabaha, Mudaraba/Musharaka. Translating them into general legalese would be respectively easy: loan/credit agreement, partnerships/ equity-based partnerships.

products do not infringe the provisions of Polish law.However, the situation looks different when one considers the foreign banks wishing to open branches in Poland. The process of commencing the banking activity is designed to facilitate operations for the foreign banks, so that, for instance, an Islamic bank wishing to operate in Poland would have to apply to the PFSA for the permission to create a Polish branch of the bank. The permission is issued after consultation with the Finance Minister (article 40, point 1, of the Act). Such a branch has no obligation to conform to the requirements of the minimum initial capital, nor to the memorandum of association, founders and the shares subscribed by them. Nevertheless,

Pursuant to Polish law, borrowers purchase the real estate on their own behalf with the money received from the bank. The borrower enters into a sale agreement with real estate seller, and becomes the sole owner of the property upon signing the sale contract. In Islamic Murabaha, the bank can be the owner of the real estate and the ownership title can be progressively transferred to the borrower. However, one must not forget the differences comprehended within the concept of ownership in Shariah and Polish law respectively

criteria are taken into account on an individual basis by the PFSA before the body will grant a permission. The bank has to provide the PFSA with the data of at least two persons to be appointed as the branch’s directors or their POs. Similar stipulations relate to a bank which intends to open a representative office in Poland. Such a bank is obligated, pursuant to the Act (article 42, point 2, item 3) to present relevant information regarding a candidate, for the perusal of the bank’s representative. The information is necessary in order to enable the PFSA to verify the knowledge and experience of the candidates, as well as their abilities to command such an office. It is also worth mentioning that the activities of a representative office of a foreign bank can be limited solely to advertising and promotional activities designed to popularize the foreign bank’s brand in Poland: such a solution would be profitable for an Islamic bank which wishes to operate in Poland. The thorough examination of the market and of the country’s banking culture, combined with a promotional campaign advertising the advantages of

Polish banking activities are varied, and the financial market can be divided into different servicing segments based on various criterion. There is scope for private banking, marketed to well-off clients (both corporate and individual), to exist alongside so-called “popular banking,” related to more than one social class. In addition, universal all-inclusive banking can offer a wide array of products (from loans to stocks deposits), and can develop banks which specialize in a specific range of services (e.g. mortgage credits). After careful consideration of the factors mentioned above, the bank must decide on the potential addressees of its services, and on the services it wishes to provide. When mortgage loans, which are popular in Poland, are in place, the bank under Polish law enters into a credit (a more appropriate term than “loan,” as Polish law differs between a loan and a credit) to purchase a real estate. Alternatively, a facility agreement may be used, where the bank transfers funds into the borrower’s bank account in order to purchase the real estate. The bank secures the loan with various collaterals which may, inter alia, include an entry in the mortgage register of the purchased real estate; a promissory note; or an insurance policy. The borrower is obligated to pay the bank in instalments, and the duration of the contract can extend to 40 years. Islamic banks, under the principles of Murabaha, can purchase the real estate on their own behalf. This contrasts with Polish law, where the banks can purchase the real estate and can sell it, but cannot hold the ownership right to the real estate while the borrower is repaying the instalments. Pursuant to Polish law, borrowers purchase the real estate on their own behalf with the money received from the bank. The borrower enters into a sale agreement with real estate seller, and becomes the sole owner of the property upon signing the sale contract. In Islamic Murabaha, the bank can be the owner of the real estate and the ownership title can be progressively transferred to the borrower. However, one must not forget the differences comprehended within the concept of ownership in Shariah and Polish law respectively. Under Shariah, the ultimate and sole owner of things is Allah. People can dispose of certain goods during their lifetime, following the rules of Islam; under Polish law (which is not a religious law) the person becomes an owner upon entering into a specific contract or upon receiving a thing (e.g. through inheritance). Islamic banks wishing to commence their activity in Poland have to be aware of this difference, as Polish notions of ownership 2010 December Global Islamic Finance

gif

World Islamic Finance Review

have progressively strengthened after the collapse of Communism in 1989. The other difference to be taken into consideration when dealing with banking services is their duration. Polish banks offer both long-term services, and short-term ones, such as leasing, whereas Islamic banks concentrate on short-term services with repayment periods no longer than 5 years. Islamic banks hoping to establish themselves in Poland would have to either limit Polish services to short-time facilities, or consider a joint venture with another bank which could offer long-term services.

Contract or company?

I would like to briefly address the concept of Mudaraba in comparison with Polish law. Under Islamic law, there are generally two parties to Mudaraba contracts: the Mudarib and the Rabbul-mal. The Mudarib is somebody who possesses sufficient knowledge and experience to conduct and supervise an investment project. This person plays the role of a manager or a managing director, as business brain. Rabbul-mal, on the other hand, is the one who possesses the monetary means to finance the investment. Islamic banks can play both roles, but usually takes that of the Rabbul-mal. In this type of relationship between the parties, the Mudarib is independent from the Rabbul-mal in the decision-making process. Compared with Polish law, such a partnership would be closest to a “limited partnership,” or limited liability company. The institution of Rabbul mal is roughly analogous to that of a limited partner in a limited partnership; in practice, the limited partner’s role is limited to provision of capital. Similarly, the role of Mudarib is close to that of the management board in a limited liability company, where the board conducts and manages the company’s affairs without limitations. 62 Global Islamic Finance

December 2010

It would be impossible for Polish banks to enter into a Mudaraba contract with their clients, as the practice is not provided for under Polish law, although it might be possible for two banks to make a Mudaraba contract between themselves. Furthermore, a client acting as a Mudarib, independently from the bank, is not acceptable under Polish regulations, as any contract which a bank enters into with a client must assume some element of involvement on the part of the bank. In the Polish banking system, the bank holds the upper hand in bank/ client relationship. Although the Polish civil law, relating to banking contracts, is based on the principle of equality between contracted parties, the bank will usually hold a more dominant position, as the body with the financial clout.

Still possible?

To sum up: any Islamic bank planning to operate in Poland will face both regulatory and cultural challenges. The Polish banking law is flexible and is open to foreign investments; however, potential investors must bear in mind the specifics of the Polish market. In my opinion, it would be a good move for Islamic banks to enter the Polish financial market. The market is still in the process of development, and within developing financial markets, a widened array of services is always beneficial both for individual clients and for the country’s economy. An Islamic bank introduced into Poland could enhance the commercial relations of Poland and Polish firms with Islamic countries and companies. Poland is a tough market for Islamic banking, but there is potential. gif

Market Review

gif

Islamic finance Taps Into Women scholars Source: GlobalIslamicFinanceMagazine.com

Rising global demand for scholars who can advise firms on compliance with Islamic legal principles called Shariah is behind the quiet and almost accidental way in which women are growing into a small but powerful force in a male-dominated business. “There are not many women involved my job,” Aida, who manages the Shariah advisory practice at Malaysia’s biggest law firm. “I am glad to be able to show to young graduates and young scholars in my field if you’re interested enough there is a way into Shariah advisory,” the 41-year-old, who went on to study at Cambridge and Harvard, said. Islamic finance has embraced women relatively rapidly in its 30-year modern history, as burgeoning demand for expert lawyers and growing female education rewrite the rules of the business.As Islamic finance expands 15-20 percent a year and enters new markets from Australia to South Africa, so the need has grown for more Shariah advisers who can structure financial transactions according to Islamic rules that crucially include a ban on interest. Shariah advisers are typically Islamic law scholars who are able to marry Shariah with international banking and legal practices to help banks devise Shariah-compliant products ranging from mortgages to hedge funds. There are 221 Islamic finance scholars globally but only a handful are in high demand, with the top six occupying almost a third of the 1,054 board positions open to Islamic experts, a Funds at work report issued this year shows. This small circle of men dominate the boards of Islamic banks but there are now about 10 women Shariah advisers in Malaysia, home to the world’s largest market for sukuk, or Islamic bonds. The number of women Shariah scholars in Malaysia has more than tripled in the last five years according to some estimates.There are no official figures, but practitioners say there are no women Shariah advisers in the Middle East.While the culture

has opened the way to the rise of women advisers in Malaysia, more conservative social mores have kept women sidelined from the Islamic finance industry in the Gulf Arab region, experts say. “The need for Shariah advisers will increase,” said Mohamad Safri Shahul Hamid, deputy chief executive at Malaysia’s MIDF Amanah Investment Bank, a sukuk arranger. “Will we see more women? In Malaysia, we will because they will want to follow the footsteps of noted women scholars. I’m not so sure about the Middle East. I still think they have to address the cultural issue. But they are moving in the right direction as, at least

hen Malaysian Aida Othman signed up for the new law program at the Islamic university, she did not expect to become one the few women with their hands on the levers of the world’s $1 trillion Islamic finance sector.

Will we see more women? In Malaysia, we will because they will want to follow the footsteps of noted women scholars. I’m not so sure about the Middle East. I still think they have to address the cultural issue. But they are moving in the right direction as, at least commercially, there are a lot more avenues for women to join the workforce.

commercially, there are a lot more avenues for women to join the workforce.” Malaysian Muslim women face little, if any, restrictions on their movements, have equal educational opportunities and women comprise about half of the country’s total workforce. Muslim women in Malaysia routinely hold political office, run large corporations and the country’s central bank and capital market regulator are both led by women. EONCap Islamic, the Shariah banking arm of Malaysian financial group EON Bank , and the local unit of Kuwait Finance House both have women chief executives. Women scholars also advise Bank Rakyat and Bank Islam, which is Malaysia’s second largest Shariah compliant lender, as well as AmIslamic Bank and the local Islamic bank-

ing arms of HSBC and Standard Chartered. The rise of women Shariah advisers in Malaysia was partly due to a central bank ruling that a scholar can only advise one bank and one insurer at a time to avoid conflicts of interest. Men still outnumber women five to one at Shariah scholar conferences in Malaysia, but women have had a hand in major controversial rulings such as approving the bai inah sale, which fed into fierce theological debates that divide the industry. With or without women, different legal schools of Islam mean some deals are acceptable to some Muslims but not to others.“Sometimes banks have no other options,” said Shamsiah Mohamad, a Standard Chartered Saadiq Malaysia adviser who has sanctioned the use of the Islamic sale and buyback structure. The 43-year-old is part of an 11-member team of national level Shariah advisers, which issues rulings governing the world’s largest sukuk market. But she says her career ambitions take into account her family and her limited grasp of English. “In Islam, we need our husbands’ approval,” Shamsiah, who has a five-year-old son, told Reuters at the university where she teaches Islamic banking. Most women advisers say they have not experienced gender discrimination although some say they are not always taken seriously at conferences, for instance. “My duty is to speak out because to me that is my view. It is not a matter of whether people accept you or not,” said HSBC Amanah Malaysia adviser Rusni Hassan, one of eight children raised by a single mother in a village in northern Malaysia. “I am used to it. I just say whatever I want to say,” And regardless of any setbacks, Aida is optimistic about the prospects for women who want to get into the sector.“Traditionally issuance of Islamic rulings and fatwas have been monopolized by men,” she said. “There are no express rulings prohibiting women from being involved in it. There are opportunities for many more, for ladies who are willing to step up.” gif

2010 December Global Islamic Finance

Market Review

gif

Islamic Banks Need Strong Liquidity Management To Withstand ‘Shocks’ Source: GlobalIslamicFinanceMagazine.com

However, though well-intentioned, the international standard setter for banks’ vision does not entirely accommodate Islamic financial institutions as their reforms “have serious implications for Islamic banks” and may even fuel liquidity risks across Islamic financial markets due to the limited stock of Syariah- compliant government securities that are geared to meet the proposed narrow definition of liquid assets. As the Permanent Secretary (Monetary) at the Ministry of Finance, Haji Mohd Roselan bin Haji Mohd Daud, underscored this point, he reminded that there is a need for a strong liquidity management infrastructure for Islamic financial institutions in order to develop the ability to “withstand shocks from externalities and at the same time reducing “costs of intermediation for Islamic banks” and thus “rendering them more competitive”. The permanent secretary was addressing workshop participants who are in the country to take part in the 6th SEACEN-IRTI/IDB Course carrying the theme “Building a Sustainable Islamic Banking System - Liquidity Management”. The opening ceremony took place yesterday afternoon at the Centrepoint Hotel in Gadong where Haji Mohd Roselan highlighted that banks are required to be “liquidity solvent before it is capital solvent to ensure that a bank’s liabilities to the public are met when they fall due”. “Two important aspects here are that this liquidity must be available at short notice and at a reasonable cost,” he said after

stating that “banking in whatever form involves maturity transformation - short-term liabilities are converted into long-term assets”.However, he also pointed that the Islamic financial world currently does not have the proper Syariah- compliant utilities to assist in overcoming this obstacle. As a result, Islamic banks are forced to hold a significant-portion of their assets in cash or readily liquefiable property “because of the scarcity of tradable money market instruments” that are in line with Islamic principles. “The lack of a global Islamic interbank market and a liquidity management scheme has hampered the systemic development of the Islamic finance industry,” he said.

fter the economic crisis that temporarily paralysed the entire globe in 2009, the Basel Committee has proposed to issue new and more effective global liquidity management standards for banks that aim to protect world finances to avoid a repeat of what was dubbed the “worst economic crisis since the 1930s”.

The lack of a global Islamic interbank market and a liquidity management scheme has hampered the systemic development of the Islamic finance industry

He reminded that those who are working within the Islamic finance arena ought to be more conscious of the threat that “without an efficient interbank market and without support from central banks, market forces will drive Islamic banks towards increasing replicating conventional banking techniques”. “We run the risk of becoming irrelevant”, whilst stressing that the Islamic finance concept of profit and loss or risk sharing “must not be compromised for short-term gain and for the sake of competition and market share”.

As he outlined the problems that are currently standing in the way of developing Islamic finances, Haji Mohd Roselan shared that a solution is in the works thanks to the

establishment of the Liquidity Task Force initiated by the Islamic Financial Service Board (IFSB) which stated that, as of October 25 this year, 11 central banks and two multilateral organisations have collaborated in a landmark global initiative for the establishment of the International Islamic Liquidity Management Corporation (IILM). It was explained that the IILM will be tasked to issue “high quality Syariah-compliant financial instruments at both the national level and across borders”, towards enhancing the “soundness and stability of the jurisdictions in which they operate”. Meanwhile, the five-day workshop - facilitated by eight resource speakers of diverse backgrounds and vast knowledge in their respective subject areas - will see the participation of 35 individuals from SEACEN member countries, including Brunei Darussalarn and non-member countries. Participants hail from financial institutions in countries such as Afghanistan, Albania, Cambodia, Indonesia, Malaysia, Korea, Bangladesh, Iran, Sri Lanka, Maldives, Pakistan as well as Turkey. Invited speakers comprise those from central banks in the region, Islamic scholars as well as from the Islamic Research and Training Institute (IRTI). The workshop is aimed at enabling participants to identify and evaluate critical regulatory and supervisory components to develop a sustainable Islamic banking system in accordance to Syariah principals by learning on ways to discuss legal and regulatory framework for Islamic banking, discover links between Islamic banking systems with Islamic capital and money markets for liquidity management, examine sukuk structuring and approval process as well as through describing issues and challenges in Islamic Liquidity Management in compliance with Syariah principles. gif

2010 December Global Islamic Finance

gif

Market Review

Regulation in Islamic Finance To Attract Investors Source: GlobalIslamicFinanceMagazine.com

he Islamic financial industry is a growing sector which with proper regulatory and standardised frameworks can expand and diversify into the estimated $2 trillion dollar sector. Islamic finance is based upon ethical Shariah compliant principles which provide investors with the most beneficial alternative to conventional finance.

bilateral payment arrangements – you can peg the Indonesian rupiah and the ringgit at a fix rate for 15 years,” instead of the current practise of over-relying on US dollar financing, he said. PT Telekomunikasi Indonesia Tbk commissioner of the board and president commissioner Tanri Abeng agreed with Yeoh, adding that the regulatory framework could address the issue of exchange fluctuation between both.

It has been reported in Malaysia that there is a need for a well established regulatory framework that has the ability to support infrastructure development and the relevant access to long-term Islamic financing, according to key industry players. YTL Corp Bhd managing director Tan Sri Francis Yeoh said Islamic financing could fill the gap felt in infrastructure financing but there should be a transparent regulatory framework in place to attract investors, both locally and foreign.

66 Global Islamic Finance

December 2010

“The banking industry must also be closer to the real economy and Islamic finance can help bridge this gap, as it avoids speculative activities,” he added. A challenge of Islamic finance in the global market right now was that investors were still trying to understand its structures and assets and how relevant regulations and frameworks would address issues such as bank defaults, said Pimco Asia Ltd managing director Brian P. Baker. Earlier in the day, 11 central banks and two multimedia organisations signed the articles of agreement for the establishment of the International Islamic Liquidity Management Corp (IILM). The signing ceremony was witnessed by Prime Minister Datuk Seri Najib Tun Razak.

“The sukuk market, which grows at 40 per cent annually, is still a bit property centric. South-East Asia needs infrastructure development which requires longterm financing. Transparent regulations will attract people to invest in these projects,” he said during a panel discussion on “Shaping Global Finance for the Next Decade” at the Global Islamic Finance Forum. Yeoh, who expressed his frustration with the lack of convergence in an infrastructure framework, added that there was ample liquidity in Asia. He said Asians were compulsive savers and that they would receive better returns for their money in the current low interest-rate environment by investing in debt financing for solid infrastructure projects. Yeoh suggested that the Indonesian and Malaysian regulators worked together to set up a regulatory framework before roping in other neighbouring countries such as Singapore and the Philippines. “The regulatory framework has to encourage infrastructure (development). You can use

ior adviser to chairman Jean Lemierre said the global finance market in the next decade required more coordination and cooperation that extended beyond the G-20 nations. He added that better implementation of the banking regulatory framework and a consolidation in the industry would lead to more efficiencies.

The IILM will issue high-quality Syariah-compliant financial instruments at both the national level and across Bank Negara Governor Tan Sri Dr Zeti Akhtar Aziz said in her welcoming address that the establishment of the IILM would further enhance the capacity of Islamic finance in facilitating efficient cross-border flows. “Both central banks as well as the finance ministries will need to be involved in coming up with such a framework. But this will help reduce the uncertainty and in business, uncertainty is equivalent to cost,” he told reporters on the sidelines of the event. Meanwhile, panel speaker BNP Paribas sen-

“It will enable effective liquidity management not only for the Islamic financial institutions but also for the management of Islamic financial portfolios. This development is also significant as it demonstrates an international collaboration among the central banks,” she said. gif

Cape Gate Investment Group Limited

Capgate Farms Capgate Oil & Gas Capgate Properties Capgate Solar Energy Capgate Technologies Capgate Pharmaceutical Capgate Security Services Capgate Transport Services Capgate Medical Supplies Services Capgate Engineering & Construction Capgate Waste Management Services Mr L Bashir Cape Gate Investment Group Suite D14, Melita Plaza Ahmadu Bello Way, Area 11 Garki, Abuja, FCT, Nigeria Tel: 080 387 19443, 0808 063 8070, 0803 339 3872 E-mail: info@capegategrp.com bashirjega@capegategrp.com

gif

Islamic Finance Instruments

Islamic Finance: Debt versus Equity Financing in the Light of Maqasid al-Shari’ah, part I Authors: Asim Anwar Kamal, Ezry Fahmy Bin Eddy Yusof, Jhordy Kashoogie, Asim International Islamic University Malaysia, Malaysia

Abstract: To obtain various scholars’ point of view pertaining the advantage of equity financing over debt financing in the modern and current application of Islamic Banking & Finance for achieving justice and equality enshrined in the objective of Shari’ah. Keywords: Debt, Equity, Islamic Finance, Islamic Banking, Maqasid al-Shariah

68 Global Islamic Finance

December 2010

Islamic Finance Instruments

he Islamic Economic system aims to address the issues of poverty and equality. It is an economic system which advocates for the raising of man in all aspects as well as Economic justice for all. Wealth concentration has been strongly condemned by both the Quran and Sunnah. A community in which there exists a high level of inequality is doomed in the long run, this is clear if we just look into history, were many societies have collapsed and many revolutions have taken place due to the mass gap between the rich and poor. Sadly it seems that man never learns from history. It is reported that the Prophet (saw) said that ‘a town in which a man goes to sleep hungry and wakes up hungry, loses the promise of protection from God” (Musnad). Today unfortunately there are many places within the Muslim world in which not just a man, but many men go to sleep hungry and wake up hungry. Islam is a system for all of mankind and the Prophet (saw) has been sent as mercy not just to Muslims but to the whole of mankind. Yet unfortunately today many of our present practices in Economics have no trace of any mercy only traces of greed. Many people are strongly opposed to PLS Sharing, and are not willing to go into Shirkah or partnership with their fellow men. The feeling of brotherhood seems to have vanished Having said this there are solutions given in the Islamic economic system. Such tools utilize profit and loss sharing instruments to channel funding to the poor. It was expected by many that such instruments would be implemented due to the advent of Islamic banks. However this has not been the case. The percentage of PLS contracts as compared to Debt based contracts is minimal. Are these debt based contracts a viable alternative with regards to fulfilling the Maqasid Shariah and economic justice or are they just mirror images of conventional debt financing products having negative implications on society? We attempt to answer this question in this particular paper. This paper is divided into sections. After the introduction, it is followed by problem

gif

statement as well as objective of the study. After that, section 4 briefs the research questions for answering the analysis in this paper. Section 5 deals with discussion obtained from literature review, which highlights important issues regarding Maqasid Al-Shari’ah in term of justice and equality vis-à- vis the current practice as well as ideal model of Islamic banking and finance. Finally, this paper ends up with conclusion. The central point of discussion throughout this paper is current practice of modern Islamic Banking & Finance, which is debt-based financing in light of objective of Shari’ah as well as socio-economic justice. Besides, this paper also scrutinizes what is the way forward for Islamic banking and finance has to do with their financing in order to achieve justice and equality enshrined in Maqasid Al-Shari’ah at the end of the day. Whilst some may argue, there is no doubt that Equity Financing is more in line with the Objectives of Shariah as it is just, provides equal opportunities and is more beneficial for society.

Definition of Maqasid Al-shariah

The prime objectives of Maqasid al-shariah is centralized on the objective of accomplishing the development of both the spiritual and socio-economical well-being of Muslims. As Kamali (2007) explains that the purpose of the Shariah is to benefit and protect mankind as in the Quran Allah tells us that he has not sent the Prophet (saw) except to be “a mercy to the worlds” (al anbiyah,;21:107). The author further goes on to explain that Adl or Justice is another very important principle and objective of the Shariah and its purpose is to create and maintain equilibrium within a society. The author defines Al-Ghazali’s classification of the Maqasid as being ranked into three; Daruriyyah (essential), Hajjah (complementary) and the Tahsiniyyah(desirable). The Darurriyah are divided into 5, which are Life, Intellect, Faith, Lineage and property. Destruction of these items leads to chaos within a society. The Hajjah seek to protect and promote the first category, with the 2010 December Global Islamic Finance

gif

Islamic Finance Instruments

Hajjat difficulty and hardship tends to be removed i.e concessions in Shariah such as the shortening of prayer for a traveler. The Tahsiniyyah are refinements in society e.g the encouragement for the wearing of perfume to the Friday prayer or voluntary sadaqah. The Shariah also encourages good conduct in mans behaviour i.e ihsan, gentleness and pleasant speech. Zanki (2008) discusses the definition of Maqasid from other Scholars perspectives. He explains how Fakhruddin al Razi believed that first Maqasid elements should be produced, and then elevated before eventually being preserved. Other scholars added other objectives to the 5 elaborated by Shatibi and Ghazali, such that also Mans dignity should also be protected, as in the Shariah slanderous accusation was also punishable. Shatibi discusses the identification of Maqasid and how to provide proof that it is actually an objective. He split this into two categories, which were subjective ways and methodological ways. He was in favor of reasoning to determine the objectives of the Shariah. Kamali is of the view that the used of the Maqasid is essential in today’s modern context as it is free form juritic problems found in other tools of Usul fiqh such as Ijma. Hence, he feels that Maqasid is free from these difficulties and thus are viable options for the development of many issues currently facing the Ummah. Furthermore, as quoted by Shidiqi (2004), according to Al-Fasi (1963), “The goal of Shari’ah is the good (maslahah) of human being as vicegerent in the society he lives in, accountable to Allah who made him in charge for establishing justice and fairness, ensuring intellectual and social wellbeing and psychological contentment for every member of the ummah.” While according to Ibn ‘Aashur (18791893), “objective of Shari’ah is meant for maintaining order in the world and preserving its goodness by ensuring the goodness of those who are ruling over in which it indicates reforming (islah) in this world and eradicating corruption (fasad) from it.”

Importance of Equality and Justice

Establishment of justice is one of the three pillars of objective of Shari’ah. Justice is important for achieving sustainable economic development because everyone has the same opportunities to contribute the capital for achieving desired outcome.

70 Global Islamic Finance

December 2010

Justice must be carried out with equality for giving out the same opportunities to everyone. Equality is such a check mechanism in order to ensure everyone gets what they deserve as well as avoiding bias and discrimination in term of race, color, age, sex, nationality.

stead of musharakah (musharakah is equity-finance oriented and murabahah is debtfinancing). This phenomenon is described by Farooq (2006) as murabaha syndrome since the Islamic Banking and Financial Institutions overly use debt-based financing as their products.

As being pointed out by Chapra (2008), Justice and human brotherhood which encompass equal treatment among individuals are the perquisite of spiritual needs fulfillment. We as a human, besides the fulfillment of material needs pursued by our effort, we also need spiritual fulfillment for having peace and comfort state of mind.

This is proven when Mehmet (2007) quoting Hasan’s recent data while studying the Malaysian case as stated: The percentage share of musharakah declined from 1.4% in 2000 to 0.5% in 2003. Evidently, it seems that the major modes of Islamic financing are in the form of bay bi thaman al-ajil and ijarah thumma al-bay with 47.4% and 27.9% respectively in 2003 (p.5).

This spiritual fulfillment cannot be attained by material means rather by immaterial means that cannot be valued by materials. The immaterial means can be pursued by fulfilling our obligation as khilafah as well as having equal treatment among individuals. The fulfillment of justice can bring social and moral uplift in the society in which there is no crime, life security, honors that could bring peace in the society. In light of Shari’ah perspective, Shari’ah advocates equality for all. In the eyes of Allah a rich man and poor man are equal and the only thing that distinguishes them is taqwa or piety. However with debt based financing there is no equality in opportunity so thus there is a separation between the poor and rich. The poor have no access to the funds generally whereas the rich can borrow as much as they like. This goes against the objectives of the Shariah. In contrast to this equity gives equal financing opportunities to all whether rich or poor. The investor will be more concerned with the expected profitability of the project rather than collateral available as is the case with debt financing. These philosophical frameworks of justice are an important yardstick to measure the development of modern practice of Islamic Banking and Finance today.

Current Practice of modern Islamic banking and finance

Evidence on current practice by Islamic banks worldwide suggests that the majorities of financing operations are not based on equity but rather takes the form of debt-like instruments (Aggarwal and Yousef 2000; Wajdi and Irwani 2006; Mehmet 2007). This is because according to Mehmet (2007), Islamic banks and financial institutions have opted for profitable Islamic financing such as murabahah in-

As we can see from that evidence, the products offered by Islamic banks are not promoting justice or in other words it is not yet fulfilling the objective of Shari’ah. Islamic banks just focus on the form rather than substance itself as an attempt to meet Shari’ah compliant. However, the attempt itself or approach used by Islamic banks as being argued by Syed Ali and Ahmad (2007), Rahman (2007) is not Shari’ah compliant because the approach used by Islamic banks just a disguise of the attempts used by conventional banks since a long time ago. It means that Islamic banks are still using debt-based financing contract when they give out the financing facilities to the customers. As a result, it does not fulfill justice and criteria in the contract as reflected in mudharabah contract. Because of that, the poor have not really benefited as well as such a killing and discrimination for those in direly needs financing from the presence of Islamic banks as the implementation of PLS contracts such as Mudharabah and Musharakah implementation is very limited. Rahman (2007) also explains that the Prophet saw was once a poor trader and eventually became successful due to PLS contracts he conducted with his wife khadijah. It is in line with Rosly (2005) that banks give out the financing to the customers based on 5C’s criteria which are credibility, character, capital, collateral, and capacity. Based on this fact, there is clearly no justice and equality inherited in the financing contract which causes income gap between for those who have access in financing and for those who are being barred for doing financing.

Islamic Finance Instruments In addition, the current practice of collateral in the prevalent banking system favor net worthy corporate clients and businesses based on strict evaluation/due diligence for doing financing. However, the profit-loss sharing mechanism desired in the Islamic banks promotes Small and Medium Enterprises (SME) as well as micro financing with a viable business (Wajdi & Abozaid, 2008), Rahman (2007). Therefore, equity based financing is more desired as compared to debt- based financing and also necessities of Islamic banks helping the poor people should be the main focus since 291 million or 24% of the total OIC-LDCs population suffers from human poverty (SESRTCIC, p.41).

The Implication of Debt Financing on Socio Economic Justice

The focal objectives of Islamic financial industry are geared to ensure resource allocation optimality and efficiency via extinction of debt based financing. One of the greatest conundrums or trickery that has adulterated the embodiment of conventional financial industry is “riba” or interest. This has placated the norms of exploitations, injustice and speculation as the central norm of the operations of the conventional financial industry which has huge socio-economic justice implications in society. Therefore, the implication of riba/debt based financing can be sought from micro as well as macro perspective. From the micro perspective, we can see that in many instances debt based financing is unjust especially to the poor. According to Soumik Majumdar (2008), under the present banking scenario in order for the transaction to occur there needs to be trust between the borrower and lender which is mostly dependant on the availability of collateral, something which the poor don’t have! Therefore the poor cannot borrow. This lack of access to funds sometimes leads the poor to borrow from unscrupulous lenders. This can be seen in Malaysia i.e. Ah Longs. This is not just or fair as these people take advantage of the poor and charge them exorbitant rates of interest, this goes against many Islamic principles especially as Islam condemns exploitation. This is the same reason why Muhammad Yunus opened the Grameen Bank in Bangladesh, as poor had no access to financing due to their lack of collateral. In other words the poor were Unbankable (Yunus, 2007). This is blatantly unjust as in Islam everyone

should have equal opportunities no matter their background. The famous Muslim scholar Nizam Al Mulk was of the opinion that for society to be stable it is a requirement that even the poor have access to the same economic opportunities. This is not the case with debt based financing as the majority of the time the poor have no access to this type of financing due to the absence of collateral hence the injustice occurs. The Maqasid Shariah aims to protect life, every year millions of poor people die due to the limited opportunities presented to them to climb out of poverty. As we saw from our definition of Maqasid some scholars have included in their definition that mans dignity should be protected. Hence we can see that mans dignity depends on his ability to survive and his ability to put bread on the table for his family. In order for man to achieve this dignity especially the poor, it is essential that they have access to financing on a fair basis so that they have the opportunity to attain dignity in the society by becoming successful entrepreneurs. If they are given this opportunity they will not have to rely on Handouts and charity and thus this is better for the society at all levels. There is a famous Chinese proverb in which it is stated “give a man a fish you will feed him for a day, teach a man how to fish and you will feed him for a lifetime’ we can relate this to our present scenario, if we give a poor man financing on Mudharabah or Musharakah he becomes independent rather than depending on charity. As Muslims we have to critically analyze the effects of an action before undertaking it. One may ask what is the actual affect of debt financing on society and is it in conflict with the basic principles of the Maqasid. According to Nazrol Kamil (2005) debt has many negative implications on our society and therefore should not be encouraged.

not one individual will bear the responsibility. Another effect on the society is that due to lack of access of funds sometimes the poor can stay poor while the rich become a lot richer. This can lead to the breeding of hatred and enmity in a society. When the inequality worsens there can be loss of life and destruction of property such as the race riots in Malaysia (1969). This goes against the Maqasid of Shariah, as the protection of property and life are some of the core principles of the Shariah. In the next issue of Global Islamic Finance Magazine authors will discuss ideal Islamic banking & finance from Maqasid Shariah perspective and misgiving on profit and loss sharing issues. gif

References and further reading: Books •

Abdul Rahim Abdul Rahman. (2007). “Islamic Microfinance: A Missing Component in Islamic Banking”, Kyoto Bulletin of Islamic Area Studies, 1-2, p. 38-53. Abozaid, Abdulazeem (2008), Contemporary Islamic Financing Modes between Contract Technicalities

and

Shari’ah

Objectives, Accepted Paper in Islamic Finance Conference 2008 at Harvard University. •

Ali, Syed Salman & Ahmad, Ausaf (2007), an Overview of Islamic Banking and Finance: Fundamentals and Contemporary Issues Journal, Journal of Islamic Banking and Finance: Fundamentals and Contemporary Issues. p. 6.

Articles •

Ahmad Kameel Mydin Meera and Dzuljustri Abul Razak. (N.D). “Islamic Home Financing through Musharakah

If we look at the Maqasid we see that one of the main aims is protection of the family unit and societal well being. With debt financing man is encouraged to live beyond his means (credit cards) and thus this has detrimental effects on the society. A man is forced to work extra in order to pay of his debts and thus has no time for his family. Clearly this is against the objectives of the Shariah. In contrast to this when Equity is used as the basis of financing this does not happen as both partners are made to look out for one another and thus

gif

Mutanaqisah and al-Bay’ Bithaman Ajil Contracts: A Comparative Analysis”, retrieved 15 Jan 2008 from: http://www. isra.my/index.php?option=com_content &view=article&id=224&Item id=72 •

Asyraf Wajdi, and Nurdianawati Irwani Abdullah. (2006). The Ideal Of Islamic Banking: Chasing A Mirage? Retrieved January 16, 2009, from www.asyrafwajdi.com/ download.php?f=0013(downloadedfrom- asyrafwajdi.com).pdf

2010 December Global Islamic Finance

gif

Market Review

Promoting Islamic Finance and Banking Source: GlobalIslamicFinanceMagazine.com Islamic finance and banking can further strengthen if the sector has effective promotion and marketing which could spur the$2 trillion industry as a global financial sector. One of the main challenges is to promote Islamic banking in the country is lack of awareness about Islamic banking concepts among general public, said Saleemullah, Director, Islamic Banking Department, State Bank of Pakistan (SBP).Speaking at a seminar organised by the State Bank of Pakistan (SBP) in collaboration with International Islamic University, Meezan Bank, and HBL on ‘Islamic Banking and Finance in Pakistan-Issues, Challenges and Way Forward’, he said that one of the key issues was lack of awareness among the general public about the Islamic banking. The stakeholders, including bankers and practitioners must play their due role in promotion of Islamic banking products.The apprehensions and confusion about Islamic banking among masses needs to be emoved, he added second major issue, he said, is capacity of banking sector where share of Islamic banking needs to be mproved. In this regard, SBP is extending all kinds of assistance to the stakeholders for promotion of Islamic anking in the country. He said there was need to remove confusion about some concepts of Islamic banking among masses for which wareness needs to be promoted. Terming research as an important area, he said that research in the area of slamic banking is very important to promote its diversified products in the 72 Global Islamic Finance

December 2010

country. Explaining the difference between Islamic and conventional banking, Saleem said that ‘the more you will earn and he more you will share in Islamic finance’. Beside other concepts, he explained, Islamic banking promotes articipationbased and asset-backed financing. He said that 98 percent of the banking industry is based on debt-based instruments. “We should have faith in slamic banking to convince the masses that the system is practicable. This banking system is one of the merging fields in the global financial market posting tremendous growth recently”. In his presentation, Ahmed Ali Siddiqui, executive vice president product development, shariahcompliance and inancial advisory, Meezan Bank, said that Islamic banking would ensure equitable distribution and circulation of ealth in the society “Islamic Banking is like a trading house which actively participates in trade and production rocess as a supplier, customer or investor. One of the key features of Islamic banking is that it ensures Shariah ompliancen transactions,” he added. About key features of Islamic banking, he said, transactions are asset-based/backed and it is socially esponsible banking because it operates under Shariah restrictions. “This banking system does not permit financing of rohibited goods and industries e ethics and moral values play a major role in investment decisions.” gif

gif

Financial Authority Guideline

Islamic Finance in the UK:

Islamic finance in retail markets Authors: Michael Ainley, Ali Mashayekhi, Robert Hicks, Arshadur Rahman, Ali Ravalia Financial Services Authority, United Kingdom

fter a slow start in the 1990s and early 2000s, the retail market has witnessed growth and some significant milestones in the last five years. Even so, establishing the market has not been as fast as some commentators predicted. Although reliable estimates of the overall size of the Islamic retail market are hard to come by, volumes appear to be relatively small. The size of the Islamic mortgage market in the UK, for example, is estimated at only ÂŁ500m compared with the stock of mortgage lending of over ÂŁ1.1 trillion in the UK as a whole and nearly 12 million borrowers.35 As far as we are aware, there are around nine or ten regulated financial institutions, including major high street banks, active in the Islamic retail markets. There are perhaps two main reasons for this modest growth. First, that demand may originally have been overestimated. Research by some commentators shows that financial decisions in the Muslim community, as in the population as a whole, are influenced by a variety of factors. Similarly, the Muslim community is not a uniform group in terms of relative affluence. In the past, there have been tax and regulatory hurdles and it is too early to judge whether recent reforms will result in an increased market share for Islamic products.

Islamic mortgages

In the UK, Islamic mortgages have been structured under two different Sharia-compliant contracts, namely, Murabaha and Ijara*. Under the Murabaha method, the provide buys the property and sells it on immediately to the consumer for the original purchase price plus an agreed profit margin. The consumer pays this higher price in de74 Global Islamic Finance

December 2010

Financial Authority Guideline ferred payments in line with a fixed payment schedule. This method of financing falls within the definition of a regulated mortgage contract and has been regulated by the FSA alongside conventional mortgages since October 2004. It has rarely been used in the UK. Ijara based contracts – Ijara and Diminishing Musharaka – are the commonly used methods in the UK. In an Ijara contract, the finance provider buys the property and becomes the legal owner. The customer agrees to buy the property from the provider at a defined price at the end of a set period, and signs a lease agreement to occupy the property. During this period, the customer makes regular payments to the provider, consisting partly of the rental payment and partly a payment towards buying the property. At the end of the term, the legal ownership of the property is transferred to the customer. In the case of Diminishing Musharaka, the transfer of the ownership is gradual, as the payments made by the customer gradually buys the provider’s equity in the property. Until recently, this type of home financing was not regulated by the FSA. Regulation Under the Finance Act 2007, the government brought Ijara-based contracts within the FSA’s regulatory framework. For regulatory purposes, these contracts are called Home Purchase Plans (HPPs). The reasons for doing so included the need for a level playing field, as customers for HPPs did not enjoy the same levels of protection as customers for conventional mortgages. This meant HPP customers were potentially vulnerable to misselling and unfair treatment, with no means of redress. The regulatory requirements that were introduced took account of the relatively small size of the market and the FSA’s commitment to a more principles-based approach. It was recognised that imposing an expensive regime could have led some firms to cease offering the products altogether and to other distortions in the market. The FSA’s requirements were generally kept at a high level and proportionate to the expected benefits for consumers. There is now a single sourcebook for the conduct of business for ‘Mortgages and Home Finance’. To date, the FSA has received a few applications to offer HPPs by existing providers and more than 50 by intermediaries to enter this market.

Prudential requirements

Under Basel 1, Murabaha-based home finance products were considered to have the same risk as conventional mortgages, risk weighted at 50%. Ijara-based products, however, were risk weighted at 100%, making them slightly more expensive for provid-

ers than conventional mortgages. Under the EU Capital Requirements Directive, the risk weights of all three products are the same in the UK, set at 35%, under the standardised approach.

Takaful

Takaful operations are mutual in nature and similar to conventional mutual insurers. Takaful firms and products are structured in a manner to address the specific concerns of Sharia scholars with conventional insurance products, namely uncertainty (gharar), gambling (maisir), interest (riba) and investment strategy. To deal with these concerns, Takaful products have three distinctive features – greater transparency in providing a clear distinction between the Takaful fund, which consists of contributions from policyholders akin to premiums, and the Takaful operator who manages the fund; an element of profit sharing; and limitations on acceptable investments. Specific models for Takaful will vary, but Takaful operations often have a two-tier structure consisting of one or more funds belonging to policy holders, above which sits a limited company with share capital which is responsible for overall governance, underwriting of risks, and investment management. Like conventional insurers, Takaful companies can generate a return based on their underwriting activity and their investment activity. The remuneration is either based on fixed fee or performance, but is commonly a combination of both, with underwriting subject to a fixed fee and investment management performance related. At times when the Takaful operator’s activities generate a loss and the funds are in deficit, this can be made up by an interest free loan provided by the limited company, to be repaid once the funds are in surplus again. As yet, Takaful activity in the UK remains very limited, with only one provider active and a second having applied for authorisation. A Lloyd’s syndicate was established to underwrite risks in a Sharia-compliant manner in 2006 with backing from a Takaful provider based in the Gulf, but this was wound down within a few months before it accepted any business. From a regulatory perspective, the FSA would treat a Takaful provider as it would any other insurance provider, assuming there was enough similarity in function and form. Given the parallels drawn between Takaful providers and conventional insurers, particularly mutual insurers, ratings agencies are also assessing them using the same method.

Treating Customers Fairly (TCF)

Principle 6 of the FSA’s Principles of Good Regulation states that ‘a firm must pay due

gif

regard to the interests of its customers and treat them fairly’. The FSA’s TCF programme, which includes financial promotions, is designed to put this into practice. The outcomes the FSA wants to achieve include giving consumers clear information, suitable advice and an acceptable level of service. In addition, the FSA would wish to see products and services in the retail market targeted to meet the needs of identified consumer groups. Many of these requirements fit naturally with the principles and requirements of Sharia law, such as the requirement for Islamic financial institutions to disclose faults and avoid misrepresentations. However, owing to the sometimes complex or uncommon nature of Islamic financial products, these institutions should ensure consumer understanding is adequate. This will become more important as the industry develops and new products are introduced. These requirements and the additional layer of Sharia compliance can give firms a good basis for embedding TCF across their business.

Financial capability

Education to familiarise Muslims and other consumers with new products and new forms of finance will be critical. In this context the FSA has devoted considerable resources to launching and implementing a ‘National Strategy for Financial Capability’ across the whole population. The strategy brings together the financial services industry, consumer and voluntary organisations, government and media to find ways to improve the UK’s financial capability. As part of this strategy, the FSA gives clear, impartial information to help consumers make informed financial decisions. This is done through helplines, a ‘Moneymadeclear’ website and a range of printed guides. With respect to Islamic finance, the FSA cannot and does not give guidance on Sharia principles, nor on whether particular products are Sharia compliant. The FSA does, however, provide explanation of products and the associated risks. The factsheet on HPPs issued in March 2007 is a good example, setting out the key messages for consumers, giving a step-by-step guide to each product and the associated risks and benefits. We have also tried to ensure the factsheet gets to the right audience and some 5,000 copies have already been distributed. In this way, the FSA can provide a platform to raise public awareness but it will clearly rely on support from other institutions and organisations, private and official, which are involved in this sector. gif

2010 December Global Islamic Finance

gif

Event Review

The 4th Islamic Financial

Intelligence Summit The 4th Islamic Financial Intelligence Summit, on 3rd November 2010, was a gathering of professionals and scholars from Islamic banking and financial sectors, law firms and government agencies. It included proactive discussions and debates on several key issues for the development of Islamic Finance. The highlights in this conference’s agenda included the new landscape for coming years, and diverse views on Islamic finance from differently geographic perspectives. Arguments from the floor came on the topic of the prospective formation of a regulated standard of Shariah-compliant structure. Naturally, the forecast of future growths and opportunities for investment returns were discussed, along with some brilliant words of inspiration.

This conference began with a presentation promising strong growth for this year’s Islamic finance market, given by Razi Fakih, the deputy CEO of HSBC Amanah. He pointed out that the Islamic banking industry has been growing at double-digit compound annual growth rates over the past few years, and is expected to reach 20% annually until 2012. Over the long term, the growth is likely to extend beyond the traditional markets such as UAE, Saudi Arabia and Malaysia, where governments have adopted regulations to support Islamic finance. Indonesia and Bangladesh are predicted to be the

76 Global Islamic Finance

December 2010

next ountries to host Islamic banking on a large scale, due to their religious demographic and to changes in regulations designed to aid the development of Islamic finance. The first debate centred ont he establishment of an Islamic Finance Centre. Three financial institution leaders, located in different geographical areas, debated the topic: Omar Kalair, the CEO & President of UM Financial, Canada and Richard Thomas, CEO of Gatehouse Bank from the UK, and Thierry Dissaux speaking on behalf of the French treasury. Paris and Toronto are each attempting to join London as global Islamic finance centres, but each city has a different legal context and different approaches towards the goal. Since 2007, the French government has played a leading role in the provision of a legal environment for the development Islamic Finance. Paris Europlace, an organization of entities working to promote French financial market, has set up a committee on Islamic Finance with the aim of identifying obstacles within the country’s tax and legislation system. The experience of Islamic bankers in Canada has been very different. There has not been the same ministerial drive within government as in France, although the Canadian Muslim community, numbering one million, has created an attractive environment for Islamic financial structures. The importance of government participation was pointed out by Richard Thomas, CEO of Gatehouse Bank in the UK. He told the conference that even with the UK’s common law and trust structures, which have allowed banking sectors to create special purpose arrangements for underlying assets in Sukuk transactions, promotion of Islamic banking activities will still be a long hard slog without government involvement. At the conclusion of the summit, the main concerns of every participant were the development and opportunities of Islamic finance in the future. Joseph DiVanna, managing director of Maris Strategies, underlined the value of Islamic finance for Muslim and non-Muslim customers, and said that the financial methods should be presented by Sharia-compliant financial services institutions.

Event Review He also identified the current failure of Islamic banking sectors to take advantage of new technologies which would enable them to target younger generations of customers. Besides this, other opportunities for continual growth were identified as: the facilitation of SME financing; the facilitation of transactional trade; the strengthening of female customer loyalty; and an alliance with FDI. Malaysia has been shaping up as the key market for Islamic Finance this year. At the end of June, its share of Islamic banking assets among the total banking sector had reached 20.9%. Together with Iran, Malaysian bankers dominated the global takaful market. Ibrahim Hassan is CEO of Maybank, ranked 17th in the Top 500 Islamic Financial Institution research; he suggested the following outlines for future growth: the construction of a supportive infrastructure; increasing the diversity of services on offer; the mutual recognition of differences in interpretation of Shariah law; the humanisation of Islamic financial services. The findings of this year’s Top 500 Islamic Financial Institution research form an absolutely vital index and reference point for those concerned with the development of Islamic finance to refer. Stephen Timewell, editor of The Banker, appeared at the summit to explain the Top 500 report with reference to changes since last year, and predictions for the future via comprehensive surveys and data analysis. The 2010 report revealed that Shariah-compliant assets rose by 8.85%, from $822bn in 2009 to $895bn in 2010 - and held the same compound annual growth rate (CAGR) of 23.46% from 2006 to 2010. Since the first report in 2007, Islamic finance has continued upward growth as conventional markets still struggle with the repercussions of the global financial crisis, despite growing pains and despite a loss of confidence in global financial systems. However, even though most Shariah-compliant institutions remained unscathed by the direct impact of the financial crisis, the overall growth momentum of the industry has been reduced from 2009’s

gif

strong double-digit growth of 28.64% to a single digit figure in 2010. Furthermore, the market optimism display in 2009 has been replaced by a cautious position on risk in 2010, as senior Shariahcompliant bankers warned that if those assets lost significant value, the attractions to Islamic investors would likewise decline rapidly. That is, asset quality has returned as a primary driver in bolstering investor confidence in Islamic finance. Meanwhile, Shariah scholars continued debate on the establishment of an industry standard for interpreting Shariah principles, in order to clarify in which circumstances and interpretations it is violated. During the past year, 18 new banks offering Shariah-compliant finance have entered the market, and six conventional banks began offering Shariah-compliant services. The rate new entries into the market has slowed from previous years (20 in 2009; 51 in 2008 and 78 in 2007). As financial services infrastructures are consolidated by central bank and government initiatives in emerging nations, banks operating in the rapidly maturing markets of GCC and Malaysia are expanding their customer base in these emerging markets. For example, economies in eastern Africa - including those of Kenya, Ethiopia, Tanzania and Uganda - have proven to be particularly resilient, as Muslim and non-Muslims give business customers of Islamic banks in greater and greater numbers. China, France, Luxembourg, Australia, Sri Lanka and Mauritius have all expressed an interest in developing an Islamic financial market in their countries while heated discussion still continues over the introduction of Shariah-compliant banking and financial services in India. Finally, as the benchmark continues to evolve along with the market of Islamic finance, conference attendees demanded a greater accountability and clarity in quantitative and qualitative reporting of Shariah activities by banks and financial institutions. 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 2010 December Global Islamic Finance

gif

Book

Business News

Review

Author: Abu Umar Faruq Ahmad Developments in Islamic Banking Practice: The Experience of Bangladesh Developments in Islamic Banking Practice is a unique study seeking to fill the lacuna left by the pitiful lack of research on developments in Islamic banking in Bangladesh and is the first of its kind. The study provides an in-depth outline of Islamic banking products offered by Islamic banks in Bangladesh after having elaborated the theoretical frameworks upon which these products are based. The book begins by providing a general outline of the theory and practices of the Islamic banking system in Bangladesh and identifies the aims and objectives, methodologies, limitations, research problems, the methodology employed in addressing them, and the desired outcomes of the study. The first chapter of the book summarizes the main issues discussed in the study. The next chapter, provides a scholarly analysis of the foundations of the Islamic banking system in the Shari`ah and its sources as the legal system in Islam. The study then discusses the Islamic viewpoint on the redistribution of income, and how it differs from the utilitarian, libertarian and Rawlsian theory of ‘maximin criterion’. It is argued that alongside Islam’s emphasis on freedom of contract and open economy, it proposes an alternative system of redistribution designed to minimize poverty. Chapter three discusses one of the most important issues in the Islamic Economic system – Riba. It pinpoints the differing views held by the modernists and the conservatives and explains the fundamental differences between conventional and Islamic banks and the new challenges created by Riba-free transactions in Islamic banks in the country in question. The following chapter, concentrates on theoretical concepts 78 Global Islamic Finance

December 2010

and practical models for Islamic banking, which emanate from the basic principles of Shari`ah. This section dispels claims that Islamic banks will bear huge losses if they operate a Profit and Loss Sharing (PLS) system owing to entrepreneurs’ not disclosing correct income and explains why Islamic banks are as feasible as conventional banks. Next, the author turns from theoretical analysis to practical perspectives. He looks into the Islamic banking practice in Bangladesh in its territorial legal context, and discusses inter alia the saving deposit schemes offered by Islamic banks in Bangladesh that are mainly aimed at mobilizing funds by Shari`ah approved means to clients who can make better utilization of them in order to keep the economy moving. It also provides an overview of the various other modes of investment in the system, and other welfare oriented investment schemes used by Islamic banks. The subsequent chapter describes the historical evolution of Islamic banking in Bangladesh and articulates the intricacies of the regulatory and supervisory framework of Islamic banks in the country. The present regulatory regime treats both conventional and Islamic banking alike in terms of both the framework and the requirements. Islamic banks are yet to enjoy a fully-fledged legal and practical regulatory framework in Bangladesh. Nevertheless, despite this regulatory impediment, the Islamic banking sector in Bangladesh has proven its quality and popularity amidst all the challenges, within a short span of time. The author continues by identifying the potential problems and identifying the opportunities of Islamic banks in Bangladesh. Islamic banks are yet to set up a new mechanism of interest-free banking, and for a sustainable

banking system, a simple PLS mechanism may not work profitably for banks. Being a comparatively new concept, Islamic banking is still unfamiliar to many classes of society. However, there are tremendous prospects for Islamic banks in Bangladesh, if they continue to provide quality services and adhere to Islamic ideals. The help of the central bank and cooperation among Islamic banks themselves is imperative to its success. Finally, the conclusion submits recommendations for reform measures in order to accelerate Islamic banking in Bangladesh. One of the key findings of the book is that despite so many legal, regulatory and other related hurdles, Islamic banks in this part of the world have successfully performed alongside conventional interest-based banks. In order to sustain this success they should not simply imitate conventional banking with a difference in mere nomenclature. Rather, they should implement the philosophy and principles of Islamic banking in practice. The study proposes of an emphasis on long-term financing based on PLS contracts as alternatives to Riba and underscores the need for good quality economic activity in the market rather than providing cash loans; it provides evidence of how inadequate supervision and cash loans may cause greater harm. Universal-Publishers: 2010, 226 pages, Boca Raton, Florida - USA www.universal-publishers.com * ISBN-10: 1599428288 * ISBN-13: 9781599428284 * US $25.95 paperback * US $21.00 ebook

e g d le w o n k in t n e m t A n inves t s e r e t in t s e b e h t s y a p always lf e s r u o y in g in t s e v Start in nce Magazine

ina F ic m la Is l a b lo G to e Subscrib

How to order: iption 1. Choose your Subscr ckages visit: n 2. To see available pa /individual-subscriptio m co e. in az ag m ce an www.globalislamicﬁn ﬁnancemagazine.com ic m la is al ob gl e@ ib cr subs or email your request to ds of payment 3. Choose your metho nt quote: f05g11f12 4. To claim your discou

tioonn rippti scri subbsc l-l-su a a u u id id iv iv d d in in / / m m o o .c .c e e n n zi zi a a g g maa icﬁﬁnnaanncceem mic slaam lobbaalilisl .glo w.g ww w ww

gif

Events

Top events

and upcoming courses 2nd Annual Corporate Tax Forum Europe Date: 17 and 18 January 2011 Venue: London, United Kingdom

The Saudi Window

Investor

Date: 8 and 9 December 2010 Venue: Saudi Arabia

2nd Annual Corporate Tax Forum Europe will provide you with the latest transfer pricing and corporate tax developments. You will have the opportunity to learn how to develop effective transfer pricing documentation and to strengthen your cross-border tax solutions. Join us in London, in the city of many surprises, and discover the key strategies of transfer pricing and taxation in the economic upswing.

This unique event is designed to generate collaboration between international investors and parties with high-quality projects. This is a rare opportunity for you to meet and confer directly with senior-level Saudi and other Gulf investors about how you can work together to achieve your respective goals.

Contact details: E: events@jacobfleming.com T: +420 257 222 800 F: +420 257 222 084

Contact details: E: ben@uciinternational.com T: +44 (0) 208 998 8890 F: +44 (0) 20 8998 8891 W: www.uciinternational.com

PPP Middle East

Date: 11-12 January 2011 Venue: Hilton Abu Dhabi, UAE The only strategic international conference to focus on the expanding Public-Private Partnership (PPP) market in the region. Taking place in the current period of greatly expanding investment requirements and shifting access to credit, this strategic international conference will gather key government and private sector stakeholders to discuss the increasing opportunities for Public-Private Partnerships in the transportation, infrastructure, social infrastructure, water and power sectors. Contact Details: E: info@bme-global.com T: +44 203 328 6530 F: +44 207 022 1722

Events

Upcoming Events Calendar Global Islamic Finance magazine recommends FAME - Financing Aviation in the Middle East 2010 Location: Abu Dhabi, UAE 1/12/2010 - 2/12/2010

EPEX Expo Location: Dubai, UAE 2/12/2010 - 3/12/2010

Berliner Boersentag Location: Berlin, Germany 4/12/2010 – 4/12/2010

The 2nd International Workshop on Islamic Economics Location: Kebangsaan Malaysia 6/12/2010 – 7/12/2010

International Accounting and Finance Conference Location: Kota Kinabalu, Sabah, Malaysia 8/12/2010 – 9/12/2010

The Saudi Investor Window Location: Riyadh 8/12/2010 – 9/12/2010

The Saudi Investor Window 2010 Location: Riyadh 9/12/2010 – 10/12/2010

Elite Saudi Careers Location: Manama, Bahrain 11/12/2010 - 12/12/2010

PPA Middle East Location: Abu Dhabi., UAE 11/1/2011 - 12/1/2011

Campus for Finance - Research Conference 2011 Location: Vallendar, Germany 12/1/2011 - 13/1/2011

Dresdener Boersentag Location: Dresden, Germany 15/1/2011 - 15/1/2011

Gulf International Industry Fair 2011 Location: Bahrain 18/1/2011 - 20/1/2011

International Property Show Dubai Location: Dubai, United Arab Emirates 1/2/2011 - 3/2/2011

FONDS Schweizer Finanzmesse Location: Zurich, Switzerland 2/2/2011- 4/2/2011

Annual Islamic Finance Summit Location: London, UK 15/2/2011 - 15/2/2011

Nigeria Oil & Gas Location: Abuja, Nigeria 21/2/2011 - 24/2/2011

14th Global Women Leaders Summit Location: Dubai, UAE 7/3/2011 - 8/3/2011

Hedge Funds World Middle East 2011 Location: Dubai, UAE 7/3/2011 - 10/3/2011

Islamic Finance World North America Location: New York, USA 15/3/2011 - 15/3/2011

INVEST Stuttgart Location: Stuttgart, Germany 18/3/2011 - 20/3/2011

International Conference on Economics and Finance Location: Izmir, Turkey 15/4/2011 - 17/4/2011

Deutsche Anlegermesse Frankfurt am Main Location: Frankfurt, Germany 6/5/2011 - 7/5/2011

Golf Business Forum Location: Dubai, UAE 12/5/2011 - 12/5/2011

25th World Gas Conference Location: Kuala Lumpur, Malaysia 4/6/2012 - 8/6/2012

For more details on upcoming events, please visit www.globalislamicfinancemagazine.com Events Section or join our Facebook Group to get weekly updates. 2010 November December Global Islamic Finance 81

gif

Glossary Business Directory

gif

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.

December 2010

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.

gif

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. 2010 December Global Islamic Finance

gif

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

Educational Institutions The Markfield Institute of Higher Education

ICMA University of reading

Contact person/ department: Mr Asim Riaz Address: Markfield Institute of Higher Education, Ratby Lane Markfield Leicestershire LE67 9SY Telephone: 01530 244 922 Fax: 01530 243 102 E-mail: info@mihe.org.uk Website: www.mihe.org.uk Description: MIHE is a pioneering institution in the field of Islamic Banking and Finance education and research. MIHE works in conjunction with many other academic and professional institutions throughout the country. It currently offers PG Certificate, PG Diploma, MA and PhD programmes validated and awarded by Gloucestershire University. MIHE’s library is well established with excellent facilities, featuring superb collection of books and journals which are regularly updated. MIHE campus offers an idyllic and tranquil setting for study and learning, well suited to holding various residential courses, with all facilities like education, residential, spiritual and catering provided for.

Contact person/ department: Bereity Address:ICMA Centre Henley Business School University of Reading Whiteknights Reading RG6 6BA UK Telephone:* +44 (0) 118 378 8239 E-mail: v.altomare@icmacentre.ac.uk Website:http://www.icmacentre.ac.uk/ Description (up to 40 words):* The Business School’s ICMA Centre at the University of Reading has launched the UK’s first collaborative MSc in Investment Banking and Islamic Finance, to be taught jointly with INCEIF (International Centre for Education in Islamic Finance) in Kuala Lumpur. The MSc is the first in the UK to use Islamic material taught by Islamic specialists, and aims to capture the increasing demand for the subject with an academic base and practical views on issues such as Islamic finance, economics and law.

Chartered Institute of Management Accountants

Contact person/ department: Annette Heninger, Press Officer Address: CIMA 26 Chapter Street London SW1P 4NP United Kingdom Telephone: +44 (0) 20 8849 2251. Fax: E-mail:cert.if@cimaglobal.com Website: http://www1.cimaglobal.com Description (up to 40 words): CIMA (the Chartered Institute of Management Accountants) is the first chartered accountancy body to offer a global qualification in Islamic Finance. The aim of the course is to produce competent staff conversant in all areas of Islamic finance at both a theoretical and practical level. The course offers employers in the sector a product which should be very attractive for both their business and as part of their employee development.

If you 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 available in the directory.

Islamic Finance Glossary Q Qard Hasan Cost

(1) A virtuous loan. Loan in the meaning of a virtuous loan that is interest-free and extended on goodwill basis, mainly for welfare purposes, the borrower is only required to pay back the amount borrowed. The loan is payable on demand and repayment is obligatory. But if a debtor is in difficulty, the creditor is expected to extend time or even to voluntarily remit the whole or a part of the loan amount. Islam allows loan as a form of social service among the rich to help the poor and those who are in need of financial assistance. Qard Hasan may be viewed as something between giving charity or gift and giving a loan (qard). A debtor may pay an extra amount over the principal amount borrowed (without promising it) as a token of appreciation to the creditor. This type of loan does not violate the prohibition on Riba, since it is the only type of loan that does not compensate the creditor for the time value of money. Such loans have not been uncommon in human history among peers, friends, family and relatives. (2) An interest-free loan given for either welfare purposes or for fulfilling short-term funding requirements. The borrower is only obligated to repay back the principal amount of the loan. Most of the Islamic banks also provide interest free loans (Qard Hasan) to their customers. If this practice is not possible on a significant scale, even then, it is adopted at least to cover some needy people. Islamic view about loan (Qard) is that it should be given to borrower free of charge. A person is seeking a loan only if he is in need of it. Hence, it is a moral duty of the lender to help his brother who may be in need. The borrower should not make an effort to take advantage of somebody needs. He should help the needy by lending him money without any charge. The reward of this act is with the God. Hence, it is referred as Qard Hasan (benevolent loan) which signifies the benevolent nature of the act of lending.

Qimah

Lit: Sale of the real value of the goods; value includes the quantity and quality of the goods, and also is a reflection of a free market and it is the reflection of a just transaction. Tech: Sale through a broker to realise a certain minimum price and allowing the broker to keep anything over and above that price.

Qimih

The practices of various Islamic banks in this respect differ. Some Islamic banks provide the privilege of interest free loans only to the holders of investment account with them. Some extend to all bank clients. Some restrict it to needy students and other economically weaker sections of the society. Yet some other Islamic banks provide interest free loans to small producers, farmers and entrepreneurs who are not qualified to get finance from other sources. The purpose of these loans is to help start them their independent economic life and thus to raise their incomes and standard of living.

Qimar

Lit.: gambling. Technically an agreement in which possession of a property is contingent upon the occurrence of an uncertain event. By implication it applies to those agreements in which there is a definite loss for one party and definite gain for the other without specifying which party will gain and which party will lose.

Qimi

“Non fungible goods, i.e. they are goods which are not interchangeable”.

Qirad

An Arabic term meaning a placement of capital for an associate to use in a trading venture. Synonym or another name for mudarabah.

Qiyas

The process of analogical reasoning as applied to the deduction of juridical principles from the Qur’an and the Sunnah (the normative practice of the community). With the Qur’an, the Sunnah, and ijma (scholarly consensus), it constitutes the four sources of Islamic jurisprudence. As a result of this method, the ruling of the Sunnah and theQur’an may be used as a means to solve or provide a response to a new problem that may arise. This, however, is only the case providing that the set precedent or paradigm and the new problem that has come about will share operative causes ( illah). The illahis the specific set of circumstances that trigger a certain law into action. Both Sunnibranch of Islam and Shi’a branch of Islam share Qur’anic interpretation, the Sunnah, and Ijma (consensus) as sources of Islamic law, although the two sects differ significantly with regards to the manner in which they use these sources. The sects also differ on the fourth source. Sunni Islam uses qiyas as the fourth source, whereasShi’a Islam uses aql (intellect).

84 Global Islamic Finance

December 2010

Unlock your potential... Establish your business in the United Kingdom www.bfsc.co.uk

gif

Business News

Next issue: In January issue: Islamic Finance and Banking Report- 2010 A Year of Innovation The Islamic finance and banking industry has steadily progressed into a major financial branch which utilises the highly ethical Shariah compliant principles which many investors prefer to use in comparison to conventional banking. The year of 2010 has seen an array of innovation in the Islamic finance sector with latest developments affecting the financial industry on a global scale. Many challenges that the Islamic financial sector has experienced during the years have been addressed by key players. The Islamic financial industry has made many milestones throughout the year and has reached a global audience. The Shariah compliant areas of transition between an unheard method of financing to a global one cover the sectors of Sukuk, Takaful, Risk Management, Standardisation and regulation amongst many others that this report will comprehensively aim to address. Islamic banking and investment have opportunities accessible to all and is quickly acquiring a diversified client base.

It is a very exciting time to get involved in the sector, whether it’s career-wise or in terms of personal wealth management. The ethical appeal of Islamic banking and investment means an increasing amount of people are tapping into these areas and you could join them in benefiting from such a move. Global Islamic Finance Magazine January issue features a variety of articles that give you need-to-know information on the origins, current trends and future outlook of Islamic banking and investment.

M FO UST RA LL READ I PR FINA SLAM N OF ES CE IC ION ALS

In the report: • • • • • •

Regulating the Islamic Financial Industry- A Necessary Challenge Promoting the Transparency of Islamic Finance in 2010 Takaful – Insurance that ensures a perfect investment The Sukuk Market Spurring the Industry Ahead Islamic Risk Management- Worth the Risks Islamic Finance and Banking Paving the way forward for 2011

Easy & Fast Ways to Buy: 1. 2. 3. 4. 5. 6. 7.

Pre-order January issue and save 50% -> Send your order until 29th of December to order@globalislamicfinancemagazine.com Order online at www.globalislamicfinancemagazine.com Call our Hotline at 0044(0) 207 859 8201 Buy us globally on the newsstand -> See more at www.globalislamicfinancemagazine.com/global-sale Subscribe at www.globalislamicfinancemagazine.com/individual-subscription -> use promotional code to claim extra discount e05g11f11 Buy on eBay Order as GIFT Subscription New!

An Aninvitation invitationtotoSucceed! Succeed! Subscribe SubscribetotoGlobal GlobalIslamic IslamicFinance FinanceMagazine magazine You are invited to subscribe to GIF Magazine. Get the latest reports and updates on Islamic ﬁnance and banking that will keep you ahead of curve. *Full subscription prices per country please visit http://www.gifmagazine.co.uk/subscriptions.php

I wish to Subscribe to Global Islamic Finance magazine Europe 12 months £129.99

UK 12 months £104.99 Full name:

Organisation:

Delivery address:

Postcode:

City:

Telephone:

Country: Fax:

E-mail: I enclose a cheque (UK banks only) for £…………… I made an online transfer to Business Media Group Ltd. for £…………. Please FAX the form to +44 207 183 4004 or call us for a free consultation +44 207 859 8201

Overseas 12 months 169.99

Where excellence is a tradition

Professional Accountants Group is a UK provider of accounting and business services for small and medium companies. Our aim is to assist and support our customers, whether they are just making ďŹ rst steps in the business environment or are well established entities in their environment. Professional and reliable service ensures the highest quality standards in order to help your business run smoothly and without unnecessary hassle.

www.pagroupltd.co.uk

Bank

Keshavarzi

It s time for our customers

earn some recognition 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 Peopleâ&#x20AC;&#x2122;s Lives Investing in Islamic Finance Products