ISSUE NO. 183 APRIL–JUNE 2012 JUMADA-AL-AWWAL TO RAJAB 1433 PUBLISHED SINCE 1991 HORIZON ANALYSIS: RESTRUCTURING SUKUK TRANSACTIONS COUNTRY FOCUS: A WIND OF CHANGE IN NORTH AFRICA ACADEMIC ARTICLE: FAITH AND FINANCE POINT OF VIEW: RISK MANAGEMENT IN ISLAMIC FINANCE – THE BLACK BOX PHENOMENON FOOD FOR THOUGHT: AN APPEAL FOR A PARADIGM SHIFT IN THE THEORETICAL FOUNDATIONS OF ISLAMIC FINANCE CAPITAL MARKETS: BAY’ AL DAYN BI AL SILA – A BREATH OF FRESH AIR FOR THE ISLAMIC CAPITAL MARKET MARKET DEVELOPMENT: ISLAMIC MICROFINANCE – INDIA AS AN EMERGING POTENTIAL MARKET Sheikh Zayed Mosque, Abu Dhabi
Transcript
ISSUE NO. 183APRIL–JUNE 2012
JUMADA-AL-AWWAL TO RAJAB 1433
PUBLISHED SINCE 1991HORIZON
ANALYSIS:RESTRUCTURING SUKUKTRANSACTIONS
COUNTRY FOCUS:A WIND OF CHANGE INNORTH AFRICA
ACADEMIC ARTICLE:FAITH AND FINANCE
POINT OF VIEW:RISK MANAGEMENT INISLAMIC FINANCE – THEBLACK BOX PHENOMENON
FOOD FOR THOUGHT:AN APPEAL FOR A PARADIGMSHIFT IN THE THEORETICALFOUNDATIONS OF ISLAMICFINANCE
CAPITAL MARKETS:BAY’ AL DAYN BI AL SILA – ABREATH OF FRESH AIR FORTHE ISLAMIC CAPITALMARKET
MARKET DEVELOPMENT:ISLAMIC MICROFINANCE –INDIA AS AN EMERGINGPOTENTIAL MARKET
Sheikh Zayed Mosque, Abu Dhabi
NEWHORIZON Jumada-Al-Awwal to Rajab 1433
CONTENTS
05 NEWS A round-up of the important storiesfrom the last quarter around theglobe.
09 SUKUK UPDATEHighlighting some of the keydevelopments in the sukuk marketduring the last quarter.
36 IIBI LECTURESReports of the January 2012lecture on Islamic financedevelopments in Africa given byIqbal Asaria and the February2012 lecture by Massoud Janekahon adapting Islamic capitalmarkets to meet the needs ofconventional borrowers.
40 DIARY OF EVENTSENDORSED BY THE IIBI
41 AWARDSListing of IIBI post graduatediplomas and diplomas in Islamicbanking.
11 Restructuring SukukTransactions
In today’s volatile capital markets, DebashisDey, Stuart Ure and Peter Wielgosz ofClifford Chance LLP suggest thatrestructuring sukuk is likely to become morecommon and set out an approach to achievethis.
15 Faith and Finance
This 2010 Harvard Paper by ProfessorMohammad Nejatullah Siddiqi argues thatfaith, independent of race, religion ornationality, has a role to play in bringing thefinance industry back to a sense of morality,fairness and the common good.
19 Bay’ al Dayn bi al Sila:A Breath of Fresh Air forthe Islamic Capital Market
The tradability of debt is important to assetliability and liquidity management in Islamiccapital markets. This article looks atMalaysia’s attempts to make this a lesscontentious issue with a new concept ofdebt trading.
24 An Interview withSultan Choudhury, IslamicBank of Britain
The Islamic Bank of Britain received itslicense from the Financial Services Authorityin 2004. Sultan Choudhury answersquestions about its progress since then andits future strategy. He also comments on theUK’s position as the leader in Islamicfinance in the western world and what couldbe done to reinforce that position.
26 Risk Management inIslamic Banks – The BlackBox Phenomenon
Dr Rania Salem examines the challengesfacing the Islamic finance sector in itsimplementation of effective riskmanagement strategies.
28 An Appeal for aParadigm Shift in theTheoretical Foundations ofIslamic Finance
Sherif Ayoub challenges the way in whichIslamic finance currently jumps throughhoops to make its institutions andinstruments march to the tune of theconventional sector and argues for aradically new approach.
30 Islamic Microfinance:India as an EmergingPotential Market
While Islamic finance is growing rapidly,Fouzia Jan claims it is failing the poorest inMuslim society. In this article she analysesthe case of microfinance in India andargues for the establishment of Islamicmicrofinance.
32 The Wind of Changein North Africa
This article takes a look at the politicalupheaval that has been taking place inNorth Africa and asks whether a floweringof the Islamic finance industry will followin the wake of the changes that have takenplace.
NEWHORIZON April–June 2012
Nearly three years after the banking crisis first hit the headlines in2008, the stories still keep coming and it seems the bankingindustry has learned nothing and forgotten nothing. According toGreg Smith, a senior executive with Goldman Sachs, in aresignation letter published in the New York Times, ‘not one singleminute is spent asking questions about how we can help clients. It’spurely about how we can make the most possible money off ofthem.’ He also referred to ‘this decline in the firm’s moral fibre.’These comments may be equally applicable to other financialinstitutions driven by an unbridled greed for profits.
In the light of these events we make no apologies for reproducing inthis issue Muhammad Nejatullah Siddiqi’s 2011 paper on faith andfinance, in which he says there is ‘a moral deficit in thecontemporary structure of the social, political and economic edifice’and calls for a return to faith-based morality. In a society based onmorality individuals are encouraged to act freely, but with thecaveat that their actions should ensure the betterment of societyand, crucially, that none are harmed as a result of economic eventsthat are often the result of immoral conduct.
While modern Islamic finance may not be perfect, as indeed noinstitution devised by human beings is perfect, it does at least striveto operate within a defined set of universal moral principles andmay therefore be a model from which the conventional financeindustry can learn lessons. Of course businesses including banksneed to be profitable, but profit at any cost should not be themantra by which they operate. This requires the exercise of self-restraint and taking personal responsibility. At one time these werethe virtues of a vibrant capitalist economy.
What is really needed is much stronger action and moral leadershipby governments and regulators to control freebooting banks.Unfortunately for society there are doubts about whether issues ofmorality, such as introducing tighter regulation to curbgambling-like speculation by the banks, are likely to affect thepresent mindset of governments and regulators. The best hope isthat, in the continuing financial crisis, market forces will cause arethink and drive funds towards ‘moral’ institutions such as Islamicand ethical banks.
EDITORIAL
Mohammad Ali Qayyum,Director General, IIBI
Andrea WhartonSue Dobson
Mohammad Shafique
IIBI
Rahim Ali (Researcher)Mohammed AminM Iqbal AsariaRichard T de BelderAjmal BhattyStella CoxMuhammad Nasir (Researcher)Iqbal KhanDr Imran Ashraf Usmani
The European IslamicInvestment Bank (EIIB) hasmade an investment inRasmala Holdings Limited, asa first step in building astrategic partnership withRasmala, a leading investmentbank operating in the GCCcountries and Egypt. The dealwill be funded from fundsreleased from EIIB’s closure ofthe Turath Quoted EquitiesFund in 2011.
Rasmala specialises in assetmanagement, investmentbanking, brokerage andresearch and was one of thefirst regional investment banksto be licensed by the DubaiFinancial Services Authority.For the financial year endedDecember 2011, Rasmalaexpects to post a loss beforeinterest, tax, depreciation,amortisation and restructuringcharges of approximatelyUS$7m. Rasmala has,however, recently undertakena number of cost reductionsand restructuring initiatives
which they believe will result inan improved performanceduring 2012. Mr. Zulfi CaarHydari, Chief Executive of EIIBsaid, ‘Rasmala has a strongregional franchise, and togetherwith EIIB’s international capitalmarkets and asset managementexperience this will be apowerful partnership to seizecurrent opportunities in theGCC.
The GCC is growing inimportance as an economic andtrading hub as its overall GDP isexpected to reach $2 trillion inless than 10 years. Our goal as apublic company is to giveinternational investors exposurevia a London-quoted vehicle tothis fast growing region, whichprovides nearly one-quarter ofthe world’s oil supplies.’
EIIB has agreed to make aUS$16m investment in Rasmalaover a 12 month period. Theinvestment is made pursuant toa financing facility that isconvertible into newly issued
ordinary shares in Rasmala,representing approximately35% of Rasmala’s enlargedshare capital, subject to certainpost completion adjustments.Rasmala has transferred amajority of management sharesto EIIB, which will allow EIIB totake a leading role in Rasmala’smanagement. (Rasmala’sconstitution provides that theholders of the managementshares have the right to appointthe majority of directors to theboard of Rasmala.)
EIIB has also acquired 7.4% ofRasmala’s existing share capitalfrom Rasmala’s chairman, Mr.Ali al Shihabi. At the same timeMr. Ali al Shihabi will relinquishhis management shares whichshall be redeemed by Rasmala.The consideration payable toMr Ali Al Shihabi shall besatisfied over a two-year periodby the issue of up to 98,565,000new ordinary shares in EIIB at aprice of 3.6 pence per EIIBShare. The agreement betweenEIIB and Mr. Ali al Shihabi
provides that during thetwo-year period from the dateof the agreement Mr. Ali alShihabi has a right to buyback, for the originalconsideration, the Rasmalashares previously held by himshould EIIB seek to acquirethe balance of Rasmala sharesthat it does not own duringthat period. If no offer hasbeen made by EIIB for thebalance of the Rasmala sharesduring such a two-year period,EIIB shall transfer suchRasmala shares back to Mr.Ali al Shihabi at the expiry ofthe two-year period at thesame price.
Rasmala will continue tobenefit from the strategicinput of Mr. Ali al Shihabiwho will continue to supportthe company in the capacity ofChairman of the RasmalaSupervisory Board. Mr. Ali alShihabi will also serve as asenior adviser to assist withpost-transaction integrationfor a period of two years.
EIIB Invest in Rasmala
Strong Appetite for Islamic Finance in Oman
A recent market research studyentitled ‘Islamic Finance inOman – Sizing the RetailMarket’ analysed the retailmarket for Islamic finance inOman across all sectors of thefinancial market, includingbanking, finance and insurance.The report, commissioned byindependent consultancy,IFAAS (Islamic FinanceAdvisory & Assurance
Services), examined the currentbehaviour of consumers andmeasured future market trends togauge the real potential forIslamic finance in Oman.
Key findings from the report reveal:
• 85% of consumers in Omanexpressed an interest inIslamic finance products, with59% saying they were very
interested and 26% quiteinterested.
• 70% of consumers in Omananticipate opening an Islamicsavings account in the next 12months. (35% expected to doso within three months of suchaccounts becoming available).
• 77% of consumers in Omanexpect to take out an Islamic
loan within the next 1–2years.
Oman is currently working ona rule book for Islamicbanking. It is due to becompleted in time for themid-year change in the law,which will effectively be thestarting gun for thoseorganisations planning tooffer Islamic banking.
The number of financialinstitutions registered in Bahraincontinued to rise last year,reaching 415 by the end ofJanuary 2012, up from 403 ayear earlier. The Kingdom saw anumber of successes in the last
few months of 2011 as financialinstitutions such as Notz Stuckiand Altaira Middle East set upin the Kingdom. Among otherfinancial firms that haveregistered in Bahrain during thecourse of 2011 are CanaraBank, AMP Capital Investorsand Deloitte Corporate Finance.
The financial services industryin Bahrain employed more than14,000 people at the end of2010, of which two-thirds wereBahrainis. Alongside theincrease in the number offinancial institutions, thefinancial sector in Bahraincontinued to grow in the firsthalf of 2011, expanding by
1.7% in the twelve months toJune 2011 according to theBahrain Economic Quarterly.
Shaikh Mohammed bin Essa Al-Khalifa, Chief Executive of theBahrain Economic DevelopmentBoard (EDB), said, ‘We at EDBare very pleased by the strongperformance of the financialsector over the last year. Thatthese businesses are choosingBahrain as their base foraccessing the Gulf economiesand the wider Middle East istestament to the strength of thelocal Bahraini workforce, thequality of the Central Bank ofBahrain’s regulation and theaccess we provide to the
strongly-growing Gulf market,which is now worth over onetrillion dollars.’
An important aspect of EDB’smandate is creating the bestconditions for attracting foreigndirect investment. Bahrain’scommitment to liberal economic policies designed toincrease growth was reflectedearlier this year as it was ranked among the world’s top 20 most economically free nations and the most free in MENA by the annual Indexof Economic Freedom,published by The HeritageFoundation and the Wall StreetJournal.
NEWHORIZON April–June 2012NEWS
Bahrain’s Financial Sector Continues to Grow
Shaikh Mohammed, EDB
The UK Property Market Turns to Islamic Finance
Jervis Rhodes, Head ofCorporate Banking at Bank ofLondon and the Middle East(BLME) believes that there is areal opportunity for Islamicfinance to offer propertydevelopers an alternative andcompetitive source of fundingsolutions at a time when thedebt markets for propertydevelopers are being squeezed.He made this comment asBLME announced thecompletion of two deals in thefirst months of 2012.
In one deal it has signed a£13.5 million developmentfinancing facility with AitchGroup Limited (“Aitch”), theLondon-based residential andcommercial propertydeveloper. The financingagreement is for a term of
three years and has been securedfor the completion of theinnovative residentialdevelopment of the TextileBuilding in Chatham Place,Shoreditch. Previously thebuilding was used as officespace, but is now undergoing acomplete transformation into 86high specification residentialunits, with some commercialunits included on the groundfloor. Efforts have also beenmade to limit the carbonfootprint of the building with acar share scheme and a cyclepark.
In a second announcement BLMEdisclosed that they have signed arevolving murabaha financingagreement with MasthavenProperty Finance Limited(“Masthaven”), a subsidiary of
Masthaven Group Limited. Thefinancing is for a term of threeyears and has been secured forthe purpose of fundingMasthaven’s bridge and shortterm property finance business.
Massoud Janekeh, Head ofIslamic Capital Markets atBLME said, ‘Due to the natureof bridging loans and short termproperty finance Masthavenrequired a flexible facility withrolling repayments. BLME wasable to provide this flexibility.We have also found that manybusinesses in UK, andparticularly in the propertysector, are increasingly lookingfor partners that can offer astable funding platform. To myknowledge this is the first timethat a facility like this has beenprovided by an Islamic Bank.’
Andrew Bloom, ManagingDirector at Masthaven,commented, ‘Throughout theprocess the team at BLMEwere extremely professionaland supportive, helpingMasthaven to find acompetitive and flexiblefinancing structure suitable toour business. This was the firsttime Masthaven have usedIslamic banking as a means offinancingand I amverypleasedwith theoutcome,and thepartnershipwe havedevelopedwithBLME.’
Jervis Rhodes
NEWHORIZON Jumada-Al-Awwal to Rajab 1433 NEWS
After a nine-month interregnumAAOIFI have announced theappointment of a new SecretaryGeneral, Dr. Khaled Al Fakih, toreplace Dr. Mohamad NedalAlchaar, who resigned on1 April 2011 to take up a Syriangovernment post.
Dr. Al Fakih has extensiveexperience in banking andfinance and a uniquecombination of expertise inIslamic law, risk management,audit and technical finance. Heholds a PhD in Islamic Studiesfrom the University of SaintJoseph, Beirut, Lebanon and anMBA in Banking and Finance.Dr. Al Fakih is a CertifiedFinancial Risk Manager (FRM),Certified ManagementAccountant (CMA), CertifiedInternal Auditor (CIA) andCertified Financial ServicesAuditor (CFSA). He is a memberof the Islamic Banks Committeeof the Association of Banks inLebanon (ABL) and the AAOIFIShari’ah Standards Committee.He was also a member of the
venture capital and Islamicsecuritisation study group as wellas the Islamic corporategovernance study group at theCentral Bank of Lebanon in2007. In addition, he haslectured on the principles ofIslamic jurisprudence (Fiqh AlMu’amalat) at the IslamicUniversity of Beirut’s Al ShariaCollege and delivered seminars indifferent countries incollaboration with theInternational Monetary Fund,ABL and the Union of ArabBanks, covering major Islamicfinance topics including theprinciples of Islamic finance,structured finance, riskmanagement and audit. Hecurrentlyheads BankAudi sal’sgroupIslamicbankingoperations.He took uphis post on1 February2012.
AAOIFI Appoint NewSecretary General
Takaful Emarat, the UAE-headquarteredShari’ah-compliant life andhealth insurance company, hasjoined forces with SaudiArabia’s Riyadh Capital tolaunch a new Shari’ah-compliant, capital-protectedglobal equity investment fund.The fund is designed to be along-term saving venture witha high degree of capital
protection. It is a global fundand is linked to the performanceof selected Shari’ah-compliantstocks, chosen for their highcash flow and low debt toequity ratio. Participation in the fund is offered to Takaful Emarat’s new andexisting holders of theireducation, whole life and wealthplans.
Takaful Emarat Launch New Investment Fund
Islamic Investment Index for Australia
Thomson Reuters and CrescentWealth, the Australian Islamicinvestment manager, havelaunched an Islamic investmentindex for Australia to help openup this resource-rich market toIslamic finance investorsglobally. The index enablesinvestors to benchmark theAustralian equities market andtherefore provides a powerfultool to those wishing to expandand diversify their investmentportfolios in accordance withIslamic principles.
The Thomson Reuters CrescentWealth Islamic Australia Index,covering 143 equities with acombined market capitalisationof $160 billion, is the firstbenchmark index to screenASX-listed companies forcompliance with Islamicinvestment principles usingThomson Reuter’s research-based approach. The Shari’ahscreening filters used by theindex exclude institutions fromconventional financial sectorcompanies with high levels of
debt or leverage such asproperty trusts and other stocksthat conflict with Islamicfinance principles. The screeningtherefore produces a dynamicbias towards resources andenergy firms, including blue chipcompanies such as BHP Billitonand Rio Tinto. The compliantcompanies are reviewed on aquarterly basis for continuedcompliance with the Accountingand Auditing Organisation forIslamic Financial Institutions(AAIOFI) standards.
Talal Yassine, managing directorof Crescent Wealth, said, ‘Thenew index is a natural fit forCrescent Wealth, as Australia’sfirst purely Islamic-focused fundmanager. There is a hugeuntapped potential to growIslamic-compliant investment inAustralia from investors aroundthe world, in particular in Asiaand the Middle East. This indexgives these investors a localperformance benchmark for theAustralian market.’
Dr Khaled Al Fakih
Commenting on theannouncement, GhassanMarrouche, Chief ExecutiveOfficer at Takaful Emarat, said,‘The takaful industry – likemany other growing industries –is facing a number of challenges.One of them is the limitationregarding Shari’ah-compliantinvestment for takaful planholders. Takaful Emarat, in itscapacity as a specialised life
takaful company, will continueto keep close relationshipswith its customers to ascertaintheir varying saving needs. Westrive hard to come up withthe solutions such as ournewly-launched TakafulEmarat Capital ProtectedFund, to give our clients aperfect combination ofprotection and saving underone takaful plan.’
Arcapita Bank, theinternational investment firm,licensed as an Islamic wholesalebank by the Central Bank ofBahrain has announced that itand several of its affiliates,including Arcapita InvestmentHoldings Limited, have filedvoluntary cases in the UnitedStates under Chapter 11 withthe goal of developing andconfirming a plan ofreorganisation. The action isdesigned to allow Arcapita toprotect their business and assetsand implement acomprehensive restructuringthat rationalises Arcapita’scapital structure and maximisesrecoveries to creditors andother stakeholders. The filingsautomatically imposed aworldwide injunction againstcollection and enforcementactions that will protect theassets of the Arcapita entitieswhile a plan of reorganisationis formulated. None ofArcapita’s operating subsidiariesor portfolio companies areincluded in the filing.
Atif A. Abdulmalik, ChiefExecutive Officer of Arcapitasaid, ‘In the last three years,Arcapita has succeeded inmanaging its business tocounter the effects of thefinancial crisis. During thisperiod, Arcapita has repaid$1.7 billion in maturing bankfacilities and stepped in with afurther $900 million to supportits investment portfolio. Afterplans to refinance a $1.1 billionfinancing facility coming dueon March 28th 2012 werenegatively impacted by theEurozone crisis, Arcapitacommenced discussions with
the facility participants to extendit by three years. Thesenegotiations started severalweeks ago and began as aconsensual and constructiveprocess with the bank group,which has supported usextensively through thedownturn. However, the actionsof certain non-bank creditorshave precluded Arcapita fromreaching such a consensualresolution before the March 28thmaturity date, jeopardisingArcapita’s ability to satisfy itsfiduciary duties to itsstakeholders. The filings offerArcapita the necessary protectionit needs to complete productivenegotiations with all parties.’
It is understood that it washedge fund creditors that werepushing for an early settlementand that it was these same hedgefunds that refused to cooperatewith Arcapita’s attempts toreach agreement with creditorsabout repayment of the debt.Most restructurings in theMiddle East and GCC havebeen rather private andprotracted affairs with problemsresolved behind closed doorsand in the case of stated-backedor strategically importantinstitutions governments havestepped in to help. Arcapita areunusual in that most of theirportfolio operations are USbased, thus allowing them toseek bankruptcy protectionunder Chapter 11 laws. Thereis, however, no guarantee thatthe problem will be resolvedunder US law; it is likely thatthe hedge funds involved willseek the most favourablejurisdiction to push throughtheir claims.
Fitch Ratings has affirmedDubai Islamic Bank’s (DIB)Long-term Issuer Default Rating(IDR) at ‘A’ and Viability Rating(VR) at ‘bb’. The outlook on theLong-term IDR is stable. DIB’sLong- and Short-term IDRsreflect Fitch’s view that therewould be an extremely highprobability of support from theUAE authorities in case of need.
The bank’s VR reflects its highexposure to real estate, weakerasset quality, high loanconcentrations, and, in thiscontext, its relatively tightcapitalisation position. It alsoreflects its strong franchise,healthy profitability andcomfortable liquidity.
Oman’s two new Islamic banks,Bank Nizwa and Al IzzInternational Bank, will issue aninitial public offering for 40%of their shares by the middle of2011. Both banks received theirlicenses in 2011 following theSultanate’s decision to permitIslamic banking and were still inthe process of formation at thetime of going to press.
It is also reported thatBankMuscat has allocatedRO150 million (approximately$400 million US) of capital tofinance its Islamic bankingwindow operation, Meethaq,subject to the necessaryregulatory approvals. If marketconditions prove favourable, thebank has indicated that capitalamount could increase.
The International Islamic TradeFinance Corporation (ITFC), amember of the IslamicDevelopment Bank Group (IDB),
has signed a frameworkagreement for cooperation withthe Government of the ArabRepublic of Egypt. Thisagreement aims to finance theEgyptian General PetroleumCorporation (EGPC) and theGeneral Authority of SupplyCommodities (GASC) with anamount of US$ 400 millionannually for three years. Theallocated amount will be usedto finance the import ofpetroleum and petroleumproducts, in addition to theimport of strategic commodities.
Al Baraka reported 2011 fullyear group results showingthat while total operatingincome was up 51% and assetsby nearly 19%, net incomewas down almost 60%. Thiswas attributed to the fullconsolidation of Al Baraka’soperations in Pakistan andBahrain for the first time. Mr.Adnan Ahmed Yousif, ViceChairman of Al Baraka IslamicBank and President & ChiefExecutive of Al BarakaBanking Group, commented,‘The conversion of the Bank’sbranches in Pakistan to anindependent Islamiccommercial bank following themerger with Emirates GlobalIslamic Bank in Pakistan andour hard work to turnaroundthese branches to profitabilityhad an evident positive effecton the operations of the Bank.We also continued ourambitious work in Bahrain tolaunch new services andproducts, open new branches,and enhance capital, technicaland human resources of theBank.’
NEWHORIZON April–June 2012NEWS
Arcapita Files for Chapter 11 In Brief
NEWHORIZON Jumada-Al-Awwal to Rajab 1433 SUKUK UPDATE
The UK government confirmed once again atthe end of January that a sovereign sukukissue is not on the cards. At an Islamicfinance seminar organised in London byinternational law firm, Norton Rose, LordSassoon, Commercial Secretary to theTreasury said again that that the UKgovernment does not consider a sovereignsukuk to be value for money. This decision islikely to be a significant disappointment forIslamic financial institutions in the UK. (Seethe Islamic Bank of Britain’s comments inour ‘In the Spotlight’ feature in this issue.)
This comment has attracted some criticism incertain quarters. There is a certain level ofdisbelief about the value for money claim,given that countries such as Malaysia,Turkey, the GCC and Indonesia say thatsukuk issuances in 2011 have proved to bemore cost competitive than conventionalbonds. It is difficult to know whether thisdisbelief is misplaced given that the Treasuryhave declined to publish the analysis onwhich the decision not to issue a sovereignsukuk is based. In theory the costs could behigher given the need to devise new legaldocumentation, move assets around and pay
for Shari’ah opinion, but there are those whobelieve these costs could be offset if thesukuk were of sufficient size and structuredso that it carries a full British Governmentguarantee. It might even attract newinvestors especially given that the currentlevel of sukuk issuance is running way shortof the demand that has been evident for atleast the last six months – too many investorschasing too few sukuk.
The failure to disclose the results of theTreasury study, of course, fuels the views ofthe conspiracy theorists who believe thegovernment has been frightened off by theanti-Islamic attitudes of certain elements ofthe popular press. Similarly the suggestionthat there is no suitable asset pool againstwhich a sukuk can be issued sounds slightlyoff the mark; various governments mayhave already cashed in the family silver, butit is hard to believe that there are absolutelyno suitable assets to back a sovereign sukuk.It is much more likely that the Treasurystudy has taken a very conservative and,dare we suggest, unimaginative approach toassessing the costs, advantages anddisadvantages of a sovereign sukuk.
Egypt Likely toIssue Sovereign
Sukuk
It should come as no surprise that Egyptis feeling the pinch in the wake of thepolitical unrest in 2011 that sawPresident Hosni Mubarak toppled frompower with revenues from both tourismand inward foreign investment fallingsignificantly. The country is eyeing apackage of measures to plug the gap andhelp to restart economic growth. Theseinclude applying for loans from both theWorld Bank and the IMF, as well as a$2 billion sovereign sukuk in the periodbefore the end of the country’s financialyear on 30 June 2012.
The MalaysianEquity-Linked
Market is Open forBusiness
Khazanah Nasional Berhad (the strategicinvestment fund of the Government ofMalaysia) successfully issued a seven-yearbenchmark exchangeable sukuk ofUSD 357.8 million in mid March 2012 viaan independent Labuan incorporated specialpurpose company, Pulai Capital Ltd.,exchangeable into the shares of ParksonRetail Group Limited, one of the largestdepartment store operators in the People’sRepublic of China. (Parkson, listed on theStock Exchange of Hong Kong, is a leadingdepartment store operator in China, with 52stores in prime locations in 34 major cities.)
The sukuk was successfully priced throughan accelerated book-building process on 14March 2012 and at the tightest end of the
No Sovereign Sukuk for the UK
A Green Initiative
Green Sukuk Climate Bonds are thebrainchild of three organisations – theClimate Bonds Initiative, the Clean EnergyBusiness Council of the Middle East andNorth Africa and the Gulf Bond andSukuk Association. These organisationshave launched a Green Sukuk WorkingGroup to promote the issuance of sukukfor the financing of climate changeinvestments and projects such asrenewable energy schemes.
Aaron Bielenberg of the Clean EnergyBusiness Council, a non-profit,non-governmental association established inMasdar City, Abu Dhabi said, ‘There is a
significant and growing number of projects,for example renewable energy in the MiddleEast, that are ideally suited to sukukinvestors. This group will help investorsmore easily identify Shari’ah compliant,clean energy investment opportunities.’
Michael Grifferty of the Gulf Bond andSukuk Association commented, ‘Interest inboth Shari’ah-compliant and ethicalinvesting is on the rise. Green sukuk cansupport this trend by expanding the rangeof available financial instruments. Theyalso support national developmentstrategies by offering longer-term financefor essential infrastructure.’
NEWHORIZON April–June 2012SUKUK UPDATE
price guidance at –0.25% yield to maturityand 30% exchange premium. Thetransaction drew a demand of 3.4 timesbook size, attracting a diverse group ofmore than 100 investors comprisinglong-only funds, hedge funds, arbitragefunds and asset managers across Asia andEurope.
The transaction has reopened the Malaysianequity-linked market, as the first Malaysianequity-linked transaction to be launchedsince early 2010. The sukuk has a maturityspan of seven years with a put option onyear three with zero periodic payment.
Khazanah’s Managing Director, Tan SriDato’ Azman Hj. Mokhtar said: ‘We arevery pleased that this issuance has beenexecuted at a very competitive price, settinga benchmark for sukuk issuances while theorder book in excess of 3 times the issuesize, underlines the market’s strongconfidence in Khazanah’s credit.’
The Pilot Platform announced in March is astrategic alliance between Hong Kong,Malaysia and the Euroclear Bank. It isdesigned to foster bond market developmentand promote financial stability at bothglobal and regional levels and in particularto encourage trading in sukuk and dim sumbonds.
The move has been spurred by the perceivedneed to provide alternative investmentopportunities to currently depressedEuropean bond markets and the stronggrowth prospects in Asia. The two productsthat are at the heart of the project are sukukin Malaysia and RMB dim sum bonds inHong Kong.
At the launch of the Pilot Platform, PeterPang, Deputy Chief Executive of the HongKong Monetary Authority, said, ‘We haveseen very encouraging development of thesukuk market in Malaysia. The amount ofoutstanding sukuk in Malaysia increasedsubstantially from MYR 146 billion(USD 41.3 billion equivalent) at the end of2006 to MYR 361 billion(USD 113.9 billion equivalent) at the end of2011. Meanwhile, the growth of the RMBdebt securities market has beenphenomenal. In a short space of 5 years, the
annual issuance amount lodged with theCentral Moneymarkets Unit (CMU) inHong Kong increased by 16 times from amodest amount of RMB 10 billion(USD 1.4 billion equivalent) in 2007 toRMB 172 billion (USD 27.3 billionequivalent) in 2011. The growth momentumis expected to pick up further after China’sannouncement to formalise the use of RMBin foreign direct investment (FDI) in 2011.’
One important function of the Pilot Platformis to enable financial institutions to make useof securities held in one of the partner systemsas collateral to conduct secured borrowing inthe local currency of another partnereconomy. The Pilot Platform is expected togive global investors convenient access toIslamic bonds and, in the other direction,Euroclear Bank’s clients will benefit from thelarge and increasingly wealthy investor base inSoutheast Asia and the Islamic world. ThePilot Platform’s services will include a globalsecurities database containing information oninternational and domestic securities,provision of a single point of entry to allowinvestors to buy and hold international anddomestic bonds through their local accountsand cross-border issuance and settlement ofbonds in foreign currencies on a delivery-versus-payment basis.
Meanwhile at the London StockExchange
Saudi ArabiaFinancesJeddah’s
InternationalAirport Expansion
In January HSBC led the issuance of a10-year, £4 billion sukuk designed tofinance the expansion of Jeddah’sInternational Airport. This was thecountry’s first sovereign-guaranteedsukuk and has been allocated a zero riskrating by the Saudi Monetary Authority,which means it can not only be held asan investment, but also be used ascollateral for finance from the Saudicentral bank. The offer was more thanthree times oversubscribed. Sources atHSBC expect to see at least five moresukuk issuances this year.
January saw two further sukuk listed on the London Stock Exchange bringing the total number of listings to 42. Emirates Islamic Bank (EIB) issued$500 million of five-year Trust Certificates. The offer closed after 12 hours and was three timesoversubscribed. Investors came from the
Middle East (57%), Asia (29%) and Europe(14%).
First Gulf Bank similarly was looking toraise $500 million with a five-year bond.The offer was 2.8 times oversubscribed.Investors came from the Middle East (69%),Asia (16%) and Europe (15%).
Hong Kong, Malaysia and EuroclearCooperation
NEWHORIZON Jumada-Al-Awwal to Rajab 1433 ANALYSIS
Overview
In the wake of the recent global financialturbulence, the Eurozone debt crisis and theresulting volatility in international capitalmarkets, issuers are actively looking atreviewing their capital structures. Indeed,many Gulf-based issuers are examining theapplication of liability managementstrategies and/or restructuring strategies inthe context of their existing sukuktransactions. Some are asking whether it ispossible to achieve a waiver or amendmentthrough a consent solicitation if theirfinancial covenants are being stressed.Questions such as ‘can we buy-in and canceldebt at relatively depressed prices?’ or ‘canwe extend the maturity of an outstandingseries of debt securities, by exchanging it fora new series of longer-dated instruments?’are increasingly raised with legal andfinancial advisers.
In the first part of this article, we examine the challenges involved in aliability management exercise for a sukuk as compared to a conventional debt issuance and explore some commonrestructuring techniques. These techniquesform the building blocks for a possibleapproach to restructuring a sukuktransaction, which is set out in the secondpart of the article. Acknowledging that thechallenges in each liability managementexercise for a sukuk will be different andwill depend on the specific underlyingIslamic structure, in the final section werefer to recent market examples todemonstrate that it is possible to implementrestructurings, which have the samecommercial effect for an obligor seeking tomanage its outstanding liability under asukuk transaction.
Common Debt Restructuring Techniques
An issuer seeking to restructure itsoutstanding debt securities has several tools
for liability management at its disposal.Without exploring the alternatives availableto it under applicable bankruptcy rules,which lie outside the scope of this article,the company may decide between a numberof strategies, the most common of whichinvolve a tender offer, exchange offer,consent solicitation or any combination ofthese. Although such options are availableto both issuers of conventional debtsecurities and sukuk (the Shari’ah-compliantalternative to conventional interest-bearingfixed income securities), implementing oneor more of the above strategies becomessignificantly more complicated in the case ofrestructuring sukuk transactions. Thereason for this added complexity lies in thenature of sukuk as an asset-based security.
In contrast to conventional bonds, whichrepresent the issuer’s contractual debtobligations to bondholders, sukuk representan undivided beneficial ownership interestin an underlying tangible asset and thereforea right to receive a share of profitsgenerated by such an asset base, which canbe structured to produce a fixed incomereturn. Furthermore, for a sukuk structureto be Shari’ah-compliant, there must be adirect link between the assets that underpinthe cash flows on the sukuk and theownership interest of the investors in suchassets. Typically, this link can be achievedthrough the ‘sale’ and consequential transferof title of an asset to a newly formed specialpurpose vehicle (SPV) that will hold suchassets on trust or as agent for the investors.
As a result of the inherent proprietarynature of sukuk, the implementation ofsome of the liability management strategiesoutlined above is more complex and hasgreater limitations than the application ofsimilar strategies to conventional debtsecurities. The limitations of these strategiesas applicable to sukuk restructurings areexplored further below.
Restructuring Sukuk Transactions
By: Debashis Dey, Stuart Ure and Peter Wielgosz, Clifford Chance LLP
In contrast to conventionalbonds, which represent theissuer’s contractual debtobligations to bondholders,sukuk represent an undividedbeneficial ownership interest inan underlying tangible assetand therefore a right to receivea share of profits generated bysuch an asset base, which canbe structured to produce afixed income return.
NEWHORIZON April–June 2012ANALYSIS
Tender Offers
An issuer with outstanding capital marketssecurities may decide to launch a public offerto purchase some or all of its securities shouldthey be trading at a level below the par value,which the issuer would need to pay to therelevant security holders upon maturity. Suchan offer may be open to all holders of thesecurities or to all holders other than those inspecified jurisdictions (for example, certainU.S. holders may be excluded for regulatorypurposes). Once the targeted holders areidentified, the issuer will inform them of theoffer by way of an offer document. Thisdocument will describe the terms of the offerand will be posted through the clearingsystems and/or through any announcementsystem utilised by the relevant stock exchangeon which the securities are listed.
In conventional transactions, it is usuallythe issuer of the securities who would beseeking to repurchase and cancel its ownoutstanding securities. In contrast, in asukuk structure the roles of the obligor (theentity seeking to manage its liability) andthe issuer (the SPV) are not fulfilled by thesame legal entity. Consequently, it isnecessary to establish a relationship betweenthe obligor and the SPV so that the sukukissued by the SPV may be repurchased bythe obligor and subsequently cancelled. Thisis a common structural feature of theliability management of sukuk transactions.
Exchange Offers
An exchange offer typically involves anoffer to the holders of existing securities toexchange some or all of those securities foran amount of new securities. Exchangeoffers are a convenient liability managementtool should an issuer desire to extend thematurity of an outstanding debt obligationwhilst retaining substantially the sameinvestor base that is already familiar withthe credit risk associated with that issuer.
As an exchange offer involves the issuanceof new securities, it is often subject togreater regulation than a straight tenderoffer. The issuer will need to produce anexchange offer memorandum to describe theterms of the exchange to investors and will
typically appoint a dealer manager tomanage the exchange offer process. Theissuance of new securities will typicallynecessitate an update to the originaldisclosure document, which was used formarketing the original securities. Althoughthese factors can push out the timeline of anexchange offer when compared to a tenderoffer, it is nonetheless a relativelystraightforward process for an issuer ofconventional securities to undertake anexchange offer. This is particularly truewhere the issuer has established aprogramme and an existing series ofsecurities can be exchanged for a new seriesto be issued under the same programme.
The situation with respect to a sukukstructure may be more complicated due tothe fact that, before 2009, sukuk weregenerally established as standalonetransactions and not as repeat issuanceprogrammes. In addition, the SPV in mostsukuk transactions is typically establishedfor the sole purpose of issuing sukuk and isnot permitted to undertake any otheractivities, including liability managementexercises. Accordingly, in order to undertakean exchange offer of a standalone sukuktransaction, a new SPV would need to beestablished as the issuer of the new series ofsukuk and it would need to acquire asatisfactory set of underlying assets tocollateralise the new sukuk to be issued. Aswith a tender offer, it is ultimately theliability of the obligor under the originalsukuk that will need to be managed.Accordingly, the exchange offer will seek toextinguish the obligor’s obligations underthe original sukuk and replace them withobligations under the new sukuk.
Consent Solicitations
An issuer may also consider launching aprocess to amend the terms of its existingsecurities by approaching holders of suchsecurities for their consent to identifiedamendments. The decision to amend theexisting terms and conditions may bemotivated by a desire to avoid a potentialbreach of a troublesome covenant or tointroduce new terms. For example, it iscommon for an issuer to propose a ‘call’
option, which would allow it to redeem itssecurities at a specified price prior to theirstated maturity.
The amendment process is generally doneby way of an extraordinary resolution at ameeting of the holders of the relevantsecurities. One of the advantages ofobtaining the consent of security holders inthis manner is that an extraordinaryresolution will bind the entire class ofholders. Provided that the necessary quorumand voting thresholds are achieved at themeeting, it will therefore be possible toretire an entire series of securities.
It is not unusual for a consent solicitation tobe accompanied by a tender or exchangeoffer. In such instances, a savvy issuer mayalso wish to use the opportunity to removecertain troublesome covenants or otherprovisions in order to make the existingsecurities less attractive to hold, therebyinducing investors to participate in theexchange or tender offer. With conventionalsecurities, issuers wishing to solicit theconsent of investors to a waiver or changeto the terms and conditions of the securitiesmay offer some form of voting incentive,such as an increase to the coupon.Unfortunately, offering such incentives isnot always possible under a sukuk structurewithout simultaneously increasing theamount of income generated by the sukuk’sasset base. For example, in the case of asukuk-al-ijara, where the periodic profitamount (coupon equivalent) is derived fromthe rental payable by the lessee to the SPVin its capacity as lessor, there would need tobe a corresponding increase to the rentalpayments under the ijara that would matchthe increase in the periodic profit amount.In such circumstances, some Shari’ahscholars will require that additional assetsare added to the structure in order to justifyany increase in the rental amount andsubsequently the periodic profit amount,which is to be paid to investors.
Restructuring a Paradigm Sukuk-al-IjaraTransaction
From the perspective of commencing asukuk restructuring, the limitations on usingliability management techniques may appear
NEWHORIZON Jumada-Al-Awwal to Rajab 1433 ANALYSIS
onerous, but they are not insurmountable.In the second part of this article, weexamine a possible approach torestructuring a paradigm sukuk-al-ijaratransaction in order to allow an obligor tomanage its outstanding liabilities.
To facilitate our illustration of how a sukukrestructuring may play out in practice, weneed to make several assumptions. Theobligor in our paradigm structure willundertake both a tender offer and anexchange offer with respect to the existingcertificates (the ‘Existing Certificates’). Inaddition, a consent solicitation would beundertaken in parallel in order toincorporate buyback and cancellationmechanics into the Existing Certificates andto allow the maturity of the ExistingCertificates to be ‘accelerated’. For the sakeof simplicity, we have also assumed that thetender and exchange offer is open to allinvestors and that a majority of the investors(holding at least 75% of the ExistingCertificates) would choose to participate inone of the two offers and that theappropriate quorum and voting thresholdswould be met. We have further assumed thatthe relevant resolutions would be passedprior to the settlement date to allow theredemption of the Existing Certificates onthe settlement date and that the obligor hassufficient sukuk assets available tocollateralise the new certificates to be issuedby the SPV (the ‘New Certificates’).
The liability management exercise willculminate on a single settlement date onwhich those investors wishing to participatein the tender offer would tender their ExistingCertificates for a cash payment and thosechoosing to participate in the exchange offerwould exchange their Existing Certificates forNew Certificates. Any Existing Certificatesacquired by the obligor pursuant to thetender offer and/or exchange offer would becancelled with any remaining certificates (the‘Remaining Certificates’) being redeemed onthe settlement date through the ‘acceleration’of the Existing Certificates.
A diagrammatic representation of therestructuring is set out below together witha step-by-step discussion of the events whichwould take place leading to settlement.
1. Pursuant to the tender offer andexchange offer launched by the obligorto holders of the Existing Certificatesissued by the existing issuer SPV (SPV 1),the obligor will be obliged to delivereither New Certificates or cash to therelevant holders as consideration on thesettlement date.
2. SPV 1 will undertake the consentsolicitation in order to amend the termsand conditions of the ExistingCertificates to incorporate buyback andcancellation mechanics and to‘accelerate’ the maturity of the ExistingCertificates such that they would beredeemed on the settlement date. Ameeting of holders in relation to theamendments would be held prior to thesettlement date in accordance with themeeting provisions in the terms andconditions of the Existing Certificates. Asa condition to the acceptance of either
Structural Steps (using the numbering in the structured diagram below)
the exchange offer or the tender offer,each investor must provide anirrevocable undertaking to vote in favourof the resolutions proposed as part of theconsent solicitation.
3. The obligor will subscribe NewCertificates issued by a new issuer SPV(SPV 2) in an amount equal to theamount of Existing Certificates to beexchanged pursuant to the exchange offer.
4. In consideration for the subscription ofthe New Certificates, the obligor willtransfer sukuk assets to SPV 2.
5. On the settlement date, the obligor willmake a cash payment to the investorswho accepted the tender offer insettlement of the tender offer.
6. On the settlement date, the obligor willdeliver New Certificates to thoseinvestors who accepted the exchange
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offer in exchange for their ExistingCertificates.
7. On the settlement date, the obligor willsurrender to SPV 1 for cancellation theExisting Certificates acquired by it,pursuant to either the tender offer and/orthe exchange offer.
It is possible that certain holders of theExisting Certificates did not participatein either the tender or exchange offer. Insuch circumstances, the obligor, on thesettlement date (which will now also bethe maturity date of the ExistingCertificates), will exercise its rights undera unilateral sale undertaking and make apayment of the exercise price (being anamount equal to all amounts due andpayable under the RemainingCertificates) to SPV 1. SPV 1 will thenpass on the proceeds of the exercise priceto the holders of Remaining Certificatesin order to redeem the RemainingCertificates and thereby enable thecollapse of the structure in its entirety.
8. SPV 1 will transfer the sukuk assets tothe obligor in consideration for thesurrender of the Existing Certificates andpayment of the exercise price by theobligor in step 7 above.
Effects of the Sukuk Restructuring andAdditional Observations
Following settlement as described in stepsfive to eight above, the obligor will havedischarged in full its obligations with respectto the Existing Certificates and the ExistingCertificates will therefore cease to exist.Instead, the obligor will have obligationsunder the New Certificates to those investorswho chose to accept the exchange offer. Theterms of the New Certificates may include alonger maturity and may also carry a higherrate of return in order to have inducedinvestors to accept the exchange offer. Theobligor will also have used cash reserves forthe purpose of the tender offer to retire aportion of Existing Certificates in order toextinguish some of its liabilities goingforward. From a commercial standpoint, theimplementation of the sukuk restructuringallows the obligor to manage its obligations
by putting it in the same position as aconventional bond issuer that implements aliability management strategy involving atender and exchange offer and a consentsolicitation, albeit with some additionalsteps and considerations. Despite the addedcomplexity of restructuring sukuktransactions, the problems are not withoutsolution as evidenced by recent publictransactions, such as the Government of Rasal Khaimah liability management transactionand the Nakheel trade creditor sukuk.
We also note that another (untested)example of a capital markets solution toliability management could take the form ofa debt-for-equity swap. Here, a company’screditors may agree to cancel some or all ofthe company’s debt owed to them inexchange for an equity stake in the business.This option could be favoured incircumstances where the business is notgenerating sufficient revenue to continue tofund payments on any restructured debtcapital markets instrument. Given that asukuk certificate effectively represents anundivided beneficial ownership interest in anunderlying income-generating asset, sukukinvestors might find such an exchange offerparticularly appealing as it would effectivelyrepresent an exchange of one type of equityinterest (in the asset underpinning the sukuk)for another (equity in the obligor) at anegotiable price. However in a market,which to date has been dominated by non-corporate issuers, it remains to be seen howpractical debt-for-equity swaps will be forobligors with government-backed entities asmajority shareholders.
Conclusion
Although the challenges in each liabilitymanagement exercise for a sukuk will bedifferent, depending on the commercialrationale and, most notably, the underlyingIslamic structure, these challenges are notinsurmountable and it is possible toimplement restructurings, which have thesame commercial effect as for an obligorseeking to manage its outstanding liabilityunder a conventional transaction.
As the current global economic volatilitycontinues, it is likely that obligors under
sukuk transactions will become increasinglyinterested in managing their liabilities byrestructuring their existing sukukobligations. Recent sukuk transactions havedemonstrated that obligors are keen toestablish sukuk programmes in place ofstandalone sukuk issuances in order toprovide maximum future flexibility vis-à-visliability management and we see this trendcontinuing. Indeed, many of the new sukuktransactions, which have been structuredpost the Dubai World standstillannouncements, contemplate future liabilitymanagement strategies from the outset.They do this by incorporating structuralfeatures, such as buyback and cancellationmechanics, which would facilitate therestructuring of such transactions in thefuture, thereby reducing the reliance oncomplex and potentially time-consumingrestructurings. These developments continueto demonstrate the growing maturity andversatility of the sukuk market and theadaptability of conventional capital marketstechnology in a Shari’ah-compliant manner.
As the current globaleconomic volatility continues,it is likely that obligors undersukuk transactions willbecome increasingly interestedin managing their liabilities byrestructuring their existingsukuk obligations.
NEWHORIZON Jumada-Al-Awwal to Rajab 1433 ACADEMIC ARTICLE
This is a 2010 Harvard paper and isreproduced with the kind permission ofProfessor Siddiqi
Introduction
Conventional wisdom would keep faith andfinance in different boxes never to be mixedwith one another. This has not servedsociety well. A holistic view of humanpersonality would like finance to be guidedby faith inspired values. Faith impactsfinance through motivation and valueorientation which, in turn, influence wealthcreation as well as the use of wealth forenhancing well being. All wealth is jointproduction involving both natural andmanmade inputs. Natural inputs such asland, air, water, minerals, solar and otherforms of energy need to be combined withhuman resources like ideas, accumulatedknowledge, new skills, as well as trust, hopeand sympathy. The joint nature of wealthcreation necessitates the sharing of wealthamong those involved in its creation.Product sharing, profit sharing, renting,wage contracts all involve sharing, butrenting and wage contracts are morevulnerable to unfairness. This may takeplace, for example when a rented piece ofagricultural land fails to produce any cropdue to draught or flood.
Regulators are called upon to ensurefairness in sharing joint products.Regulation of business practices is awell-established tradition going back to theearliest periods of history. Its earliest formsare the obligation to fulfil promises and tellthe truth. Not tampering withsocially-approved weights and measures andnot indulging in clipping metal coins soonfollowed. All these are examples of faith
inspired values as they reflect a moral viewof human relationships. In the absence offaith moral values have to be anchored intopragmatism, which can easily succumb torelativism depriving morality of the strengthneeded to prevent predatory practices. Toassert that these values reflect theevolutionary necessity to preserve andpromote vital interests ensuring survivaldoes not contradict their essentially moralnature. There is no conflict betweenmorality and survival-necessitated pursuits.It is faith that provides the trust needed toremove any fear of dissonance between wellbeing enhancing values and survivalensuring interests. By enhancing trust,morality reduces transaction costs andincreases efficiency.
Faith answers questions for us beyond thereach of our sensory means of knowing.Who are we? Where to are we headed? Arewe accountable for our choices here andnow? Faith impacts finance through theanswers it provides to question such as whyto produce and for whom to produce. Thestrength of our faith is reflected in theintensity of our efforts to produce. It is alsoreflected in our decisions on what to dowith one’s earnings. The nature of our faithdetermines where we stand in the broadspectrum from the exclusive pursuit of selfinterest and to reaching out to all ofhumanity. Faith broadens the scope of andwidens the horizon for productive efforts.
The realistic middle ground (to which mostof us stick) is avoiding harming others whileserving our self interest and aspiring to dogood to others if and when circumstancescall for it. Faith does this throughgenerating moral obligation towards others,however, all societies have not been the
same in this regard. In recent humanexperience western secularism has pushedback faith and encouraged greed and thepursuit of self interest as a means to socialwell-being; concern for others has dimmed.The natural tendency of faith to generatemorality is ruptured by false notions aboutthe efficacy of amoral behaviour indelivering social good. It is also weakenedby man’s proclivity to selfish behaviour inabsence of spiritual roots.
The overriding focus on shareholder valuemaximisation has pushed out otherstakeholders such as customers, employeesand society at large. A moral approach tofinance has the potential to take thestakeholder approach, be long-term focusedand to address the issue of compensationbased on fairness and equity.
Faith has often been replaced by aggressiveideologies justifying cruelty, even brutality, inthe name of rapid growth. Faith emphasisesinclusive growth even though vested interestscare only about impressive growth. Themodern scenario of mega cities, divided intoluxurious living quarters and shiny suburbson one side and dark, dilapidated slumslacking basic amenities such as clean drinkingwater and schools on the other, is largely aproduct of economics that have purged faithand morality. Despite their claim to be guidedby reason, modern economic ideologies haveresulted in the most unreasonable scenario inwhat is aptly called the global village. Thesame division between the rich and poor thatafflicts our mega cities afflicts the globalvillage too. Modern economics has no answerto the question.
The cause lies in a moral deficit in thecontemporary structure of the social,
Faith and Finance: The Value Guided Pursuit of Interests
By: Muhammad Nejatullah Siddiqi, Professor Emeritus, Aligarh Muslim University,India. He has received awards for his academic and research work. He has alsoauthored a large number of books on Islamic economics and finance and presentedpapers at conferences.
NEWHORIZON April–June 2012ACADEMIC ARTICLE
political and economic edifice. This moraldeficit lies in a lack of concern on the partof individuals for the good of others, whichsometimes degenerates further intoexploiting others in pursuit of one’s owngain. The moral deficit itself is caused by theabsence of faith; sometime a weak faith orfaith diluted by confusing world viewsproduces the same result – impotent faithincapable of moral uplift. A robust faithbrings into focus the essential oneness ofmankind owing its existence to the sameCreator. The brotherhood of man, equalityin dignity and identical rights to God-givenresources in the environment, as well as inhuman relations; all belong to this focus andare sustained by it. Regaining this focusshould be high on agenda of all concerned.
Ground Reality and Desired State of theWorld
Going forward we need to explore twoparallel concepts: the actual conditionspertaining to faith-finance relations incontemporary society and the potential offaith in correcting finance’s current course. Ibegin with the latter, the potential of faithfor ameliorating the contemporaryeconomic crisis. The nature of finance is toocomplex to issue a simple list of dos and donots in the name of faith. Its ever changingnature defies any list of prohibitions andobligations to suffice for all places and alltimes. However, the crucial values thatpromise to help in securing fairness inchanging conditions are: the concern forothers’ well-being; the will to abstain fromharming others even at the cost of personalsacrifice and the willingness to submit todemocratically-enacted social regulations.Most of the recent adverse developments infinancial markets responsible forwidespread sufferings are rooted in theabsence of these values. Current economictheories do not embody or promote thesevalues. For example, the Friedman schoolthat has been influential from early nineteeneighties through today openly warns againstfirms and individuals trying to care forothers. The ruling dogma is that one bestserves society by serving oneself. No wonderthe other two values, the will to abstainfrom harming others and a willingness to
abide by rules also evaporated under theencouragement of the unlimited pursuit ofself interest. Given this environment, whowould not twist the rules to make themserve one’s own interest?
The answer necessitates pondering overwhat the quest for fairness in the financialsystem entails. In the absence of hard andfast regulations capable of ensuring fairnessit is not structures but perspectives,understandings and morals that matter.People who want to behave will find waysto do so, if not straightaway then haltingly,by experimentation. They may even findways to constrain deviants and minimise theloss of social weal due to individual perfidy.Much has been made of the lack of fullinformation to economic decision makers indebunking the idea of caring for socialgood. The reality is there is no way to havefull information about future values. Thefalsity of the assumption of marketmechanisms somehow magically solving thishuman predicament has been exposed by asuccession of crises. Man must try to makeup for the inevitable information deficit byexperimentation, pooling availableinformation and sharing the consequencesof ill-informed decisions. They can do so atthe individual level as they have been doingat the societal level. Faith is a positive aidinsofar as it creates an incentive tocooperate for the social good.
People of faith have learnt some lessonsduring the quest for fairness in the past.These deserve to be our starting point in asimilar quest today. As I proceed tosummarise them, I beseech you not to getstuck with them, quibbling over the varietyof interpretations and controversiessurrounding the circumstances in whichthey are applicable. I also underline the factthat these form the first steps to be taken inman’s search for a just and fair financialsystem. By no means would they besufficient on their own to usher in a justsociety.
Pillars of Fair Finance
The prerequisites of fairness in financeinclude the prohibition of interest, fraud (inits myriad forms), gambling and
Economists can at best warnabout the disastrousconsequences of continuingon the beaten path. Recentlythey have been doing soaplenty. Islamic economistscan take the next step ofsuggesting how to leave thebeaten path safely in favour ofalternative ways of financingand monetary management. Ithink financing based on risk-sharing cannot make muchprogress without a system ofmoney creation andmanagement that uses sharingbased instruments and abjuresinterest-bearing instruments.
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transactions involving excessive uncertainty(gharar in Arabic). These prohibitions are tobe seen in the perspective of privateownership, freedom of enterprise and thesupervisory role of the state as the guardianof the poor and the weak. Faith encouragescharitable giving, which includes lending tothe needy and expecting to receive no morethan what was given. Regarding businessloans, shifting all the risk onto the borroweris repugnant to faith while encouragingpartnership and profit-sharing instead suitsfaith. This follows from the nature of theenvironment in which business is done, asfuture value/productivity is surrounded byrisk and uncertainty. Gambling is creatingrisks to play with chance. Financialspeculation that thrives by trade in otherpeople’s risk is a contemporary example ofgambling. Some activities are surrounded byuncertainties to such an extent thatcontractual relationships built around them become problematic. The contractsthrough which these activities are carried onare not transparent, affording the sameinformation to all concerned. The means ofjust sharing is missing; it is better to avoidthem. That sums up the Islamic thinker’sattitude towards excessive uncertainty(gharar).
In Islam the jurists have worked hard totranslate the three principles listed above –prohibition of interest, prohibition ofgambling and minimisation of gharar, intorules governing business relationships. Theever changing nature of these relations,however, in itself largely shaped by changingtechnologies, defies being captured in a netof rules framed at a particular time andplace. Innovation in ways of doing businessnecessitates making new rules, so theprocess of rule making must go on!
Protecting the weak from the strong, theknowing from the unknowing and the poorfrom the rich necessitates somesocially-imposed restraints to humanfreedom, including the freedom ofenterprise. Securing fairness would,however, need more than imposingrestraints. That is where the valuesmentioned above – concern for others,readiness to limit one’s potential gains inthat context and following
democratically-enacted laws becomerelevant. We need to harness humaningenuity in positively enhancing justice andequity, not only in preventing injustice.Faith is capable of doing so. The nature of acompetitive economy is often cited as thereason for the inability of an individual firmto promote social good. It is a challenge toour ingenuity to harness the forces ofcooperation to counteract this.
Faith versus Cult
Faith knows no land, race, language, norculture, but people of faith sometimesdevelop strong attachments to one or moreof these to the extent of identifying theirreligion with a particular land, race,language or culture. Worse still, sometimesreligion is made to serve national, racial andother narrow goals. As a result faith loses itspower to generate a universal moralityoverriding narrower interests. In today’sworld faith has had little influence onfinance since faith has been made a tool ofnational, racial and other social ambitions.Religion is the expression of faith inparticular people, translating faith’sdemands into rules of conduct. Over timethese rules have often been turned andtwisted to suit particular interests.
The rejuvenation of faith necessary totransform the current financial systemwould first involve the disentangling of faithfrom other narrower loyalties such asreligion or citizenship. Faith in its purestform, i.e. faith detached from religion,citizenship, etc. has the capability to cutacross all ideologies and promote morality.By creating positive sympatheticrelationships with the faith of others wouldmake men accountable and responsible toeach other, but faith in its current state,faith that is made subservient to nationalismor imperialism, fails to do so. Impure faithcreates an artificial distinction betweenmorality and faith. Loyalty to a nation orrace, for example, dictates certain ethics andpriorities that are generally in conflict withthose of another nation or race. Incombination with the first and major barrierto moral behaviour in finance, humangreed, faith cannot impact finance unlessand until these barriers are removed.
Islam’s contribution to universalisingfaith-generated morality lies in pushing backthese barriers to their proper secondarypositions. The best periods of Islamichistory have been when tribal or racialloyalties were kept in check and universalmorality reigned supreme, as was the case inthe early decades of Islamic history.Conversely, the worst period occurred whentribal and racial identities surpasseduniversal morality in the creation andsharing of wealth. The resilience of Islamicmorality necessitates calling for a review of the financial system in the light of Islamic ideals of justice and equity (Adl andIhsan). The fifty year old movement ofIslamic banking and finance is a recentexample.
Diluting Faith’s Mandate
Originally the position of people of faithregarding interest on loans was that thecharging interest on loans to the needy wasimmoral; charging interest on commercialloans was considered unfair as it amountedto shifting the risk to the borrower. As iswell known this position was later modifiedby many faith groups to allow moderaterates of interest on commercial loans. We need to take notice of this development.
The distinction made between loans toalleviate need (which do not result inanything marketable) and loans forproductive purposes has no basis in thetexts to which these faith groups swearallegiance. They did it supposedly onpragmatic grounds to facilitate financialtransactions between owners of moneycapital and users of money capital forcreating additional wealth. It was arguedthat interest payments were needed tocompensate for the loss of the opportunityfor profitable employment of that capital onthe part of the lender, ignoring the fact thatno opportunity for guaranteed profit existedin the real world. Man’s environment ischaracterised by uncertainty about thefuture value productivity of capital as FrankKnight demonstrated in his 1921 book Risk,Uncertainty and Profit. Furthermore, as theauthor of the article on usury in theEncyclopaedia of Religion and Ethics (1967)
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points out, any legitimacy accorded tointerest in one sector permeates throughoutthe economy with the passage of time. Islam eliminated that possibility bydeclaring excess payment above the initialamount lent as prohibited riba. As theQuran says:
Believers! Have fear of Allah and give up alloutstanding interest if you do truly believe.But if you fail to do so then be warned ofwar from Allah and His Messenger. If yourepent even now, you have the right of thereturn of your capital; neither will you dowrong nor will you be wronged. [II:278–80].
The distinction between low and high ratesof interest or between loans for business andloans for need-fulfillment is not recognisedby the Quran. As regards the presumptionthat commercial loans were not prevalent atthat time, it has no basis in history. On thecontrary riba in seventh century Arabia wasoverwhelmingly common in commerce. Thisis underlined by the declaration made by theProphet, peace be upon him, in his last Hajjsermon cancelling all interest owed to hisuncle, Abbas bin Abdul Muttalib. Abbasadvanced money capital to the growers ofdates in Medina as well as to the growers ofgrapes in Taif. Failure to pay at the time theloan was due then justified an increase inthe amount to be repaid.
Some have tried to grant legitimacy tointerest arguing that it is analogous withrent. Unlike money capital, which must firstbe spent to acquire real goods and services,rented goods like machines and real estateare usable right away. Islam, like all otherreligions allowed charging rent as a price forusufruct. Jurists often absolve the lesseefrom the obligation to pay rent should therented property lose its ability to providethe expected usufruct.
The legitimacy of profit and rent is hedgedwith the provisions directed againstmonopoly and hoarding in order tomaintain fair competition. The rest is largelyleft to the market functioning under thewatchful eyes of the social authority. AbuBakr, the first ruler succeeding the ProphetMuhammad, peace be upon him, describedthe ruler’s duty as protecting the weak fromthe strong.
Speculation in financial markets often takesthe form of betting on the uncertainty of theoutcome of future events. Regulators mustrealise that such trading in risk is no morethan gambling and serves no legitimatefinancial purpose. As such, regulatorsshould prohibit such trades and they shouldexamine all associated financial instruments,such as derivatives, for such characteristics.
Conclusion
Faith has the potential to influence financialmarkets by moulding human behaviour inaccordance with moral values conducive tosocial weal. The essential universality ofmoral values has to be protected from beingmade subservient to hegemonic ambitionsrooted in racial, national or religiousidentities. People of faith have devisedinstitutions to realise the ideal of a justsociety. Within the framework of privateownership, freedom of enterprise and statesupervision, prohibition of fraud, gamblingand interest form necessary parts of thesearrangements. Rapid technological changesnecessitate adapting these institutions tonew circumstances and making newarrangements in order to realise social goals.Continuing innovations in financial marketspresent new challenges for regulators. Thequest for fairness in finance becomes acontinuous process. The recent resurgenceof Islamic finance should be looked upon aspart of that process.
Mohammad Nejatullah Siddiqi is a notedIndian economist and winner of the KingFaisal International Prize for IslamicStudies. He was educated at the AligarhMuslim University, where he becameAssociate Professor of Economics andProfessor of Islamic Studies. He has alsoserved as Professor of Economics at KingAbdul Aziz University in Jeddah, SaudiArabia and was also a Fellow at the Centreof Near Eastern Studies at the University of California, Los Angeles and VisitingScholar at the Islamic Research andTraining Institute of the IslamicDevelopment Bank. He is a prolific authoron the subject of Islamic economics andhas appeared on conference platformsaround the world.
NEWHORIZON Jumada-Al-Awwal to Rajab 1433 CAPITAL MARKETS
Preamble
Malaysia has established itself as one of theworld leaders in Islamic finance. With thesupport of the Malaysian government, theyhave pioneered initiatives designed todevelop and strengthen the Islamic financesector. By the end of 2009 Malaysia hadrisen to third place in the worldwiderankings behind Iran and Saudi Arabia witha total of $102.6 billion in Islamic assetsand is one of the most active markets forsukuk and other Islamic securities.
Malaysia has, however, been frequentlycriticised by many scholars, especially thosefrom the Gulf Cooperation Council (GCC)countries, for some of the morecontroversial products in the marketparticularly Bay’ al Dayn and Bay’ al ‘Inah.Malaysia has now started to move awayfrom Bay’ al Inah as the main instrument in
the commercial banking market, althoughBay’ al Dayn is still widely used in theIslamic capital market sector.
Bay’ al Dayn – An Overview
Bay’ al Dayn literally means ‘sale of debt’. Itis defined as the sale of a payable rightarising normally from a transaction, serviceor loan to either the debtor himself or toany third party. According to the SecuritiesCommission (SC) of Malaysia, debt tradinginvolves the sale and purchase of securitiesor debt certificates that are issued by adebtor to a creditor as evidence ofindebtedness and that conform to Shari’ahlaw. In the context of the Islamic capitalmarket, such a sale results frommu’awadhat maliyyah contracts (exchangecontracts), such as murabahah, bai’bitthaman ajil (BBA), ijarah, ijarahmuntahiya bittamleek, istisna’ and others.
There are two types of Bay’ al Dayn, i) Bay’al Dayn al nasiah (the sale of debt foranother debt) and ii) Bay’ al Dayn al naqd(the sale of debt for cash or spot return).Both types of debt trading can be sold toeither the debtor (Bay’ al Dayn li al madin)or to any party other than debtor (Bay’ alDayn li ghayr al madin).
All jurists unanimously agree that the firsttype of debt trading, i.e. sale of debt foranother debt is not permissible according toShari’ah, based on the Hadith narrated byAbdullah ibn Umar in the prohibition ofbay’ al kali’ bi al kali’. There are, however,differences in opinion among the juristspertaining to the permissibility of sellingdebt for cash or spot return. In terms ofselling a debt for cash to the debtor, themajority of jurists agree that such sale is
permissible due to the element of gharar(uncertainty).
There are disputes among the juristspertaining to the sale of a debt for cash to athird party other than the debtor. TheMaliki’s argued that such a sale to a thirdparty is permissible, subject to thefulfillment of all the following conditions -i) immediate payment for the purchase, ii)the debt is confirmed, iii) the presence of thedebtor during the sale, iv) a different type ofpayment from the debt; if the payment is ofsimilar type it must be at par to avoid riba,v) debt from sales of currency to bedelivered in the future cannot be createdand vi) the goods related to the debt mustbe valuable and able to be sold. Theseconditions are to ensure that the right of the
Bay’ al Dayn bi al Sila: A Breath of Fresh Air for the Islamic Capital Market
By: Ahmad Mukarrami Ab Mumin, Head of Shariah Division, RHB Islamic Bank andMuhammad Sofiyussalam, Researcher, Shariah Research and Training, RHB IslamicBank
Ahmad Mukarrami
MuhammadSofiyussalam
NEWHORIZON April–June 2012CAPITAL MARKETS
debt purchaser is protected, to avoid ribaand to avoid any sale of debt beforepossesion (qabd).
Scholars from the Shafii school also permitsuch sale if the debt is mustaqirr (legallyestablished) and immediate delivery must be made. A similar situation applies withthe opinion of Ibn al Qayyim, which allows such sales as there is no prohibitionfrom the general text of the Qur’an andSunnah as well as the consensus from thescholars.
The Hanafi’s on the other hand disallowBay’ al Dayn due to the expectation of thepotential risk faced by the debt purchaser,the debtor and the nature of the debt itself.The Hanafi’s opined that the debt is in theform of mal hukmi (intangible asset) and itis risky to the purchaser since it isundeliverable and the debt buyer is unableto own the item, i.e. the debt.
The Zahiris, together with Ibn Syubrumahand Ibn ‘Abbas hold the view that debt canonly be waived and can never be sold, dueto the incidence of gharar. Ibn Hazm of theZahiris claim that this type of transactionbelongs to the sale of an unknown, whosespecific characteristices are not observed,which is unlawful and devouring of others’wealth.
Issues in Contemporary Bay’ al Dayn
The Bay’ al Dayn instrument is normallyapplied in secondary markets for thepurpose of liquidity management. Forinstance, an organisation might want to sellits receivables due in the future forimmediate cash. On the other hand, acompany with a very high level of liquidity,e.g. a bank with huge deposit pool fromcustomers might also want to balance theliability by having receivables in hand asassets.
As far as this dicussion is concerned, thetype of debt trading relevant to the capitalmarket is the sale of debt to a third party.There are two major issues concerning Bay’al Dayn al naqd li ghayr almadin (sales ofdebt for cash to the third party) in thecontemporary perspective.
The first issue is regarding the amount ofpayment to be made in consideration of thesale of debt. The majority of jurists say that,even though the sale of debt to a third partyis allowed, it must be exclusively done atpar value and in a spot transaction. This isbecause both the debt and cash is of thesame category, which is currency and thus,they must be exchanged on a spot basis andmust be of same value. Any option,therefore, to sell at a discount or at apremium is tantamount to riba. The salemust also made in cash to eliminate theelement of bay’ al kali’ bi al kali’. Theprinciple, therefore, of dha’ wa ta’jjal is notapplicable in the sale of debt. This is theopinion adopted by the OIC Islamic FiqhAcademy and the Accounting and AuditingOrganization for Islamic FinanceInstitutions (AAOIFI).
Some scholars including Ibn ‘Abbas,Nakhaie, Zufar, Abu Thaur, Ibn Taymiyyahand Ibn Qayyim allow the principle dha’ wata’ajjal. The argument by Ibn Taymiyyah isthat riba is something that is increase innature and not decrease. Ibn Taymiyyahalso argued the wording of both riba anddiscount are totally different, thusdistinguishing these two principles. This isthe basis used by the Shariah AdvisoryCouncil (SAC) of the Securities CommisionMalaysia in approving the transaction ofdiscounting sales of debt.
The second issue is related to thedeliverability of the debt by the originalcreditor to the new creditor. This is theargument of the Hanafi’s due to the highpotential risk incurred by the purchaser ofthe debt. This argument is also debated bythe Maliki’s based on the conditions thatneed to be fulfilled prior to the transaction.This is true especially when there is anabsence of supervision and control. Thescholars opined that the maslahah of thebuyer should be safeguarded, because he isthe one who has to bear the risks ofacquiring the debt sale while making thesale contract. Such matters may not besignificant in the Malaysian context,however, as the debt securities instrumentsare regulated by Bank Negara Malaysia(BNM) and the Securities Commission (SC),
The majority of jurists say that,even though the sale of debtto a third party is allowed, itmust be exclusively done atpar value and in a spottransaction.
NEWHORIZON Jumada-Al-Awwal to Rajab 1433 CAPITAL MARKETS
who have put considerable effort intoensuring the rights of all parties, especiallythe debt purchaser, are safeguarded.
Bay’ al Dayn bi al Sila: An AlternativeSolution
A key characteristic of good liquiditymanagement instruments is the ability ofsuch an instrument to be traded in thesecondary market. Bay’ al Dayn instrumentsare tradable, but they are very controversialin the view of Middle Eastern scholars,because they are in effect discounted sales.
In order to solve the problem, some scholarshave suggested the idea of trading the debtvia a commodity. Such a sale is called Bay’al Dayn bi al sila’. With this instrument thedebt is sold to the new creditor, but thepayment made to the original debtor ismade in the form of commodities, i.e. crudepalm oil, plastic resin, rubber etc. Whenpayment is made via commodities, the issueof riba is eliminated, because the payment is
in the form of the value of a commodity andnot money. Commodities can be traded atany price agreed by both parties and neednot necessarily to be equal to the amount ofdebt. The diagram below explains how Bay’al Dayn bi al sila’ is done to facilitate thesale of receivables. RHB Islamic Bank is, infact, the first bank in Malaysia to organise adeal to sell its receivables to a third partyusing such an instrument.
The original debt was between the debtor(ABC) and the original creditor (XYZ), butXYZ wants to realise the money tied up inABC’s debt and not due until a future date.To do this XYZ proposes to sell the debt tonew creditor LMN, a third party. Prior tothe purchase of the debt, LMN purchasescommodities from the Bursa Suq al Sila’,worth the amount it is agreed will be paidto XYZ. XYZ sell the debt to LMN for thetotal amount of the principal plus the profitdue in the future and LMN make thepayment to XYZ immediately in the form of
the commodity with no mention of themonetary value.
The reason why the buyer purchases thedebt without mentioning the monetaryvalue of the commodity is to eliminate theelement of a cash payment. When paymentis made in terms of the net weight value ofcommodities, it can be at any price agreedbetween the seller and buyer, whether that isat a discounted or premium rate. Finally, thedebt is transferred to the new creditor (B)and the seller (A) can sell the commoditiesin return for cash. The debt obligation ofthe debtor (C) is conveyed to (B) as the newcreditor.
Conclusion
In the context of the Islamic financeindustry, especially for the Islamic capitalmarket sector in Malaysia, tradability ofdebt is essential for a variety of reasons withasset liability management and liquiditymanagement being the foremost objectives.
The instrument currently usedin the Malaysian market has,however, led to variousdisagreements amongprominent scholars in Islamicfinance. An earlier decision ofthe Shari’ah Advisory Councilof the Securities Commission ofMalaysia was based solely onthe maslahah, but theinnovative initiative fromscholars in their introduction ofBay’ al Dayn bi al sila’ isconsidered to be a solution tothe disputes. The untiringefforts of Bank NegaraMalaysia along with theMalaysian government toensure all products in themarket not only comply withShari’ah concepts, but are alsofree from any disagreements,will hopefully mean that thisnew concept of debt trading willbring much needed clarity to thewhole Islamic capital marketsector, not only in Malaysia andbut all over the world.
Structure of Bay’ al Dayn bi al Sila
Over 20 years service to the Islamic finance industryIIBI education and training programmes have helped hundreds,if not thousands, to develop their knowledge of the guidingmoral principles and ethics on which Islamic banking andinsurance is based and the skills in applying concepts to practice.
IIBI is planning specialised courses of study to develop and enhance a skill set within a specific area or discipline leading to the award of an IIBI Professional Certificate.
“The IIBI has played a major role in Islamic finance in London through its lectures, seminars and courses. Its diplomas are internationally recognised and taken by hundreds of Muslims and non-Muslims interested in Islamic finance.”
Professor Rodney Wilson School of Governmentand International Affairs Durham University UK
“There would have been no career in Islamic financial services, for me and many of my friends, without IIBI.”
Mr Richard Thomas OBE CEO, Gatehouse Bank, UK
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The course provided me with an insight into what Islamic banking and takaful are and how they work. Topics covering how they compete with their conventional counterparts are especially of interest, as Islamic finance is aimed at social and
economic harmony and is very different from the conventional profit-driven finance industry. Also, the distant learning mode suits a working adult like me. (on the PGD course)
Bonnie Chan Siu Man Evergo Holdings Company Ltd, Hong Kong
“Deal not unjustly, And ye shall not be dealt with unjustly”
[2:279 The Holy Qur’an]
The Pioneering Role of IIBI
The IIBI has pioneered many ‘firsts’ in Islamic finance education, learning and development. Notably among these are:
1. The first organisation dedicated solely to promote Islamic finance education, learningand development worldwide.
2. The first to realise the need for learning and qualifications in Islamic finance and responding by introducing a diploma by distance learning in 1994 followed by a post graduate diploma.
3. The first to take the initiative in holding public lectures and seminars as well as international conferences in London to raise awareness of the principles and practice of Islamic banking and insurance.
4. The first to publish a monthly magazine providing a global perspective on developments in Islamic banking and insurance.
5. The first to compile a compendium of legal opinions in Islamic banking, in three volumes,by a leading international Shari’ah scholar.
6. The first to promote access to information on the fundamental concepts and operating principles of Islamic banking and insuranceon the IIBI website.
“IIBI in London comes to mind as the original thought leadership platform from which many of the products, services and ideas have come to the Islamic finance industry”
Mr Iqbal Khan CEO, Fajr Capital& former CEO HSBC Amanah
“ ver years, IIBI has proved to be a most durable and invaluable organisation. I am confident that it will continue to be a key provider of education, training and research services in the years to come.”
Mr Richard de Belder Partner and Head of Islamic Finance, SNR Denton, International law firmIL
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The Mission of the IIBI is to be a centre of excellence for education, training, research and related activities, to build a wider knowledge base and deeper understanding of the world of finance promoting the moral and ethical principles of equity, socio-economic justice and inclusiveness.
The Diploma in Islamic Banking course provided by the IIBI is designed with high quality and provides appropriate and useful information to understand and get invaluable knowledge in the foundations of the Islamic banking and insurance.
Excellent course! For someone who had only studied and inter¬acted with the discipline from a distance, I found the course extremely helpful to bridge the theoretical side with how its principles can be applied to daily business life. (on the PGD course)
Thomas Polson, Cascade Risk Placement, USA
NEWHORIZON April–June 2012IN THE SPOTLIGHT
IBB came into existence in August 2004when the Financial Services Authority(FSA) granted the Bank its license. InSeptember 2004 IBB became a UKpublicly listed company on the AlternativeInvestment Market (AIM). The Bank’svision was to offer Shari’ah-compliantretail financial services and the journeybegan when the capital was raised byinvestors in the UK and the Middle East.The first step was to set up theinfrastructure, processes and products aswell as bring together the team.
This was followed by the setting up of abranch network. IBB now has a nationalbranch and agency network in keylocations including London, the Midlandsand North West. To complement this, andto enable Shari’ah-compliant banking tobe accessible to consumers across theUK, IBB also developed its Smart Bankingfacilities, i.e. telephone and internetbanking.
Extensive product development work hasalso been carried out since the Bankstarted life. As a result IBB now claims tooffer the largest range of Shari’ah-compliant retail financial products in theUK to more than 50, 000 customers.
Sultan Choudhury studied economics atthe University of Nottingham in the early1990’s. His interest in Islamic financebegan at this time. He maintained hisinterest after qualifying as a charteredaccountant and moving into financialservices. His desire to enter the field ofIslamic finance crystallized when he wenton Hajj in 2002. In 2004 he joined thefounding management team of the IslamicBank of Britain (IBB), the first dedicatedIslamic bank in the West. Since 2004 hehas worked in all areas of IBB.
Thinking about the backing IBB hasreceived from QIIB, apart from the obviousstability and improvement in your liquidityposition, what would you say has been themain impact of this backing for IBB?
Being part of the QIIB network of Islamicbanks is about more than just stability. Itgives us access to product expertise andsynergies in relation to our respectivebusinesses.
Are there any general economic or bankingworld factors that are affecting yourprogress in either a positive or a negativesense, e.g. has the disillusion with banks ingeneral helped or hindered your progress?
The banking sector crisis and its causes havehelped generate awareness of Islamic bankingand IBB in the UK. It helped improve theperception of Islamic finance as a resilientand viable alternative to conventionalbanking. We are not immune, however, to thereal world economic situation and yields havefallen significantly for deposits in general. Wehave countered this by growing our asset baseand we still provide market leading returns toour customers.
In late 2010 you hoped that the capitalinjection you received would help to growyour Home Purchase Plan mortgagebusiness. Has this growth materialised orhave you been affected by the generalmalaise in the UK housing market?
IBB’s Home Purchase Plan (HPP) businesscontinues to go from strength to strength.We have been able to offer new deals andhave launched a Buy to Let Purchase Planand a Home Purchase Plan product forGCC customers wishing to buy a propertyin the UK.
Similarly, how have your fixed and variablerental rate products announced in late 2010done and what would you say are thereasons for this?
In August 2011 the Bank re-launched theHPP with new rental rates and higher‘finance to value’ (FTV) ratios. Customerscan now access Shari’ah-compliant homefinance from IBB with a 20% deposit. Thisrepresents the lowest Finance to Value(FTV) ratio in the UK for aShari’ah-compliant mortgage at 80%. Both
products are available for purchases,refinancing or releasing additional capital.IBB’s fixed-rate HPP product (fixed at4.19% until December 2013) is the mostpopular product as it gives customers theability to plan finances knowing there willnot be rent changes.
How has IBB fared against well-establishedcompetitors such as HSBC Amanah andothers and how is this affecting your marketshare?
I think there is plenty of market share foreveryone. IBB has a differentiated position inthe market as we are the only whollyShari’ah-compliant retail player. Ourcustomers think of us as one of their own – aspart of the community, not a large corporate.
Currently there are only a small number ofplayers in the market and the competitionthat exists is at a healthy level. IBB offersthe largest range of Shari’ah-compliantretail financial products in the UK, so weare able to access the market in more waysthan one. IBB’s products are also wellrespected for their competitive rates and theway in which the Bank has workedinnovatively to develop such a wide range.
The issue here is not of taking market sharefrom other Islamic finance players. As acollective, we need to raise awareness ofShari’ah-compliant banking so that we canall increase our share of the retail financialservices sector. Our main competitor is stillconventional banking and the lack ofeducation about Islamic finance amongstconsumers is the hurdle we all need toovercome.
Is your strategy primarily to attract Muslimcustomers or is it to attract customers of allreligions or none who are looking forethical banking alternatives to mainstreamUK banks?
As a Shari’ah-compliant bank, developingShari’ah-compliant retail financial products,we are of course primarily catering forMuslim customers. However, IBB is keen to
An Interview with Sultan Choudhury, Islamic Bank of Britain
NEWHORIZON Jumada-Al-Awwal to Rajab 1433 IN THE SPOTLIGHT
attract all consumers interested in IBB, bothfor its ethical offering and its competitiveproducts. The competitiveness of oursavings products, for example, has seenthem featured at the top of the tables onprice comparison websites. This has resultedin a surge of interest from both Muslim andnon-Muslim consumers.
Islamic banking is also increasingly beingperceived as an ethical alternative toconventional banking. This has beenrecognised by the recent ‘Move Your MoneyCampaign’ and IBB is pleased Islamicbanking is being promoted in this way.Shari’ah-compliant finance is based onsound principles and we would like to seemore consumers taking advantage of what ithas to offer.
What are your short and medium-term aimsin the UK market?
IBB’s strategy is to build a profitable bankthat is the Islamic retail bank of choice. Thismeans we are focused on growth for theshort and medium term. We are workingtowards achieving growth and profitabilityby significantly increasing our balance sheet– both assets and deposits. In the short-termthis means increasing our reach anddistribution and being competitive with themainstream. As a first step towardsextending its reach, IBB recently launched anagency network, in addition to the IBBbranch network. Agencies extend the Bank’sfootprint and enable the Bank to be moreinvolved in local communities. By co-locatingIBB staff with a local, complementarybusiness partner, IBB aims to provide a morepersonal banking service. To compete withthe mainstream IBB has launched new HomePurchase Plans and savings products whichoffer rates that are competitive. CurrentlyIBB is offering an initial expected profit rateof 4% for customers opening our new 120Day Notice Account beating many of therates offered by conventional savings productproviders. IBB also aims to supplementrevenue from assets with fee incomegenerated through sales of third-party,Shari’ah-compliant products.
Given that QIIB’s stated aim is to build aninternational banking presence, how do youor they see IBB playing a part in this strategy?
IBB is very much QIIB’s arm in the UK. Inthe long term we hope to be in Europe too,but our current ambitions are focused onthe UK for now.
On a broader front, how do you see thefuture of Islamic banking in the UKprogressing; do you believe other Islamicbanks based in the GCC, Middle East orMalaysia will eventually set up retailoperations in the UK and would this be agood thing for the future of Islamic bankingin the UK.
London will always be attractive foroverseas banks, whether mainstream orIslamic. The question is whether the highfixed costs of doing retail business in the UKand the consequent long payback periodwill prove an attractive investment foroverseas banks when cheaper emergingmarkets such as North Africa are openingup.
Do you think the UK will continue to be aleader in Islamic finance in the West? If sowhy and if not, why not?
Yes, I do think the UK has the strength tocontinue with its position as western leaderin the global Islamic finance market place.Whilst the UK industry is nascent, it isexpanding rapidly. We have 22 banks ofwhich five are wholly Shari’ah-compliantbanks. We have government recognition ofthe sector along with regulation and taxlegislation in place. The UK also has anindustry body, the UK Islamic FinanceSecretariat (UKIFS), which seeks to promotethe UK Islamic finance industry bothinternationally and domestically. This hasbeen set up as a trade body under theumbrella of TheCityUK. RecentlyTheCityUK signed a Memorandum ofUnderstanding (MOU) with the DubaiInternational Financial Centre Authority(DIFC) to share financial, legal andregulatory expertise. This will help UK firmsexploit the opportunities that exist forIslamic finance in the Middle East. I think,therefore, that the UK has a very valuablelead in the ‘race’ and is not sitting on itslaurels to maintain its position. The industrycollaborates very successfully to ensuresuccess continues.
If you could have one wish granted in termsof the economic, legal or regulatoryenvironment in the UK, what would it be?
The Islamic banks in the UK need the Bankof England to provide a sovereign ratedShari’ah-compliant instrument, which isconsidered an eligible asset for liquidity. Wecannot use the current government bondsthat pay interest. If we are forced to take upgovernment bonds, the interest has to beforegone or given to charity with adetrimental effect on our profits. Either aUK Sovereign Sukuk or simply aMurabaha/Wakala-based treasuryinstrument offered by the Bank of Englandwould serve to eliminate this problem.
It is often said that there is shortage of skilledpersonnel for the Islamic finance industry?What has been your experience so far?
Whilst there is a lack of qualified Islamicbanking and finance professionals withexperience there are a large number ofgraduates and post-graduates with Islamicfinance qualifications. The problem in theUK is that, as a small industry, there are notenough jobs available. Typically Islamicbanks are too small to operate graduateschemes and are limited in the amount ofwork experience they can provide. At IBBwe do provide work experience inconjunction with the Elshaarani Centre forIslamic Business & Finance (EIBF) Centre,which is part of the Aston Business School,offering an MSC in Islamic Finance.
Another issue is that since the UK industryis still relatively young, it can sometimes bedifficult to find personnel with technicalexperience, i.e. individuals with a thoroughunderstanding of Shari’ah and itsapplication for financial products. IBB hasbeen fortunate. Our Shari’ah SupervisoryCommittee consists of experienced andknowledgeable scholars. IBB’s Shari’ahCompliance Officer is also a member of theAccounting and Auditing Organisation forIslamic Financial Institutions (AAOFI) andis a Certified Shari’ah Advisor and Auditor.This high level of expertise is demonstratedby the fact that IBB is able to offer thelargest range of Shari’ah-compliant retailfinancial products in the UK.
NEWHORIZON April–June 2012POINT OF VIEW
The Importance of Risk Management
Islamic banks have witnessed significantgrowth over the past four decades, yet theaggregate level of total assets of Islamicbanks is, for example, only around 30% ofUBS total assets, according to 2010statistics. (Swiss-headquartered UBS isbelieved to be the second largest manager ofprivate wealth assets in the world – Ed.)The industry is, however, expected to seefurther growth, as Islamic banks open inmore markets around the world.Additionally, as a result of the ongoingfinancial crisis, in which banks have beenconsidered to have had a major role,markets have been searching for a moreprudent and more transparent bankingmodel that would overcome the criticalflaws of current banking systems. TheIslamic banking model is currently one ofthe models attracting attention, as itemphasises transparency and value creationin its dealings and shuns greed.
Growth, however, does not only mean alarger market share, but also moreinteraction with the global market, a widerrange of products to meet global marketdemands and, last but not least,commitment to international regulationsand financial stability. Financial stability is,of course, critically linked with managingrisks in banks and so it follows that Islamicbanks need to have a strong focus on theirrisk management practices and disclosures.
The Black Box Phenomenon
The Basel accords, particularly Basel III,stress the facts that transparency and liquiditymeasures are two essential aspects in riskmanagement and both of these represent achallenge to the Islamic banking industry. The
Basel accords require that risk managementpolicies and procedures be disclosed by allbanks with risk definitions, measurementmethods and mitigation strategies beingdisclosed in a bank’s annual report. For mostIslamic banks, however, risk managementseems to be a ‘black box’, where only a fewcommon items are disclosed with no furtherdetails provided. For example, one bank maydisclose the use of Value at Risk (VaR) as onemeasure to quantify market risk; however,how much the risk is, or which method wasused in calculating VaR, is left for the readerto guess.
The ‘black box’ phenomenon could exist forone of two reasons – either the bank doesnot have an adequate and advanced processfor managing risks so they would not be infavour of the disclosure or the bank strategyis not in favour of disclosing important riskmanagement strategies such as the ProfitEqualisation Reserves (PER) and InvestmentRisk Reserves (IRR). It is claimed thatIslamic banks follow the ‘best practices’ forrisk management, just like theirconventional counterparts, if, however, thatis not disclosed through their annualreports, the world at large is likely toremain sceptical.
The Status Quo
On the one hand, looking back through therelatively short history of Islamic banks,some positive developments in the area ofrisk management must be acknowledged.Large Islamic banks such as Dubai IslamicBank (DIB), Kuwait Finance House (KFH)and Abu Dhabi Islamic Bank (ADIB),among others, have shown development intheir risk management disclosures over thepast few years. On the other hand, the lackof an integrated approach in managing bank
risks, in which risks should be adequatelyreported and monitored, remains achallenge.
Considering the current status and therelative youth of the Islamic bankingindustry, determining the level of integrationbetween different risk factors presents amajor challenge to the industry, becauseIslamic banks lack the data to effectivelycarry out such an exercise. Such a challengecan only be met through a vigorousapplication of a fully-integrated riskmanagement framework, which involvesadequate reporting and the identification ofrisks. Adequate reporting requires Islamicbanks to unify the identification of thesources of the underlying risks, whichcurrently is not the case. Islamic banks needto work on building databases with therequired set of inputs, which in turn willfacilitate risk analysis and incorporatecorrelation events. There is a need for a setof common definitions of risks and tofacilitate this there is a priority requirementfor banks to cooperate in the recording ofrisk events and thus to develop an aggregatepool of information.
There is an urgent need to build a riskdatabase for Islamic banks to enable themto quantify the different risks and indentifythe existing correlations. This will not bepossible without a full and transparentdisclosure of risk management practices.
The Way Forward: Challenges and FutureOutlook for an Integrated RiskManagement System
There are some challenges facing Islamicbanks in the development of an adequateand integrated risk management system.First, Islamic banks are not following
By: Dr Rania Salem, Lecturer in Finance, German University, Cairo
NEWHORIZON Jumada-Al-Awwal to Rajab 1433 POINT OF VIEW
uniform reporting and disclosure standardsor harmonised Shari’ah standards. AAOIFIstandards require comprehensive disclosuresand reporting, but these are not yetuniformly followed by Islamic banks.Applying the AAOIFI standards wouldallow for comparability across Islamicbanks operating in different countries andfacilitate the role of supervisory andregulatory authorities. Transparency amongindustry players can be achieved once astandardised reporting system is followed.
Shari’ah harmonisation is a challenge todeveloping a structured Islamic finance
framework. A centralised Shari’ah boardthat ensures the compliance of financialproducts to Islamic finance principles hasalso become an inevitable demand. It is alsorecognised that infrastructure weaknesseswithin product development impedeeffective risk management. It is essential,therefore, to build a well-established andglobally-accepted, legal Islamic financeframework and this represents the secondchallenge. Such a framework should providethe elements that constitute aShari’ah-compliant financial tool based onmaqasid al-Shari’ah guidelines (theobjectives of Islamic law). These guidelineswould facilitate product development andfinancial innovation.
The underdevelopment of financialinnovation within the Islamic financeindustry is another challenge to riskmanagement in Islamic banks, wheredeveloping Shari’ah-compliant instrumentsto mitigate risks and manage liquidity risk isamong the main challenges. On the otherhand, according to Geert Bossuyt, DeutscheBank’s Head of Structuring for the MiddleEast and North Africa, ‘too often,‘innovation’ is achieved by pushing thebarriers and/or issuing fatawa by takingthem out of their context. Innovation ideallyshould be the result of a well-documentedand fundamental discussion on Shari’ah’.Product development is essential in the areaof risk mitigation and it should, of course,be compliant with Shari’ah.
A third challenge to the development of anintegrated risk management system is theshortage of skilled human resources. One ofthe main factors that should be consideredby Islamic banks, in order to support theimplementation of an efficient riskmanagement process, is having qualifiedpersonnel. Islamic bank managers shouldnot only possess in depth knowledge of thegeneral principles of Islamic banking, butshould also enhance that knowledge inrelation to more advanced products.Furthermore, a full understanding ofShari’ah principles is a prerequisite. It is,
therefore, recommended that more emphasisshould be placed on training and educatingemployees and managers on advancedaspects of Islamic banking and riskmanagement. Islamic banks should invest inboosting risk management understandingand skills.
The relatively small size of Islamic bankspresents another challenge. Theimplementation of an integrated riskmanagement framework and the use ofmore advanced conventional riskmeasurement tools require the use ofadvanced models and computer software,which are not affordable for relatively smallIslamic banks.
Finally, even though some may consider thatIslamic banks are not currently in need ofmore sophisticated measurement methodsor cannot afford to adapt such measures fortheir own use, it is highly recommended thatIslamic banks in their current state ofdevelopment should start to developdatabases capable of facilitating thedevelopment and/or the adaptation ofappropriate risk measurement methods inthe future. This is particularly criticalbecause Islamic banking businesses aregrowing within a competitive market. Theyare, thus, expected to keep pace withadequate risk management systems and theappropriate measurement of risks. Adoptingan adequate risk management frameworkwill enable Islamic banks to extend theirbusinesses to riskier activities thuspromoting higher profits and growth.Furthermore, adequate risk managementensures that risk-taking decisions match thebank’s capacity for absorbing possiblelosses. It should also be recognised that riskmanagement is a dynamic area, whichrequires continuous research, as the globalfinancial map is constantly changing. Aboveall, the effective application of an integratedrisk management system requires amulti-stakeholder collaboration betweenIslamic banks, regulators and supervisors toenhance the development of Islamic banksin both theory and practice.
Dr. Rania Salem is a lecturer in financeat the German University in Cairo (GUC),Egypt. She obtained her BachelorsDegree from the faculty of Commerce,Ein Shams University, Egypt in 2002, andan MBA in Financial Management fromthe Arab Academy for Banking andFinancial Sciences in 2005. She receivedher Ph.D. – magna cum laude – entitled‘A Risk Management Framework forIslamic Banks’ from the GUC in January2011. Prior to joining the academic field,Dr. Salem worked as an AnalystAssistant in the Research Department inthe CIBC (Commercial InternationalBrokerage Company).
NEWHORIZON April–June 2012FOOD FOR THOUGHT
The Nature of Scientific Revolutions
In 1962, Thomas Kuhn published a ground-breaking book titled ‘The Structure ofScientific Revolutions’, wherein hechallenged the view that scientific progresscan only be achieved by way of incrementalincreases in knowledge within certainparameters as defined by existing paradigms.Instead, he proposed the concept of scientificrevolutions that espoused the view that thereare times in human history when a particularparadigm proves inadequate in explainingnew findings, challenges and contradictionsthereby ushering in a ‘Paradigm Shift’ inscientific thought that reshapes the discourseon a particular subject matter. In making hisargument, Kuhn used the example of thedifficulty in maintaining Ptolemaic earth-centric astronomical beliefs within the newlyformed theories in the 17th century thatsupported the Copernican sun-centered view.
In the realm of Islamic finance with itsreligious and economic scientificfoundations, a similarity can be drawn inthe discourse that began shortly after theeffective commencement of the industry inits contemporary form in the 1970ssubsequent to the establishment of fully-fledged Islamic banking institutions. Inessence, there has been some difficulty inrelying on incremental advances inknowledge within the current legal-centredparadigm to reconcile the differencesbetween the religious interpretations of thescripture and the neo-classical economictheories that form the basis for modernfinancial practices. This could be attributedto the fact that financial intermediation andthe associated capital markets with theircontemporary characteristics really have nocomparable institutional analogies outside
of the last two centuries, let alone in thecommercial practices of the early Muslimcommunity in the 7th century.
The Illustrative Nature of Riba
No other subject can illustrate this difficultymore than riba, which along with gharar(excessive uncertainty) and maysir(gambling behaviour), form the three pillarsof the economic doctrine of the Shari’ah.For riba, the fundamental basis for itsprohibition can broadly be related to theelimination of the injustices linked to thefinancial slavery of individuals byopportunist money lenders who strive tobenefit from the sanctity of debt repaymentobligations in Islam without any of thecommensurate risks that exist in the worldof commerce.
This economic and social rationale for theprohibition of riba was translated to meanthe charging of any interest on top ofborrowed money. In time, an understandingdeveloped that any percentage figurecharged for borrowing is to be defined asriba as opposed to profits generated fromasset financing, which were deemed to bereligiously legitimate. To formalise thisunderstanding, a rather distinct set of legalcontracts was established that revolvedaround the murabaha, istisna’a, and ijarafinancing schemes (all of which in theircurrent format have only existed since the1970s) along with elaborate rules thatsought to internalise assets and profits intotheir structure.
The Flaws in the System
Certainly, the presence of an asset at thecentre of financing can promote sustainable
economic growth due to the reduction ofexcessive uncertainty and gamblingbehaviour. The forcing of a completelyasset-backed model, however, does have itsdrawbacks as it superficially alters theincentives and constraints of economicagents; augments the transaction costs ofthe financing arrangements and in somecases just simply fails to address thelegitimate needs of financiers (e.g., theshort-term interbank market).
In a similar vein, while it may be argued bysome that the elimination of any and allinterest through the benevolence of lenderscan reduce the debt burden on borrowersand even result in more equitable wealthcreation in society, the most probableoutcome, in the presence of moral hazardand inflation, is likely to be excessive debtformation and economic disequilibrium.The consequences of the low interest ratesin the period prior to the global financialcrisis provide a vivid illustration of thatreality. Notably, as evidenced by theproliferation of sub-prime mortgages andexcessive consumption of durable goodsalong with their ensuing adverse effects, thisaforementioned reality is not altered by theexistence of an asset within the frameworkof the proposed zero-interest financing.
As for the demands for the replacement of apercentage of interest by an amount of‘profit’, it can only be stated that theeconomic bases for these arguments arerather weak and their implementation caneven be dangerous. In effect, these demandssimply play on semantics rather than anyparticular substance since in any financingarrangement the characterisation ofamounts and percentages areinterchangeable. In fact, a valid assertion
An Appeal for a Paradigm Shift in the TheoreticalFoundations of Islamic Finance
By: Sherif Ayoub who has carried out research at the University of Edinburgh andColumbia University. He has also been associated with some of the leadingorganisations in the world
NEWHORIZON Jumada-Al-Awwal to Rajab 1433 FOOD FOR THOUGHT
can be made that the declaration of apercentage (as opposed to an amount) islikely to reduce gharar due to its relativityto the underlying amount of the purchaseand the timeframe of financing. This isapparent in that the seemingly smallamounts of profit in microfinance have beenfound to mask unusually high interest rates.What is actually disconcerting about profitlabel demands is their eventualconsequences as demonstrated by thearguments of some Islamic financeacademics that the usury laws that provide aceiling on interest rates in the West providemore protections from predatory lendingthan the potential for unlimited profits inIslamic financial transactions.
It is perhaps the prohibition of interest ratesand the acceptance of LIBOR (LondonInterbank Offered Rate), however, that bestexemplifies the difficulty that the industry hashad in modernising its operations to conformto contemporary financial methodology.Effectively, the utilisation of LIBOR as areference was legitimised in bankingoperations based on the illustrious butcherargument whereby it was deemed acceptablefor a beef butcher to have the same profitmargins that are enjoyed by the competitoracross the street – the pork butcher. Needlessto say, the acceptance of LIBOR based on thisanalogy along with the persistent refusal toformally acknowledge interest rates, the yieldcurve and contemporary asset pricing theoriesare still an open paradox.
The Importance of Context
Thus, it eventually becomes clear from theforegoing analysis that the favourite answerof economists, ‘It depends…’ is ratherrelevant in the scientific examination of thedynamic and complex financial sector,which includes Islamic finance. Essentially,apart from the characterisation of theprohibition, it is also important to note thatas with any directive in the Shari’ah inregards to worldly dealings betweenindividuals (i.e., not acts of worship), thecontext is an important factor to consider inthe implementation so as to not introducenegative externalities that can take awayfrom (or exceed) the benefits that underliethe original objectives.
Of course, the subjectivity of this economic-centred paradigm is at odds with theperception of the objectivity of the legal-centred one. This is despite the fact thatwithin Islamic jurisprudence there is ampleevidence of the importance of moderation,which is itself contextual in nature.Eventually, it should dawn on us that ourcontinued attempts to proceed byincrementally adjusting the Islamic financemodel within the current legal-centredparadigm through the establishment ofmultiple derivations from theaforementioned contracts (often precededby the term ‘parallel’ or ‘reverse’ and insome cases ‘Wa’ad’) is more of a risk than abenefit to the industry.
Balancing Legal and EconomicFundamentals
In essence, the effects of any transaction(and indeed the entire financial system)along with the judgment of deeds beforeGod have less to do with legal technicalitiesand more to do with economicfundamentals (i.e., it is not the colour ofwine or its ingredients that is the basis forthe prohibition, but rather it is itsintoxicating effects). The failure to recognise that fact has resulted in aformalistic exercise that has ranged from the infamous commodity murabaha andwakala structures for interbank liquiditymanagement to the economically-questionable mutual fund-style PLS (Profit Loss Sharing) model for the Islamic banking industry (remember thatmost of the assets are illiquid contracts over longer-term tenors while depositorshave mainly short-term liquiditypreferences).
That is not to say that the legal aspectsshould be absent from Islamic finance; thiswould be detrimental to the overall stabilityof the system. What is being proposed is alogical scientific process that is built on aneconomic-centred paradigm that caneventually be formalised by legal methods asopposed to the current cart-before-the-horsemodus operandi whereby legal contracts areestablished and economic theory is broughtin to (unsuccessfully) rationalise theirexistence.
Interestingly, the realisation of thiseconomic-centred proposition will not onlymark a paradigm shift in the theoreticalfoundations of Islamic finance to be more inline with Maqasid Al-Shari’ah (objectives ofIslamic jurisprudence), but also serve as apotential instigator to a paradigm shift inneo-classical economic theories that arebuilt on self-centred rationales as opposedto the religiously-desired human-centredones that include fairness, productivity,wealth creation, and stability.
To that end, it should be acknowledged byall of us that the economic doctrine of theShari’ah (and indeed the whole of thescripture) is for the benefit of all of mankindnot just Muslims. Thus, the sooner theindustry moves away from ring-fencingitself with the rhetoric of Islamic versusconventional finance along formalistic linesand adopts a more inclusive, systematicapproach to the evolution of economictheories, the sooner the world can benefitfrom the wisdom of God. That wouldindeed be a scientific revolution.
Sherif Ayoub has carried out research atColumbia University in the USA and atEdinburgh University in Scotland, wherehe obtained a PhD in Finance. He hasalso been associated with some of theleading organisations in the world. Theviews expressed are entirely those of theauthor and do not represent the views ofany organisation in any way.
NEWHORIZON April–June 2012MARKET DEVELOPMENT
The main aim of the article is to assess thepotential for an alternative to conventionalmicrofinance – Islamic microfinance. Thearticle argues that Islamic microfinance canplay an important role in the eradication ofpoverty, the socio-economic development ofthe poor and small (micro) entrepreneurswithout charging any interest (riba). Inaddition, it generates ethical and moralattributes and creates a new motivationamong the micro entrepreneurs. Its profitand loss sharing feature, which is differentto conventional microfinance, allows it toreach the poorest of the poor; allowsequitable distribution of wealth; optimalutilisation of resources and control overinflation and in this way leads to socio-economic justice. This article also aims toexamine the possibility of narrowing thegaps between haves and have nots, whilebearing in mind the present financialinclusion policies as the main agenda fordeveloping economies.
What is Microfinance?
The definition of microfinance is ‘aprogramme that extends small loans to thepoor for self employment projects and helpsthem to generate income in order to takecare of themselves and their families. Itprovides financial services to theunbankable and the poorest sections ofsociety, who do not normally have anyaccess to the formal financial system indeveloping countries. It acts as an efficienttool for various micro entrepreneurs, theunsalaried and for other informalincome-generating activities.
Why Islamic Microfinance?
Microfinance has undoubtedly yieldedfavourable results to a certain extent andmicrofinance institutions have grown
rapidly to meet the rising demand, but theiroutreach is still small compared with theneed for such finance. It has been found thateven among those who have some access tobasic banking services, there is evidence ofsignificant credit constraints. This problemhas been primarily identified in the MiddleEast, where Muslims are now showing aninclination to avoid borrowing frominterest-based financial institutions. This isbecause, under Shari’ah principles, they areprohibited from being involved in anyfinancial instruments involving interest(riba). A large section of the Muslimpopulation, therefore, rejects thisinterest-based financing, which in turn leadsto increasing poverty among Muslimpopulations.
Researchers from the Islamic DevelopmentBank estimated that in the six countrieswith the largest Muslim populations(Indonesia, India, Pakistan, Bangladesh,Egypt and Nigeria) the number of peopleliving on less than $2 per day far exceedshalf a billion. Recent studies have alsoshown that Muslims are excluded fromaccess to banking products and services to asignificant extent, with exclusion rates ashigh as 80% in India. Finally, for Muslimswith access to microloans, the ConsultativeGroup to Assist the Poor has suggested thatup to 40% reject loans on religious grounds.This means that there is huge potential forinterest-free microfinance that is yet to betapped.
Interest-free financing is based on profit andloss sharing and is therefore a form ofpartnership, where the partners share profitsand losses on the basis of their capital shareand effort, but where there is no guaranteedrate of return. It is also consistent with therequirement that Muslims do not act asnominal creditors in any investment, but are
actual partners in the business. It is, ineffect, equity-based financing and does notinvolve any kind of interest (riba). It mayprove to be a productive approach to theeradication of poverty in the future, butfinancial services alone cannot be sufficientto solve the problems of poverty. It isessential, therefore, for microfinance to becomplemented by education in order toenhance economic growth and development.
Islamic finance is growing rapidly, but it haslargely failed to engage the Muslim poor,who comprise almost half of all theMuslims in the world. This issue needs to beaddressed and Islamic microfinance wouldappear to be a potential solution. The targetgroup for microfinance is not, however,constituted by the poorest of the poor, whoneed other interventions such as food aidand health security, but those poor who liveat the border of the so called poverty line;those who could reasonably attain a decentquality of life and who have entrepreneurialideas, but lack access to formal finance.
Microfinance is also a very flexible tool thatcan be adapted to every environment, basedon local needs and the economic andfinancial situation. Following this logic,microfinance can also easily be adapted tocultural environments, such as thoseexisting in countries with majority Muslimpopulations.
The ultimate goal of Islamic finance is themaximisation of social benefits as opposedto profit maximisation, through the creationof healthier financial institutions that canprovide effective financial services at a grassroots level, an alternative to the Westernsystem that has created the currentsocio–economic crisis. This suggests thatIslamic microfinance possesses atremendous potential that needs to be
Islamic Microfinance: India as an Emerging Potential Market
By: Fouzia Jan, a research scholar at Jamia Millia Islamia, is working on interest-freemicrofinance and its feasibility for India. She is an MBA (Finance & Marketing) fromBangalore University and a biochemistry graduate from the University of Kashmir.
NEWHORIZON Jumada-Al-Awwal to Rajab 1433MARKET DEVELOPMENT
recognised efficiently and effectively. In fact,the current, worldwide economic crisis andthe problems that have occurred withconventional microfinance in variouscountries like Bangladesh and India compelus to look seriously at alternatives. Thatalternative may be interest-free financing.Islamic microfinance is a new area ofinterest within both the Islamic finance andmicrofinance fields of study and they appearto share many common characteristics suchas risk sharing, promoting entrepreneurshipand striving for economic justice.
Microfinance in India
Microfinance provides access to finance forthe poor, those who do not have access tobanks or other financial institutions. Indeedit has been viewed as an important tool forthe empowerment of the poor, contributingto the growth of civil society. The evidencefrom existing studies on the impact ofmicrofinance on the poor provides a rangeof results - from a substantially positiveimpact in Bangladesh to an insignificantimpact in Thailand. To some extent thevariability of the results depends on theanalytical methods used. In India, forexample, it has been found that loans forproductive purposes were more importantfor poverty eradication in rural areas thanin urban areas.
Crisis in Andhra Pradesh
In 2010 a major crisis occurred in India’smicrofinance sector. In the state of AndhraPradesh microfinance was characterised bythe charging of exorbitant rates of interest,resorting to unethical ways of recoveringloans by confiscating title deeds, usingabusive language, combining multipleproducts like savings, insurance and loansto ensure prompt recovery and aggressivelypoaching from government and banks tocapture their borrowers. This in turnnegated the main motive of povertyreduction and led to a number of suicidesamong rural borrowers who could not paytheir insurmountable debts and facedforceful collection methods by the lenders.
There has also been a situation in Andhra Pradesh, where some largemicrofinance institutions (and many smaller ones) were increasing client numbers at 5–10% per month in somedistricts in 2009, as newly recruited staffaggressively sought to achieve their financial targets and the credit bubble burst. In short, it can be said that themicrofinance lost its raison d’être in AndhraPradesh and this resulted in the exploitationof the poor through high interest rates,excessive debt burdens and coerciverecovery practices.
Finally in October 2010, with no warningor consultation with stakeholders, theGovernment of Andhra Pradesh issued theAndhra Pradesh Microfinance Institutions(Regulation of Money Lending) Act, 2010effectively shutting down all private sectormicrofinance operations in the state. The actdoes not, however, apply to AndhraPradesh’s government-backed microfinancebusiness, which directly competes withprivate sector microfinance institutions(MFIS). As a result microfinance lost itsmain aim of poverty eradication and turnedinto chaos.
The Potential Benefits of IslamicMicrofinance
There are undoubtedly lessons to be learned from the Indian experience withmicrofinance and, given that India has thesecond largest Muslim population in theworld, this may hasten the development of an interest-free Islamic microfinancesystem. In addition Islamic microfinancecould be beneficial in other ways - betterrecovery rates and increased organisationaland borrower sustainability, as well as more effectively meeting microfinance’s core objective of poverty alleviation,increased production and job creation.Simultaneously, Islamic microfinance can also offer an alternative paradigm for millions of poor people who arecurrently not served by conventionalmicrofinance.
Challenges and Issues
It has been suggested that Islamicmicrofinance could be a critical enabler ofwealth creation and its equitabledistribution, but the challenge of povertyalleviation through microfinance needs to beachieved through a comprehensive approachto the issue. Innovations in Islamicmicrofinance must be set within abackground that includes financialinstruments yielding stable income flows,cover or security to deal with penalties onpayment defaults and formulae for pricingIslamic financial products. Innovationsshould be firmly based in the application ofa new product or a technology to specificmarket opportunities, for example, lifestyleor explicit socio-economic problems.Combining the Islamic social principle ofcaring for the less fortunate withmicrofinance’s power to provide financialaccess for the poor has the potential toreach out to millions more people, many of whom have now started to prefer Islamic products over conventional ones. It also demands the development offinancial reporting standards to build the infrastructure for transparency in the global Islamic microfinance sector.
It is time for the industry to adoptinnovative and sound practices and provethat the model works efficiently; that microentrepreneurs with an appropriate businessidea can be helped and thence find a wayout of poverty. In this way Islamicmicrofinance can be a fruitful initiativetowards microenterprise development andprove to be a positive accelerator ofeconomic growth.
Islamic microfinance is, however, a newconcept, still in its infancy and demandsfurther, thorough market research toidentify market segments and to enableproducts to be customised appropriately. Italso demands the development of trainingcourses so that micro entrepreneurs are wellequipped to take advantage of theopportunities they are being offered.
NEWHORIZON April–June 2012COUNTRY FOCUS
Background
The history of North Africa is one ofinvasion and foreign influence. Thoseinvasions have come from its Mediterraneanneighbours rather than from the continentof Africa itself, perhaps because most of theregion, with the exception of Egypt, is tosome extent cut off from its Africanneighbours by the Sahara desert and theAtlas Mountains. In antiquity the coloniserswere the Greeks, Phoenicians and Romans;in late antiquity it was the Umayyads withtheir roots in modern Saudi Arabia andtheir capital in Damascus in modern Syriaand in the 18th and 19th centuries it wasmainly the French and British and theOttoman Turks, with walk-on roles by theSpanish and Italians. Visit any NorthAfrican country and you will see the legacyof these various invasions from the remainsof great Roman cities such as Leptis Magnain Libya through the Greco/Roman templesin Egypt and the great mosque at Kairouanin Tunisia to the French colonialarchitecture of Casablanca. Although Islaminitially came to Africa through traders andwas well received in the coastal areas, it wasthe expansion of the Umayyad empire thatwas responsible for embedding Arab culturein North Africa. Today the Muslimpopulations of the North African countriesrange from 95% of the total population inEgypt to virtually 100% in Tunisia andMorocco.
Despite the fact that Islam came to NorthAfrica within a decade of the Prophet’sdeath (pbuh), making the region one of thelongest-established Muslim communities inthe world, Islamic finance has made veryfew inroads in the region. (Managementconsultants, McKinsey estimate that Islamicbanking accounts for just 1% of the totalbanking assets in the region.) Curiously, thevery first tiny shoot of the modern Islamicfinance industry was the founding of asavings cooperative in the town of Mit
Ghamr in Egypt in the 1960s. Depositors inthe organisation could also take out smallloans to invest in production and eventuallythe organisation also attracted investmentfunds with returns being based on aprofit-sharing system. It was, however, GCCstates such as Dubai that took up the batonin the 1970s with the Dubai Islamic Bank,the first truly modern Islamic bank, openingin 1975.
The Wind of Change
While Islamic banking is now flourishingaround the world, North African countriescan boast only a handful of Islamic banks,but is this about to change? Early in 2011Tunisia was the first country in the region toexperience a popular uprising against a veryautocratic government regime and throughthe year this spread to Egypt and Libya. InMorocco, King Mohammed VI has held onwith a combination of strict control andmoderate reform. Algeria has also remainedrelatively quiet, perhaps due to the actionsof a regime determined to suppress popularprotest at any cost, but also perhaps becausethe memory of a decade of civil war andunrest in the 1990s is still too fresh in theminds of the population.
One characteristic of the old regimes wasthat they pursued vehemently secular policiesin the world of finance, fearing that overtlyIslamic institutions could be a back door topower for Islamic extremists. Financial lawsand regulations were inimical to theestablishment of an Islamic finance sector.Although it is still too soon to make any firmjudgement about whether or how thissituation is likely to change, this review ofNorth Africa will take a look at the story todate and try to identify early signs of change.
Egypt
It is an irony that the Islamic bankingindustry in Egypt, widely cited as the
birthplace of modern Islamic finance,currently accounts for only 3-4% of thetotal banking sector. Islamic banking wasfirst licensed in Egypt in 1977 and althoughthe central bank set liquidity requirementsfor Islamic banks, it did not set any Shari’ahstandards and this may in part have beenresponsible for a number of failures amongsmall Islamic financial institutions in the1980s. Experts have described these failedinstitutions as speculative ventures withdubious religious credentials. Needless tosay, this did nothing to promote the cause ofIslamic banking in Egypt.
Another possible factor in the sector’s failureto thrive is that following the scandals of the1980s, is the 1996 fatawa issued by SheikhMohammed Tantawi, at the time GrandMufti of Egypt, declaring that some forms ofinterest were permissible, specifically intereston government bonds and ordinary savingsaccounts. His view was that interest or ribawas only haram when it was excessive andmanipulative.
The first fully-fledged Islamic Bank inEgypt, the Faisal Islamic Bank of Egypt,founded by a Saudi businessman, PrinceMohammad Bin Faisal, opened its doors inmid 1979. It is the largest of the Islamicbanks in Egypt with 24 branches. Havingweathered the 2008 financial crisisreasonably well, Faisal Bank’s latestfinancial results suggest that the civil unrestin 2011 have taken a toll; net profits fellfrom LE 337.9 million in 2010 toLE 186.6 million in 2011.
The Egyptian division of Al Baraka Bankwas founded in 1980, initially under thename Al Ahram and currently has 20branches. It is difficult to estimate whetherthey too have been affected by the 2011unrest in Egypt as their results are rolledinto the Bahrain-based Al Baraka groupresults, but it would be somewhat surprisingif they had not. Indeed, when announcing
The Wind of Change in North Africa
By: Andrea Wharton
NEWHORIZON Jumada-Al-Awwal to Rajab 1433 COUNTRY FOCUS
the 2011 financial results Sheikh SalehAbdullah Kamel, Chairman of Al BarakaBanking Group, commented on ‘theextremely difficult political developments ina number of Arab countries including thosein which we operate and their repercussionson the business and banking environment.’
Egypt’s National Bank for Developmentestablished in 1980 was acquired by theAbu Dhabi Islamic Bank in 2007. It beganwith a remit to develop Egypt’s privatesector, but now offers a range ofShari’ah-compliant products and services tocorporate and individuals through 70branches across the country.
Egypt is potentially the biggest market forIslamic finance in North Africa with apopulation of more than 80 million people,95% of whom are Muslim. On the otherhand there are a number of factors, whichmake it difficult to predict whether or howfast Islamic finance will grow in Egypt. Firstand foremost is the need for stability.President Hosni Mubarak may have beenousted 12 months ago, but the country isstill essentially under the control of themilitary and early 2012 saw furtheroutbreaks of civil unrest. Although Egyptare said to be considering the issue of a
sovereign sukuk by mid 2012 as part of aparcel of measures to pay down their deficitand to raise much needed funds to boosteconomic development, it is difficult tobelieve that adjustments to banking lawsand regulations to make Egypt a moreIslamic-finance-friendly environment are topof the government’s agenda.
Second, around 90% of Egypt’s populationis unbanked. It could be argued that this is afunction of the lack of ready access toIslamic banking for the 95% of people inEgypt who are Muslims. On the other handsome commentators suggest that EgyptianMuslims are somewhat less conservativethan their counterparts in the Middle Eastand using conventional banks that chargeand pay interest is less of an issue for them.
It is hard not to conclude, therefore, that thefuture of banking in general and Islamicbanking in particular in Egypt is more likelyto be linked to a return to political stabilityand economic growth than to any otherfactor and the jury is out on when thoseconditions might be achieved.
Libya
There are currently no Islamic banks inLibya and indeed prior to 2005 there wereno foreign banks of any kind in the countrywith banking being largely state controlled.Following the revolution, which saw the fallof Colonel Muammar Gaddafi’s regime,Libya’s National Transition Council (NTC)are said to be reviewing their financial lawswith a view to attracting more foreigninvestment into the country. This review isbelieved to include Islamic bankingregulations and the omnipresent Al Barakahas already applied for a license to set up abank in Libya.
While Libya’s considerable oil wealth andthe billions in assets controlled by the LibyaInvestment Agency might prove a temptinginducement to Islamic banks, particularlythose in the GCC, to set up Libyanoperations, it is likely to be some timebefore this particular juggernaut begins toroll. The country is still far from stable.Recent news reports suggest that armedmilitias, the legacy of the civil war are a
challenge to the authority and control of theNational Transition Council.
The first step towards regularising thesituation in Libya will be the democraticelections, which are scheduled to be held inJune 2012, although at the time of writingno firm date had been set. This event is keynot just because it signals some sort ofreturn to normality, but also because theNational Transition Council is an interimgovernment with limited legislative powers.Even if financial legislation is fairly high ontheir agenda, it is unlikely that there will bemuch movement before the end of 2012.
Second, although the central bank in Libyacontinues to function, Libya probably doesnot have the people resources to implementfinancial change quickly. The countryprobably has few individuals, who could beconsidered experts in international financeand certainly not in Islamic finance. This inturn would mean they would have to relyon outside help and while there is a lot ofgoodwill towards countries such as Qatarand the United Arab Emirates, who wereovert supporters of the anti-Gaddafistruggle and who could certainly providethat expertise, it is difficult to know howopen any new regime will be to outsideinvolvement.
The question is just how quickly Libya willwant to move on financial change. While areturn to law and order and ensuring thegovernment’s remit runs across the whole ofLibya might seem to be the top priority,financial change is important. The civil warwas not just about removing a corrupt andautocratic government; it was also aboutimproving life for the majority of Libyans.To do that the new government will need arobust financial structure to underpininfrastructure development and, given thataround 97% of Libya’s population isMuslim, it is logical to believe that Islamicfinance will have a role, but almost certainlyalongside conventional finance. In theory itshould be possible to discern the futureshape of finance in Libya by the end of2012 or the beginning of 2013, but thatshape is unlikely to be transformed into factbefore 2014/15. In practice, with the oil-richCyrenaica declaring independence and
Aga Khan Mausoleum
NEWHORIZON April–June 2012COUNTRY FOCUS
various municipalities setting up their owngovernments, prospects for progress onfinancial infrastructure issues, includingIslamic banking, look poor.
Tunisia
Geographically the smallest country inNorth Africa, Tunisia is almost 100%Muslim. It is somewhat wealthier than otherNorth African countries; has a bettereducated population and a well-establishedand relatively sophisticated conventionalbanking system. Prior to the uprising thatsaw the relatively peaceful overthrow of thegovernment of Zine el-Abidine Ben Ali,there were three Islamic banks in thecountry working alongside conventionalbanks and according to Tunisia’s primeminister, Hamadi Jebali, that situation willnot change, although modifications toexisting laws have been proposed to ensureconventional and Islamic finance receiveequal treatment in terms of taxation. Hismoderate Islamist party, Ennahdaapparently models itself on Turkey’s AKP,which backs the idea of a secular state.
Mr Jebali is, however, keen to establishTunisia as a financial hub in the region andto attract foreign investment, whether thatcomes in the form of conventional orIslamic finance. His willingness to exploit
all options is underscored by the recentrumours that the Tunisian government iscurrently in discussion with banks aboutissuing a sovereign sukuk sometime beforethe end of 2012. The country apparentlyneeds some $35-45 billion to finance itdevelopment plans over the next five years.
It is also reported that the Tunisiangovernment is to set up a working group toconsider how Islamic finance in the countrycan be developed alongside conventionalfinance. The working group will compriserepresentatives from the central bank, thestock exchange and private institutions.
Islamic banking arrived in Tunisia in 1983when Al Baraka opened a subsidiary initiallycalled Best Bank, but now operating underthe Al Baraka label. It has eight branches inthe country. In 2008, they were joined byNoor Bank, who opened a representativeoffice in Tunis mainly catering forinvestment and corporate banking. (Thiswas UAE-based Noor Bank’s first overseasventure.) In 2009, Sakhr El Matri, a son-in-law of former president, Ben Ali, foundedZitouna Bank, Tunisia’s first home-grownIslamic bank. Following the overthrow of hisfather-in-law’s regime, the bank was placedunder the control of the Tunisian centralbank. It appears that the bank is movingforward again and has opened several new
branches in the second half of 2011 andearly 2012.
Algeria
Algeria is the second largest North Africancountry by population after Egypt and isabout 95% Muslim. So far it has beenlargely unaffected by the uprisings that haveaffected its neighbours. Throughout the1990s the country was torn apart by civilwar in which around 200,000 people diedand it may be that the shadow of theseevents has muted the country’s appetite forprotest. Local, low-level protest is, however,a fact of life. So far the strongly secular,military-backed government has managed tocontain any broader, national protest with acombination of tight security and using someof the country’s substantial oil and gaswealth to buy off potential protestors.
Some commentators, however, believe thatthe elections due in May 2012 could prove aflash point. If the elections are free and fairand if Islamist parties achieve a degree ofelection success, it is uncertain how thegovernment will react. If the elections arenot perceived to be free and fair, that toocould prove a trigger to protest.
The Algerian banking sector is dominatedby the state – six public sector banksaccount for around 90% of the assets anddeposits and with restrictions on foreigninvestment and a suspension of any newbanking licences, it is difficult to see thissituation changing any time soon. (Islamicbanks account for just 1% of bankingactivity.) According to Nacer Haidar,Secretary-General of Al-Baraka Bank,Algeria has only one bank branch for every26,000 people compared to one for every7,000 people in neighbouring countries andone for every 2,000 people in developedcountries. Furthermore it has only oneIslamic bank, Al Baraka, which was set upin 1991 to provide retail and commercialbanking services. (Al Saalam put a toe in thewater in 2008, but this is a largelyexploratory exercise looking for Gulfinvestment opportunities.)
Al Baraka in Algeria has around 21branches and intends to expand its network
Kairouan Mosque
NEWHORIZON Jumada-Al-Awwal to Rajab 1433 COUNTRY FOCUS
to 47 by 2015. It has also started work on anew 15-storey headquarters building inAlgiers and apparently intends to expand itsrange of Islamic financial services includingtakaful.
Morocco
Morocco, like Algeria, has so far avoidedthe turmoil that has affected other NorthAfrican countries. When he came to powerin 1999 on the death of his father, KingHassan, King Mohammed implementedsome moderate reforms, but the country’sconstitution is designed to keep the King inpower and to limit the power that anyindividual political party can achieve.
Currently Morocco has no Islamic banks,but a new bill is apparently about to besubmitted that will authorise theintroduction of Islamic banking in thecountry. It will permit existing banks tofully or partially (Islamic banking windows)convert to Islamic banking. QIIB (QatarInternational Islamic Bank) were quick offthe mark when they held talks with the PJD(Islamist Justice and Development Party)with a view to establishing Islamic bankingoperations in Morocco. (In elections inNovember 2011 the PJD won the most seatsin parliament and under constitutionalreforms agreed earlier in 2011, KingMohammed was obliged to appoint a primeminister from that party rather thanwhomever he pleased.) The proposed bankwould be owned 51% by Moroccan citizensand 49% by Qataris.
Early Days
What will happen in North Africa inrelation to the political situation is stillanybody’s guess. Libya is clearly the mostpolitically unstable country in the region;there are big question marks over Egypt andeven in those countries that did notexperience uprisings in early 2011 or haveapparently settled down, there is a degree ofuncertainty about what will happen in thefuture.
The financial infrastructure in the regionalso leaves something to be desired.Autocratic governments in the region have
and in some cases still run business,including banking, to further their own aimsand those of their supporters rather than forthe general benefit of their countries andpeople. One view would be that there is alot of work to do simply to create a stableand transparent legal and regulatoryframework, which will allow these countriesto move forward in economic terms andthat the introduction of Islamic banking willbe low on the agenda.
Another view is that, if these countries aregoing to go back to the drawing board interms of the legal and regulatory frameworkgoverning finance, there is a uniqueopportunity to create an environment thatwill foster Islamic as well as conventionalfinancial institutions. In addition QIIB’searly interest in Morocco, which currentlyat least seems to be one of the more stablecountries in the region, would seem tosuggest that a more Islamic-banking-friendlyenvironment could eventually attract muchneeded investment from oil-rich GCC states.While Libya and Algeria have hydrocarbonresources and therefore a potentially strongrevenue stream, they could certainly benefitfrom the financial expertise that Islamicbanks could bring.
It is, however, difficult to estimate if andwhen Islamic banking in North Africa willreally take off. The political situation is stillfar from stable across the region and it isdifficult to know whether governments suchas that in Libya, which have stated theirintention of enacting legislation to smooththe path for Islamic banking, will even be inpower by the end of 2012. Currently theonly safe prediction is there is likely to bechange, but quite what that change will beor when it will come is beyond theforecasting powers of this journal.
The second question is whether Islamicbanking in the region will meet the needs ofall the inhabitants of the region. To datethose banks that have set up operations inNorth Africa are mainly GCC-basedorganisations catering for the urban middleclass, but there is, for example, a hugerequirement for the sorts of facilities thatwill help lift rural farming communities outof poverty and thus contribute to theeconomic development of the region. IfIslamic finance is going to pay more than lipservice to its principles of delivering socialbenefit as well as complying withrequirements such as the avoidance ofinterest, then Islamic banks in the regionwill need to think hard about what productsthey offer and how they deliver them; they need to go back to their roots. It isessential to do this, if the desire for greater distribution of wealth, one of theunderlying causes of the Arab Spring, is tobe met.
Commenting on the North Africansituation, Mr Iqbal Asaria, an associate ofAfkar Consulting and lecturer on Islamicfinance, said, ‘North African economies willbe under stress for some time following theArab Spring and new operators will find itdifficult to make things work successfully.People will have to be very patient and longsighted, but the change of political will isthe single most important factor in terms ofestablishing a flourishing Islamic financeindustry.’ He believes that it is quite likelythat some conventional banks in the regionwill convert to become Islamic banks and ifjust a few do this, it will provide an impetusto Islamic finance in general.
Koutoubia Mosque
NEWHORIZON April–June 2012IIBI LECTURES
The modern Islamic finance industry hadits beginnings in Africa, in Sudan and hasnow spread across the Continent, toGambia, Egypt, Nigeria, Kenya, Algeria,Uganda and Tanzania. This trend isexpected to accelerate with the ArabSpring in North Africa as official hostility toIslamic finance is replaced with Islamicfinance ’friendly’ jurisdictions.
The problems of Africa, however, aredifferent to those of the GCC or SouthAsian countries. African economies arestill dominated by agriculture and thebanked population is small. There is hugepotential for micro finance and microtakaful schemes, which could bedesigned to capture the imagination ofthe African population; this is alsoessential for Islamic finance to makeheadway in Africa. In addition innovativedistribution and banking channels willneed to be developed.
Mr Asaria began his lecture with athumbnail sketch of Africa. The Continenthas a population of somewhere between900 billion and 1 trillion people of whom50-60% are Muslim. Over the last 200years Africa was colonised by Europeanpowers and these powers, mainly the Britishand the French have bequeathed a legacy,which includes different languages, legalsystems and attitudes, all of which havecreated barriers between African nations.
The African population is stillpredominantly rural, 60% of the peopleliving outside towns and cities. Key exportsare commodities – hydrocarbons andminerals in addition to agricultural produce.The average GDP (Gross Domestic Product)is less than $1,000 per head of population.
Only 20–30% of the total population isbanked, although there is a disparitybetween urban and rural populations, withthe latter much less likely to use banks.There is just one bank branch for every100,000 people in Africa. The situationwith capital markets is even worse.Essentially Johannesburg is the only capitalmarket of any significance and the onlycentre in Africa, where liquidity is sufficientto permit secondary market trading. Thereis some capital market activity in Kenya anda few North African countries, notablyEgypt, but at a much lower level. On theplus side Africa is commodity rich and thereis considerable potential there. As a resultmany different types of organisations,including international banks, have beensetting up operations in Africa in recentyears. These include organisations such asBarclays and Standard Chartered who hadhistoric links with Africa, but most recentlyGCC-based banks have been putting a toein the water. An estimated 12 Africancountries currently have some form ofIslamic financial institution and centralbanks in these countries are beginning tothink about ways to regulate them. Theintroduction of Islamic banking has createdissues in some countries, notably Nigeria(see New Horizon, October to December2011).
Banking in Africa does, however face anumber of challenges. First and foremostthere are serious infrastructure needs. Inmost African countries there is noguarantee, for example, of 24/7 electricity.Roads, ports and airports among otherfacilities all need upgrading.
Second is the large unbanked population,which needs finance for agriculturaldevelopment, all types of export finance,particularly for commodities andmicrofinance.
Despite these challenges, there are a numberof developments in Africa, which may proveuseful for reaching the unbanked
population. In sub-Saharan Africa, which isthe less developed part of the Continent,almost 70% of the population had mobilephones by 2008, ranging from 100% inBotswana through 60–70% in Nigeria to10% in the very nomadic country of Niger.Potentially, therefore, banking services couldbe delivered to the unbanked population viamobile phone. Kenya already has amobile-phone-based banking service,M-Pesa, where money can be transferredusing text messages. Banks, includingIslamic banks, which want to do business inAfrica, need to consider innovative methodssuch as the use of mobile phones to deliverservices. Online banking is another potentialdelivery method. By 2001 there was almostuniversal Internet connectivity throughoutAfrica via a mixture of broadband, dial up,satellite and undersea cable.
Islamic finance has some particularadvantages when it comes to banking inAfrica. The salam contract, for example,was originally designed to prepay farmersfor a crop, which would be delivered later.In the modern Islamic finance industry thatcontract has been adapted for otherpurposes, but for Africa salam in its originalform would be particularly helpful.
There are, however, other developments thatwill be needed to meet the needs of Africasuch as micro takaful. Crop failures andepidemics of animal disease are realproblems for African farmers. One exampleof the type of scheme required is thatlaunched by Oxfam, which has partneredwith Swiss Re to provide cover for cropfailure for a very small premium. Withoutcover of this kind, it is difficult to see howbanking operations could be sufficientlyrobust. There are also good micro takafulproducts available in Sudan.
Thirdly, there is the issue of improvinginfrastructure and one interesting idea is theDesertec project. This, at the moment, is aEuropean project designed to tap the solarenergy capacity of the Sahara to provide
Promoting Islamic Finance
NEWHORIZON Jumada-Al-Awwal to Rajab 1433 IIBI LECTURES
between 15–20% of Europe’s energy needs.It would not compromise Europe’srequirements in any way if this sameresource were to be used to provide all ofWest Africa’s energy needs, but the cost,however, would not be insignificant;Desertec is expected to need an investmentof around $500 billion. It might, however,be possible to finance such a project vialong-term sukuk. This is potentially a bigrole for Islamic finance and could beextended to sustainable projects in theKalahari, which would be capable ofsupplying energy to Southern Africa.
The potential roles for Islamic finance,therefore, extend from the micro projects atthe lower end of the scale, financing farmingright up to huge projects such as renewableenergy. The opportunities are there.Agriculture and commodities are well suitedto Islamic finance contracts; indeed it iswhere many Islamic financial instrumentsstarted. Renewable energy is also a veryacceptable type of investment in an Islamicfinance context.
There is, however, competition for thisbusiness. The World Bank is already veryactive in Africa through a number of itsgroup members. The InternationalDevelopment Association (IDA) providesgrants to countries where per capita GDP isless than $600. It is quite simply impossibleto compete with IDA funding. It is 50-yearmoney, a 10-year grace period and nointerest. The International Bank forReconstruction and Development (IBRD)lends at commercial rates, albeit at lowerrates than normal banks, but these loans areessentially for infrastructure projects. AnyIslamic bank would probably need to lookat areas, which are not covered by IBRDloans. The third arm of the World Bank, theprivate sector funding operation, is theInternational Finance Corporation (IFC),which is particularly good at doing duediligence on products, which solves a lot ofproblems for Islamic banks, who can thenparticipate in syndicates with the IFC.
In addition to the World Bank, there aremultilateral developments banks, whichoperate on a similar model – the AfricanDevelopment Bank and the Islamic
Development Bank, which has 12 Africanmembers, although it also operates innon-member states. There is also anincreasing amount of bilateral developmentaid, with traditional funders, OECD(Organisation for Economic Cooperationand Development) countries, being joinedby India and China. In the case of India andChina, project funding is not necessarilytotally disinterested and commercial.
Finally there are countries trying to buylarge tracts of land with a view to providing
food security for their own people. This iscausing tensions in Africa and potentiallycreating problems for institutions such asbanks.
In conclusion Mr Asaria said that Islamicfinance is mainly delivering services to theurban middle class, fulfilling urban needs.There is very little agricultural lending, littleor no microfinance, negligible microtakafuland very little use of innovative technology.If Islamic finance wants to succeed in Africa,it needs to take a long, hard look at itsoperations.
In response to questions, Mr Asaria saidthat he believed window operations wereprobably the main way forward for Islamicfinance in Africa, because the capitalrequirements to set up a new bank wouldgenerally prove to be a barrier to thatapproach. On the issue of changing tax lawsto enable Islamic banking to flourish, MrAsaria said that he believed South Africa,Kenya and Tanzania were in the process ofreviewing tax laws, with Nigeria likely tofollow, although not immediately. Thedriver for such changes is probably thedesire of these countries to attract inwardinvestment and in this context sukuk are anoption that they want to be able to use. Heagreed that tax laws currently are a majorobstacle to Islamic finance in Africa.
Islamic capital markets remain reliant onIslamic banks with surplus liquidity. Byoffering simple and competitive Islamiccapital market products, it should bepossible to grow the asset base byincreasing the inflow of funds from Islamicinvestors, while also offering opportunitiesfor conventional investors and borrowersto be active players in Islamic capitalmarkets. The challenge is also to remaintrue to the spirit of Shari’ah principles –achieving equity, social justice and
M Iqbal Asaria, a qualified economist andaccountant, is an associate of AfkarConsulting Ltd. He is also head ofEuropean operations for Yasaar Ltd andnon-executive director at Amiri CapitalServices. He has worked as an investmentanalyst in the City of London for severalyears. More recently he has been involvedin consultancy on financial productstructuring and niche marketing servicesto faith and ethnic communities in the UKand was a member of the Governor of theBank of England’s working party set up tofacilitate the introduction of Shari’ah-compliant financial products in the UKmarket. He teaches graduate level coursesin Islamic finance, banking and insuranceat a variety of UK universities andbusiness schools. He was awarded a CBEin 2005 for services to internationaldevelopment.
NEWHORIZON April–June 2012IIBI LECTURES
creating a moral economy and at thesame time to meet regulatoryrequirements.
The Landscape of Islamic Finance in theGlobal and UK Contexts
Most mid cap organisations tend to borrowmoney from the high-yields loan market,which, since the financial crisis, has fallenoff the cliff in Europe falling from$250 billion per annum at its height toabout $50 billion now. In part that is areflection of where the banking market is,but also there is no appetite forsyndications. Most Islamic borrowers alsofall into the sub-investment grades, evenmost government issues. For example, thebiggest issuer is Dubai, which is not a ratedentity by itself. The Islamic capital marketshave, however, seen fairly consistent growthand assets are now valued at more than$1 trillion. One qualification is that thisfigure does include the Islamic Republic ofIran, which is not really a part of the largerIslamic finance community, as well as some largely domestic markets such asTurkey.
As a niche market, still less than 1% of thetotal market, Islamic finance always has thespace to grow, but importantly it has theliquidity to grow. Liquidity is a recurringtheme in Islamic finance and it is a keyreason why conventional borrowers arelooking at it.
Taking a historical look, in 1975 thefounding of the Dubai Islamic Bank, theIslamic Development Bank and the KuwaitFinance House was a response to the faithor inclusion agenda; there was a demandfrom Muslims for an alternative toconventional banking. These organisationswere set up primarily to fulfil that need andactivity was concentrated around the GCC,but with some developments in the MENAregion and Malaysia. Products were fairlyprimitive, mainly wakala and murabahabased. None of the more recentdevelopments around tawarruq, forexample, existed at that time, because taxwas not a big issue in the jurisdictionsconcerned and transactions were relativelysmall. At that stage what was on offer was
definitely not likely to appeal to OECD(Organisation for Economic Cooperationand Development) investors.
The second stage of development took intoaccount issues such as scale, regulation andstandardisation with the appearance oforganisations such as AAOIFI and IFSB andthe whole Shari’ah scholar movement. Aframework was beginning to emerge. Thisphase saw the growth of Islamic financeacross MENA, Malaysia and other regions.This phase also threw up the differences inthe Shari’ah approach to Islamic finance,leading to some fragmentation.
Around 2000 the capital markets element ofIslamic finance began to develop with theadvent of sukuk and other interbankactivity. This was in part driven by somepeople realising they could be better off bydoing something under Shari’ah. Thewindow operations of conventional banksbecame particularly active in this phase,legitimising earning greater returns under aShari’ah structure.
Finally in 2007 banks such as BLME andthe European Islamic Investment Bankentered the arena seeing an opportunity todiversify their exposure by acquiring assetsoutside the GCC and also to developproducts under English law that would meetOECD requirements and create a levelplaying field for Islamic banking products.While banks such as BLME cannot competewith the conventional banks on theprovision of financial services to blue chipcompanies, they are finding that there is arich seam of opportunity with SMEs (Small and Medium Enterprises), who arenot well served by the big, conventionalbanks.
Nevertheless, the biggest capital marketsgrowth in the short to medium term is likelyto be in the GCC partly because of thesurplus liquidity in that region and alsobecause Islamic finance is reaching a certainlevel of maturity in that region. Some of thelargest Islamic banks are in the Middle East,for example the Dubai Islamic Bank, AlRahji Bank and the Kuwait Finance House,which alone account for about 20% of theassets of Islamic banks.
Islamic wholesale banking can now deliverpretty much anything that conventionalbanks can using a murabaha structure, butDr Janekah suggested that the sector shouldbe using a wider range of the structuresavailable. The equivalent of a syndicatedfixed loan in the conventional sector is asyndicated murabaha the majority of whichare structured around the metal trade. Forexample, BLME recently completed atransaction with Turkish syndication thatused the underlying commodities. In hisview, trade finance is underused; it is notnecessary to use the metal trade as much asit is; it is possible to use the trade flow itself.He commented that ijarah is very wellsuited to Islamic finance with the mainissues being capital allowances and taxationin the change of ownership, but if these aretaken into account upfront, there should befew problems.
Capital Markets and Sukuk
Sukuk is the main capital markets productin Islamic finance and it has been growingsteadily. The market in 2011 is estimated tohave been worth $67 billion with the GCCaccounting for about 25% of that. Indeed insome markets sukuk issuance has been on apar with bonds. In the past sovereign wealthfunds and government agencies were morelikely to issue bonds rather than sukuk; thissituation has changed and is in partresponsible for the growth in the sukukmarket.
Fund managers in the UK consider sukuk tobe akin to emerging market bonds issued bygovernment agencies or high-yield bondsissued by sub-investment corporates in theUK. In the last few years tenors havetypically been around five years, rather thanthe 10 or 20 years, which was the normpreviously. It is a buy and hold instrument.What the market needs is more regularissuance to allow a secondary market todevelop.
In the conventional bond market the SPVlends and borrows money, a debt contract.In sukuk, however, the ijarah structuremeans that there is a constant transfer ofassets between the SPV (Special PurposeVehicle) and the originator of the sukuk and
NEWHORIZON Jumada-Al-Awwal to Rajab 1433 IIBI LECTURES
that has tax implications. In the UK inrecent years, however, changes to thetaxation system have helped to level theplaying field for Islamic banks.
In the UK Islamic banks such as BLME andQIB (UK) have been disappointed by thefact that HSBC has been the conduit forsukuk listed on the London Stock Exchange.Not all sukuk, however, get listed. Thosethat do tend to be are the rated governmentand quasi government, but some sukuk areprivate placements. One of the advantagesof London is that it is a major centre for thefund and asset management industry andmany of the investors in sukuk have noIslamic links; they are simply asset managersin the conventional market with a lot of thecustomers coming through the syndicationsdesks.
The concept of ownership is quite importantin Islamic finance, but the majority ofinvestors do not want ownership and thehassle of things like taxation that areassociated with ownership. Their mainconcern is security and the UK’s AlternativeFinance Act addresses this issue quite well.While the sukuk investor has beneficialownership, that ownership behaves like asecurity, because in the case of default youhave to sell back to the original borrower,creating a clear debt obligation with thatperson.
Another benefit of operating in the UK isthe robustness of English law and thereliability of the courts. English law ischosen in pretty much all Islamic financingtransactions. Trust legislation in particularfacilitates the development of capitalmarkets. In terms of risk management theLondon market offers hedging lines toIslamic banks, which offsets the risk to anextent.
The Role of Trade Finance
Trade finance brings banks together, buildsrelationships and creates a channel fordistribution. Unfortunately we do not seemuch trade finance. One reason is that mosttrade banks like to have an internationalpresence and also banks want to place theirmoney with clearing banks in the interests
of security. The big international banks suchas HSBC, Standard Chartered and DeutscheBank tend to pick up most of the businessand are very cost efficient. There is,however, a big opportunity for Islamicbanks. More than $1.4 trillion of tradeflows take place between countries of theOrganisation of Islamic Conference (OIC),with around $430 billion of that being intraOIC trade. Currently a negligible amount ofthat trade, about 1%, goes through Islamicbanks and yet that is the most natural formof Islamic contract, a very simple murabaha;it is an opportunity that is being missed. It isa ‘significant glue’ that brings bankstogether and would have the effect ofdeveloping the capital market.
In Conclusion
Islamic banks have weathered the financialcrisis much better than conventional banks.The liquidity surplus represented by petroldollars is still there and there is a betterestablished Islamic finance platform. Islamicfinance is not immune to shocks. The ArabSpring, for example, has affected liquidity inthe Middle East; some sukuk have run intotrouble and the Dubai property bubble hascreated a need for some refinancing, but theway the Islamic sector has weathered thesehas demonstrated the platform has a degreeof maturity and stability, which is reassuringfor investors. It has also led to some changesin structuring. There is now much greaterclarity around sukuk issuance such as whathappens to the assets and investorresponsibilities.
The UK has been the OECD leader inIslamic finance, but there is a question overhow long this will continue. The UKgovernment continues to say no to asovereign sukuk, which is not surprisingbecause they want the cheapest money andIslamic finance is not the cheapest. A UKsovereign sukuk would, however, beextremely helpful to the UK Islamic financeindustry; it would help it to maintain itsOECD leadership and would haveaccelerated the growth of Islamic finance inthe UK. Islamic banks in the UK also needovernight placement facilities, whichcurrently do not exist. There is someprogress. For example, the FSA (Financial
Services Authority) has now agreed that theIDB’s (Islamic Development Bank) sukukcan be used as liquidity instruments byIslamic banks. The problem is that furtherprogress is likely to be slow, because theissue is not high on the UK government’sagenda; they have too many other things to do.
European corporates can definitely tap theIslamic capital markets. Pricing and the costof documentation is now more in line withconventional offerings, although taxationcontinues to be an issue that may detersome corporates. Trade finance is also animportant and untapped area.
Dr Massoud Janekah joined BLME (Bankof London and the Middle East) in April2007 as Director of Corporate Bankingbefore becoming Director of IslamicCapital Markets. He has many yearsexperience gained across a number ofindustries. He spent 10 years managinginvestments for global products atICI/Zeneca before moving into strategicconsultancy roles first with AT Kearneyand then Integrum. He moved to financialservices when he joined BDIC as acorporate finance adviser, later becominginvolved with structured debt at EuropeanAmerican Capital.
NEWHORIZON April–June 2012IIBI NEWS
April
16–17: 7th Annual World TakafulConference, Dubai
The takaful industry is forecast to reach$25 billion by 2015, but if this growth is tobe realised the industry will need to becomemore competitive and better attuned to theneeds of the market. Subtitled ‘GlobalChallenges and Growth Opportunities’, thistwo-day conference will focus on whatindustry players need to do to takeadvantage of the market’s growth potential.It will as usual include the release of Ernst &Young’s 2012 edition of the World TakafulReport focussing on ‘Takaful Regulationsfor Growth, Equity and Stability’.
18: 2nd Annual Middle East IslamicFinance and Investment Conference,Dubai
Titled ‘Room to Grow: New Directions inthe Next Growth Phase for Islamic Bankingin the Middle East’, this one-day conferencewill look at the challenges of maintaininggrowth in the industry, particularly in thewake of the Arab Spring; the strengtheningof regulation and governance; the impact ofthe new Islamic Interbank Benchmark Rateand the harmonisation of Shari’ah rulings.
This year the event will take place in Dubai.Traditionally, this major technology showtook place in Bahrain, but in 2011 it had tomove date and location at the last minutedue to civil unrest in Bahrain. After one yearin Abu Dhabi, it has elected to stage thisyear’s show at Dubai’s InternationalConference and Exhibition Centre.
Admission to the conference, exhibition andnetworking events is via MEFTEC’s HostedDelegate Programme.
5–6: 3rd Annual World Islamic BankingConference Asia, Singapore
Titled ‘Islamic Finance in Asia –Strengthening Connectivity and CapturingCross-Border Opportunities’, the conferencewill be moderated by Professor AndrewWhite, Director, International Islamic Lawand Finance Centre, Singapore ManagementUniversity and will cover a range of topicsincluding capital markets, asset management,governance and risk management.
10–11: 3rd Annual Asia Islamic BankingConference, Kuala Lumpur, Malaysia
This event in Kuala Lumpur will addressissues such as asset management on Shari’ahprinciples, capital markets and equity anddebt and risk management in Islamic banking.
The two-day conference titled ‘Takaful andRe-takaful – Planning to Overcome theChallenges to Growth’ will be chaired by DrAlberto Brugnoni and will address topicssuch as regulations, risk management andmanaging liquidity pools. On the day prior to
the main conference, 10 July, there will be aone-day masterclass for which delegates canregister separately. A dinner on the evening of11 July will also see the presentation of theInternational Takaful Awards nominationsfor which close on 4 May 2012.
The Institute of Islamic Banking andInsurance’s ever popular residential summerworkshop will take place at FitzwilliamCollege, Cambridge this year. Theworkshop, in its 6th year, with itsinteractive sessions and lectures fromleading practitioners focuses on innovationand differentiating Islamic financialproducts from those offered by theconventional financial sector.
14–16: Islamic Finance in a ChangingWorld, Abu Dhabi
The conference will consider the significantpolitical and socio-economic developmentsthat have occurred recently and theirprobable effects on the performance andfuture position of Islamic financialinstitutions (IFI’s), regulatory frameworksand popularity of Islamic products beingoffered to the public, governments andbusiness firms.
NEWHORIZON Jumada-Al-Awwal to Rajab 1433 IIBI NEWS
In order to offer wider choice to potential applicants, IIBI launchedits Diploma in Islamic Banking (DIB) by distance learning inJanuary, 2010. The course builds candidates’ knowledge of Islamicbanking concepts as well as their practical applications. It supportscandidates seeking a career in Islamic banking and also their careerprogression in the Islamic finance industry.
Candidates having a graduate degree may take up the IIBI PostGraduate Diploma course in Islamic Banking and Insurance (PGD),however those who wish to build a good foundation of Islamicbanking concepts and operations, may opt to take the DIB courseand later on progress to the PGD. DIB holders wishing to take upthe PGD course will get an exemption from some of the PostGraduate Diploma modules.
Postgraduate Diplomas in Islamic Banking and Insurance (PGD)Awards
To date students from more than 80 countries have enrolled in thePGD course. In the period January to March 2012, the followingstudents successfully completed their studies:
Yusuf Ahmad Tanko, Deputy Manager (Research andPublications), National Insurance Commission, Nigeria
Amanullah Shahid, UK
Mobeen Ahmed Khan, Pakistan
Sami Bait Rashid, Sales Manager, BankMuscat, Oman
Imen Kouki, Professor of Finance, University of Tunis, Tunisia
Lamaran Muhammad Gidado, General Manager, YankariSavings and Loans Ltd, Nigeria
Mohamed Mofaz Mohamed Zubair Sri Lanka
Diplomas in Islamic Banking (DIB) Awards
Students from 23 countries have enrolled on this course so far. Thefollowing students completed their studies in the period to March2012.
Ali Korrow Issack, Accountant, Kingdom ManagementConsultants, South Africa
Amina Kabale Guyo, Relationship Officer, Equity Bank Ltd,Kenya
Junaid Iqbal, Branch Manager, Kasb Bank, United ArabEmirates
Muhammad Asili Ali Ahmadi, Head Teacher, Coventry MuslimAssociation, United Kingdom
Muhammad Farrukh Ansari, Sales Assistant, Maxol/Mace,Ireland
Omar Shueb Omar, Kenya
Patrick Käseberg, Advisor, Finanzberatung fur Muslims,Germany
Salman Younus, United Kingdom
Suleiman Ali, Payroll Administrator, London Midland Trains,United Kingdom
Syeda Siddica Banu Syed, India
Sylvester Da Silva, Assistant Manager – Trading Desk, DDGILtd, United Kingdom
Tamim Rashid Al Tamtami, Relationship Manager, BarwaBank, Qatar
Abdul Latif Parkar, Business Development Manager, EZYTravel Doha Qatar, Qatar
IIBI Post Graduate Awards and Diplomas in Islamic Banking
M N Mohamed Fawaz, Accountant, Aqua Sun Holidays, SriLanka
The course offered an opportunity to go through a process ofstudies and especially how to deal with brother Muslims interms of transactions related to commercial dealings, which isvery significant to the spirit of Islam particularly at a timeMuslims at large are only concerned with complying with theobligations of fulfilling the commands on rituals aspects, e.g.prayers, fasting, etc in Islam, but are much less concernedwith mandatory obligations towards their Muslim brothers.
Naseeha Mahomed, Ernst & Young, South Africa
The course provided valuable insight on matters pertaining toIslamic finance. It highlighted areas of concern and mattersthat require further consideration. I liked the fact thatdifferent views on a subject were clearly expressed as thiscreates room for innovation.
NEWHORIZON April–June 2012GLOSSARY
An Islamic version of option, a deposit for the delivery ofa specified quantity of a commodity on a predetermineddate.
This refers to the selling of an asset by the bank to thecustomer on a deferred payments basis, then buying backthe asset at a lower price, and paying the customer incash terms.
A ruling made by a competent Shari’ah scholar on aparticular issue, where fiqh (Islamic jurisprudence) isunclear. It is an opinion, and is not legally binding.
Islamic jurisprudence. This is an important source ofIslamic economics.
Lit: uncertainty, hazard, chance or risk. Technically, saleof a thing which is not present at hand; or the sale of athing whose consequence or outcome is not known; or a sale involving risk or hazard in which one does notknow whether it will come to be or not.
A record of the sayings, deeds or tacit approval of theProphet Muhammad (PBUH).
Activities which are permissible according to Shari’ah.
Activities which are prohibited according to Shari’ah.
A leasing contract under which a bank purchases andleases out a building or equipment or any other facilityrequired by its client for a rental fee. The duration of thelease and rental fees are agreed in advance. Ownership of the equipment remains in the hands of the bank.
A sukuk having ijara as an underlying structure.
The same as ijara except the business owner iscommitted to buying the building or equipment orfacility at the end of the lease period. Fees previouslypaid constitute part of the purchase price. It is commonly used for home and commercial equipmentfinancing.
A contract of acquisition of goods by specification ororder, where the price is fixed in advance, but the goodsare manufactured and delivered at a later date.Normally, the price is paid progressively in accordancewith the progress of the job.
Gambling – a prohibited activity, as it is a zero-sumgame just transferring the wealth not creating newwealth.
A form of business contract in which one party bringscapital and the other personal effort. The proportionateshare in profit is determined by mutual agreement at thestart. But the loss, if any, is borne only by the owner ofthe capital, in which case the entrepreneur gets nothingfor his labour.
In a mudarabah contract, the person or party who actsas entrepreneur.
A contract of sale between the bank and its client for thesale of goods at a price plus an agreed profit margin forthe bank. The contract involves the purchase of goods bythe bank which then sells them to the client at an agreedmark-up. Repayment is usually in instalments.
musharakahAn agreement under which the Islamic bank providesfunds which are mingled with the funds of the businessenterprise and others. All providers of capital are entitledto participate in the management but not necessarilyrequired to do so. The profit is distributed among thepartners in predetermined ratios, while the loss is borneby each partner in proportion to his contribution.
An agreement which allows equity participation andsharing of profit on a pro rata basis, but also provides a method through which the bank keeps on reducing its equity in the project and ultimately transfers theownership of the asset to the participants.
An interest-free loan given for either welfare purposes or for fulfilling short-term funding requirements. Theborrower is only obligated to pay back the principalamount of the loan.
In a mudarabah contract the person who invests thecapital.
Reinsurance based on Islamic principles. It is amechanism used by direct insurance companies toprotect their retained business by achieving geographicspread and obtaining protection, above certain thresholdvalues, from larger, specialist reinsurance companies andpools.
Lit: increase or addition. Technically it denotes anyincrease or addition to capital obtained by the lender as a condition of the loan. Any risk-free or ‘guaranteed’rate of return on a loan or investment is riba. Riba, in allforms, is prohibited in Islam. Usually, riba and interestare used interchangeably.
Salam means a contract in which advance payment ismade for goods to be delivered later on.
Refers to the laws contained in or derived from theQuran and the Sunnah (practice and traditions of theProphet Muhammad (PBUH).
An authority appointed by an Islamic financialinstitution, which supervises and ensures the Shari’ahcompliance of new product development as well asexisting operations.
A contract between two or more persons who launch a business or financial enterprise to make profit.
Similar characteristics to that of a conventional bondwith the key difference being that they are asset backed;a sukuk represents proportionate beneficial ownership inthe underlying asset. The asset will be leased to the clientto yield the return on the sukuk.
A principle of mutual assistance.
A donation covenant in which the participants agree to mutually help each other by contributingfinancially.
A form of Islamic insurance based on the Quranicprinciple of mutual assistance (ta’awuni). It providesmutual protection of assets and property and offers joint risk sharing in the event of a loss by one of itsmembers.
A sale of a commodity to the customer by a bank ondeferred payment at cost plus profit. The customer thensells the commodities to a third party on a spot basis and gets instant cash.
The diaspora or ‘Community of the Believers’ (ummatal-mu’minin), the world-wide community of Muslims.
A promise to buy or sell certain goods in a certainquantity at a certain time in future at a certain price. It is not a legally binding agreement.
A contract of agency in which one person appointssomeone else to perform a certain task on his behalf,usually against a certain fee.
An appropriation or tying-up of a property in perpetuityso that no propriety rights can be exercised over theusufruct. The waqf property can neither be sold norinherited nor donated to anyone.
An obligation on Muslims to pay a prescribed percentageof their wealth to specified categories in their society,when their wealth exceeds a certain limit. Zakat purifieswealth. The objective is to take away a part of thewealth of the well-to-do and to distribute it among the poor and the needy.
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