Global Islamic Finance Magazine November 2011

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Banking & Finance

November 2011

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Unleashing the Power of Innovation in Islamic Finance Institutions

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How to Run an Islamic BankMarketing, Branding and Leadership

Choice of Law and Islamic Finance

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Contents;QWERTYUIIOPDFHJUIIOPDFHJJ

Islamic Finance

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22 Unleashing the Power of Innovation in Islamic Finance Institu-tionsMany key leaders from Islamic financial institutions have recognised the need for innovation in Islamic products and services to further cater for the growing demand of the highly competitive financial world…

28 Shining the Spotlight on GIF’s Brand Ambassadors

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

News

9 Islamic Finance News

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32

4 Global Islamic Finance November 2011

Islamic Banking

32 How to Run an Islamic Bank, part 2When spreading awareness of Islamic finance it is important to educate the customers. They will be more willing to emerge themselves into Islamic finance if they have the knowledge…

50 Choice of Law and Islamic Finance, part 1Financial experts estimate the current worth of Shariah-compliant assets at almost one trillion U.S. dollars globally. As measured by these assets, the global market for Islamic financial services has grown ten percent per year since the mid-1990s. The potential market for Islamic financial products could be as high as four trillion U.S. dollars…

World Islamic Finance Review

58 The Past and Future of Islamic Finance in NigeriaNigeria is one of the biggest Muslim communities in the world, with 65 percent of an estimated 150 mil-lion people identifying themselves as Muslim. With a thriving Islamic business industry, the country has established itself in the Islamic financial industry with growing consumer and corporate banking sectors…

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

Islamic Finance

58

Market Review

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

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

72 Value of Global Sukuk Rises to $47 billionSukuk (Islamic bonds) issuance last July worldwide amounted to about $5 billion, down 37 percent from the previous month, Kuwait Finance House (KFH) said Saudi riyal formed about 15 percent of those Sukuk, it noted…

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

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

76 Event Review

80 Events Calendar

82 Business Directory

84 Glossary

86 In the Next Issue

75

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65

78 Book Review

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Risk Management

65 Risk Management Framework in Islamic Banking, Part 1 Although Islamic banks and Islamic financial institutions are precluded from getting involved in the kind of complex credit trading that has paralysed their conventional competitor that’s no reason for compla-cency…

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Editor-in-Chief

Farhad ReyazatPhD in Risk Management

International Editorial Board

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

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

Contributors

Tasnim NazeerMaged EzzeldinShelina JanmohamedNima Mersardi TabariJulia C. ColónFarhaa Xha

Aluwalu AdoFarhad ReyazatJal OthmanNorliza MohammedEhsan Waquar AhmadMuhammed Farook Mirak

Dioumel Ka Muhammad Usman BaigMuhammed RafeekMohammad AlamiAbdulrahman UsmanDaud Vicary Abdullah

Haraja AdeolaDavid McLeanPaul-Henri Pruvost

Editing and Proofreading

Colette Sensier Carina Lewis

Executive staff

Agnes GradzewiczDavid SmithGareth PlattSimon Hartshorne

Amy ThompsonNelly AhmedovaRitika BanerjeeAjay Surti

Beata JagorowPatricia Ke-Hsuan TsaiTajah Brown

Top Brand Ambassadors

Saleem Uddin Faisal, BahrainAmjad Suri, IndiaSyed Ilyas, IndiaMahamoud El Aref, EgyptShuhratbek Iskandarov, GermanyBasil Armoush, Jordan

Bouhssine Ben Jadda, MoroccoAuwalu Ado, NigeriaAbdulrahman Usman, NigeriaAdeeb Zaki, Pakistan Asim Hameed, Pakistan Muhammad Farrukh Saleem, Pakistan

Said Bunu, QatarFarhaa Xha, Saudi ArabiaMirak Farook, Sri LankaKareem Hammour, UAEMuhammad Zeeshan, UAEMajd Ghanem, UAE

Ichrak Bennani, UAEMuhammad Athar Khan, UAEIchrak Bennani, UAEAnees Razzak, United KingdomDian Kartika Rahajeng, United Kingdom

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Global Islamic Finance maga-zine is proud to

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

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

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

Many Islamic financial commodities such as Su-kuk and Takaful are providing investors and fi-nancial institutions with countless opportunities. This is the reason why many countries around the world have tapped into the Islamic finance and banking sector, setting up subsidiaries and Islamic windows as a means to get a slice of the lucrative openings available.

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

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

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

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

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

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

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

Farhad ReyazatPhD in Risk Management Editor in Chief

Editorial Letter

To write the letter to the editor, send an email to [email protected].

Islamic finance newsIslamic finance news

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Central Bank of Oman Formulating Stand-ards for Islamic Banking Sector

It has been reported that the Central Bank of Oman (CBO) is in the process of forming a central national committee for determin-ing the legal regulations and standards for Islamic banking in the country.

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

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

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

Khalil al Khonji, chairman of OCCI, said that the meeting touched on the approach of the banking and financial system in the sultanate after the concerned departments announced the approval for Islamic banks. “Within its framework of organising Ram-adan nights on economic issues, OCCI was keen to highlight the experience of Islamic banking in GCC states,”

Khonji added, during the meeting, an official of Qatar National Bank Islami made a pres-entation on the evolution of Islamic banks. CBO had recently organised two seminars to provide knowledge and training about the sector in collaboration with a specialised bu-reau. Statistics indicate that the volume of Islamic banking assets in the GCC states is about US$240.3bn.

Indonesia Eyes Financial Halal Industry Share

Indonesia is eyeing a greater share of the Shariah compliant halal industry pie, the Indonesian government is working to be-come the center of the world’s expanding industry, VIVA news website reported.

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

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

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

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

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

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

Al Baraka Islamic Bank Operating Income Soars

Al Baraka Islamic Bank continued its ef-forts in expanding business operations in Bahrain and Pakistan by building sustain-able business relations with major indus-trial and commercial companies in the first six months of 2011.

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

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

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

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

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

2011 November Global Islamic Finance 9

‘Islamic Banking-Differences, Growth and Future Challeng-• es’: Find out what Islamic banking is, what it’s achieved and where it’s heading.‘The Rise of Islamic Bank of Britain-Interview with Steven • Amos’: Gain a fascinating insight into the UK’s most fa-mous standalone Islamic bank through this interview with its Head of Marketing.‘An Introduction to Risk Management in Islamic Banking’: • Learn why risk management is as vital to Islamic banking as it is to conventional banking.‘What is Basel II?: What it means for Islamic Banking. Part • I’: Get to grips with the most iconic symbol of banking regu-lation and how it affects Islamic banking.‘The Suitability of HSBC Bank Mauritius as a Test Case for • Shariah-compliant Banking Services on the Island’: Discov-er through this case study how Islamic banking is breaking into brand new markets.‘The British Bankers Association Seminar: From Amanah to • Iijhara’: A candid look at one of Britain’s biggest banking events from the Islamic finance perspective.

Looking for a Job in Islamic Banking?: Dip into the Global Islamic Finance Magazine

Article CollectionBored of your bank? Facing redundancy? Looking for a change of career direction? If you work in banking and you’re looking for a fresh challenge, Islamic banking may be for you. The Global Islamic Finance Magazine Article Collection December 2009-June 2010 is out now and features many articles to help get your Islamic banking career started. Each article is available to buy separately so you can mix and match to find the formula that will open up Islamic banking to you.

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

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

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“Despite the continuing difficult internation-al, regional, economic and financial condi-tions in the first half we have continued to achieve good financial results and we were able to achieve satisfactory returns to our shareholders as a result of a steady and clear improvement in the performance of the Bah-raini economy, which quickly returned to nor-mal thanks to the sound economic policies of the government,” said Al Baraka Islamic bank chairman Khalid Rashid Al Zayani.

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

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

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

“We also focused on improving the work environment, enhancing and developing

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

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

Moody’s affirms ‘Aaa’ rating for Islamic Development Bank

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

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

Moody’s concluded that the bank’s risk pro-file is likely to remain healthy over the me-dium term and the prevailing situation in certain member countries appears unlikely to impact the bank’s creditworthiness.

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

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

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

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

stitution through adherence to the highest levels of professionalism, due diligence and prudent practices while conducting tasks with integrity and sincerity. He noted that during the past year, Islamic Development Bank continued its reform process with the view to strengthen perform-ance through completion of the first phase of the implementation of SAP - the world’s leading ERP solutions.

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

Newsgif

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

,,

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

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

,,

,,

Hajara Adeola,managing director, Lotus Capital Limited

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

David Mclean,Managing director, The World Islamic Banking Conference (WIBC)

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

Paul-Henri Pruvost,banking credit analyst, Standard and Poor’s, Paris

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

Farhad Reyazat, Editor in Chief, Global Islamic Finance Magazine

,,


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Eversheds Advises Barwa Bank on First Islamic Window Acquisition

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

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

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

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

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

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

Egypt Makes A New Shariah Compliant Fi-nance Offering

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

NDB launched Ijara Services, which hopes

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

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

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

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

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

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

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

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

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

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

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

,,

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

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

,,

,,

Hajara Adeola,managing director, Lotus Capital Limited

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

David Mclean,Managing director, The World Islamic Banking Conference (WIBC)

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

Paul-Henri Pruvost,banking credit analyst, Standard and Poor’s, Paris

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

Farhad Reyazat, Editor in Chief, Global Islamic Finance Magazine

,,


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10 BEST COMPANIES TO WORK FOR IN ISLAMIC FINANCEAuthor: Dr Farhad Reyazat, Editor in Chief, Global Islamic Finance Magazine, United KingdomTajah Brown, Global Islamic Finance Magazine Editorial Team, United KingdomTasnim Nazeer, Global Islamic Finance Magazine Editorial Team, United KingdomDioumel Ka, Global Islamic Finance Magazine Editorial Team, United Kingdom

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


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lobal Islamic Finance magazine highlights the 10 best companies to work for in Islamic finance. The best place to work is one where the employees feel confident in their environment and develop their skills. They have pride in what they do and enjoy working with the people in their team day to day. The companies featured in the list were recognised for their relationship with em-ployees, the training and the benefits they offer.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Islamic finance is a unique form of socially responsible investment and provides an eth-ical alternative to conventional financing. It is imperative to Islamic banking and finance for employees to form an understanding of the importance of risk sharing as part of rais-ing capital and the avoidance of riba (usury) and gharar which means risk or uncertainty. There are many sectors within the Islamic fi-nancial industry that one could consider to work in as outlined in Figure 1.

Careers in Islamic BankingMany students studying Islamic finance or banking courses and even business profes-sionals choose to go down the pathway of Islamic banking to further excel in employ-ment.

To obtain a career in Islamic banking an indi-vidual would find it beneficial to take an edu-cational qualification or course in the sector. Islamic banking is the fastest growing sec-tor from the banking industry and there are more than 250 Islamic banks worldwide and the number is growing rapidly with main-stream banks offering Islamic windows.

There is at least £300bn in assets, up from £5bn in 1985 and the industry is expected to reach to over $2 trillion dollars by 2012. The global economy can further prosper from the opportunities that the Islamic banking industry holds and it is growing at an aston-ishing 15 to 20 percent a year.

Rising oil prices and Europe’s growing Mus-lim population are driving an unprecedented surge in financial Shariah-compliant prod-ucts and services which show the vast inter-est in the industry to further engage in gath-ering more employees and experts to cater for the rising demand of the industry.

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

G

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

www.iiconline.co.uk

International Investment Co (IIC)

International Investment Co (IIC)

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

There are many reknowned fully fledged Is-lamic banks around the world that offer op-portunities for training and job prospects. In addition there are many educational institu-tions around the world which offer qualifica-tions in Islamic finance.

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

Takaful Providing Innovative Career Oppor-tunitiesThe Islamic financial sector of Takaful (Islamic insurance) provides many career opportuni-ties for the individual. Figure 2 highlights the following sectors of Takaful which you could enter employment in.

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

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

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

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

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

Positive Future for Careers in Islamic Fi-nanceThe future of working in the Islamic finance industry looks promising as there are many Is-lamic financial and banking institutions open-ing up around the world. In addition there is much scope to enter into careers in the sec-tors of Takaful as it has a strong potential for employment in the future.

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

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

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

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

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

The work place should focus on work ethic, talent, team work and development of skills. Companies should focus on their staff by maintaining a productive and happy environ-ment.

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Islamic Banking

Islamic Finance Firms

Accounting Firms with Islamic Divisions eg CIMA

Takaful Insurance Companies

Islamic Banks

Islamic Banking Head Offices

Figure 1: Successful Shariah Compliant Employment Sectors

Medical Health Insurance

Family Insurance

Child Education Insurance

Personal Accident Insurance

Investment Insurance

Travel Insurance

Marine Insurance

Fire and Accident Insurance

Engineering Insurance

Motor and Vehicle Insurance

Figure 2: Careers in Takaful Sectors

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

Dubai Islamic Bank

“To be the leading provider of innovative fi-nancial services in accordance with the leg-islation of Allah”

Country: United Arab EmiratesEstablished: 1975Sector: Islamic Banking

Dubai Islamic bank’s mission statement con-firms why they are high on our list. “We are proud to be the first Islamic bank worldwide that has translated true Islamic economic principles into practice, out of firm belief in the need of mankind for an economic sys-tem based on the final revelation.

By partnering with our customers in halal earnings, employing best business practic-es, the latest financial services technologies and placing our trust in Allah, we are con-fident of our success.” Being the first full-service Islamic bank the company are at the top of its field.

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

CIMB Group

“We think ASEAN. We believe in the power of scale and diversity of ASEAN and draw on our people, knowledge and insights to serve and connect our customers”

Country: MalaysiaEstablished: 1924Sector: Banking

CIMB Group operates under a range of en-tities which include CIMB Investment Bank, CIMB Bank, CIMB Islamic, CIMB Niaga, CIMB Securities and CIMB Thai. The Group also has a place in 14 different markets world wide, including countries such as Malaysia, Singapore, Thailand and Indonesia. With these and many more impressive statistics this company was rightfully put in second

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

MEGA

“MEGA Brands. MEGA Clients. Market Lead-ers.”

Country: United Arab Emirates Established: 1993Sector: Event Services

Mega Events reach third on our list through their strong and impressive portfolio of Is-lamic finance brands such as The World Is-lamic Banking Conference, The World Taka-ful Conference and The World Islamic Funds Conference. With over 17 years running each brand has been developed securing a high position in the Islamic financial market. The business information firm focuses on the Islamic finance sector creating profit and meaning for the market leaders in the indus-try across the globe.

With a strong team of employees and the av-erage stay is 7 years this is the place where people do enjoy working. In addition, Mega Events awards their staff with the Mega Star Awards Programme aimed to recognise the achievements and performance of the team. Employee benefits include the opportunity to work with the industry leaders and inter-nationally respected guru speakers.

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

Sophie Shah McLean, Director, Business Development, MEGA

“I have now completed 7 years at MEGA and have enjoyed huge professional growth during this period. Joining at an entry-level sales position and then being promoted several times through the years to now be the Director of Business Development con-tinues to be an exciting growth curve. Engaging our internation-al portfolio of clients, building our globally respected brands,

launching new events across the world , and working with the great members of the MEGA team ensure each day is stimulating and challenging”

Qatar Islamic Bank

“A leading, innovative and global Islamic bank adhering to the highest Shari’a and ethical principles; meeting international banking standards; partnering the develop-ment of the global economy and participat-ing in the advancement of the society”

Country: QatarEstablished: 1989Sector: Islamic BankingBranches: 28

Qatar Islamic Bank has earned their place fourth on our list. With a range of values it just shows that this bank is focused on principles. The values are integrity, transpar-ency, justice, cooperation and teamwork, loyalty and commitment and excellence.

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

Clifford Chance

“Exceeding Clients’ expectations, local ex-cellence, global standards, an ambition for success, investing in talent, an adaptable and approachable team, thinking ahead, strength through diversity, community”

Country: United KingdomEstablished: 1987

Sector: International LawBranches: 34

Clifford Chance has a strategy for their em-ployees focusing on their responsibilities and also considers the development and diversity within their staff. The companies put time into their community, people and environment priding themselves in being creative with what they do.

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

Allen & Overy

“We mean being able to pull together all our resources and respond to our clients’ needs in almost any country, at any time”

Country: United KingdomEstablished: 1930Sector: International LawBranches: 38

The successful international law firm also reaches top in our list with a strong global network of offices and running for 80 years. They give their staff the opportunity to work globally in offices located in countries such as Beijing, Hong Kong, Madrid, Moscow, Sydney and Amsterdam.

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

KPMG

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

Country: United KingdomEstablished: 1870Sector: Accounting

KMPG have a team of over 10,000 employees and partners located in 22 offices around the world. This company has secured a place on our list through the range of em-ployee’s benefits, focus on staff and the strong global network. The

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Figure 4 : Growing Takaful Sector

2.422.78

3.193.67

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6.42

7.39

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$3$4$5

$6$7$8

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2007 2008 2009 2010 2011 2012 2013 2014 2015

Global Takaful Market $bn

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

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

The company also have a focus on the cli-ents, skills and resources in order to tackle the issues and opportunities within the in-dustry.

Islamic Development Bank

“Together we build a better future”

Country: Saudi ArabiaEstablished: 1975Sector: Islamic Banking

This company has a team of up to 1,000 employees working towards the develop-ment and social progress of the countries they work with and the Muslim communities. The current bank membership is located in 56 countries around the world. Islamic De-velopment Bank gives its customer a choice of different types of development assistance focusing on a range of sectors.

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

Abu Dhabi Islamic Bank

“Islamic financial solutions for the global community”

Country: United Arab EmiratesEstablished: 1997Sector: Islamic BankingBranches: 66

Abu Dhabi bank has been running for many years earning the title of third place. Their mission statement is simple but powerful and their vision statement does the same “to be the top tier Islamic financial services group”. When considering their staff the mentoring programs give them the leader-ship guidance they need. Providing opportu-nities for them to develop professionally and contribute to the culture of mutual respect and support. The bank also offers gradu-ate development programs and careers for students and talented professionals. Their

values consist of “simple, sensible, trans-parent, mutual benefit, hospitality and toler-ance and Shariah inspired.”

Takaful Emarat

“To promote the concept of Takaful as a genuine Shariah compliant alternate to In-surance”

Country: United Arab Emirates Established: 2008Sector: Takaful InsuranceBranches: 3

Takaful Emarat based in Dubai aim to pro-vide Takaful insurance in the Middle East with the goal of expanding to other parts of the world. The company abide by the Islamic principles and also offer life and health prod-uct tailored to suit individuals and corporate needs. Their mission states “To manage participants financial security with full com-pliance of Shariah, to gain trust and confi-dence by providing value added products and services back by international expertise and to act fairly and transparently in the best interest of participants”.

Global Islamic Finance Magazine would like to congratulate all the companies featured in this list. The purpose of the listing is to cel-ebrate successful and effective working en-vironments within Islamic finance. We hope that more companies are encouraged to take part in our next listing. The next issue of Global Islamic Finance Magazine will feature the ‘10 most influential people in the Islamic Finance industry’ highlighting the achieve-ments and impact the selected people have made in the Islamic Finance industry. If you would like to feature in our listing or recom-mend some one please feel free to contact us at [email protected]

Include all the website of the companies in the list

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

Qatar Islamic Bank from: http://qib.com.qa/english/site/topics/in-• dex077b.htmlABC Islamic Bank from: http://www.arabbanking.com/En/Islam-• icBank/Pages/default.aspxAllen & Overy from: http://www.allenovery.com/AOWEB/Home/Al-• lenOveryHome.aspx?prefLangID=410Clifford Chance from: http://www.cliffordchance.com/home.html• Dubai Islamic Bank from: http://www.dib.ae/en/index.htm• KPMG from: http://www.kpmg.com/uk/en/pages/default.aspx• CIMB Group from: http://www.cimb.com/index.php?&tpt=cimb_• group Islamic Development Bank from: http://www.isdb.org/irj/portal/• anonymous?guest_user=idb_engMega Events from: http://www.megaevents.net/•

References and Further Reading

Dubai Islamic Bank

CIMB Group

MEGA

Qatar Islamic Bank

Clifford Chance

Allen & Overy

KPMG

Islamic Development Bank

Abu Dhabi Islamic Bank

Takaful Emarat

The top 10 best companies to work for in Islamic finance by Global Islamic Finance Magazine

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UNLEASHING THE POWER OF INNOVATION IN ISLAMIC FINANCIAL INSTITUTIONSAuthor: Tasnim Nazeer, Global Islamic Finance Magazine Editorial Team, United Kingdom

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

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


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The Scope for Innovation in Islamic Prod-ucts and ServicesMany key leaders from Islamic financial in-stitutions have recognised the need for in-novation in Islamic products and services to further cater for the growing demand of the highly competitive financial world. Although there is demand for innovative and creative products one also has to recognise that these products and services must adhere to the principles of Shariah finance. Shariah com-pliancy plays an important part in product innovation for Islamic financial institutions. Many Islamic scholars and governing bod-ies around the world have been called to ac-count for certain products or services which have not been deemed as Shariah compliant in one country but are readily available in another.

Therefore standardisation of Shariah compli-ant guidelines is needed in order to further harmonise the sector. Daud Bakar, the re-nowned Malaysian Islamic scholar and en-trepreneur and managing director of Amanie Islamic Finance Consultancy & Education LLC, said in a statement that the “Islamic finance industry was allowing Muslims to rediscover their identity and Shariah adviso-ries were the custodians of the Shariah gov-ernance process within the prescribed legal limitations”.

Shariah advisors are of utmost importance when it comes to introducing new products into the Islamic financial market and all prod-ucts have to undergo some form of establish-ing if it is genuinely in Shariah compliance. The Islamic financial industry has seen a pro-liferation of Islamic services and products which have come close to their conventional counterparts. Additional Islamic financial in-stitutions have also offered products which utilises various Shariah compliant financial instruments such as Mudaraba and Ijara leasing.

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

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

Re-crafting of Islamic synthetic prod-• ucts: Drawing from the core products identified above, re-crafting of Islamic synthetic products have been possible in some cases such as the reverse Mu-rabahah, diminishing Musharakah to provide housing finance and Sukuk. In addition there have been variants along with Musharakah Term Finance Certifi-cates (MTFCs) which is a form of Sukuk. MTFCs have a stronger appeal since these are issued against the strength of issuer’s balance sheet rather than specific assets of the corporate and are close to PLS framework.

Hybrid Islamic products: These products • are supported by advancements in Is-lamic securitisation such as the accept-ance of Islamic Investment Certificates,

and Sukuk bonds that are Shariah com-pliant and tradable asset backed securi-ties. The Islamic financial Industry has a hybrid of different types of Sukuk with AAOIFI recognising about 14 different types of Sukuk. Most Sukuk are spon-sored by sovereigns, both in domestic and international markets which are also further supported by approved Gov-ernment assets. Although Ijarah (asset based) are successful the Islamic bond arena of Sukuk are the most popular, in addition the other hybrid-Sukuk which is backed by synthetic loans, sale-lease backs or head-lease/sublease ijarah and profit sharing structure are now emerging to be quite popular. The pool of assets for some Islamic bonds which have comprised of Istisna’ and Mura-bahah receivables as well as Ijarah. Another example is the convertible Su-kuk – whether genuine Ijara or hybrid it can have an embedded option allowing them to be converted into another asset form depending on specified conditions so there is many innovational products in the hybrid structure.

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

Islamic Investment Indices: This type • of innovative product uses the system whereby equity benchmark indices track the performance of leading trad-

ing institutions who are involved in activities consistent with Islamic Shariah law. Examples of this are Dow Jones and FTSE Islamic indi-ces which focus on lim-ited range of companies and exclude companies which are involved in products or businesses which do not adhere to the principles set out in Shariah finance.

Islamic Finance

Prohibition of Riba (interest) and Uncertainty

Prohibition of Forbidden Assets

Existence of Underlying Asset

Profit Sharing/Risk Sharing

Figure 3: Shariah Principles for Islamic Financial Products/Services

Standalone and Hybrid Services

Capital Market Options for Fund Management, Takaful products

Sovereign and Corporate Services for Retail Banking Sector

Islamic Synthetic Products

Hybrid Islamic Products

Islamic Mortgages

Islamic Insurance

Figure 1: Products and Services for Inno-vation in Islamic Financial Institutions

Murabahah synthetic (debt based) products that are backed by sale-

repurchase agreements or back to back agreement of a borrower held asset or

lender’s purchase,

Ijarah leasing (asset backed) provide financing; and

Equity based profit sharing contracts Musharakah or Mudarabah or crop

sharing (Muazarah).

Figure 2: Popular Islamic Synthetic Financial Products


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

Risk management in Islamic finance is an-other aspect of innovation which has come to the forefront of Islamic banking and finance. The financial industry of intermediation is relatively a recent proposal to the Islamic Shariah. It has been developed in the West-ern countries over the past four centuries or so. Recognition of financial intermediation as an independent industry is crucial in un-derstanding the system of the hybrid finan-cial contract Scholars and governing bodies of Islamic finance who fail to recognise this industry still dispute for preferences of shar-ing over other modes of financing instead of taking such preference to be decided by the basis of market circumstances and forces.

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

The role of Islamic financial recrafting or most popularly known as reengineering has been developed in contracts that fit the Shariah compliant financial industry and its success or failure can be assessed on the basis of the extent to which new contracts maintain the main characteristics implied by the pro-hibition of Riba and preserve the objectives of this no interest policy. There are numer-ous Islamic financial products in the market and they are rapidly increasing by the day. New products are always developed through a process of combining existing contracts and arrangements. We have essentially nine main hybrid Islamic financing contracts prac-

ticed in Islamic banks today: Murabahah to the purchase ordered, installment sale, Mudarabah investment deposit, current ac-count deposit, three-party Istisna’, leasing to the purchase ordered, compound Salam, Buy Back and Tawarruq with scope for more. Islamic Financial Innovation Paving the Way ForwardMany Islamic financial institutions that intro-duce new products and services that adhere to the principles of Shariah are doing suc-cessfully well. Some companies use existing products and Islamic financial instruments to further unleash innovation in a Shariah compliant manner offering collaborations with leading sponsors to further attract key customers to their brand.

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

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

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

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

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

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

Figure 3 shows the principles of Shariah compliant finance which should form the ba-sis of all instruments and products that are introduced by Islam to financial institutions and banks. It is important to stay clear of in-vestments which you feel doubtful of as this may hinder your chances of being recognised as a fully fledged Islamic financial institution. It is important to harness these principles in proposing any product or working on reengi-neering existing products to further excel in the Islamic financial industry.

Challenges faced by the Introduction of In-novation in Islamic FinanceAs with any financial system or products there is bound to be challenges that will need to be faced and overcome in terms of the Islamic financial products and introduc-ing innovation into the forefront. One of the key challenges as discussed above is stand-ardisation and harmonisation of the Islamic financial industry as a whole.

There have been many instances when a company is unsure of whether their Islamic financial product is Shariah compliant due to the fact that there has been a dispute about it between scholars who have different forms of opinions. Therefore a standardised regula-tory body needs to come together to create a unified approach to tackling Shariah com-pliancy on products, brands and services. Differing interpretations of the Shariah also make regulation across jurisdictions a tricky task. For example, some Islamic contracts such as the ‘Bai Bithaman Ajil’ (deferred pay-ment sale) are approved by Malaysian regu-

Islamic Finance


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

Many Islamic financial institutions face the challenge of attracting Muslims and Non Muslims who have been in business with conventional banks and have already es-tablished their business needs with them. Islamic banks therefore have to work on pro-moting their products so that the customer base can see a shift from conventional to Is-lamic financial institutions. The Islamic financial industry has to provide com-petitive products & services in order to tempt and persuade both Muslims and Non Muslims around the world to buy into Islamic products and services.

Innovation is crucial to the survival of a business and in our the Islamic fi-nance industry it helps to revitalise Is-lamic roots, improve meeting customer needs, offer businesses a competitive edge, thus resulting in new and sus-tained source of profits and income. What can we therefore identify as the four main areas of application for inno-vation in Islamic finance? This can be identified in Figure 4.

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

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

It would be beneficial to the Islamic financial industry if more products of handling and transferring risks particularly cross border risk and particularly currency risks are fa-cilitated. Confirming, adapting or evolving Is-lamic financial products such as the Islamic Profit Rate Swap (IPRS), or Islamic Cross Cur-rency Swaps (ICCSs) can spur innovation and

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

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

Paving the way forward for Innovation in

Islamic FinanceIn this edition of Global Islamic Finance Mag-azine have described and comprehensively shown you the ways in which innovation has facilitated and unleashed into the forefront of Islamic finance. There are many chal-lenges which need to be overcome in order for the industry to further prosper however the Islamic finance industry is growing at an unprecedented rate and there is much scope and demand for such innovative products to cater for the growing market. In this article we have equipped you with the necessary

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

Encouraging employees through incentives through bonus schemes of profit sharing and

maybe buying into the equity for further commitment can help spur the suc-cess of your company. A need for a high quality level of training both at the entry ranks and senior ones can further spur innovation within the industry. There is much scope for creative and innovative Islamic financial products to be suc-cessful in the global financial industry if given the chance. Proper regulatory guidelines for Shariah investments and products need to be laid out in a stand-ardised format in order to make things easier for investors and business pro-fessionals.

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

insurance.

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

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

Islamic Finance

T h e role of Is-

lamic financial recrafting or most popularly known as re

engineering has been developed in contracts that fit the Shariah compli-

ant financial industry and its success or failure can be assessed on the basis of the extent to which new contracts maintain the main characteristics

implied by the prohibition of Riba and preserve the objectives of

this no interest policy

„Products

People

Market Place

Regulatory environment

Islamic Banking Institutions

Figure 4: Four Main Areas of Application for Innovation in Islamic Finance


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

As far as the Muslim population (13.5%) as well as the developmental needs of India is concerned, there is a higher future poten-tial for Islamic banking in the country. But it requires either new legislation or change in the current legal and regulatory framework. The only remaining option is, starting Non-banking financial companies to meet inter-est-free financial needs of the country. The Islamic business activists noted this option very lately and made certain experiments. But timely changes in the law as well as the high level completions from their conven-tional counterparts crated much constraint in their performance.

But it is to be noted that countless advocates and well-wishers of the Islamic banking sys-tem trying their best for propagating Islamic banking. But support from the authority is minuscule in India. At the same time differ-ent government appointed committees like Raghuram Rajan committee 2008, has em-phasised the about the vitality of interest-free finance in the country.

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

“Saudi Arabia has the dubious honour of be-ing the heartland of Shariah and yet having an inconsistent attitude towards Islamic fi-nance. In its 30-year history, Islamic finance in the country has taken two steps forward, one-step back and sometimes ‘stood’ there. After intense lobbying in 1987, a bank was allowed license to offer strictly Islamic finan-cial products.

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

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

“In March 2005, CBSL issued an ordinance to include provisions for Islamic finance in which Sri Lanka became one of the few coun-tries to have specific legislation for Shariah-compliant financial operations. The amend-ment also provided flexibility for conventional financial institutions to establish windows to offer Islamic banking and finance products and services. According to Islamic Finance News Malaysia Islamic, the banking sector in Sri Lanka is estimated around US$900 mil-lion. Sri Lanka has a number of Islamic finan-cial service providers including market leader Amana Bank Limited, Muslim Commercial Bank (MCB), People’s Leasing Company - Islamic Financial Services Unit, First Global Group, and ABC Investments (Baraka Islamic Financial Services). Commercial Bank Islamic Banking Window, LOLC Islamic Finance unit, Amana Takaful Limited (ATL), the only Taka-ful provider in the country, was introduced in 2002 and ATL was listed on the Colombo Stock Exchange (CSE) in late 2006. Amana Securities Limited (ASL), a subsidiary of Ama-na Investments Limited, is a trading member of the CSE and is one of just 20 stock-broking companies licensed to operate on the CSE.

The country’s largest bank, Bank of Ceylon, was planning to launch an Islamic banking unit in early 2008, but the bank decided to delay due to the global financial crisis. The island’s first ever full-fledged Islamic licensed commercial bank named Amana Bank Lim-ited has been established under Section 5 of the banking Act No. 30 of 1988 to carry out Islamic banking business in Sri Lanka aiming to deliver retail, business, and private bank-ing facilities including wealth management, infrastructure financing, bonds, corporate treasury placement and many other finan-cial products and services in the country to attract Shariah-compliant investment funds from the Middle East and the Far East. The Sri Lankan government has allowed enough avenues in the fiscal and regulatory policy framework to facilitate Islamic finance since 2005. Furthermore, positive support and a favourable financial regulatory environment are encouraging for Islamic financial institu-tions to set up operations and for local and international investors to participate in taking the country’s Islamic finance industry to new growth.”

Muhammed Farook Mirak,

General Manager, Crescent Schools International, Sri Lanka

Farhaa Xha,

Student, Economics and Development Studies, Saudi Arabia

Muhammed Rafeek,

Msc Islamic Banking and Finance, Durham University, United Kingdom

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


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“The evolution of Islamic banking and fi-nance in Nigeria dated back to the mid-nineties, through various involvements by the academia, which saw to the involvement of leading universities in Nigeria towards the debate, and understanding of Islamic economics and financial system. The promi-nent pioneering institutions in this direction where Usmanu Danfodio University Sokoto, Ahmadu Bello University Zaria and the Uni-versity of Maiduguri the trio from the North-ern part of the country, a region with the highest number of Muslim population in the country.

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

However, the Ahmadu Bello University, fol-low suite in rigorous enlightenment through seminars and conferences especially the prominent ‘student-seminar’ series pio-neered by the economics department. The university make the first efforts to bring together academia, students, financial ex-perts, bankers Muslims and Christian cler-gies to a common fold to the discuss Islamic economics banking and finance at a broad-er level.

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

The erstwhile Habeeb Nigeria Bank was the first to introduce the Non-interest Sav-ings Account, back in 1997. Though peo-ple welcome the move with great enthusi-asm, the proposal could not see the light

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

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

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

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

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

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

Abdulrahman Usman ALFA,

Executive Officer, Legacy Pension Managers Limited, Nigeria

Mohammad Alami,

American universityof Science and Technology, Lebanon

Muhammed Farook Mirak,

General Manager, Crescent Schools International, Sri Lanka

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gif Market Review

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

This authority (National Shariah Board) will be responsible for regulating Islamic finance and banking institutions, the told the Ob-server, after his speech at a workshop on “Islamic Finance and Banking,” organised by Horwath Mak Ghazali LLC. Al Zadjali said the CBO has issued some directives for this sector and work on a complete legal frame-work of rules and regulations are currently under way. According to these directives, all Islamic finance and banking organisations

will be required to set up Shariah Boards to ensure that their products and services are in accordance with the principles enshrined in the Holy Quran. In response to a query, the CBO chief said all Islamic banks will be required to invest their deposits in Oman only. The CBO has so far granted licences to Bank Nizwa and Al Izz International Bank to operate as fully Shariah-compliant institu-tions. These local banks will be up and run-ning by early 2012 in partnership with their foreign partners, he added.

Until May this year, Oman was the only GCC country where Islamic finance did not exist. Following the Royal Decree issued by His Majesty Sultan Qaboos in May this year to establish an Islamic financial services sec-tor, almost every bank in Oman is consider-ing launching an Islamic window in addition to the two full-fledged Islamic banks being launched. They are keen to tap the unful-filled demand for Islamic banking.

Oman, say experts, holds out an Islamic fi-nance and banking market of not less than $8 billion. The CBO chief said global Shari-ah-compliant assets are estimated to have crossed $1 trillion in 2010 and are expected to grow at the rate of around 20 percent. More than 600 Islamic financial institutions now operate in more than 75 countries. He stressed the need for robust Shariah gov-ernance (Islamic laws outlined in the Holy

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

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

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

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

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

Among the many attractive fea-tures of the interest-free Islam-ic banking is that it does not

involve buying and selling of debt, rules out speculative activities and is based on ethical investments

„

Authorityfor Islamic Banking in Oman

Source: GlobalIslamicFinanceMagazine.com

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HOW TO RUN AN ISLAMIC BANKMarketing, Branding and Leadership, part II

Author: Shelina Janmohamed, Senior Strategist, Ogilvy NoorMaged Ezzeldin, Executive Director, Bridge Capital LimitedTajah Brown, Global Islamic Finance Magazine Editorial Team, United Kingdom

Abstract: Islamic banking and finance has changed the financial systems creating an alternative to the conventional way of banking. Part 2 of How to run an Islamic bank will discuss the aspects that encourage the demand for Islamic finance and banking and explore the perspective of the consumer. In order to attract Muslims a connection between Islamic banking and religion can be made. The question remains what attracts non Muslims to Islamic finance? This article will outline the spread-ing of awareness in Islamic banking, marketing, promotional strategies, branding and the demand and need for Islamic banking and finance. The article will also cover topics such as Leadership within Islamic finance exploring the qualities of a leader and the Islamic work ethic. an Islamic institution.

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

HOW TO RUN AN ISLAMIC BANKMarketing, Branding and Leadership, part II

Islamic Banking gif


Shelina Janmohamed, Senior Strat-egist, Ogilvy Noor

She is a senior strategist at Ogilvy Noor, the world’s first bespoke

Islamic branding practice, offering expert practical advice on how to

build brands that appeal to Muslim consumers, globally. She is also an award winning blogger and author,

and was named by The Times news-paper as one of the UK s 100 most

influential Muslim women.

Spreading awareness of Islamic BankingWhen spreading awareness of Islamic fi-nance it is important to educate the cus-tomers. They will be more willing to emerge themselves into Islamic finance if they have the knowledge. It is vital to provide guidance on areas such as imagery, wording, symbol-ism and even colours when looking at brand-ing and logos.

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

Shelina Janmohamed, Senior Strategist at Ogilvy Noor gives her views on the impor-tance of education when establishing an Islamic bank in an area that is not familiar with Islamic finance. She says that it is key to engage in conversation with the con-sumer, but first Islamic banks must understand the key as-pects of the Muslim consumer, the values they are looking for and the communications that fulfils their needs. She contin-ues saying “The consumer is on a journey to find the product and brand that best suits their needs. First we need to under-stand, what are their internal starting points? What beliefs do they start their journey with which will provide the backdrop to their choices?”

Islamic banks also need to think about what influences the con-sumers externally? What are the outside influences that could change their decision mak-ing and change their views on brands and products? Shelina Janmohamed says that the ex-ternal influences could consist of the materials the consumer reads from established banks

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

With developments in Islamic finance for ex-ample an increase in the number of financial institutions offering Islamic finance products and services, the industry is becoming a sig-nificant role in the financial system. We need to expand our understanding and awareness of Islamic finance in order to ensure strong regulatory frameworks and suitable jurispru-dence.

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

Shelina Janmohamed also men-tions important aspects of estab-lishing an Islamic bank saying, “If you wish to establish Islamic banking, these stages in the consumer’s journey need to be mapped, understood and built into awareness building strate-gies.”

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

Setting up a Products’ Development Unit that creates the firms products and services targeting its audience that can both compete with rivals and adhere to Shariah principles.

Forming a Shariah Board to review and approve all products and services extended by the firm. The board function could be outsourced to special-ised firms. The board should review all conceptual frameworks, processes, fees and related issues to any new product and modify if needed in coor-dination with the Business & IT sides of the firm, and consulting the legal department regarding any conflict with regulators.

Choose a proper IT system that serves the firms operations without com-promising the Shariah principles.

Attract and train talents that mainly believe in the Islamic finance industry, and getting them through strict screening as most of the operational risks in Islamic banks are employee related.

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

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

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

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

Figure 1: Shariah-compliant company rules

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Islamic Banking

Promotion and Marketing StrategyPromotion consists of informing, persuad-ing and influencing the customer’s decision process. There is wide range of ways to pro-mote your Islamic bank such as:

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

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

banks to focus on their marketing strategy. Marketing goals and plans should address matters such as product and service price, distribution, communication and the proc-ess of developing new products. The goals of Islamic banks within the marketing sec-tor are to gain the interest of Muslims and non-Muslims within conventional banking, create competitive products and services and expand the share of existing customers. Shelina Janmohamed expresses her views on the importance of keeping up-to-date with the target audience.

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

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

Maged Ezzeldin, Executive Director, Bridge Capital Limited

He is a seasoned Islamic finance professional with over 15 years of experience in the services indus-

tries, mainly within Islamic banking and finance. Having experienced the full product cycle in Islamic

Banking, which included Product Development to Day-to-Day opera-tions for over 7 years. Maged have also worked for almost 7 years in

Investment Banking, taking compa-nies public; from proposal to floata-tion. He also held C-level positions

in Compliance in Islamic Investment Banking, with strong background of Capital Market regulations. Current-ly, Maged is the Director of Bridge Capital Limited an FSA authorised and regulated Shariah compliant

corporate finance firm.

1970s 1980s 1990s 2000s

Institutions:- Commercial Islamic

banks

Institutions:- Commercial Islamic banks

- Takaful- Islamic investment com-

panies


- Takaful- Islamic investment companies- Asset management companies

- Brokers/Dealers


- Takaful- Islamic investment companies

- Islamic investment banks- Asset management companies

- E-commerce- Brokers/Dealers

Products:- Commercial Islamic

banking products Products:- Commercial Islamic bank-

ing products- Takaful

Products:- Commercial Islamic products

- Mutual Funds/Unit trust- Islamic bonds

- Shariah-compliant stocks- Islamic stock broking

Products:- Commercial Islamic products

- Mutual Funds/Unit trust- Islamic bonds

- Shariah-compliant stocks- Islamic stock broking

Area:- Gulf/Middle East


- Asia PacificArea:

- Gulf/Middle East- Asia Pacific


- Asia Pacific- Europe/America

- Global Offshore MarketSource: Islamic capital market face finding report

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

Trade Financeservices

www.otfonline.co.uk

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

otf ads 1.indd 23 02/05/2011 11:41:20

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Islamic Banking

are an excellent resource for interacting with and understanding the cutting edge of con-sumer desire amongst the target audience.” The main goals for Islamic banks when fo-cusing on the Marketing aspects is to ex-pand the share of existing customers, gain the attention of Muslims and non-Muslims within conventional banking and having the ability and resources to produce competi-tive products and services. Franchise value is another important aspect it determines the strength of a banks market with a geo-graphical market or business niche. A strong franchise value gives banks the opportunity to generate and sustain recurring earnings, resulting in economic value which could im-prove the rick protections in the particular market.

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

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

Maged Ezzeldin the executive director of Bridge Capital Limited expresses his views about the importance of education, being the first step to establishing an Islamic bank. With over 15 years experience in the serv-ices industry, focusing on Islamic banking and finance, He says “working according to Islamic Shariah is similar to socially respon-sible or ethical way of running a business”. He outlines the rules applying to Shariah-compliant companies within the banking and financial services sectors, shown in fig-ure 1.

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

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

Banks must have a planned strategy, estab-lished policies and a constant monitoring of prices and cost when providing products. The seller can determine what the price of the products will be but it must be fair and not oppressive. Another important aspect that customers have complained about is the charge put on the customers when bor-rowing. They have complained that financing with Islamic banks are more expensive then loans given from conventional banks. This is a problems that will not help Islamic finance compete with conventional.

There are five points to consider when mar-keting within Islamic finance, which is the product, the prices, promotion, the location and the public. When establishing an Islamic bank there are 4 main points to apply, which are to offer new products in a rapidly grow-ing market, develop credibility and spread awareness of products, educate the staff and keep up dated with the customers de-mands and strong infrastructure for operat-

ing smoothly.

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

Flexing to different people styles

Maintaining Proper Boundaries

Figure 3: Six secrets pyramid: indispensible management hu-man relations practices of highly effective bosses

Advanced Rapport-Building

Criticising Skilfully

Building judgment, perspective, diplomacy, and tact

Expanding Self-Awareness Practising Empathy Following Golden Rule Principles

Basic Foundation Skills

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

Personalism

Idealism

Weak shared beliefs

Great expectation

Deeply and widely shared

beliefs

Empathy and indifference

Content and positive

involvement

Ordinary person

Great person

Caliphal model

Prophetic model

Lack of institu-tionalism

Institutionalism

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

Figure 4: Islamic model of leadership

Societal characteristics

Culture State of society Type of leaders Leadership model Outcome

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Islamic Banking

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

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

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

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

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

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

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

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

In general, Islamic finance is ideal for traders and manufacturers. The most famous and customer friendly product is Murabaha fi-nance which smoothly fulfills customer’s working capital require-ments.

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

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

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

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

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

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

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

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

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

seconds interview…

Muhammad Usman Baig, Assistant Vice President, Key Accounts Manager, Mashreq Bank, Qatar

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Islamic Banking

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

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

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

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

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

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

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

creativity, imagination and ingenuity. Putting your staff first does have a positive outcome and takes some of the pressure of satisfy-ing the high demanding customers. There is a long list of traits and skills for an Islamic leader such as being knowledgeable, coura-geous, keeping promises, humble, honesty, forgiving, flexibility, wisdom, following up on work and recognising achievers. Those are just some of the qualities leaders should have within the Islamic finance industry. Important points are also mentioned in the Islamic work ethic such as wealth must be earned, transparency, quality of work and generosity. Staff will work if they are commit-ted to the goals of the institution they are working for. The staff will also commit if the job is satisfying and under suitable working conditions.

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

In order for Islamic banks to become suc-cessful in areas such as leadership, market-ing and promotion, branding and spreading awareness they need to understand the needs, behaviour and choices of their target consumer. Islamic banks also need to be aware of the competition and be innovative and creative if they wish to get the competi-tive advantage.

Haron, S. & Azmi, W, N, W. (May 2005). Marketing Strategy of Islamic bank-• ing: A lesson from Malaysia. Retrieved from http://klbs.com.my/Pdf/Mar-keting%20Strategy.pdfVong, J. (Nov 2010). Marketing of Financial Services. The leadership Cor-• poration Australia. Retrieved from http://leadershipcorp.com/2010/11/7/islamic-banking-introductionPepinsky, T. (Oct 2010). The Demand for Islamic Banking: Piety, Class and • Global Identity. Retrieved from http://belfercenter.ksg.harvard.edu/files/uploads/mei/conference/pepinsky-islamicbanking.pdfHunt, R. (Oct 2007). Islamic banking: Core Vendors Fill Growing Demand • for Shariah-Compliant Banking. Retrieved from http://sukuk.me/library/education/islamicbankingreport.pdf The BrandFinance Banking 500 2011. Retrieved from http://brandirectory.• com/league_tables/table/banking_500_2011Brandinstinct. Taking a holistic view on customer experience strategy. Re-• trieved from http://www.brandinstinct.com/blog/category/articles/ CPI Financial. Islamic Banks-Their Strategies and ratings. Retrieved from • http://www.cpifinancial.net/v2/FA.aspx?v=0&aid=247&sec=Islamic%20FinanceO’Connel, V. & Kohn, S. (2005) 6 Secrets of Highly Effective Bosses, Career • Press, Inc.Ali, A. (2005) Islamic Perspectives and Management and Organization, Ed-• ward Elgar Publishing Limited.

The Banker (2008). How to run a Bank. Financial Times• Tahir, M. & Umar, M. (2008). Marketing Strategy for Islamic Banking Sector • in Pakistan. Retrieved from http://btu.se/fou/cuppsats.nsf/all/ca69eb7e5dcfd5b8c12574800082dade/$file/Islamic%20Banking.pdfIslamic Finance Resource. (2009). Branding an Islamic bank: Absa Islamic • Banking. Retrieved from: http://ifresource.com/2009/07/28/branding-an-islamic-bank-absa-islamic-banking/Bank Indonesia. (2008). Grand Strategy of Islamic Banking Market Devel-• opment. Retrieved from http://storage.jak-stik.ac.id/ProdukHukum/Ban-kIndonesia/GrandStrategyIslamicBankingMarketDevelopment.pdf?token=698adc9e81c9f6899e4e6fc95eed5b2fc6bdbeb0|1311674336#PDFPTaylor, J. (2004). Understanding and Supporting Islamic Finance: Product • Differentiation and International Standards. Retrieved from: http://www.stanford.edu/~johntayl/taylorspeeches/Understanding%20and%20Sup-porting%20Islamic%20Finance%20(8%20may%2004).docEmbi, S. & Taib, I. & Husain, A. Marketing of Islamic banking products. Fi-• nancial Sector Talent Enrichment Programme. Retrieved from: http://www.ibbm.org.my/pdf/marketing%20of%20islamic%20banking%20program_GC.pdfIslamic Capital Market Fact finding report. (2004). Report Of The Islamic • Capital Market Task Force Of The International Organization Of Securities Commissions. Retrieved from: http://www.iasplus.com/resource/ioscois-lamiccapitalmarkets.pdf

References and Further Reading:

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

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

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

Pakistan’s plan is to raise that figure to 12 percent from 7 percent currently by 2015. Islamic finance growth has faced challenges due to the worsening geopolitical and secu-rity situation in Pakistan.

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

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

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

“Historically, the poor and oppressed in a so-ciety are more inclined to follow the norms of their religion than the affluent,” said Mud-dassir Siddiqui, an Islamic scholar and part-ner at law firm SNR Denton in Dubai.

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

Islamic Bank, said.m“The new regulatory require-ments are a good first step by the government to reach-ing those in rural areas, where there is little trust for banks and people prefer to keep money under their pil-lows,” he said.

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

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

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

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

“We currently have 100 branches in Paki-stan and consider it to be a growth area for us,” said Adnan Ahmed Yousif, chief execu-tive of Al Baraka Bank. “At our bank, we are looking to get to 200 branches over time. The country definitely has a lot of potential within Islamic finance.”

Pakistan to Focus Islamic Financein Rural Areas

Source: GlobalIslamicFinanceMagazine.com„T h e p r o s -

pect for growth is al-ready attracting interest

from both the convention-al banks in Pakistan and foreign institutions, pri-

marily out of the Gulf region

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HYDROCARBON RESOURCES AND ISLAMIC LAW

Author: Nima Mersardi Tabari, PhD Candidate, University of London

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

Adherence to Islam is the common characteristic of Persian Gulf oil and gas produc-ers and their legal regimes to different extents reflect this common characteristic. This

article addresses the Islamic law of natural resources and the legal frameworks of Islamic finance methods used in upstream projects.

Keywords: Islamic Law, Hydrocarbon Resources, Shariah Compliance, Middle East


Islamic Finance gif

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

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

Today, the legal regimes and business prac-tices of the Middle Eastern hydrocarbon pro-ducers reflect this common historical and ideological foundation. Thus, it is of para-mount importance to International Hydro-carbon Companies (IHCs) and their lawyers to understand the impact of Islamic law on the investment environment of the region, in general, and its hydrocarbon industry, in particular. Islamic law or Shariah purports to govern all aspects of the private and public life of the believers, dividing all human ac-tions into objectively good and inherently bad. Its all- embracing character is the con-stant narrative of Islam as a religion and a civilisation.

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

Hydrocarbon Resources under Islamic Law

OwnershipIn Shariah, ownership or Melk is defined as the right to benefit, dispose and use Mal. Mal or property refers to anything that the con-cept of ownership extends to. This would in-clude the object (E’in) and its benefit (Naf’e). Property should have monetary value and its exchange should be customary. If property is in possession and its benefit is permitted then it can be subject of a valid transaction. However, if it is not in possession, or is non-determinable, there cannot be a valid trans-action.

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

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

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

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

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

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

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

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

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

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

London.

He holds an LLM with distinction in International Commercial Law and

is a graduate member of the Energy Institute (GradEI). He moved to the United Kingdom after working for 6 years on international commercial law, oil and gas law, international

investment law and Islamic finance in Iran.


gif Islamic Finance

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

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

BaiThe simplest nominate contract, which is used as a starting point on many other in-struments, is Bai (sale). It follows from the general prohibitions on Gharar and Riba, dis-cussed above, that a sale contract to be valid under Shari’ah must be instant and absolute. Thus, a sale attributed to a future date or a sale conditional on a future event is void.

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

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

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

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

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

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

a simple Murabaha transaction, as cost plus profit sale, with the price paid by the bor-rower immediately and in full. In this case no financing is involved and the lender would only act as a Simsar (broker or middle-man). In Islamic finance Murabaha is usually used for providing trade financing in conjunction with Bai Mua’jjal which as a form of credit sale permitted in Islamic law.

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

The profit is usually defined in reference to an interest rate index such as the LIBOR (London Inter-Bank Offered Rate). This meth-od of determining the profit in a Murabaha is a natural outcome of a dual financial system. The profit obtained is not Riba, as the market value of assets and the interest rate index are indicative of one another. Hence, the similarity of the outcome to the conventional financing method is a predictable result of the two systems operating in the same glo-bal market.

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

IjarahAn Ijarah transaction is the Islamic equiva-lent of a lease and is defined as a bilateral contract allowing for the transfer of the usuf-ruct. Thus, an Ijarah transaction involves the transfer of ownership in Naf’e rather than E’in. To be valid similar conditions to a Bai transaction, albeit with a different terminol-ogy, must be satisfied. In an Ijarah agree-ment:

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

Moreover, as the center of gravity of capital markets shift towards

east and south and Muslim inves-tors’ financial clout grows, the demand for Shariah-compliant investment opportunities would also increase. Thus, it is expected that the region will experience a rise in Shariah-compliant funding for E&P projects

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paid on specific dates, the object should have a use and it • cannot be used by the lessee for pur-poses other than specified in the Ija-rah agreement.

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

SalamAs discussed above, sale of non-existent objects is forbidden in principle as it would result in Gharar. However, primarily to ac-commodate agricultural activities the Prophet approved Salam as an exception to the aforementioned general prohibition. Salam is a sale contract where the pur-chase price is paid in full against the future delivery of a well-defined object in a speci-fied time. As such, in a Salam contract, the Mabi’y does not have to be in existence at the time of entering into the agreement, and the seller does not need to be in pos-session. It is most suitable for financing of agriculture or small construction projects. As an Islamic finance product, Salam can be utilised to provide working capital. The lender pays in full for a defined object in advance for supply on a pre-agreed future date. The lender will receive a discount in return for the advance payment. This is calculated by reference to a benchmark, such as LIBOR. Thus Salam is in effect a Shariah-complaint forward sale, which can be used as a method of providing capital for short-term production increase and/or efficiency improvement projects in opera-tional oil and gas fields.

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

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

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

Where the partners invest capital into • a commercial enterprise. (Sherkat al-Amwal)Where the partners jointly undertake • to render services and share the fees. (Sherkat al-Amal)Where the parties share in the profit • accrued from spot sale of commodi-ties jointly purchased on deferred prices. (Sherkat al-Wujooh)

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

MudharabahMudharabah is a form of partnership where one party (the investor or Rab al-Mal) pro-vides capital and the other (the manager or Mudharib) manages the funds provided. Profit share is determined according to a ratio specified in the original contract. Un-like Musharakah, where all parties could participate in the management and con-duct of business, in Mudharabah the inves-tor cannot interfere in the management. As such, Mudharabah is often referred to as a trust rather than a partnership.


Ehsan Waquar Ahmad, Shariah Advisor, United Bank Limited, Pakistan

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

Islamic Banking is passing through an evolution phase

and it is quite natural that any system evolving un-dergoes continuous improvement. It is a series of change that follow one after the other. Financial products on the part of institution is not independ-ent, there are factors where the economy, the businesses, the regulator and the norms within the economy play a vital role. If the economy and the regulator stresses on any particular sector, ob-viously, the banks will develop products to ensure business and compliance with the regulation. Like in Pakistan, the regulator wants to focus on the agriculture sector. There was development in products that can entertain agriculture business.

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

What are your thoughts on the demand for Sha-riah compliant investment opportunities?

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

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

Bankers do prefer debt base modes for financing activities. This is something natural. It is human nature that they resist novel products and ways. However, gradually they have to explore innova-tion. As stated earlier it is an evolution process that the Islamic product will ride through the product life cycle. Those now commonly used may be cash cows but will gradually turn to dogs and those question marks will move upwards. Trade base products will take off once attractive results are derived. When bankers compare the returns and the risks, they might consider the tradeoff.

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

I think it is their call to promote these projects. When there is a public demand, intuition will de-velop products to entertain their demand. In ad-dition, when these products are frequently used, they undergo improvement that finally leads to maturity and success. In addition, this I suppose is what evolution is.

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

A. SukukSukuk are the Shariah-compliant equivalent of conventional bonds. Sukuk is the plural for sakk. Each sakk or “Islamic bond certificate” represents a proportional ownership in a “subject” which can be tan-gible assets, a pool of predominantly tangible assets or permissible ventures such as Mudharabah or Musharakah.

The issuer sells the certificates to the investor with a contractual obli-gation to buy back the certificate at par value at a future date. The in-vestor/holder acquires ownership benefits alongside the risks associ-ated with such ownership. The holder then rents back the subject of the certificate to the issuer in return for predetermined payments on basis of an Ijarah agreement. The ownership of the subject is propor-tional but undivided and the payments received as rent correspond to the interest payments to bond holders. As such, Sukuk encompass notable characteristics of both shares and bonds. It should however be distinguished from conventional bonds and conventional equities. It is different from both the former, which represent debt obligations of the issuer, and the latter, which represent ownership interests in the issuer/originator, since:

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

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

Conclusion Adherence to Islam is the common characteristic of the Middle East-ern hydrocarbon producers and their legal regimes and business practices to different extents reflect this common characteristic. As such, painting a reliable picture of the legal regimes governing the exploitation of hydrocarbon resources in the region requires consid-eration of rules of Shariah with regards to natural resources. Added to this, is the growing role of arbitration and alternative dispute reso-lution in solving international commercial and investment disputes; which provide the possibility of the utilisation of Shariah as the gov-

M Ja’fari Langrodi, Maktabhay Hoghoghi dar Hoghogh Islam • (Schools of Thought in Islamic Law), (Ganj-e- Danesh , Tehran, 1990)1-12, 202-210.T Daintith, United Kingdom Oil and Gas Law (Sweet & Maxwell, • 1984) 18A Obied, Ketab al-Amwal (the Book of Property), (Maktab al-Tigariah • , Cairo, 1944) 276- 280; and M Bunter, “The Islamic (Sharia) Law and Petroleum Developments in the Countries of North Africa and the Arab World”, (2003) OGEL 1(Ibid and M Ja’fari Langrodi, Maktabhay Hoghoghi dar Hoghogh Is-• lam (Schools of Thought in Islamic Law), (Ganj-e- Danesh , Tehran, 1990)1-12.See: C Richardson, “Islamic Finance Opportunities in the Oil and • Gas Sector: An Introduction to an Emerging Field” (2006) Texas In-ternational Law Journal 42, 120-153.I Warde, Islamic Finance in the Global Economy (Edinburgh Univer-• sity Press, Edinburgh, 2000) 133. See: T Zaher and M Hasan, ‘A Comparative Literature Survey of Is-• lamic Finance and Banking’ (2001)See: T Zaher and M Hasan, ‘A Comparative Literature Survey of Is-• lamic Finance and Banking’ (2001) Financial Markets, Institutions and Instruments 10 (4) 155-199.Sahih Bukhari, Volume 3, Book 39, Number 534• Sahih Bukhari, Volume 3, Book 39, Number 537• See: M Usmani, An Introduction to Islamic Finance (BRILL, 2002) • 69-83C Richardson, “Islamic Finance Opportunities in the Oil and Gas • Sector: An Introduction to an Emerging Field” (2006) Texas Interna-tional Law Journal 42, 133Sahih Bukhari, Volume 3, Book 35, Number 455• Sahih Bukhari, Volume 3, Book 35, Number 44• See: M Usmani, An Introduction to Islamic Finance (BRILL, 2002) • 83-93See: C Richardson, “Islamic Finance Opportunities in the Oil and • Gas Sector: An Introduction to an Emerging Field” (2006) Texas In-ternational Law Journal 42, 120-153See: M Usmani, An Introduction to Islamic Finance (Idaratul Ma’arif, • Karachi, 1998) 31-92C Richardson, “Islamic Finance Opportunities in the Oil and Gas • Sector: An Introduction to an Emerging Field” (2006) Texas Interna-tional Law Journal 42, 130K Hassan and M Lewis, Handbook of Islamic Banking (Edward Elgar • Publishing, 2007) 51

References and Further Reading:


erning law in E&P related arbitration and alternative dispute resolu-tion proceedings.

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

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

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What are your thoughts on the future de-velopment of Islamic finance products?We see that the development of Islamic fi-nance is growing very fast especially in the Asian countries such as Malaysia, Indone-sia, Pakistan and Brunei as well as in the Middle East countries. Many Islamic finan-cial institutions have been established by both foreign and local players and expanded their products and services to cover Islamic finance growing market. Islamic finance has gained a significant global exposure and ex-perienced a phenomenal growth in the last three decades.

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

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

The range of Islamic financial products has broadened considerably in recent years in responsible to the more diverse and dif-ferentiated requirements of participants. Driven by these market forces, the Islamic financial products have progressed and grown in sophistication, as can be seen from the offering of a wider range of products with various product structures, multiple catego-ries of service providers and a different mix of consumer composition, Islamic finance

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

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

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

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

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

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

What are your thoughts on the demand for Shariah compliant investment opportuni-ties?Although Islamic finance is based on finan-cial instruments which do not pay or receive interest, the demand for Shariah compliant investment opportunities is increasing. The global financial crisis may prove to be a bless-ing in disguise for Shariah compliant invest-ment opportunities, especially in the area of Islamic capital market (“ICM”) as compared to their conventional counterparts due to, in large part, more conservative structuring and the absence of leverage.

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

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

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

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

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

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

A wide range of Shariah compliant invest-ment opportunities enable the financial in-stitutions to tap not only conventional inves-tors but also Islamic investors, hence allow diversification of the investors based. With growing appreciation for Shariah compliant investment products, and also the rapid growth of wealth among the Muslim popula-tion, the Islamic financial institutions should position themselves to prepare for contin-ued growth in their products innovation.

What Islamic financial instrument do you use the most? In addition, what is its ben-efit?What type of Islamic financial instruments to be used in any Islamic financial transactions will all depend on the class of assets that may be used for the purpose of the transac-tion. As most are aware, the Islamic financial

contracts are not based on loans concept but are based on sale/purchase (Muraba-hah), profit/loss sharing (Mudharabah/Mus-yarakah) or rental/lease (Ijarah) principles.The class of assets that can be used range from mere tangible properties to include rights and claims or receivables. Most of the underlying assets used are normally in the form of real tangible assets.

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

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

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

What advice would you give to those want-ing to invest in Shariah-compliant project finance?First and foremost, the prospective inves-tors need to understand that in any Shariah compliant project finance deal/structure,

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

The Islamic finance Sukuk structure used in the project finance especially in the Mid-dle East typically is the Ijarah structure. For some like Asian countries, the Musyarakah is also quite common for a project finance transaction. The most common issue in relation to the Is-lamic project finance is the risks associated with the relevant assets. As such, it is im-portant for the investors to understand the risks associated with ownership of the rel-evant assets for every underlying structure adopted in relation to the Sukuk contracts. It is important for the investors to be aware of what kind of risk control measures taken in structuring the project finance transaction.

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

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

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

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

CHOICE OF LAW AND ISLAMIC FINANCE, PART IAuthor: Julio C. Colón, University of Texas School of Law

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

The bulk of these assets are held by com-mercial banks, while investment banks, Su-kuk, equity funds, and the assets of takaful account for twenty-five percent of Shariah-compliant assets. Strikingly, business ac-tivities in the Islamic financial sector are not con-fined to countries whose legal systems are Shariah-based. The United Kingdom,

a common law country, ranks ninth in the world in holdings of Shariah-compliant as-sets. In the United States, there are approxi-mately nineteen providers of Islamic finan-cial products, including banks, mortgage providers, and investment brokers.

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

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

Ambiguity may lie in the terms used within the contract to describe the various types of Shariah-compliant transactions. European and U.S. courts succeed at varying degrees in interpreting such clauses. Contract lan-guage affects performance and expecta-tions for parties to financial transactions. Judges evaluating cases subject to Shariah may even have to overcome constitutionally imposed limitations on their ability to inter-pret laws derived from religious sources.

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

reference Islamic law and a national system is the industry practice in Islamic finance. Local choice of law doctrine and policy con-cerns should not prevent courts or arbitral tribunals from Recognising the validity of a clause that references both Islamic law and a national system.

Shariah as a Choice of Law“A Purely Discretional Form of Justice”: Is-lamic Law in Western Tribunals

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

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

He described the ruler of Abu Dhabi as an absolute monarch who administers a “pure-ly discretionary form of justice with some assistance from the Koran.” After analys-ing the choice of law issue, the arbitrator relied instead on principles of English law. The arbitrator in Ruler of Qatar v. Interna-tional Marine Oil Co. Ltd. arrived at the same conclusion as Lord Asquith in Trucial Coast. The arbitrator in Ruler of Qatar made a clear statement as to his belief concerning the in-adequacy of Is-lamic law.

After acknowledging that Islamic law was the proper law to apply, he stated that it does not “contain any prin-ciples which would be suf-ficient to interpret this particular contract.” The arbitrators’ opinions in both cases do not at-tempt to give any principle through

CHOICE OF LAW AND ISLAMIC FINANCE, PART IAuthor: Julio C. Colón, University of Texas School of Law

Shariah as a choice of law for common law courts and arbitrators is not peculiar to the current era of Islamic finance. Early cases demonstrate that arbitrators de-

nied that Islamic law was sophisticated enough to utilise in com-plex commercial disputes. In the case of Petroleum Development (Trucial Coasts) Ltd. v. Sheikh of Abu Dhabi, Lord Asquith acted as an arbitrator in a dispute arising out of a contract executed in Abu Dhabi. He acknowledged that Abu Dhabi’s law, which was based on Islamic law, should be applied

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

Had the arbitrators attempted to answer the question before them, they would have found that there was expansive litera-ture on Islamic contract law. Recently, a British court was asked to decide whether Shariah is a legitimate choice of law in the United Kingdom. In Shamil Bank of Bahrain EC v. Beximco Pharmaceuticals Ltd and others, the Court of Appeals was asked to consider whether a particular contract was invalid un-der Shariah law.

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

When Beximco failed to make payments un-der the agreement, Shamil Bank claimed the amount outstanding under the agreement. Beximco claimed that the agreement was invalid because it contained a hidden form of riba. The Appellate Court acknowledged that if the phrase “subject to the principles of the Glorious Shariah” was a valid choice of law clause, then Beximco would succeed under the agreement.

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

According to the court, if the intention of the parties was to incorpo-rate Shariah law into the contract, then they did not do so effectively; instead, they would have had to identify a foreign law or code and, more specifically, to which part of the contract the clause applied. The appellate court, in strict applica-tion of this principle, stated, “it is plainly insufficient for the defendants to contend that the basic rules of the Shariah applicable in this case are not controversial. Such ‘basic rules’ are neither referred to nor identified.”

The Need for Combined-Law ContractsShamil Bank has been positively accepted by commentators in its two main proposi-tions concerning Shariah as a choice of law:

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

This conclusion would likely be the same for other common law jurisdictions. European civil law jurisdictions will also probably re-quire that the law governing a contract be that of a state. These propositions are not present in arbitration forums: it is possible to allow one system of law to govern a con-tract and still subject the same agreement to Shariah. The increase in banking transac-tions correlates with an increase in disputes arising out of these contracts. The result of Shamil Bank is problematic for contracting parties who would like to “mix” laws, as Bex-imco purported was its intention. Before ex-plaining this issue, perhaps it will be useful to explain other choice of law clause options that are available to contractors. Theoreti-cally, contracting parties to a Shariah-com-pliant transaction may choose from three options: that the contract is:

1) subject exclusively to Islamic law; 2) subject solely to a state legal system,

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

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

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

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

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

“However, the current culture of Islamic finance is liberal, with parties beginning with the assumption that a deal is Shariah-compliant, and contracting parties are not necessarily knowledgeable of Islamic law. Muhammed Al-Jasser, governor of the Saudi Arabian Monetary Agency states:”

We have richness in diversity . . . . Everything is permissible unless it is shown to contra-vene Islamic tenets. Someone has to tell me if and how it contravenes explicitly. In fact, most conventional financial products are fine . . . . Regulators and supervisors are not religious scholars. They are in charge of financial stability and the safety of the insti-tution is para-mount.

The state of choice-of-law in Shariah-com-pliant finance may be described in four key principles:

1) a combined-law clause will likely be found to be repugnant to the laws of common law and civil law countries; 2) Shariah or Islamic law as a choice of law

Julio C. Colón, holds a Juris Doctorate from the University of

Texas School of Law. His research focuses on utilising existing legal frameworks to produce innovative

Shariah-compliant financial products for the U.S. market. He

has also clerked at the Inter-American Court of Human

Rights and advocates for responsible corporate growth based

on the model of community partnership.

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

Almost all of these contracts contain an ar-bitration clause, particularly those involving parties from different national jurisdictions. Most arbitration in Islamic finance is done using combined-law, meaning under one na-tion’s laws subject to Shariah law. Consider-ing the outcome and publicity of the Shamil Bank case, this result seems counterintui-tive, and in order to facilitate an understand-ing of the work of the arbitrators, it will be necessary to enter into some discussion about the role Shariah occupies in today’s legal systems.

Shariah in Modern Legal SystemsShariah is the name for “all the laws of Islam including Islam’s whole religious and liturgi-cal, ethical, and jurisprudential systems.” As put by one Saudi scholar speaking at a U.S. university:

Broadly defined, the Shariah consists of “eve-rything written by Muslim jurists throughout the centuries” . . . . Narrowly construed, “the Shariah is confined to the undoubted prin-ciples of the Qur’an, what is true and valid of the Sunna, and the consensus of the community represented by its scholars and learned men during a certain period and re-garding a par-ticular problem, provided there was such a consensus.”

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

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

obligatory• recommended• merely permissible• ill-advised• unlawful.•

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

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

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

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

an immutable source of constitutional • law; a precedential source of common ac-• tions and defenses;and a source of treatise for the interpre-• tation of civil codes.

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

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

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

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

There is no religious requirement for mem-bership on the bank’s Monetary Board; how-ever, in creating the rules and regulations for the Islamic Bank, the Monetary Board was required to follow the principles of Shariah law. The charter for the Islamic Bank provid-ed for the creation of a board of arbitration with jurisdiction to settle any disputes aris-ing from conflicts between the Islamic Bank and its investors or shareholders.

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

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

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

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

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

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

This new regulation extended the author-ity of religious courts to non-Muslims, pro-vided that they were involved in a dispute concerning “Islamic economic matters.” In such disputes the religious courts, like the Basyarnas, must rely on both the “material law” related to Islamic financial transactions and Shariah law. It is standard practice for better-established arbitral tribunals to utilise a combined-law approach to hear cases in-volving Islamic finance. Indeed, acceptance of a mixed choice of law is written into the rules of many of these specialised bodies.The Kuala Lumpur Regional Centre for Arbi-tration (KLRCA) houses a specialised depart-ment to arbitrate Islamic financial disputes. The Asian-African Legal Consultative Organi-sation (AALCO) established KLRCA in 1978

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

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

As a forum specialised in Islamic finance, the KLRCA also provides in its rules that “[t]he arbitral tribunal shall apply Shariah prin-ciples and the law designated by the parties as applicable to the substance of the dis-pute.” This statement explicitly provides for the application of Shariah law in combina-tion with the chosen law of the parties as ne-cessitated by the terms of the contract and facts surrounding the conflict.

However, the KLRCA presupposes that when a Shariah principle is in dispute the arbitra-tor will not be competent to judge the mat-ter. In such cases where a Shariah principle is in dispute, Rule 33 provides that the ar-bitrator shall ad-journ the proceedings and refer the issue to either the Shariah Advisory Council of the Central Bank of Malaysia or a Shariah expert agreed upon by the par-ties. The United Arab Emirates houses three main arbitration centers that routinely hear disputes regarding Islamic financial matters. Among its institutions are the Dubai Inter-national Arbitration Centre (DIAC), the Abu Dhabi Commercial Con-ciliation and Arbitra-tion Centre (ADCCAC), and the International Islamic Centre for Reconciliation and Com-mercial Arbitration (IICRCA), the last of which is a specialty forum created by the Islamic Development Bank to cater to the Is-lamic finance industry.

The practices of the ADCCAC are ambigu-ous; however, its charter does provide for a relaxed requirement of professional experi-ence for one who seeks to apply to the “Con-ciliator’s Panel” if the applicant is a universi-ty graduate of “economics, commerce, law or Islamic law ‘Shariah.”’ This may allude

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

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

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

According to its procedural rules, the MAT will “[i]n arriving at its decision . . . take into account the Laws of England and Wales and the recognised Schools of Islamic Sa-cred Law.” The MAT states that its overrid-ing objective is to ensure that a judgment is secured “in accordance with Qur’anic Injunctions and Prophetic Practice.” True to its goals, the MAT’s rules stipulate that an arbitral tribunal must consist of at least one “scholar of Islamic Sacred Law” and one “solicitor or barrister of England and Wales.” The MAT has had some success in its ap-proach, as indicated by a 15% increase in the use of the MAT by non-Muslims in 2009. In fact, although the use of Shariah law in commercial arbitration has a mostly nega-tive history, pre-Shamil Bank cases show that nothing prevents a Western tribunal from using a combined-law approach.

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

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

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

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

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

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

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

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

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

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

Do you believe English law is the most popular when dealing with agree-ments adhering to Islamic principles? Yes, I do but having said that I believe that this is a result of decades of dominance of western thoughts in trade and commerce rather than by rea-son of the pure suitability of English Law to Islamic finance. Islamic finance is governed by an entirely different set of rules, principles and concepts. Whilst the destination in the sense of the ultimate objectives of English Law and the Shariah may be similar, the journey to that destination is and can be very different.

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

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

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

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

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

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

I certainly think it has a very bright future. The inherent principle of fair-ness and equality makes it a corpus of law that has universal application. As a corpus of law, it has been acutely under utilised. This is primarily due to reasons of misconceptions and misperceptions. In a world where per-ception is seen as being greater than the truth, Shariah and Islamic Laws is currently comatose. It has to be resuscitated and one of the best tools of resuscitation is re branding. We need to re brand Islamic finance and Islamic Laws and the Shariah.

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Soraya Permatasari & Suryani Omar, Shari-• ah-Compliant Hedging Derivatives Start in Malaysia: Islamic Finance, Bloomberg (Dec. 22, 2010), http://www.bloomberg.com/news/2010-12-21/Shariah-compliant-hedg-ing-derivatives-start-in-malaysia-islamic-finance.html.Duncan McKenzie, Islamic Finance, Mondo-• visione (Oct. 29, 2008), http://www.mondo-visione.com/media-and-resources/news/islamic-finance/.See Nathif J. Adam & Abdulkader Thomas, • Islamic Bonds: Your Guide to Structuring, Is-suing and Investing in Sukuk 42-64 (2004) Abdi Shayesteh, Islamic Banks in the • U.S.: Breaking Through Barriers, New Ho-rizon, Apr.-Jun. 2009, at 1, http://www.kslaw.com/Library/publication/6-09%20New%C20Horizon%20Shayesteh.pdf.In re Arbitration Between Petroleum Dev. • (Trucial Coast) Ltd. v. Sheikh of Abu Dhabi, 1 Int’l & Comp. L. Q. 247, 250-51 (Sept. 1951).Arthur J. Gemmell, Commercial Arbitration in • the Islamic Middle East, 5 Santa Clara J. Int’l L. 169, 179 (2006).Faisal Kutty, Shari’a Factor in International • Commercial Arbitration, 28 Loy. L.A. Int’l & Comp. L. Rev. 565, 591 (2006).Shamil Bank of Bahrain EC v. Beximco • Pharm. Ltd., [2004] EWCA (Civ) 19, [1], [2004] 1 W.L.R. 1784, 1787 (appeal taken from Eng.). See Handbook of Islamic Banking xvii, 52 • (H. M. Kabir Hassan & Mervyn K. Lewis, eds., 2007) Jason Chuah, Recent Case, Shamil Bank • of Bahrain EC v. Beximco, 10 J. Int’l Mar. L. 125, 126 (2004).Council Regulation 593/2008, Rome I, art. 1 • (1), 2008 O.J. (L 177) 6, 10 (EC), available at http://eur-lex.europa.eu/LexUriServ/LexU-riServ.do? uri=OJ:L:2008:177:0006:0016:EN:PDF.Shaistah Akhtar, Arbitration in the Islamic • Middle East: Challenges and the Way Ahead, in The International Comparative Legal Guide to: International Arbitration 2008, at 11 (Global Legal Group, 2008), available at http://www.iclg.co.uk/khadmin/Publica-tions/pdf/2201.pdf; see also Chuah, supra note 33, at 126.Oliver Agha, Islamic Finance Dispute Resolu-• tion, Leading Lawyers 2009, at 29 (Islamic Finance News, 2009), available at http:// www.aghashamsi.com/downloads/Article.pdf.Andreas Junius, Islamic Finance: Issues Sur-• rounding Islamic Law as a Choice of Law Under German Conflict of Laws Principles, 7 Chi. J. Int’l L. 537, 543 (2007).Kilian Bälz, Islamic Legal Studies Program, • Harvard Law School, Shariah Risk?: How Is-lamic Finance has Transformed Islamic Con-tract Law 13 (2008).

See, e.g., Press Release, White & Case LLP, • Law Office of Mohammed Al-Sheikh in As-sociation with White & Case Advises on SAR 7 Billion Sukuk (July 7, 1998) (on file with author) (noting the association of White & Case with a law firm experienced in Islamic finance).Bälz, supra note 40, at 24; Charles P. Trum-• bull, Islamic Arbitration: A New Path for Inter-preting Islamic Legal Contracts, 59 Vand. L. Rev. 609, 643-44 (2006).Mushtak Parker, Islamic Finance is Grow-• ing at a Phenomenal Pace: Al-Jasser, Arab News, Nov. 30, 2009, http://archive.arab-news.com/? page=6&section=0&article=128946.Muhammed Al-Bashir & Muhammed Al-• Amine, Istisna’ and Its Application in Islamic Banking, 16 Arab L. Q. 22, 36 (2001).Taha Jabir Al-Alwani, Source Methodology • in Islamic Jurisprudence 69 n.1 (Yusuf Talal DeLorenzo & Anas S. Al-Shaikh-Ali trans., In-ternational Institute of Islamic Thought, 3rd ed. 2003).Ahmed Zaki Yamani, Minister of Petroleum • and Mineral Resources, Saudi Arabia, Ad-dress at the New York University School of Law (Oct. 24, 1978), in George Sayen, Arbi-tration, Conciliation, and Islamic Legal Tradi-tion in Saudi Arabia, 9 U. Pa. J. Int’l Bus. L. 211, 239 (1987) (internal citations omit-ted).Ibrahim Abdulla Al-Marzouqi, Human Rights • in Islamic Law 10, 30-33 (2d ed. 2001).Faizal Manjoo, Comment to Discussion • Board: The Islamic Finance Framework, Opalesque: Islamic Finance Intelligence (Aug. 31, 2009), http:// www.opalesque.com/OIFI119/Discussion_Islamic_Finance_Framework19.html.Al-Marzouqi, supra note 51, at 44. Partial • Translation Of Sunan Abu-Dawud Book 24, Number 3585, Univ. of S. Cal. Ctr. for Muslim-Jewish Engagement, (Ahmad Hasan trans.), http:// www.usc.edu/schools/college/crcc/engagement/resources/texts/muslim/ha-dith/abudawud/ 024.sat.html (last vi-sited Mar. 12, 2011).David R. Vishanoff, Kitab al-Waraqat fi usul • al-fiqh, A Handbook of Legal Theory, http://faculty-staff.ou.edu/V/David.R.Vishanoff-1/Translations/Waraqat.htm (last visited Mar. 12, 2011) (translating original Arabic text of Kitab Al-Waraqat fi usul al-fiqh, written by Imam Al-Haramayn Al-Juwayni in 1450, and noting legal values that are relevant to a dis-pute over a financial transaction).See William Ballantyne, Introduction to Is-• lamic Law And Finance 1, 3 (Chilbi Mallat ed., 1988), available at http:// www.soas.ac.uk/cimel/materials/islamic-law-intro.html This was euphemistically referred to by one • Muslim law professor as “what we call the establishment clause.” Mohamed Mattar, Address at the Johns Hopkins School of Ad-

vanced International Studies Islamic Law Fo-rum: Islamic Law in U.S. Courts: Theory and Practice (Oct. 2, 2005).Ashley S. Deeks & Matthew D. Burton, Iraq’s • Constitution: A Drafting History, 40 Cornell Int’l L.J. 1, 19-21 (2007); Gemmell, supra note 15, at 171; Amir H. Khoury, Ancient and Islamic Sources of Intellectual Property Protection in the Middle East: A Focus on Trademarks, 43 IDEA 151, 201 (2003); Clark Benner Lombari, Islam-ic Law as a Source of Constitutional Law in Egypt: The Constitu-tionalization of the Shariah in a Modern Arab State, 37 Colum. J. Transnat’l L. 81, 82 n.4 (1998).Khalil Jarrar, Lex Islamicus: Preventative and • Remedial Measures Protecting Sukuk Invest-ment Account Hold-ers, Opalesque: Islamic Finance Intelligence (Aug. 31, 2009), http://www.opalesque.com/OIFI118/Lex_Reme-dial_ Measures_Protecting_Sukuk_Invest-ment18.html.Abdel Aziz Dimapunong, Islamic Banking • Research Inst., Islamic Bank Arbitration 6 (2006).Milagros Santos-Ong, Update: Philippine Le-• gal Research, GlobalLex § 4.1 (June 2009), http://www.nyulawglobal.org/globalex/Phil-ippines1.htm.Creating a Central Bank for the Philippines, • Bangko Sentral ng Pilipinas, http://www.bsp.gov.ph/about/history.asp (last visited Mar. 10, 2011).See New Central Bank Act (RA 7653), Bang-• ko Sentral ng Pilipinas, http://www.bsp.gov.ph/about/charter_02.asp (last visited Mar. 10, 2011) (no mention of a religious require-ment).See Abdul Rasyid, Settlement of Islamic • Banking Disputes in Indonesia: Opportu-nities and Challenges 1-2 (2008), avail-able at http:// www.apmec.unisa.edu.au/apmf/2008/papers/25-abdul%20Rasyid.pdf (giving an over-view of the historical role of the settlement of Islamic banking disputes in religious, civic, and arbitral fora).Id. at 6. As an aside, English-speaking Mus-• lims are still at odds on the best spelling of the word “Shariah.” How-ever, Malay-speakers are more unified in their approach, almost always choosing to use the spelling “Syariah.” Peter Tan, Malay Loan Words Across Different Dialects of English, 14 Eng-lish Today 44, 49 (1998).Who We Are, Kuala Lumpur Regional Centre • for Arbitration, http:// www.klrca.org.my/Is-lamic_Banking-@-Arbitration_of_Islamic_Fi-nancial_Sector_at_ KLRCA.aspx (last visited Apr. 5, 2011).About AALCO, Kuala Lumpur Regional Cen-• tre for Arbitration, http:// www.klrca.org.my/about_AALCO.aspx (last visited Mar. 10, 2011).


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World Islamic Finance Review gif


Nigeria is one of the biggest Muslim com-munities in the world, with 65 percent of an estimated 150 million people identifying themselves as Muslim. With a thriving Islamic business industry, the

country has established itself in the Islamic financial industry with growing consumer and corporate bank-ing sectors.

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

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

THE PAST AND FUTURE OF ISLAMIC FINANCE IN

NIGERIA

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

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

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

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sidiaries, divisions and units are available. The establishment of this bank was the re-sult of a high demand for an Islamic Bank in Nigeria, West Africa and also the specific products on offer, other banks in Nigeria at the time were not offering interest free banks.

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

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

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

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

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

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

The Lotus Capital Islamic finance forum states “Recent events in the global financial markets have shown that Islamic Banks and Islamic Mutual Funds have fared better than their conventional counterparts, not neces-sarily because of superior fund manage-ment skills but simply because of the activi-ties and businesses they have avoided”. The forum goes on to say that the destructive effects of interest encourages us to find an alternative that is economically sustainable when matched with conventional finance. This could produce a higher real economic activity, employment and development.

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

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

Aluwalu Ado gives us an insight into the challenges Nigeria face with in the Islamic finance Industry. He says that “High default rates in Nigerian banks will lead to same or even higher rates in Islamic Fi-nancial Institutions (IFIs) unless a sound risks management policy is put in place”.

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

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

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

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

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

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

“Sound regulatory and supervisory guidelines, in-cluding that of Shariah advisory of Islamic Financial

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

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

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

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

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

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

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

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

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

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

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

Lotus Capital state “Lotus Capital is duly reg-istered with the Securities & Exchange Com-mission (SEC) as Fund Managers, Corporate Investment Advisers and Issuing House”.

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

Aspiratio Strategy Financial Sector as Catalyst & IFC

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Harajara Adeola the CEO of Lotus Capital Limited shares her views on Islamic finance in Nigeria with 234next.com. “However, no-body says you are not allowed to make mon-ey and that is another fallacy about Islamic finance. A lot of people feel Islamic finance is free finance. It is not. It is just finance around reality; real trade, real service, real added value”.

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

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

They say that these are beliefs that everyone would agree with, these are key factors that form the beginnings of all civilised societies. Lotus Capital mentions their commitment to Islamic finance and state ‘This encourages ownership and profit sharing in the conduct of investing and business to create a fairer and more productive economic system’.

They stand by the core values of integrity, professionalism, confidentiality service, ex-cellence and dynamism. Along with other audits, the Lotus Capital goes through a reg-ular review by the Shariah Advisory Board. The board is made up of Islamic scholars educated in Islamic laws, principles, trade traditions finance and economics.

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

Influential People that Affect Nigeria’s Fi-nancial Market These are some of the most influential peo-ple within Nigeria’s financial market.

Lamido Sanusi is the grandson of one • of the most powerful traditional rulers in Nigeria and the central bank gover-nor; with this status the strong minded Sanusi has made a big impact in the fi-nancial industry such as the bailout of nine commercial banks just weeks after he took on the central bank. His reputa-tion grew because people in the indus-try said he rescued the second biggest economy in Africa, the sub-Saharan. His achievements include a degree in Eco-nomics and Islamic Law at a university in northern Nigeria. He began teaching economics and then entered the area of banking in 1985.

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

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

The Framework Behind Non-interest Islam-ic FinanceJanuary 2011 the CBN produced the regu-latory and supervisory framework and guidelines for non-interest Islamic finance. The framework states “the objective of the framework is to provide minimum standards for the operation of institutions offering non-interest banking and financial services in Nigeria”. The framework lists the licensing requirements a NIFI needs to followed in or-der to be licenced by the CBN and the NIFIs which have to refer to the Shariah principles and practices in its Memorandum and Arti-cles of Association.

The framework requirements state that the promoters of the NIFI are to produce an agreement, which includes the roles of the two parties. The agreement must accom-pany the grant of licence applications and

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Aluwalu Ado, Regional Executive North (Takaful), African Alliance Insurance Plc, Nigeria

Aluwalu Ado’s most influential people in Islamic Finance

Alhaji Sanusi Lamido Sanusi

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

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

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

Alhaji Mustapha Bintube A former executive director of a leading financial Institution and the pioneer managing director of Jaiz International Plc. He was instrumen-tal to the development of Islamic finance in Nigeria.

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

Ahmed Zakari &CO (char-tered accountants)

This firm has Alhaji Ismaila Zakari as its managing partner. They are auditors to Jaiz International Plc and representative of IIBI in Nigeria. They also specialise in zakat and related matters and played a signifi-cant role in promoting Islamic finance in Nigeria. They have organised various trainings on different subjects of Islamic finance.

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

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

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

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

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

The regulatory and supervisory framework declares that the non-interest banks with permission for national banking are eligible to continue banking operations with all Fed-eration states. The frameworks states that the licencing requirement can be accessed in more depth from the Financial Policy and Regulations Department, the CBN.

The commissions and fees section of the framework reveals that the financial institu-tions continuing non-interest banking and services can charge commission or fees with preference to Shariah principles and the guide to bank charges. Sanusi Lamido, Islamic Scholar and contributor to the Nige-rian banking sector, outlines the problems the CBN could encounter in the Gulf News. The first hindrance is the lack of knowledge, skills and ability to operate within the Islam-ic finance industry.

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

nomics, accounting, banking and finance. The final problem is the lack of recognition of Islamic finance and its advantages.

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

Nigeria’s Oil IncomeThe Punch newspapers says “economists, however, say proper management of oil money is crucial, if Africa wants to build on its success in attracting result-oriented in-vestors into the vibrant frontier economies”. The newspaper refers to the Business Moni-tor international saying that it suggests an increase in Nigeria’s oil consumption; it pre-dicts that the country will be using 567,000 bpd by 2020.

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

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

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

In 1988 the NNPC became a commercial, integrated international oil company ac-cording to the National Bureau of Statistics. The statistics also state that the function of the NNPC is to explore, process and market crude and petroleum, it aims towards effi-ciency, profitability and financial autonomy in all decisions.


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Central Bank of Nigeria from: http://• www.cenbank.org/intops/FXstructure.aspNational Mirror - Deepening Nigeria’s • financial markets with Islamic finance from: http://nationalmirroronline.net/business/8202.htmlGulf news.com – Nigeria on track to be • Africa’s Islamic finance hub from: http://gulfnews.com/business/banking/niger-ia-on-track-to-be-africa-s-islamic-finance-hub-1.640710Diamond Bank from: http://www.dia-• mondbank.com/careers/our-bank.htmlAustralian Government – Export Finance • & Insurance Corporation from: http://www.efic.gov.au/country/countrypro-files/Pages/Nigeria.aspxNigeria news daily.com – Islamic finance • in Nigeria: Issues and Challenges from: http://nigerianewsdaily.com/nigeria-news-business/12917-islamic-finance-in-nigeria-issues-and-challenges.htmlPunch – Rising revenue: charting a • rosy future for Nigeria’s economy from: http://www.punchng.com/Articl.aspx?datex=02/23/2011&theartic=Art201102232533564National bureau of Statistics from: • http://www.nigerianstat.gov.ng/index.php/pages/sectorStatisticsReuters – Factbox – Nigeria’s financial • market reformers http://www.reuters.com/article/2011/03/28/nigeria-mar-kets-reformers-idUSLDE72O1TZ20110328?pageNumber=1Arab news – Nigeria faces challenge in • promoting Islamic finance from: http://archive.arabnews.com/?page=6&section=0&article=129940&d=21&m=12&y=2009Lotus Capital from: http://www.lotuscapi-• tallimited.com/index.php?option=com_content&view=article&id=18&Itemid=2Reuters Africa – Nigeria eyes role as • African Islamic banking hub from: http://af.reuters.com/article/topNews/idAFJOE7270I220110308?pageNumber=2&virtualBrandChannel=0&sp=trueDoing Business 2011 – Nigeria from: • http://www.doingbusiness.org/~/media/FPDKM/Doing%20Business/Docu-ments/Profiles/Country/DB11/NGA.pdfArab News – Nigeria opens market for • Islamic finance from: http://archive.arabnews.com/?page=6&section=0&article=121487&d=13&m=4&y=2009Jaiz International PLC from: http://www.• jaizinternationalplc.com/about_us.htmlNext – Nigeria can be a hub for Islamic • finance from: http://234next.com/csp/cms/sites/Next/Money/5677777-147/story.csp


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

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

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

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

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

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

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

Auwalu Ado ends by giving his views on the future of the Islamic finance industry in Ni-geria, he says “Although it has taken so many years to take off, once it does Islamic finance will succeed and will favourably compete with its conventional counterpart. There will be more Islamic banks and finan-cial institutions in the country especially in the northern and south western parts. I see a slow growth of the sector in Nigeria at the beginning, but Islamic finance will grow at a fast pace in the next few years”.

Non interest banking in Nigeria would help establish a new market and introduce insti-tutions, such as the Islamic Money Market and Takaful (Islamic Insurance) companies. This type of bank cannot produce treasure bills or other interest bearing securities and so cannot get involved in conventional open market operations, claims The Nigeria Voice.

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


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RISK MANAGEMENT FRAMEWORK IN ISLAMIC BANKING:

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RISK MANAGEMENT FRAMEWORK IN ISLAMIC BANKING: Basel II and III, challenges and implications in Islamic Banking

Abstract: The time to fix the roof is when the sun is shining; Risk management has not been

uppermost on the Islamic banking sector’s agenda in recent years. It is crucial for Islamic Banks (IBs) to have com-

prehensive risk management framework as there is growing realisa-tion among IBs that sustainable growth critically depends on the develop-

ment of a comprehensive risk management framework. Islamic banks should be dusting their ladders off now. If Islamic banks are serious about playing a greater role in the financial system,

they will need to get to grips with risks which may not currently be well understood or well managed. In this article a frame work for Risk management in Islamic Banks will be discussed firstly, then generic risk associated with banks

and unique risks exposed to Islamic Banks will be categorised.

The contractual complexity of Islamic banking transactions which gives rise to awkward operational risks, and the uncertainties associ-ated with Shariah compliance leave them exposed to a few risks including fiduciary and reputational these risks will be briefly reviewed. Although Basel II standards, does not account for the specific risks related to the nature of Islamic banks’ activities however the funda-

mental tenet of Islamic finance is that of fairness, and Islamic financial institutions at a most basic level are often structured towards fee-based revenues for services rendered and profit- and risk-sharing structures. Thus, in essence, Islamic financial institutions are closer

in spirit to asset management companies than to conventional banking institutions, and the impact of their operations on the balance sheet is unique. These particularities highlight the unique characteristics of Islamic banks and raise serious concerns regarding the ap-plicability of the Basel methodology to Islamic banks. Islamic banks’ activities differ in substance and in form from conventional banks’

operations and they thus face a different risk profile. The article gets to grips with Basel II accord and share challenges on adopting Basel II in Islamic Banks.

Keywords: Basel II, Islamic Financial Institutions, Islamic Banks, Risk


Author: Dr Farhad Reyazat, Editor in Chief, Global Islamic Finance Magazine, United Kingdom

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Although Islamic banks and Is-lamic financial institutions are precluded from getting involved in the kind of complex credit trading that has paralysed their conventional competitor that’s

no reason for complacency. The life is not easy for Islamic banks, they have their own blind spots and frailties. Islamic banks tend to have significant concentrations of expo-sure to local real-estate markets and much of it in the form of equity-like investments.

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

The contractual complexity of Islamic bank-ing transactions gives rise to awkward op-erational risks, and the uncertainties asso-ciated with Shariah compliance leave them exposed to fiduciary and reputational risk. In recent years understandably, the focus has been on growth and on the struggle to innovate and compete in this increasingly competitive market. Shariah-compliant as-sets worldwide are approaching $1.2 Trillion and have been growing at more than 10% per year over the past 10 years. There is still huge untapped potential. Standard & Poor’s

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

Risk Management Concept in Islamic BanksIt is crucial for IBs to have comprehensive risk management framework as there is growing realisation among IBs that sustaina-ble growth critically depends on the develop-ment of a comprehensive risk management framework. The risk management strategy must be integrated with its overall corporate strategies (e.g. Froot and Stein, 1994). In conjunction with the underlying frameworks, basic risk management process that is gen-erally accepted is the practice of identifying, analysing, measuring, and defining the de-sired risk level through risk control and risk transfer. BCBS defines financial risk man-agement as a sequence of four processes:

the identification of events into one 1. or more broad categories of market, credit, operational and other risks into specific sub-categories;the assessment of risks using data and 2. risk model; the monitoring and reporting of the risk 3. assessments on a timely basis; and

the control of these risks by senior 4. management.

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

Exposure identification;1. Data gathering and risk quantification;2. Management objectives;3. Product and control guidelines; 4. Risk management evaluation; 5. Strategy development; 6. Implementation;7. Performance evaluation 8.

A comprehensive explanation of risk man-agement in Islamic banking are made by Ak-kizidis and Khandelwal covering the aspect of risk management issues in Islamic finan-cial contracts, Basel II, Basel III and Islamic Financial Services Board (IFSB) for Islamic financial risk, examining the credit, market


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

IFSB Guidelines on Rrisk Management of Islamic BanksAccording to IFSB, the primary aim of releas-ing its risk management standard stems from the recognition that although “certain issues are of equal concern to all financial institutions” some risks are localised to IBs and as such, these principles “serve to com-plement the BCBS guidelines in order to ca-ter the specificities of IBs”.

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

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

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

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

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

understanding risk and risk manage-1. ment; risk identification; 2. risk analysis and assessment;3. risk monitoring.4.

By making reference to the model adopted by Al-Tamimi and Al-Mazrooei, the function of risk management practices is as follows:RMP= f(URM, RI, RAA, RM)Where:RMP= Risk Management Practices URM= Understanding Risk and risk Manage-mentRI= Risk Identification RAA= Risk Analysis and Assessment RM= Risk Monitoring

The conceptual framework suggests there is a positive relationship between risk man-agement practices and the aspect of risk management process. Secondly, it suggests the category of risk management processes that influence most of the practice of risk management to be examined.

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

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

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

Risk Principle GuidelineGeneral requirementCredit Risk

Principle 1.0Principle 2.1Principle 2.2

IIFS shall have in place a comprehen-sive risk management and reporting process.IIFS shall have in place a strategy for financing, recognising the potential credit exposures at various stages of the agreement.IIFS shall carry out due diligence review.

Principle 2.3 IIFS shall have in place an appropriate method-ology for measuring and reporting the credit risk exposures.

Principle 2.4 IIFS shall have in place Shariah-compliant credit risk mitigating techniques.

Equity Investment Risk

Principle 3.1Principle 3.2

IIFS shall have in place appropriate strategies, risk management, and reporting processes in respect to the risk characteristics of equity instruments.IIFS shall ensure that their valuation methodolo-gies are appropriate and consistent.

Principle 3.3 IIFS shall define and establish the exit strategies in respect of their equity investment activities.

Market RiskLiquidity RiskRate of Return riskOperationalRisk

Principle 4.1Principle 5.1

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

Principle 5.2Principle 6.1Principle 6.2Principle 7.1

IIFS shall assume liquidity risk commensurate with their ability to have sufficient recourse to Shariah-compliant funds.IIFS shall establish a comprehensive risk man-agement and reporting process to assess the potential impact of market factors affecting rate of return on assets.IIFS shall have in place an appropriate frame-work for managing displaced commercial risk.IIFS shall have in place adequate systems and controls.

Principle 7.2 IIFS shall have in place appropriate mechanisms to safeguard the interests of all fund providers.

Figure 1: The IFSB guidelines on risk management

Source: IFSB (2005)

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in risk identification. The main techniques used in risk management are establishing standards, credit score, credit worthiness analysis, risk rating and collateral. The study by Al-Tamimi and Al-Mazrooei was conducted on banks’ risk management of UAE national and foreign banks. Their findings reveal that the three most important types of risks en-countered by UAE commercial banks are for-eign exchange risk, followed by credit risk, then operating risk.

In the case of Islamic banks, studies made especially on risk identification and risk miti-gation includes the work of Haron and Hin Hock on market and credit risk, and Archer and Haron specifically on operational risk. Haron and Hin Hock explain the inherent risk i.e. credit and market risk exposures in IBs. Also, they illustrate the notion of displaced commercial risk that is important in IBs. They conclude that certain risks may be con-sidered as being inherent in the operations of both Islamic and conventional banks.

Although the risk exposures of IBs differ and may be complex than conventional financial institution, the principles of credit and mar-ket risk management are applicable to both. In addition, the IFSB’s standards on capital adequacy and risk management guiding principles mark the first steps in an ongoing process of developing prudential standards and filling regulatory gaps in the field of Is-lamic finance.

Apart from those two risks, Archer and Haron show that IBs are ex-posed to a number of operational risks that are different from those faced by conventional banks. They argue that the complexities of a number of their products, as well as there relative novelty in the contemporary financial serv-ices market, combined with the fiduciary obligations of Islamic banks when it acts as a Mudarib, imply that for IBs operational risk is very important consideration.

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

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

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

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

Risk Analysis and AssessmentIn the context of Islamic banking, few con-ceptual studies discuss the risk measure-ment aspects particularly on the unique risk.

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

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

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

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

According to them, control has to be estab-lished at different levels. The control by the management board will not be enough to

ensure the effective functioning of the risk monitoring system, because the management board members do not have time on their hands to exercise extensive control. Hence, the management board will install an independ-ent unit to complete the task of internal supervision. This task is the responsibility of the internal audit.

Also, the supervisory board is obliged to control the risk man-agement process. The supervi-sory board is supported by the auditor. If the auditor discovers a defect, he will have to inform the supervisory board and the

management board. Finally, the sharehold-ers of the corporation can use their rights to demand information in order to judge the efficiency of the risk management system. The director’s report enables the sharehold-ers to assess the status of the corporation knowledgeably and thoroughly.

Distinct Features of Risk Management in Islamic BankingWe will explain Basel accord regarding Is-lamic banks later in this article. Besides the usual capital adequacy ratios proposed un-

Risk Analysis and Assessment

Risk Management Practices

Understanding Risk and Risk Management

Risk Monitoring

Risk Identification

Figure 2: Conceptual Framework

Instrument Credit risk

Mark-up risk

Liquidity risk

Operational risk

Murabahah 2.56 2.87 2.67 2.93Mudarabah 3.25 3.00 2.46 3.08Musharakah 3.69 3.40 2.92 3.18Ijarah 2.64 3.92 3.10 2.90Istisna 3.13 3.57 3.00 3.29Bay’ al-Salam 3.20 3.50 3.20 3.25DiminishingMusharakah 3.33 3.40 3.33 3.40

Figure 3: Risk perception: Risks in different modes of financing (scale 1-5)

Source: Khan and Ahmed (2001)



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der Basel, followed both by conventional and Islamic banks, there are some distinct features of risk management under Islamic Bank-ing. These distinct characteristics of risk management in Islamic banks are discussed.

Islamic banks provide financing which is backed by assets and can-not deal in documents. All financing provided by Islamic banks results in the creation of assets i.e. capital formation. Islamic financing due to the asset backed nature results in productive economic activities; hence, it does not result in inflation. Furthermore, the underlying as-set collateralises the loan transaction provided by Islamic banks.

Islamic banks need to comply with conventional regulatory stand-ards as well as Shariah standards. Shariah compliance is strictly fol-lowed under Islamic banks. This dual check covers the legal risk as there is a double check on money laundering and other fraudulent activities. Shariah compliance is ensured by the Shariah Supervisory Board, which comprises of influential scholars.

The referent power of these scholars is utilised for further endorsing the system in the eyes of the general public and increasing accept-ance of Islamic banking among masses. Shariah compliance also ensures Corporate Social Responsibility (CSR) and ethical compli-ance. Islamic banks do not conduct business with tobacco, alcohol and other harmful toxic producing companies. This mechanism has given Islamic banking the name of ‘ethical banking’ in Europe.

Clean borrowing is not allowed in Islamic banking. Islamic banks pro-vide financing only to create assets. Therefore, Islamic banks do not offer credit cards, personal loans and running finance/ overdraft. On the downside, Islamic banks by restricting themselves to asset-backed financing cannot provide need-based loans, short-term fi-nancing for overhead expenses or financing for debt swap.

Risk Specificities of Islamic Financial InstitutionsIslamic banks’ activities differ in substance and in form from con-ventional banks’ operations and face a different risk profile. Basel II identified three types of risk exposures for conventional banks: credit risk, market risk and operational risk. Figure 4 draws a com-parative risk profile for conventional and Islamic banks.

Credit risk is the default payment risk and risk weights are assigned based on the counterparty risk. Market risk results from the risk of losses in on- and off-balance sheet positions arising from move-ments in market prices. It applies to the portfolio of financial instru-ments held by the bank and is composed of four elements: interest rate risk (further divided into specific and general market risk), eq-uity position risk, foreign exchange risk and commodity risk.

Finally, operational risk represents the risk of loss resulting from in-adequate internal processes. Early attempts by scholars to cater to the specificities and characteristics of Shariah-compliant products and services identified at least four different types of risks that are not accounted for under Basel II. We categorise here the generic risk associated with banks operation in general and unique risk Islamic Banks should be dealt with.

As credit risk, market risk and operational risk are among the most important and common risks which Islamic Banks, conventional banks also face them. Some policy guidelines to mitigate them are briefly reviewed in figures 8 to 11.

Capital Adequacy and Basel IIThe Basel Committee on Banking Supervision first drafted the Basel Capital Accord in 1988. The accord focused primarily on creating a framework for measuring credit risk, and setting minimum capi-tal standards in order to safeguard banks against a loss or default.

Conventional bank Islamic Bank

1. Credit risk 1. Credit Risk

2. Market risk: Equity riskCommodity riskInterest rate riskForeign exchange riskEquity riskCommodity riskRate of return riskForeign exchange risk

2. Market risk:

3. Operational risk 3. Operational risk

4. Price risk

5. Fiduciary risk

6. Displaced commercial risk

Figure 4: Risk profile of conventional vs. Islamic banks

Types of risks Definition

Credit risk The potential that a counterparty fails to meet its obligations in accordance with agreed terms and conditions of credit-related contract

Market risk The potential impact of adverse price movements such as benchmark rates, foreign exchange rates, equity prices on the economic value of an asset

Liquidity risk The potential loss arising from the bank’s inability either to meet its obligations or to fund increases in assets as they fall due without incurring unac-ceptable costs or losses

Operational risk

The potential loss resulting from inadequate or failed internal processes, people and system or external events

Figure 5: The generic risks for banks could be categorised

Source: Khan and Ahmed (2001)

Types of risks Definition

Shariah non-compliance risk

Risk arises from the failure to comply with the Shariah rules and principles

Rate of return risk

The potential impact on the returns are caused by unexpected change in the rate of returns

Displaced CommercialRisk

The risk that the bank may confront commer-cial pressure to pay returns that exceed the rate which has been earned on its assets financed by investment account holders. The bank foregoes part or its entire share of profit in order to retain its fund providers and dissuade them from with-drawing their funds.

Equity Invest-ment risk

The risk arising from entering into a partnership for the purpose of undertaking or participating in a particular financing or general business ac-tivity as described in the contract, and in which the provider of finance shares in the business risk. This risk is relevant under Mudharabah and Musharakah contracts.

Figure 6: Islamic banks are exposed to some unique risks

Unique risks for Islamic banks


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Policy Guidelines

Credit Risk Policy - The policy ad-dresses the broad credit manage-ment framework that covers the objective, strat-egy, structure and credit processes in order to establish the best practices in the manage-ment of credit risk that are in line with the regulatory requirements.

1. Pricing Matrix Guidelines

2. Acceptance Letter Offer Guideline

3. Negative List Guideline

4. Valuation Guideline

5. Discretionary Power Guideline

6. Sovereign Risk Guideline

7. Consumer Grading Guideline

8. Sectoral Guideline

9. Watchlist Guideline

10. Financing Process Guideline

11. Credit Recovery Guideline

12. Guidelines on Risk Adjusted Pricing for

Figure 8: Credit Risk

Policy Guidelines

Market Risk Policy – De-scribes the Risk Policy and Analytics, Asset and Liability Management (ALM) and Middle Office functions of the Market Risk Department

Trading Book Policy - Addresses market risk factors which include but not limited to profit rate or rate of return, foreign exchange, equity and commodity risks inherent in the Bank’s trading and banking books

1. Market risk limit guideline

2. Hedging Guideline

3. Mark-to-Market Guideline

4. Rate Reasonability Check Guideline

5. Value-at-Risk (VaR) Guideline

6. Asset and Liability Management

Guideline

7. Market Risk Manual & Procedures

Figure 9: Market risk

Displaced Commer-cial Risk

Islamic Bank

Rate of Return Risk

Shariah non-com-pliance Risk

Equity Investment Risk

Figure 7

Credit Risk Operational Risk

Market Risk Liquidity Risk

The committee’s overarching ambition was to encourage the con-vergence of national banking regulators globally towards “common approaches and standards”. With later revisions of the accord, the Basel Committee anticipated the risk issues faced by large global banks.

However, one thing which it did not foresee was the increasing glo-balisation of Islamic finance, which in 1988 was largely confined to a handful of Middle Eastern countries. Although the Islamic finance industry still represents only a small percentage of total banking as-sets, it is growing at a rate of more than 15% per year, and Islamic banks have established themselves as forerunners in such major financial hubs such as London, Malaysia and Singapore.

Basel IIBasel II marks a move away from formulaic regulatory capital calcu-lations to a more risk- and principles-based three-pillared approach to capital management.

The first pillar of minimum capital levels includes operational • Risk, along with more familiar credit and other financial risks (e.g. liquidity risk).The second pillar is a supervisory review process that seeks • to encourage improvements in risk management by linking regulatory capital requirements to the firm’s Internal Capital Adequacy Assessment (ICAA) and the soundness of its internal control structures.This is augmented • Basel III•

The Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced a substantial strengthening of existing capital requirements and fully endorsed the agreements it reached on the 26th of July 2010. These capital reforms, together with the introduction of a global li-quidity standard, deliver on the core of the global financial reform agenda and were presented to the Seoul G20 Leaders summit in November 2010.

The Committee’s package of reforms will increase the minimum com-mon equity requirement from 2% to 4.5%. In addition, banks will be required to hold a capital conservation buffer of 2.5% to withstand future periods of stress bringing the total common equity require-ments to 7%. This reinforces the stronger definition of capital agreed by Governors and Heads of Supervision in July and the higher capital requirements for trading, derivative, and securitisation activities to be introduced at the end of 2011.

Islamic banks are among the best capitalised banks in the world, and historically comply with inflexible standards of capitalisation, Islamic Banks for capital requirements means that local banks al-ready exceed norms set by the Bank for International Settlements (BIS) as part of the Basel III accord.

Islamic banks already have stricter capital requirements than what are proposed in Basel III. With the Islamic banks being amongst the best capitalised on a global scale, they are on the safe side com-pared to their European or US counterparts, Tier 1 and total capital requirements currently stand at 8% and 12%, respectively, which are already higher than the target 2019 ratios set by Basel III.

The second of the Basel accords - the Basel II - was introduced in June 2004, in order to create an international standard for banking regulators to use when creating regulations on the amount of capital needed to be put aside by banks to guard against the types of finan-cial and operational risks commonly faced by these institutions. Ad-vocates of Basel II believe that such an international standard can

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FINANCIAL STABILITY

Capital requirements for ...Credit risk

Standardised Approach -foundation IRB Approach -Advanced IRB Approach -

Market riskStandardised Approach -Internal VaR Models -

Operational riskBasic Indicator Approach -(Alternative) Standardised -ApproachAdvanced measurement -Approaches

Pillar IMinimum Capital Requirements

Regulatory framework for banks

Inte - rnal Capital Adequency Assessment Process (ICAAP)Risk ma - nagment

Supervisory Framework

Eval - uation of internal Systems - of banksAssessment of risk profile -Review of complaince wit all -regulationssupe - rvisory measures

Pillar IISupervisory Review Process

Disclosure requirements of banks

Transparency for market -participants concerning the bank` s risk position (scope of application. risk management, detailed information on own funds, etc.)Enh - anced comperability of banks

Pillar IIIMarket Discipline

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help to protect the international financial system from the types of problems which might arise should a major bank or a series of banks collapse.

Basel II attempted to accomplish this with the theory that setting up risk and capital management requirements should be designed to ensure that a bank holds capital reserves appropriate to the risks the bank exposes itself to, through its lending and investment practices. Generally speaking, these rules mean that the greater risk to which the bank is exposed, the greater the amount of capi-tal the bank needs to hold, in order to safeguard its solvency and overall economic stability.

Basel III was fully endorsed on the 26th of July 2010. These capital reforms, together with the introduction of a global liquidity stand-ard, speak to the core of the global financial reform agenda, and were presented to the Seoul G20 Leaders summit in November.

Figure 14 shows the build up of common equity and conservation following the Basel III system, and exhibits potential growth by the year 2020.

Figure 15 shows how the system implements the capital ratio over the risk-weighted assets when enhancing risk coverage of secu-rity products, trading and counterparty credit risk. Islamic banks have scope to further collaborate with the system to improve trans-parency and capital liquidity. These are two sectors of the Islamic finance industry which need to be improved in order to further progress in the competitive market.

“The majority of Islamic banks in Malaysia already maintain capital levels well above the current regulatory minimum, BNM says, and the Liquidity Coverage Ratio (LCR) under Basel III is conceptually similar to the liquidity framework adopted by Malaysian Islamic banks. However, the board says, the LCR will require Islamic banks to hold more liquid assets for wholesale funding than they are re-quired to under the existing liquidity framework”.

Policy GuidelinesOperational Risk Policy – The policy provides the effective and ef-ficient operational risk management through out the bank through its strategies in terms of organisation structure, process, risk tolerance, risk measurement and analytic model man-agement information system

1. Operational risk management guideline2. Management Awareness and Self3. Assessment (MASA) Reporting Guideline4. Fraud Handling and Reporting Guideline5. Takaful/Insurance Guideline6. Key Risk Indicators (KRIs) Guideline7. Outsourcing Guideline8. Operational Risk Management Proc-ess for Information Security Manage-ment System9. Customer Complaint Guideline 10. BRCP

Figure 10: Operational risk

Policy GuidelinesShariah Compliance Risk Management Policy – The policy provides the Shariah requirements applicable throughout the bank in its activities, products and services in compli-ance with the Shariah principles, provisions of the Islamic Banking Act 1983 and Bank Negara Malaysia’s rules and regulations.

1. Wadieah contract guideline 2. Ijarah and Ijarah Muntahiah Bit Tamlik Guideline3. Murabahah and MPO Contract Guideline 4. Mudharabah (financing) Contract Guideline5. Musharakah (financing) Contract Guideline 6. Handling and Reporting of Shariah Non Compliances Guideline 7. Mudharabah (Deposit) Contract Guideline 8. Musharakah Mutanaqisah Contract Guideline 9. Dhamanah/ Kafalah Contract Guideline 10. Wakalah Contract Guideline 11. Tawarruq Contract Guideline

Figure 11: Shariah compliance risk

Figure 12:

The Basel III reform of bank capital regulation

New capital ratiosCommon equity• Tier 1• Total capital• Capital conservation buffer•

Raising the quality of capitalFocus on common equity• Stricter criteria for tier 1• Harmonised deductions • from capital

capital ratio = capital

Risk-weighted assets

Enhancing risk coveragesecuritisation products• Trading book• Counterparty credit risk•

Macroprudential overlay

Leverage ratio

Mitigating procyclicalitycountercyclical • buffer

Mitigating systemic risk(work in progress)

Systemic capital • surchage for SIFIsContingent capital• Ball-in debt• OTC derivatives•

Basel I- Introduced in 1988

Basel II-Introduced in 2004

Basel III-Introduced in 2010

Figure 13: The Basel System

Basel - III, % of RWAs

Build up of common equity and conservation buffer over time

14.00

10.50

7.00

Min Existing Tier 1Plus Common Equity

3.50Min Existing Common equity

0.00

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

year(1st jan)

%

Min Common Equity Capital Conservartion Buffer Tier 1 Equity

2.00

4.00

2.00

4.00

3.50

4.50

4.00

5.00

4.50

5.50

4.50

6.00

4.50

6.00

4.50

6.00

4.50

6.00

4.50

6.00

0.631.25 1.88 2.50

Source: Basel Risk Management Information

Figure 14:

Figure 15:

Akkizidis, I. and Khandelwal, S. K. 2008, “Financial Risk •

Management for Islamic Banking and Finance”, Palgrave

Macmillan, First Ed.

Al-Tamimi, H. 2002, “Risk Management Practices: An Empiri-•

cal Analysis of the UAE Commercial Banks”, Finance India,

Vol. XVI, No. 3, pp. 1045-1057.

Al-Tamimi, H. and Al-Mazrooei M., 2007, “Banks’ risk man-•

agement: a comparison study of UAE national and foreign

banks”, The Journal of Risk Finance, Vol. 8 No.4, pp. 394-

409.

Archer, S. and Haron, A. 2007, “Operational Risk Exposures •

of Islamic Banks”, in Archer, S. and Karim, R. A. A. 2007, “Is-

lamic Finance: The Regulatory Challenge”, John Wiley & Son

(Asia) Pte Ltd.

Baldoni, R. J. 1998, “A Best Practices Approach to Risk Man-•

agement”, TMA Journal, Jan/Feb, pp. 30-34.

Barton, T. L., Shenkir, W.G. and Walker, P. L. 2002, “Making •

Enterprise Risk Management Pay Off”, USA, Prentice Hall

PTR, Financial Times.

BCBS 2001, Consultative Document: Principles for the Man-•

agement and Supervision of Interest Rate Risk, Bank for In-

ternational Settlements.

Boston Consulting Group 2001, “From Risk Taker to Risk •

Manager: Ten Principles for Establishing a Comprehensive

Risk Management Systems for Banks”.

Drzik, J. 1995, “CFO Survey: Moving Towards Comprehensive •

Risk Management”, Bank Management, Vol. 71, pp.40.

Freeland, C. and Friedman, S. 2007, “Risk and the Need for •

Capital” in Archer, S. and Karim, R. A. A. 2007, “Islamic Fi-

nance: The Regulatory Challenge”, John Wiley & Son (Asia)

Pte Ltd.

Fuser, K., Gleiner, W. and Meier, G. 1999, “Risikomanage-•

ment (KonTraG) – Erfahrungen aus der Praxis”, Der Betrieb,

Vol. 52, No. 15, pp. 753-758.

Greuning, H. and Iqbal, Z. 2007, “Banking and Risk Environ-•

ment” in Archer, S. and Karim, R. A. A. 2007, “Islamic Fi-

nance: The Regulatory Challenge”, John Wiley & Son (Asia)

Pte Ltd.

Harrington, S.E. and Niehaus, G. R. 1999, “Risk Manage-•

ment”, Irwin/McGraw-Hill, New York.

IFSB 2005, “Guiding Principles of Risk Management for In-•

stitutions (Other than Insurance Institutions) Offering only Is-

lamic Financial Services”, Islamic Financial Services Board.

Iqbal, Z. and Mirakhor, A. 2007, “An Introduction to Islamic Fi-•

nance: Theory and Practice” John Wiley & Son (Asia) Pte Ltd.

Jackson-Moore, E. 2007, “Measuring Operational Risk” in •

Archer, Simon and Karim, R. A. A. 2007, “Islamic Finance:

The Regulatory Challenge”, John Wiley & Son (Asia) Pte Ltd.

Khan, T., and Ahmed, H. 2001, “Risk Management: An Analy-•

sis of Issues in Islamic Financial Industry” IRTI/IDB Occa-

sional Paper, No. 5.



Risk Management gif


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

The report said the sovereign Sukuk topped issuances in July, including three versions of Sukuk for Saudi and Qatari companies. In the Middle East and North Africa region, only a few countries have is-sued Sukuk so far and these are 5 of the GCC states and including Sudan.

It added that the Sukuk market for com-panies in the GCC countries continued to expand this year through the issuance of two local versions from Saudi Arabia and an international Sukuk from Qatar.

Despite the decline, the main Sukuk mar-ket continued its annual increment by 133 percent in July, raising the value of annual releases to $52.1 billion. The Is-lamic finance industry is estimated to be

worth $1 trillion and is expected to double over the coming years. Egypt was planning to issue its first Islamic debt guidelines in 2011 to catch up with the Gulf and South-east Asia and help spur sales. However, the recent developments could delay such plans till further notice. In Algeria, Ismail Noureddine, the president of Commission of supervision of stock exchange opera-tions (COSOB), declared that the introduc-tion of new financial products as Sukuk is under consideration.

Turkey has made major steps in devel-oping Islamic finance and facilitating is-suance of Sukuk. The Turkish National Assembly in Ankara passed the Finance Bill 2011 in February which includes tax neutrality measures for Sukuk Al-Ijara (leasing certificates), paving the way for a spate of corporate Sukuk issuances in the country. KFH has said earlier that the

value of Sukuk is-sued in the first half of this year has amounted to some $47 billion, exceed-ing the record high reached last year of $45 billion. The issuance of global Sukuk jumped in the first half of 2011 by

34.7 percent, KFH said, noting that Sukuk markets saw a seesaw movement in June after Malaysian government issued Sukuk amounting to $2 billion.

Separately, global Sukuk issuance rose by 18 percent in Q2 2011 on year-ago levels to $16 billion, Zawya’s Sukuk Quarterly Bulletin said recently. Across H1 2011, some $43.8 billion was raised globally, setting a new record. Government issu-ance dominated in Q2 2011, totalling $11.651 billion.

Malaysia has made unprecedented achievements in the Islamic finance sec-tor and it currently dominates domestic Sukuk, with 72 percent by value, Sudan leads short-term issuance (maturity one year or less).

Value of Global Sukuk Rises to $47 billion


gif

gif Market Review

„The Islamic finance industry is estimated to be worth $1 trillion and is expected to double over the coming years. Egypt was planning to issue

its first Islamic debt guidelines in 2011 to catch up with the Gulf and Southeast Asia and help spur sales


A four-member delegation from the Kuwaiti parliament visited the Luxembourg financial centre, called Luxembourg for Finance in order to get first-hand informa-tion on the way the banking and finance sector functions in the small European country.The head of the centre, Fernand Grulms, welcomed the Kuwaiti parlia-mentarians and briefed them on the activities of the Luxembourg financial centre which is a public-private partnership between the Luxembourg government and the Luxembourg financial industry federation.

He noted that Luxembourg is the second largest investment fund centre in the world after the Unit-ed States, and the premier private banking centre in the Eurozone. The financial sector is the largest contributor to the Luxembourg economy 143 banks and 108 insurance companies are based in Luxembourg and 84,000 peo-ple are employed in the financial sector. The largest Chinese bank ICBC has chosen Luxembourg as its European headquarters.

Grulms explained that political and social stability, a transparent legal framework, high standard of regulation and Luxembourg’s openness to the world are the reasons behind the attrac-tion of international banks and insurance companies. On her part, Elenaor de Rosmor-duc, an expert on Islamic banking at the Lux-embourg financial centre briefed the Kuwaiti MPs in the situation of the Islamic finance sector in Luxembourg. She noted that on the global level Islamic finance was worth one trillion US Dollars and there were 614 Sha-riah complaint institutions in 47 countries. Islamic finance was growing by 25 percent annually, she noted. Rosmurduc said that government support, a stable system, tax di-versity and a talented workforce are among the factors that are attracting Islamic finance

to Luxembourg. There are 39 Shariah-com-plaint institutions based in Luxembourg but there is no Islamic bank here as yet. Later, speaking to the Kuwait news agency, KUNA, MP Khalid Sultan Bin Eissa said this is the first day of the visit of the Kuwaiti parliamen-tary delegation to Luxembourg.

“There are a lot of similarities between Kuwait and Luxembourg which is a small country with a population of 500,000 only. We discovered here today that Luxembourg holds the second largest position in the fi-nancial sector in the world after the US,” he said.Bin Eissa said the lesson to draw for us in Kuwait is that the size and population of a country is not any hindrance in developing

Kuwait into an important finan-cial and trade hub in the world.

“We learnt today a lot about the financial institutions in Lux-emburg and also about Islamic financial institution. Our visit here was very useful and we call on the financial and investment bodies in Kuwait to explore these special capabilities and to benefit from them,” he said.

He noted that even the Ameri-can finance sector is making use of these capabilities offered by Luxembourg. On his part, Fernand Grulms told KUNA that “Luxembourg and Kuwait can do much more in the future and what we can do is to enact our double-tax treaty because that will lead to improvement in our business.” “We must organise networking between business people from Kuwait and Luxem-bourg so that we start to know each other much better and that will also enhance business development in the future,” he said.

Grulms said that today Luxem-bourg is very well positioned in terms of Islamic finance in Eu-rope and we can certainly pro-

vide our tools and our expertise for those who would like to launch Islamic financial products.” We hope to do more business in the future,” he added.

The Kuwaiti parliamentary delegation in-cludes Dr.Dhaifalla Abu Ramia, Saad al-Aze-mi and al-Saifi al-Ajmi. Head of the Kuwaiti parliamentary delegation Mubarak Al-Khe-rainej who is the president of the Kuwait-Luxembourg inter-parliamentary friendship group and chairman of the foreign affairs committee in the Kuwaiti parliament is ex-pected to arrive in Luxembourg.

KUWAIT TO DEVELOP COOPERATIONin Islamic Finance Sector in Luxembourg


gif

„W e

must organise net-working between busi-

ness people from Kuwait and Luxembourg so that we start to know each other much better and that will

also enhance business development in the

future

gif Market Review


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

The cumulative net profit of the eight Qatar Exchange-listed banks registered 25% growth during the January to June pe-riod this year against a 10% rise in the corresponding period of the previous year, according to the data collected from the Qa-tar Exchange.

The banks’ cumulative net profit stood at QR7.38bn and total as-sets at QR543bn during the first six months of this year. The surge in profitability came despite the Qatar Central Bank restrictions on personal borrowings by both nationals and expatriates.

The banking regulator had capped lending to expatriates at QR400,000 and limited the bor-rowing for nationals at QR2mn. It has also capped personal loan rates at 6.5%, which according to bank officials, has thinned the net margins.

QNB, the country’s largest lender by assets, reported a 31% growth in their net profit in H1 2011 (against a 30% growth in the year-ago period), Commercial Bank 17% (-13%), Doha Bank 14% (-5%), Qatar Islamic Bank 17% (-%), Ahli Bank 28% (8%), Internation-al Islamic 18% (7%), Masraf Al Rayan 14% (56%) and Al Khaliji 122% (3%).

The lenders’ cumulative operating income surged 25% with interest/finance earnings growing by a similar proportion whereas fee and commission income grew slower at 6% during January to June this year. Both Ahli

Bank and Masraf Al Rayan gave total oper-ating income; while others gave net operat-ing earnings. QNB has reported a 30% jump in its operating income, Commercial Bank (14%), Doha Bank (16%), Qatar Islamic Bank (14%), Ahli Bank (20%), International Islamic (14%), Masraf Al Rayan (41%) and Al Khaliji (56%).

Within the operational parameters, QNB reported a 35% growth in interest income, Commercial Bank (8%), Doha Bank (28%), Ahli Bank (19%) and Al Khaliji 58%. In the case of Shariah-principled lenders, Qatar Is-lamic Bank’s finance income was up 23%;

International Islamic (16%) and Masraf Al Rayan (15%). In the case of net fee and commission income, QNB could register a 5% rise, Commercial Bank (6%), Ahli Bank (25%), Masraf Al Ray-an (433%) and Al Khaliji (20%); while Doha Bank’s fell 18% and Qatar Islamic Bank (39%).

The cumulative assets of the banks stood at QR542.89bn, of which loan portfolio’s share was 55% or QR300.73bn at the end of the 30th of June 2011.

QNB’s total assets were valued at QR263.60bn, of which loans com-prised 57.11% or QR150.53bn; Commercial Bank QR67.72bn (59% or QR39.79bn); Doha Bank QR49.53bn (56% or QR27.71bn); Qatar Islamic Bank QR50.14bn (49% or QR24.73bn); Ahli Bank QR17.36bn (64% or QR11.06bn); International Islamic QR22.17bn (46% or QR10.12bn); Rayan QR48.93bn (58% or QR28.33bn) and Al Khaliji QR23.44bn (36% or QR8.46bn).

In the Islamic financing segment of the conventional lenders, net income from the Shariah-princi-pled route was still on the rise in the case of a majority of the banks but largely on account of the fall in ‘unrestricted invest-

ment account holders’ share in the profit’.

QNB’s financial statement gave a consolidat-ed figure for both conventional and Islamic financing. The net impairment on loans and advances registered increases in the case of QNB, Commercial Bank, International Islam-ic and Al Khaliji, while that of Qatar Islamic Bank fell. Doha Bank and Ahli Bank showed lower provisions for impairment on loans and advances.

Qatar’s Islamic BankingSector Performance Improves


gif

„I n the Is-

lamic financing seg-ment of the conventional

lenders, net income from the Shariah-principled route was still on the rise in the case of a major-ity of the banks but largely on ac-count of the fall in ‘unrestricted

investment account holders’ share in the profit

gifMarket Review

Islamic Finance Ltd.Islamic Finance Ltd offers a comprehensive rangeof Islamic finance solutions to help expedite yourinternational business, trade and risk mitigation.Islamic Finance Ltd is committed to providing its

business customers with a range of innovativeIslamic 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

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GIF header.indd 1 20/05/2010 14:40:30

The Leading Islamic bankers and corporate borrowers held discussions about the devel-opment of Islamic corporate finance at the International Summit on Islamic Corporate Fi-nance (ICFS 2011). The two day Summit held on the 10th and 11th of October in Abu Dhabi was in partnership with Noor Islamic bank. The Summit focused on exploring the role of Islamic syndicated loans, trade finance and project finance in diversifying the corporate funding mix and increasing deal flow. The keynote address was given by the senior vice-president and head of treasury at MAF Hold-ings, Daniele Vecchi.

Islamic finance has become the financial so-lution for number expanding businesses both regionally and all over the world. Those that attend the summit will be aiming to under-stand and capitalise on the rise of demand for Islamic finance from the corporate busi-ness sector. The ICFS 2011 is the perfect opportunity to bring together all key compo-nents of the deal-making value chain. The corporate banking leaders and corporate end users of these services came together in

order to develop long-term business relation-ships. Managing director of the International Summit on Islamic Corporate Finance, David McLean gives his views saying “with market preferences increasingly shifting towards Shariah-complaint banking and finance, more and more businesses are looking to include Islamic finance as a key component of their funding mix. Though Islamic retail banking, Takaful and Sukuk have traditionally been the main industry growth drivers, analysts are becoming more convinced that Islamic corporate finance, which includes syndicated lending, trade finance and project finance could be poised to be a powerful new growth driver for the global Islamic finance industry and meet the pent up demand of corporate borrowers for expanding the role of Islamic finance in their funding mix.”

He also says “There is no doubt that Islamic finance is maturing into a global phenome-non as highlighted by the increasing appetite for Islamic instruments and deal structure across international capital markets, corpo-rate loans and asset finance.”

Event Review gif

The International Summit on Islamic Corporate Finance bring together Corporate Borrowers and Islamic Bankers

Author: Tajah Brown, Global Islamic Finance Magazine Editorial Team, United Kingdom

Daniele Vecchi discussed the corporate bor-rowers’ expectations of Islamic corporate finance and also highlighted how Islamic fi-nance can play a more vital role in the corpo-rate funding mix. The event focused on how to capitalise the need for Islamic finance from the business side becoming part of the cor-porate funding mix.

Discussing the partnership with ICFS 2011, Hussain AlQemzi, CEO of Noor Islamic Bank and Group CEO of Noor Investment Group says “Islamic finance has been emerging as a viable corporate finance alternative, high-lighting by several recent landmark transac-tions both regionally and globally. However, the Shariah-compliant corporate finance mar-ket has not yet realised its full potential as its value proposition has not been fully commu-nicated to its corporate client base.”

He added, “We are delighted to be a strategic partner of the International Summit on Islam-ic Corporate Finance and see this event as a unique platform to engage the corporate bor-rowers in critical discussions that will seek to increase the ratio of Islamic finance in their overall corporate funding mix.”

The ICFS 2011 also featured a special key-note session with professionals in the indus-try such as Kazim Ali, Corporate Unit Head, Noor Islamic Bank. The session focused on the corporate borrower’s expectations of Islamic corporate finance and the role of Islamic finance in diversifying the corporate funding mix. Associate Sponsor, Mashreq Al Islami announced its role at the Summit held in Le Royal Meridien, Abu Dhabi. The CEO of Mashreq Al Islami, Moinuddin Malim was a panelist at the ‘Assessing Key Market

Opportunities for Islamic Corporate Finance’ session. Moinuddin Malim expresses his views saying, “Islamic finance is quickly be-come an integral part of the global Islamic finance industry and has taken its roots in almost all of the Muslim countries but has also been under discussion and penetration in selective Western and Far Eastern jurisdic-tions.

Islamic products and services are available for every segment of the industry so long as it has acceptability under Shariah. Retail, wholesale, investment, capital markets, as-set management and treasury products and solutions are available across broad spec-trum to meet the requirement of customers who prefers Shariah-compliant alternative.

Over the last 10 years we have witnessed an increasing appetite for Islamic products & services. Even post financial crises, the growth of Islamic finance outpaces that of conventional finance in our markets. Mashreq Al Islami is known for its range of financial services to accommodate the market needs.

Conferences such as the international Sum-mit on Islamic Corporate finance are critical in facilitating such dialogues and we are de-lighted to be a part of it”. Takaful and Sukuk have been the main driving force within the Islamic finance industry. Islamic corporate fi-nance could also become a new driving force for the industry globally, according to industry analysts. The new driving force could con-tribute to meeting the demands of corporate borrowers for expanding the Islamic finance sector in the funding mix.

Islamic Finance Ltd.Islamic Finance Ltd offers a comprehensive rangeof Islamic finance solutions to help expedite yourinternational business, trade and risk mitigation.Islamic Finance Ltd is committed to providing its

business customers with a range of innovativeIslamic 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

GIF header.indd 1 20/05/2010 14:40:30

Event Review gif

gif

There is no doubt that Is-lamic finance is maturing into a global phenomenon

as highlighted by the increasing ap-petite for Islamic instruments and deal structure across international capital markets, corporate loans and asset finance

„

gif Business NewsBookReview

How to Run an Islamic BankPart 1: Putting corporate strategy in places, values, regulationsPart of Article Collection, individual article/ £4.99

When considering the aspects involved in running an Islamic bank it is vital to channel resources such as knowledge and relationships in the right direction in order to strike a balance between innovation and con-trol. Strategy is the art of creating value and providing frameworks, mod-els and governing ideas. It could be compared to software, which needs to be updated as people expand their knowledge and gain experience. How to run an Islamic bank will explore the different strategies involved in the running of an Islamic bank such as risk positioning and financial fundamentals.

Islamic banking is a rapidly growing industry with the establishment of many new institutions embracing Shariah compliant banking. The UK has combined assets of US$300 million and overall the Islamic finance industry is worth an estimated one trillion US dollars globally.

Order Number: 2011g086

Throw it all and see what sticks: The Current State of Is-lamic Asset Management and a Prescription for ChangePart of Article Collection, individual article/ £4.99

Nearly all activities labelled today as “Islamic asset management” or “Islamic wealth management” are not at all related to their conven-tional cousins. They consist of simply creating products with fatwa, throwing them into the market, and seeing what sticks. It is random, undisciplined, and has nothing to do with the professional practice that we call asset management.

We like to call this the “throw it all and see what sticks” theory of asset management. In other words, the theory assumes that inves-tors are not seeking to improve their chances of achieving long-term savings objectives through disciplined investment.


Takaful (Islamic Insurance): Concept, Challenges, and Op-portunities Part of Article Collection, individual article/ £4.99

Through desktop research, one can get a plethora of materials and pa-pers on Takaful, but most tend to focus either on the fundamentals of Takaful or on Takaful models. Takaful is structured on the principles of sharing and pooling mortality/morbidity risk with other participants, It is seen as the Islamic counterpart of conventional mutual Insurance. Part 1 of this article will explore the key issues and challenges facing the world of Takaful and suggested areas where work is required to find solutions. Therefore this article is intended to provide useful reference material for practioners by summarising key aspects such as an overview of Takaful and the intricacies of the models.


Islamic Asset Management: An Asset Class on Its Own?by Dr. Natalie SchoonEdinburgh University Press/ £23.74

Islamic asset management has been growing at a similar rate as the Islamic financial industry as a whole and at the time of writing close to 700 funds are incorporated in the major databases with an estimated funds under management of around $70 billion. This book reviews the Islam-

ic asset management industry in detail, including the types of funds offered and their operational procedures.

It shows that although there are differences between conventional and Islamic asset management, these do not appear to have a significant impact on how the funds perform. Shariah compliant funds are therefore an attractive alternative for Muslim and non-Muslim investors alike.

ISBN-10: 0748639969ISBN-13: 978-0748639960

Risk Sharing in Finance: The Islamic Fi-nance Alternative by Zamir Iqbal, Abbas Mirakhor, Hossein Askari, Noureddine KricheneJohn Wiley & Sons/ £48.41

The recent U.S. financial debacle has affected the entire world and led to major reviews of risk management in financial institutions. Perhaps a simpler alternative is just to adopt the systems used for centuries in Islamic finance. Risk Shar-ing in Finance expounds upon this novel idea,

suggesting that the Islamic financial system can be developed for use around the world by providing a helpful paradigm for crafting global fi-nancial reforms.

Demonstrating how Islamic finance can successfully expand its array of risk sharing instruments, for example issuing government shares to finance development projects and placing limits on short sales and lev-eraging, the book makes a compelling case for thinking outside the box to redevelop a vibrant stock market.

Provides analysis of the comparative historical, theoretical, and em-• pirical investigation of risk management in both the conventional and the Islamic–type financial systems Explores the benefits and the implications of introducing Islamic • finance around the world and explains how wider reliance on risk sharing can be implemented Establishes a connection between the flawed contemporary West-• ern system of capitalist finance and the ancient, traditional forms of risk–sharing prevalent in Islamic finance

ISBN-10: 0470829664ISBN-13: 978-0470829660


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Islamic Finance news Roadshow3rd November 2011, TurkeyOrganised by RedMoney Group

Islamic Finance news roadshow8th November 2011, CanadaOrganised by RedMoney Group

Islamic Finance news roadshow10th November 2011, USOrganised by RedMoney Group

The 9th Middle East Forex & Investment Summit 2011 15th – 16th November 2011Abu Dhabi, United Arab Emirates Organised by Arabcomgroup

18th Annual World Islamic Banking Con-ference (WIBC 2011)20th & 22nd November 2011Republic of BahrainOrganised by MegaEvents

The Kingdom Investors Summit21st – 22nd November 2011Riyadh , Saudi ArabiaOrganised by Naseba

7th Operational Excellence in Banking - OPEX 201121st- 22nd November 2011Dubai, United Arab EmiratesOrganised by Fleming Gulf

Russian Power: Finance and Investment22nd – 24th November 2011Moscow, RussiaOrganised by Adam Smith Conference

Russian Banking Forum22nd November- 1st Dec 2011Moscow RussiaOrganised by Adam Smith Conference

Risk Management in Oil & Gas22nd – 23rd November 2011, Doha, QatarOrganised by Fleming Gulf

November December

Event Calendar

Commodities Week Middle East5th – 7th December 2011Dubai, United Arab Emirates Organised by Terrainn

Global Islamic Finance Awards & Confer-ence10th December, United Arab Emirates Organised by Global Islamic Finance Magazine

1st Annual Islamic Project Finance & Trade Finance Conference10th – 11th December 2011United Arab Emirates Organised by Global Islamic Finance Magazine

International Conference on Islamization in Modern Science and Scientification of Islamic Studies19th – 21st December 2011Selangor, MalaysiaOrganised by Association of Malaysian Muslim Intellectual (PIMM)

gif Event

January

Academy of International Business MENA Chapter Conference13th – 15th January 2011Dubai, United Arab Emirates Organised by AIB-MENA

Morison Menon

Address:204 Tower- A, Gulf Towers, Oud Metha, P. O. Box 55535, Dubai, UAETelephone: +971 4 33 66 990Fax: +971 4 33 66 992 E-mail: [email protected]: www.morisonmenon.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 Con-sulting, 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.

gifGlossary gifBusiness Directory

Business DirectoryBanks

European Islamic Investment Bank

Contact person/ department: Keith McLeod Address: European Office 131 Finsbury Pavement London EC2A 1NT EnglandTelephone: +44 20 78479900Fax: +44 20 78479901E-mail: [email protected] Website: www.eiib.co.uk

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.

Arab Banking Corporation

Contact person/ department: Nadia Mehdid Address: Station House, Station Court, RawtenstallRossendale BB4 6AJ, UKTelephone: +44 1706237900Fax: +44 1706237909E-mail: [email protected] Website: www.arabbanking.co

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

Bank of London and Middle East

Contact person/ department: Michelle ArnoldAddress: Sherborne House119 Cannon StreetLondon, EC4N 5ATUnited KingdomTelephone: +44 20 7618 0000Fax: +44 20 7618 0001E-mail: [email protected] Website: www.blme.com

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 inter-national 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.

(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: [email protected] Website: www.rbsbank.ae 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.

Dubai Islamic Bank PSJ

Address:P.O.Box 1080 Dubai United Arab Emirates Telephone: + 9714 2953000Fax: +971 4 295 411E-mail: [email protected] Website: www.alislami.ae/en/

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.

Al Baraka Islamic Investment Bank

Al Baraka Tower , P.O. Box 1882Manama , BahrainTelephone: + 973 250 363Fax: + 973 274 364E-mail: [email protected]: www.albaraka.com

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.

Abbas Accounting

Address:ABBAS ACCOUNTING P.O.Box : 78142 Dubai, U.A.ETelephone: +971 4 2820300Fax: +971 4 2820322E-mail: [email protected] Website: www.abbasaccounting.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.

Baker Tilly MKM

Address:Epico “Safar” Building Liwa Street Abu Dhabi United Arab Emirates Telephone: +97 1506226719Fax: +971 26226088E-mail: [email protected]: www.bakertillymkm.com

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.

HLB HAMT Chartered Accountants

Address:106, Al Nayali Building Abuhail Road, P.O. Box: 32665 Dubai - United Arab EmiratesTelephone: +97142627147Fax: +971 4 2627148E-mail: [email protected]: www.hlbhamt.com/

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 repre-sentation, 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.

Accountancy firms

BDO International

Address:BDO - London 55 Baker Street London W1U 7EUTelephone: +44 207 486 5888Fax: +44 0207 487 3686E-mail: [email protected] Website: www.bdo.uk.com/

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.

Barber Harrison and Platt

Address:2 Rutland Park Sheffield S10 2PDTelephone: +44 114 266 7171Fax: +44 114 2669846E-mail: [email protected] 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 acco-untants in South Yorkshire and Derbyshire our continued success owes much to our dynamic approach and ability to fulfil client demands. This requires the highest level of commitment and performance. Barber Harrison & Platt provide advice to plc’s, private companies, partnerships, sole traders, individuals and trusts. The close working relationship we enjoy with clients provides a deep insight into a far wider range of business situations and problems than are traditionally associated with accountancy.

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Norton Rose (Middle East) LLP

Contact person/department: Neil D. Miller, PartnerAddress:4th Floor, Gate Precinct Building 3, Dubai International Financial Centre, Dubai, UAE PO Box 103747Telephone: +971 (0)4 369 6300Fax: +971 (0)4 369 6350Email: [email protected]: 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

Lawrence Graham LLP (LG)Contact person/ department: James Foster, head of LG’s Dubai officeAddress: PO Box 33090 8th Floor Convention Tower Zabeel Road Dubai, UAE Telephone: +971 4 329 2420Fax: +971 4 329 2430E-mail: [email protected] 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.

Trowers & HamlinsContact person/ department: Nicholas EdmondesAddress:Sceptre Court 40 Tower Hill London EC3N 4DXTelephone: +44 20 7423 8000 Fax: +44 20 7423 8000 E-mail: [email protected] Website: www.trowers.com

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.

King and SpaldingContact person/ department: Jawad l AliAddress:125 Old Broad Street LondonEN EC2N 1ARTelephone: +44 2075517500Fax: +44 2075517575E-mail: [email protected]: www.kslaw.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.

Allen & OveryContact person/ department: Michael DuncanAddress:Bishops Square Allen & Overy LLP One Bishops Square London E1 6AD United KingdomTelephone: +44 20 3088 4197E-mail: [email protected] 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.

Clifford Chance

Contact person/ department: Anna WardAddress: 10 Upper Bank Street Canary Wharf London E14 5JJTelephone: +44 20 7006 1000E-mail: [email protected] 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.

Overseas Trade Finance Ltd

Address:Bilton TowerLondonW1h 7LETelephone: + 207 859 8201Fax: +44 845 862 1220E-mail: [email protected]: 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 bu-siness 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

Chahine Capital Group

Contact person/ department: Andrew PellAddress: 43, Avenue MontereyLuxembourg, L-2163Telephone: +44 20 7 1270001 +352 260 955Fax: +44 20 7127 4611E-mail: [email protected] Website: www.chahinecapital.com

Description: Specialists in quantitative equity investment strategies. Digital Stars Europe (Bloomberg: BILDSCELX) available as Chahine Islamic Stars Eu-rope, with Fatwa from Sharia board headed by Dr Elgari. Bespoke investment strategies under mandate and client branded funds also available.

Advisory and Consultancy firms

Malaysia International Islamic Financial Centre (MIFC)

Address:MIFC SecretariatBank Negara MalaysiaJalan Dato’ Onn50480 Kuala LumpurMalaysiaTelephone: +603 2692 3481Fax: +603 2692 6024E-mail: [email protected]: 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.

Qatar Financial Centre

Address:P.O. Box : 23245, DohaTelephone: +974 496 7777Fax: +974 496 7676E-mail: [email protected]: www.qfc.com.qa

Description: Qatar is one of the world’s fastest growing economies, and the we-althiest 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.

Dubai International Financial Centre (DIFC)

Address:The Gate, Level 14P.O. Box 74777, Dubai, UAETelephone: +971 4 362 2222 Fax: +971 4 362 2333 E-mail: [email protected] 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.

If you would like to list your company in Financial Directory, please send your order to [email protected]. Claim your 25% discount by giving the following discount code: X10G01. Please note that only limited space is available in the directory.

Law firms

AR Business Consultants Chartered Certified Accountants

Tel: + 44 (0) 208 776 9500Fax: + 44(0) 208 778 8966Regent House Business CentreSuite No: 209291 KirkdaleLondon 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.


Prosperitus Capital Partners

Contact person/department: Kamran H. Khan Co-Managing Partner Address:Berkeley Square House LondonW1J 6BD

Telephone: +44 207 193 5755 Mobile: +44 7943 866 552 E-mail: [email protected]

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 inno-vation 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 RandallAddress: 4 Creed Court5 Ludgate HillLondon EC4M 7AA Telephone: +44 (0) 20 7246 9940Fax: +44 (0) 20 7246 9944

E-mail: [email protected]: www.commanderfund.co.ukCommander fund is primarily a conventional based asset mana-gement 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 develo-ping a strong client base and market presence there.

Capitala

Contact Person. Department : Patricia AssaadAddress: Al Moroor Street PO Box 30398 Email: [email protected] Telephone: +971 2 412 1111Fax: +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

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Bai Stands for “sale” or contract of sale. It is often used as a prefix in referring to different sales-based modes of Islamic finance, such as Murabaha, Istisna’a, and Salam.

Bai al Inhah

Buying an object for cash then selling it to the same party for a higher price whose payment is deferred so that the purchase and sale of the object serves as a ruse for lending on interest. It equates to a double sale by which the borrower and the lender sell and then resell an object between them, once for cash and once for a higher price on credit, with the net result of a loan with interest. Used by some Islamic banks, it refers to selling of an asset to the customer through deferred payments. At a later date, the bank will repurchase the asset and pay the client in cash terms. Thus, Bai al Inah comprises two agreements; in the first agreement, the bank sells an identified asset to the customer at an agreed price and the customer can complete the purchase of bank’s asset by payment in instalments over an agreed period; in the second agreement, the bank re-purchases the same asset from the customer at a lower price and on completion of the second transaction, the bank will pay the lump sum amount in immediate cash at the price agreed between them. The difference in the price is the bank’s profit, which is determined in advance. This arrangement is prohibited by the majority of Shari’ah scholars as it also equates to a sale and buy-back arrange-ment. Also known as Bay-al Inah or Inah. Similar to tawarruq however, intawwaruq a third party is involved as an intermediary.

Bai’ al Mutlaq Conclude a sale without any option to rescind.

Bai’ al Muqayaza Exchange of goods with goods is called barter.

Bai Bithaman Ajil (BBA)

This contract refers to the sale of goods on a deferred payment basis; a deferred payment sale. Islamic banks use it as a mode of financing for purchase and sale or deferred payment of consumer goods. Technically, this financing facility is based on the activities of buying and selling. There is no interest charged. Equipment or goods required by the cus-tomer are purchased by the bank which subsequently sells the goods to the customer at an agreed higher price; payment is deferred and the customer is allowed to settle payment either by installments or in a lump sum within a pre-agreed period. The deferred payment price which is the bank’s sale price includes a profit mark-up for the bank agreed by both parties. Similar to a Murabaha contract, but with payment on a deferred basis known as Murabaha Muajjal.

Bai Mu’ajjalLit.: a credit sale or deferred payment contract. Technically, a financing technique adopted by Islamic banks, It is a contract in which the seller allows the buyer to pay the price of a commodity at a future date in a lump sum or in installments. The price fixed for the commodity in such a transaction can be the same as the spot price or higher or lower than the spot price. The concept is the same as Bai Bithaman Ajil (BBA).

Bai wafa Buy-back, sale and repurchase, a contract with the condition that when the seller pays back the price of goods sold, the buyer returns the goods to the seller.

Bay’al ayan Sale of tangible objects such as goods (as opposed to sale of services or rights).

Bay al-dayn Sale of debt. According to a large majority offuqaha’, debt cannot be sold for money, except at its face value, but can be sold for goods and services.

Bayu al-Gharar Trading in risk, where the Arabic word ghararis taken to mean “risk”. See Gharar.

Bay-al InahAlso termed as Bai ah Inah. Buying an object for cash then selling it to the same party for a higher price whose payment is deferred so that the purchase and sale of the object serves as a ruse for lending on interest. At a later date, the bank will repurchase the asset and pay the client in cash terms. Similar to tawarruq however intawarruq a third party is involved as an intermediary.

Bay al-kali bil kali A sale in which both the delivery of the object of sale and the payment of its price are delayed. It is similar to a modern forward sale contract.

Bay al-mudaf A sales contract in which delivery of both the commodity and the payment is deferred - for example forward sales in modern times. Such contracts are not permitted by the Shari’ah.

Bay muzayadah Sales by auction.

Bayt-al-Mal Public Treasury in the Islamic State.

Batil Null and void. Invalid sale or contract. One that does not fulfil the conditions relating to offer and acceptance, subject matter or the consideration and possession or delivery of the subject matter or involves some contravention of the Shari’ah, such as the involvements of riba, gharar or qimar. Also termed as Aqd Batil and Bai Baatel. Opp.Sahih.

Islamic Finance GlossaryB


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